10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

FORM 10-Q

(mark one)

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

For the quarterly period ended September 30, 2011

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

For the transition period from _______ to _______.

Commission File No. 000-28321

Brownie’s Marine Group, Inc.

(Name of Small Business Issuer in Its Charter)

Nevada	90-0226181
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
940 N.W. 1st Street, Fort Lauderdale, Florida	33311
(Address of Principal Executive Offices)	(Zip Code)
(954) 462-5570
(Issuer’s Telephone Number, Including Area Code)
(Former Name, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x      No  ¨

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

Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer  ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes  ¨   No  x

There were 37,809,550 shares of common stock outstanding as of November 4, 2011.

PART I

Item 1.Financial Statements

Financial Information

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

	September 30,
	2011			December 31,
	(Unaudited)			2010
ASSETS
Current assets
Cash	$	105,721		$	4,171
Accounts receivable, net of $26,000 and $15,000 allowance  for doubtful accounts, respectively		26,699			29,553
Accounts receivable - related parties		42,737			23,998
Inventory		562,600			525,595
Prepaid expenses and other current assets		166,964			36,484
Deferred tax asset, net - current		376			469
Total current assets		905,097			620,270
Property, plant and equipment, net		1,115,397			1,139,911
Deferred tax asset, net - non-current		73,453			108,309
Other assets		2,895			2,895
Total assets	$	2,096,842		$	1,871,385
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued liabilities	$	538,851		$	510,641
Customer deposits		96,902			58,390
Royalties payable - related parties		116,238			87,048
Other liabilities		12,147			13,346
Other liabilities and accrued interest - related parties		23,792			31,752
Convertible debentures, net		386,875			90,676
Notes payable - current portion		1,087,307			—
Notes payable - related parties - current portion		187,465			205,180
Total current liabilities		2,449,577			997,033
Long-term liabilities
Notes payable - long-term portion		—			1,053,993
Notes payable - related parties - long-term portion		61,969			124,014
Total liabilities		2,511,546			2,175,040
Commitments and contingencies
Stockholders' deficit
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000  issued and outstanding		425			—
Common stock; $0.001 par value; 250,000,000 shares authorized; 52,121,579 and  4,051,502 shares issued, respectively; 33,082,630 and 4,051,502 shares outstanding, respectively		33,083			4,052
Common stock payable; $0.001 par value; 462,694 and 543,240 shares, respectively		463			543
Prepaid equity based compensation		(762,499	)		(41,586	)
Additional paid-in capital		5,956,343			2,233,119
Accumulated deficit		(5,642,519	)		(2,499,783	)
Total stockholders' deficit		(414,704	)		(303,655	)
Total liabilities and stockholders' deficit	$	2,096,842		$	1,871,385

See Accompanying Unaudited Notes to Consolidated Financial Statements

1

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net revenues
Net revenues	$	478,012		$	390,152		$	1,159,707		$	1,154,363
Net revenues - related parties		181,249			171,735			459,648			529,772
Total net revenues		659,261			561,887			1,619,355			1,684,135
Cost of net revenues
Cost of net revenues		473,563			378,790			1,187,323			1,232,336
Royalties expense - related parties		16,688			16,331			40,537			47,293
Total cost of net revenues		490,251			395,121			1,227,860			1,279,629
Gross profit		169,010			166,766			391,495			404,506
Operating expenses
Selling, general and administrative		357,907			363,557			954,545			973,365
Research and development costs		3,434			16,696			44,715			49,342
Total operating expenses		361,341			380,253			999,260			1,022,707
Loss from operations		(192,331	)		(213,487	)		(607,765	)		(618,201	)
Other expense, net
Other (income) expense, net		1,947			(26,143	)		(4,561	)		(31,041	)
Interest expense		174,440			199,930			411,714			239,098
Interest expense - related parties		3,059			(2,957	)		2,092,869			13,569
Total other expense, net		179,446			170,830			2,500,022			221,626
Net loss before provision for income taxes		(371,777	)		(384,317	)		(3,107,787	)		(839,827	)
Provision for income tax expense (benefit )		37,892			(38,955	)		34,949			(134,571	)
Net loss	$	(409,669	)	$	(345,362	)	$	(3,142,736	)	$	(705,256	)
Basic loss  per common share	$	(0.02	)	$	(0.13	)	$	(0.11	)	$	(0.30	)
Diluted loss per common share	$	(0.02	)	$	(0.13	)	$	(0.11	)	$	(0.30	)
Basic weighted average common shares outstanding		18,402,210			2,685,284			28,196,705			2,321,727
Diluted weighted average common shares outstanding		18,402,210			2,685,284			28,196,705			2,321,727

See Accompanying Unaudited Notes to Consolidated Financial Statements

2

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

															Prepaid			Additional					Total
	Common stock				Common stock payable						Preferred				equity based			paid-in		Accumulated			stockholders'
	Shares		Amount		Shares			Amount			Stock Shares		Amount		compensation			capital		deficit			deficit
Balance, December 31, 2010		4,051,502	$	4,052		543,240		$	543			—	$	—	$	(41,586	)	$	2,233,119	$	(2,499,783	)	$	(303,655	)
Issuance of stock payable from prior reporting periods		337,290		337		(337,290	)		(337	)		—		—		—			—		—			—
Discounts on convertible debentures		—		—		—			—			—		—		—			168,500		—			168,500
Stock granted for consulting and legal services		41,772		42		17,333			17			—		—		—			9,831		—			9,890
Current period amortization of prepaid equity based compensation		—		—		—			—			—		—		22,250			—		—			22,250
Net loss		—		—		—			—			—		—		—			—		(273,404	)		(273,404	)
Balance, March 31, 2011 (Unaudited)		4,430,564		4,431		223,283			223			—		—		(19,336	)		2,411,450		(2,773,187	)		(376,419	)
Issuance of stock payable from prior reporting periods		17,333		17		(17,333	)		(17	)		—		—		—			—		—			—
Discounts on convertible debentures		—		—		—			—			—		—		—			300,000		—			300,000
Stock granted for consulting and legal services		81,958		82		50,344			50			—		—		—			10,230		—			10,362
Stock issued for prepaid  inventory		253,334		253		—			—			—		—		—			37,747		—			38,000
Issuance of preferred stock for debt forgiveness		—		—		—			—			425,000		425		—			2,124,575		—			2,125,000
Repayment of short term loan in stock		50,000		50		—			—			—		—		—			450		—			500
Issuance of stock in consideration of personal guarantees		20,000,000		20,000		—			—			—		—		(1,000,000	)		980,000		—			—
Convertible debentures converted to stock		2,900,000		2,900		—			—			—		—		—			—		—			2,900
Current period amortization of prepaid equity based compensation		—		—		—			—			—		—		131,836			—		—			131,836
Net loss		—		—		—			—			—		—		—			—		(2,459,663	)		(2,459,663	)
Balance June 30, 2011 (Unaudited)		27,733,189		27,733		256,294			256			425,000		425		(887,500	)		5,864,452		(5,232,850	)		(227,484	)
Issuance of stock payable from prior reporting periods		50,344		50		(50,344	)		(50	)		—		—		—			—		—			—
Discounts on convertible debentures		—		—		—			—			—		—		—			58,802		—			58,802
Stock granted for consulting and legal services		172,529		173		256,744			257			—		—		—			6,616		—			7,046
Convertible debentures converted to stock		4,626,568		4,627		—			—			—		—		—			21,973		—			26,600
Stock issued under private offering		500,000		500		—			—			—		—		—			4,500		—			5,000
Current period amortization of prepaid equity based compensation		—		—		—			—			—		—		125,001			—		—			125,001
Net loss		—		—					—			—		—		—			—		(409,669	)		(409,669	)
Balance September 30, 2011 (Unaudited)		33,082,630	$	33,083		462,694		$	463			425,000	$	425	$	(762,499	)	$	5,956,343	$	(5,642,519	)	$	(414,704	)

See Accompanying Unaudited Notes to Consolidated Financial Statements

3

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(3,142,736	)	$	(705,256	)
Adjustments to reconcile net loss to net cash (used in) provided  by operating activities:
Depreciation		26,183			25,898
Change in deferred tax asset, net		34,949			(134,571	)
Equity based compensation for consulting and legal services		27,298			24,137
Accretion of convertible debt discounts		321,286			—
Forgiveness of debt Interest expense - related party		2,082,500			—
Amortization of prepaid equity based compensation expense		279,087			202,888
Stock and warrant interest expense on loan payable conversion		—			181,446
Loss on issuance of stock for purchase of intellectual property		—			148,500
Gain on sale of fixed asset		(5,000	)		—
Changes in operating assets and liabilities:
Change in accounts receivable, net		2,854			(17,290	)
Change in accounts receivable - related parties		(18,739	)		(16,645	)
Change in inventory		(37,005	)		(35,902	)
Change in prepaid expenses and other current assets		(16,480	)		(9,407	)
Change in other assets		—			4,073
Change in accounts payable and accrued liabilities		28,210			297,300
Change in customer deposits		38,512			6,210
Change in income tax refunds receivable		—			121,802
Change in other liabilities		(11,199	)		(754	)
Change in other liabilities and accrued interest - related parties		(5,505	)		13,173
Change royalties payable - related parties		29,190			35,342
Net cash (used in) provided by operating activities		(366,595	)		140,944
Cash flows from investing activities:
Sale of fixed asset		5,000			—
Purchase of fixed assets		(1,669	)		(6,786	)
Net cash provided by (used in) investing activities		3,331			(6,786	)
Cash flows from financing activities:
Proceeds from borrowing on convertible debentures		440,000			—
Proceeds from issuance of stock under private offering		5,000			—
Proceeds from short term loan exchanged for stock		500			—
Proceeds from borrowing on loan payable		10,000			—
Proceeds from borrowings on notes payable		35,764			—
Principal payment on convertible debenture		(24,000	)		—
Principal payments on notes payable		(2,450	)		(28,167	)
Principal payments on notes payable - related parties		—			(27,531	)
Net cash provided by (used in) financing activities		464,814			(55,698	)
Net change in cash		101,550			78,460
Cash, beginning of period		4,171			2,713
Cash, end of period	$	105,721		$	81,173
Supplemental disclosures of cash flow information:
Cash paid for interest	$	59,833		$	57,273
Cash paid for income taxes	$	—		$	—

See Accompanying Unaudited Notes to Consolidated Financial Statements

4

BROWNIE'S MARINE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2011		2010
Supplemental disclosures of non-cash investing activities and future operating activities:
Convertible debenture issued for prepaid inventory	$	76,000	$	—
Discounts on convertible debentures	$	527,302	$	—
Stock issued for prepaid equity based compensation	$	20,000	$	279,000
Stock and additional paid-in capital for purchase of intellectual property	$	—	$	148,500
Preferred stock issued for forgiveness of note-payable - related party	$	42,500	$	—
Stock issued for prepaid inventory	$	38,000	$	—
Write-off of fully depreciated fixed asset sold	$	20,938	$	—
Convertible debenture converted to stock	$	29,500	$	—
Repayment of short term loan	$	500	$	—
Issuance of stock in consideration of personal guarantees	$	1,000,000	$	—
Conversion of loan payable for stock and warrants (excluding interest of  $181,446)	$	—	$	180,000
Conversion of note payable- current portion and related accrued interest to convertible debenture (excluding interest of $17,025)		39,724		---

See Accompanying Unaudited Notes to Consolidated Financial Statements

5

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Reclassifications – Certain reclassifications have been made to the 2010 financial statement amounts to conform to the 2011 financial statement presentation.

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

Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements.   We have incurred losses since 2009, and expect to have losses through 2011.  We have had a working capital deficit since 2009.  Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage further discussed in Note. 9.  NOTES PAYABLE.

In addition, the Company is behind on payments due for accrued payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables.  While the Company has received no formal notices of default and is working out these matters on a case by case basis, there can be no assurance that cooperation the Company has received thus far will continue.  Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS, Note 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 8. OTHER LIABILITIES, Note 9. NOTES PAYABLE, and Note 10.  CONVERTIBLE DEBENTURES.

During the third quarter of 2010, the Company settled several lawsuits for infringement of one of the Company’s patents.  The settlement was in the form of cash and inventory credits, and the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others as further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.   In addition, the Company introduced some of its own new products to market in mid 2010, including the variable speed electric and battery powered diving units.  We believe the combined addition of these products to complement the sales of our other products will allow us to generate enough sales to supply us with sufficient working capital in the future.  However, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the fourth quarter of 2011.  This raises substantial doubt about our ability to continue as a going concern. We will need to raise additional funds and are currently exploring alternative sources of financing.  We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 10.  CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities.   We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.

6

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Going Concern (continued) – If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Inventory – Inventory is stated at the lower of cost or market.  Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory.  Inventory consists of raw materials as well as finished goods held for sale.  The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.

Property, Plant, and Equipment – Property, Plant and Equipment are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years  except for the building that is being depreciated over a life of 39 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment.  The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

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

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

Revenue and costs incurred for time and material projects are recognized as the work is performed.

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, 2011, and 2010, was $28,509 and $8,194, respectively.  Advertising and trade show expense incurred for the nine months ended September 30, 2011, and 2010, was $42,981 and $9,802, respectively.

Customer deposits and return 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.

7

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees.  Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value.   Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries. 

For the three and nine months ended September 30, 2010, the Company amortized prepaid stock based compensation associated with stock options granted October 1 and December 1, 2009.  See Note 12. EQUITY INCENTIVE PLAN for further discussion.  For the three and nine months ended September 30, 2010, the Company recorded stock based compensation associated with warrants granted on December 31, 2009.  See Note 11. STOCK WARRANTS FOR LEGAL SERVICES for further discussion.  For the three and nine months ended September 30, 2011, the company granted stock for consulting services.  See Note 13.  STOCK ISSUED FOR CONSULTING SERVICES.

Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value.   Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries.  See Note10.  CONVERTIBLE DEBENTURES for further discussion.

8

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair value of financial instruments – The carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature.

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities.  Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period.  Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.  Common stock equivalent shares are excluded from the computation if their effect is antidilutive.  All common stock equivalent shares were excluded in the computation for the three and nine months ended September 30, 2011, and 2010, since their effect was antidilutive.

New accounting pronouncements –  In January 2011, the FASB released Accounting Standards Update No. 2011-01 (“ASU 2011-01”), Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which deferred the disclosure requirements surrounding troubled debt restructurings. These disclosures are effective for reporting periods ending on or after June 15, 2011. We do not expect the disclosure requirements to have a material impact on our current disclosures.

In April 2011, the FASB released Accounting Standards Update No. 2011-02 (“ASU 2011-02”), Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance for determining whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must conclude that 1) the restructuring constitutes a concession and 2) the debtor is experiencing financial difficulties. ASU 2011-02 also requires companies to disclose the troubled debt restructuring disclosures that were deferred by ASU 2011-01. The guidance in ASU 2011-02 is effective for public companies in the first reporting period ending on or after June 15, 2011, but the amendment must be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 is not expected to materially impact our consolidated financial statements.

2.  INVENTORY

Inventory consists of the following as of:

	September 30, 2011		December 31, 2010
Raw materials	$	344,243	$	333,107
Work in process		—		—
Finished goods		218,357		192,488
	$	562,600	$	525,595

3.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets totaling $166,964 at September 30, 2011, consists of $135,402 of prepaid inventory, $15,000 of prepaid advertising and promotion, and $16,562 of prepaid insurance.

Prepaid expenses and other current assets totaling $36,484 at December 31, 2010, consists of $15,435 credit toward inventory resulting from patent infringement settlements, $8,662 of prepaid inventory, $10,736 of prepaid insurance, $1,651 of prepaid software maintenance.

9

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following as of:

	September 30, 2011			December 31, 2010
Building, building improvements, and land	$	1,224,962		$	1,224,962
Furniture, fixtures, vehicles and equipment		104,928			124,197
		1,329,890			1,349,159
Less:  accumulated depreciation and amortization		( 214,493	)		( 209,248	)
	$	1,115,397		$	1,139,911

5. CUSTOMER CREDIT CONCENTRATIONS

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 6 – RELATED PARTIES TRANSACTIONS.  Combined sales to these entities for the three months ended September 30, 2011 and 2010 represented 27.49% and 30.55%, respectively, of total net revenues.  Combined sales to these entities for the nine months ended September 30, 2011 and 2010 represented 30.59% and 31.45%, respectively, of total net revenues. For the three and nine months ended September 30, 2011, sales to one unrelated customer represented 22.10% and 10.00%, respectively, of total net revenues. For the three months ended September 30, 2010, sales to one other unrelated customer represented 12.53% of total net revenues. Sales to no other customers represented greater than 10% of net revenues for the three and nine months ended September 30, 2011 and 2010.

6. RELATED PARTIES TRANSACTIONS

Notes payable – related parties

 Notes payable – related parties – consists of the following as of September 30, 2011:

Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal  and interest payments of $7,050, maturing on August 1, 2013.	$	249,434
Less amounts due within one year		187,465
Long-term portion of notes payable – related parties	$	61,969

10

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. RELATED PARTIES TRANSACTIONS (continued)

Notes payable – related parties (continued)

As of September 30, 2011, principal payments on the notes payable – related parties are as follows:

2011	$	129,104
2012		78,246
2013		42,083
2014		—
2015		—
Thereafter		—
	$	249,434

As of September 30, 2011, the Company was approximately twenty-two months in arrears on payments due under the Note payable to the Chief Executive Officer.  No default notice has been received and the Company plans to make payments as able.  See Other liabilities and accrued interest– related parties within this Note for the related accrued interest in arrears.   On April 21, 2011, the Company issued 425,000 shares of preferred stock, designated as Series “A” Convertible Preferred Stock, to Robert Carmichael in consideration for forgiveness of $42,500 due under the Note payable to Chief Executive Officer.  The Series “A” Convertible Preferred Stock may be converted to common stock at a rate of $.01 per share, or 42,500,000 shares of common stock.  The fair market value per common share upon which the transaction was based was $.05.  Accordingly, the Company recognized $2,082,500 as interest expense – related party as part of the transaction.

On March 18, 2011, the Company's Chief Executive Officer transferred all financial interest in GKR Associates, LLC (GKR). Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties. On September 18, 2011, the Company and GKR converted GKR's note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.

On February 12, 2010, as part of the requirements for conversion of its non-related party, revolving line of credit to a term loan, the Company converted GKR's second mortgage to a third mortgage.  See Note 9. NOTES PAYABLE for further discussion. The Company was fifteen months in arrears on mortgage payments due GKR at September 30, 2011.  No default notice has been received and the Company plans to make payments as able.

Notes payable – related parties consists of the following as of December 31, 2010:

Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013.	$	291,934
Promissory note payable due an entity in which the Company’s Chief Executive Officer has a financial interest, GKR Associates, LLC., secured by third mortgage on real property, having a carrying value of $1,120,994 at December 31, 2010, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.		37,260
		329,194
Less amounts due within one year		205,180
Long-term portion of notes payable – related parties	$	124,014

11

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. RELATED PARTY TRANSACTIONS (continued)

Net revenues and accounts receivable  – related parties – The Company sells products to three entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer.  Terms of sale are no more favorable than those extended to any of the Company’s other customers.  Combined net revenues from these entities for three months ended September 30, 2011, and 2010, was $181,249 and $171,682, respectively. Combined net revenues from these entities for nine months ended September 30, 2011, and 2010, was $459,648 and $529,719, respectively.   Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at September 30, 2011, was $30,191, $3,184, and $9,362, respectively.  Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2010, was $13,777, $4,753, and $5,468, respectively.

Royalties expense – related parties  –   The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns.  Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually.  Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement.  Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter.  Total royalty expense for the above agreements for three months ended September 30, 2011, and 2010, is disclosed on the face of the balance sheet. As of September 30, 2011, the Company was approximately twenty-three months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.

Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements.  Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and 371,250 shares of the Company’s common stock.   In addition, the CRC is entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010.  For financial reporting purposes the Company valued the group of patents at $0 which is the lower of CRC’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $182,250 loss on the transaction comprised of $148,500 fair market value of the stock on the September, 30, 2010 grant date less the $0 historical cost, plus the $25,500 cash, plus the $8,250 liability.  See Other liabilities and accrued interest– related parties below for inclusion of the $8,250. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties. In addition, see Note 15. PATENT INFRINGEMENT SETTLEMENT for further discussion on income earned in the third quarter of 2010, from the Company’s successful settlement of several lawsuits for infringement of one of these patents.

Other liabilities and accrued interest– related parties

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

	September 30, 2011		December 31, 2010
Accrued interest on Notes payable – related parties	$	15,570	$	23,530
Due to Principals of Carleigh Rae Corp., net		8,222		8,222
Other liabilities – related parties	$	23,792	$	31,752

12

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. RELATED PARTY TRANSACTIONS (continued)

As of September 30, 2011, the Company was approximately twelve months in arrears on accrued interest due under the Note payable to the Chief Executive Officer.  No default notice has been received and the Company plans to make payments as able.  The $8,222 due the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 20,000,000 shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of the first and second mortgages of the Company.  The restrictions on the common stock will expire 50% on April 20, 2012, and 50% on April 20, 2013, if Mr. Carmichael continues his full time employment with the Company.  The company valued the stock at $.05 per share and will record $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expire.     The unearned balance of the compensation is recorded as prepaid compensation as a component of shareholders’ deficit.  As of the three and nine months ended September 30, 2011, the Company recognized $125,001, and $237,501, respectively, as amortization of prepaid compensation under this agreement.  Prepaid compensation remaining under this agreement as of September 30, 2011 is $762,499.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities of $538,851 at September 30, 2011, consists of $198,530 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $71,837 accrued payroll and related fringe benefits, $133,415 accrued payroll taxes and withholding, $34,549 accrued real estate taxes, $34,613 accrued interest, and $5,333 other accrued liabilities.  Accrued payroll taxes and withholding were approximately nine months in arrears at September 30, 2011.  Balances due certain vendors are also due in arrears to varying degrees.  The Company is handling both matters and each instance on a case by case basis.

Accounts payable and accrued liabilities of $510,641 at December 31, 2010, consists of $324,560 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $73,689 accrued payroll and related fringe benefits, $18,978 accrued real estate taxes, $28,295  accrued interest, and $4,545 other accrued liabilities.

8.  OTHER LIABILITIES

Other liabilities of $12,147 at September 30, 2011, consists of $10,000 loan payable, and $2,147 on-line training liability.  The $10,000 short-term loan, unsecured loan is from one of the Board of Directors and is without stated terms.

Other liabilities of $13,346 at December 31, 2010, consists of $2,681 of on-line training liability, and $10,665 accrued legal fees and costs associated with default under the Company’s first and second mortgages.   See Note 9.  NOTES PAYABLE for discussion related to consolidation and restatement of promissory note.

Effective July 1, 2005, the Company began including on-line training certificates with all hookah units sold.  The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder.  The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates).  The certificates have an eighteen-month redemption life after which time they expire.  The eighteen-month life of the certificates begins at the time the customer purchases the unit.  The Company owes the on-line training vendor the agreed upon negotiated rate for all on-line certificates redeemed payable at the time of redemption.  For certificates that expire without redemption, no amount is due the on-line training vendor.

13

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8. OTHER LIABILITIES (continued)

The Company estimates the on-line training liability based on the historical redemption rate of approximately 10%.  The Company continues to monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate.

9. NOTES PAYABLE

Notes payable consists of the following as of September 30, 2011:

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,100,420 at September 30, 2011, bearing interest at 7.5% per annum, due in monthly interest only payments beginning on February 22, 2011, maturing on May 22, 2012, with balloon payment of principal and any accrued and unpaid interest.	$	1,053,993
Promissory note payable, secured by third mortgage on real property, having a carrying value of $1,100,420 at September 30, 2011, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.		---
Promissory note payable, unsecured, bearing interest at 5% per annum, due in monthly principal and interest payments of $2000,  maturing on August 31, 2012.		33,314
		1,087,307
Less amounts due within one year		1,087,307
Long-term portion of notes payable	$	—

As of September 30, 2011, principal payments on the notes payable are as follows:

2011	$	18,345
2012		1,068,962
2013		—
2014		—
2015		—
Thereafter		—
	$	1,087,307

On March 18, 2011, the Company's Chief Executive Officer transferred all financial interest in GKR. Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties, and the note payable due them was reclassified to this Note as presented in the table above. On September 18, 2011, the Company and GKR converted this note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.

On February 18, 2011, the Company’s wholly owned subsidiary, Trebor Industries, Inc., entered into a Forbearance Agreement with Branch Banking and Trust Company (“BBT”) for the promissory note in the principal amount of $1,000,000 in favor of BBT (the “Term Loan”) and the promissory note in the principal amount of $199,991 in favor of BBT (the “Second Note”). The Term Loan and Second Note are collectively referred to as the “Secured Notes”.  The Secured Notes are secured by the Company's Fort Lauderdale facilities and personally guaranteed by the Company’s chief executive officer. As previously disclosed, the Company failed to bring the Secured Notes current and in January 2011 BBT accelerated the full principal and accrued interest due under the Secured Notes, as well as initiated collection and legal action.  The Forbearance Agreement effectively extends the maturity date of the Secured Notes to May 22, 2012.  The Secured Notes were consolidated under a Consolidated and Restated Promissory Note in the principal amount of $1,053,993, effective November 22, 2010, (the “Consolidated Note”).  The maturity date of the Consolidated Note is May 22, 2012, and may be prepaid at any time.  The interest rate on the Consolidated Note is 7.5% per annum. Pursuant to the Forbearance Agreement the Company paid $33,000 to BBT at closing.  In addition to the monthly interest only payments required under the Consolidated Note, Trebor was required to pay BBT $6,028 by February 28, 2011, and monthly payments of approximately $3,555 on March 10, 2011, April 10, 2011, and May 10, 2011, to satisfy disbursements, costs and expenses associated with the Forbearance Agreement.

14

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

9. NOTES PAYABLE (continued)

Under the Consolidated note, the Company accrued $10,665 of legal fees and costs as of December 31, 2010, which is reflected in Other liabilities.  In addition, the Company accrued interest through December 31, 2010, and this is reflected in Accounts payable and accrued liabilities.

In February 2011, the Company converted a vendor payable into an unsecured promissory note as reflected above in table summarizing notes payable as of September 30, 2011.   Principal and interest payments of $2,000 per month were to begin on February 28, 2011, and continue through August 31, 2012, maturity.  As of September 30, 2011, the Company was in arrears on approximately four-month’s payments.  No default notice has been received and the Company plans to make payments as soon as it is able.

Notes payable consists of the following as of December 31, 2010:

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,120,994 at December 31, 2010, bearing interest at 7.5% per annum, due in monthly interest only payments beginning on February 22, 2011, maturing on May 22, 2012, with balloon payment of principal and any accrued and unpaid interest.	$	1,053,993
Less amounts due within one year		—
Long-term portion of notes payable	$	1,053,993

10. CONVERTIBLE DEBENTURES

The Company has outstanding convertible debentures as of September 30, 2011, as follows:

Effective October 4, 2010, the Company converted an accounts payable for legal services to a $20,635 convertible debenture.  The debenture matured on April 4, 2011, and bears interest at 5% per annum.  At the option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common Stock at the conversion price per share of $.001 by written notice.  The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.  The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.

The Company valued the beneficial conversion feature (BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value.  Accordingly, the $20,635 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture and recognize interest expense through its maturity on April 4, 2011.  At maturity the Company did not redeem the convertible debenture, but rather the holder sold and assigned it to an unrelated third party for the face value of the debenture.  At September 30, 2011, the balance of the convertible debenture, net is $15,135, which is $20,635 debenture, less $20,635 discount, plus $20,635 discount accretion, less $5,500 converted to stock.  At December 31, 2010, the balance of the convertible debenture, net is $10,318 which is $20,635 debenture, less $20,635 discount, plus $10,318 of accretion.

Effective November 27, 2010, the Company purchased exclusive rights for license of certain intellectual property from an unrelated party for an initial sum of $125,000.  Payment was in the form of a convertible debenture bearing simple interest of 10% per annum to accrue until paid in full or converted.  The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention.  The debenture is convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender.  Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price.

15

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. CONVERTIBLE DEBENTURES (continued)

The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value.  Accordingly, the $125,000 debenture is discounted by the amount of the BCF.  The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion.  The debenture matured on May 27, 2011.  At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $125,000 debenture, less $53,571 discount, plus $53,571 of accretion.  At December 31, 2010, the balance of the convertible debenture, net is $80,358, which is $125,000 debenture, less $53,571 discount, plus $8,929 of accretion.  Because there is no assurance of success and the invention is still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense.  Both parties have agreed to confidentiality regarding the invention during the pre-prototype stage.  In addition, the Company has agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

Effective January 7, 2011, the Company ratified a technology and license agreement with commitment for purchase of inventory related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met.  Since the Company did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities.  The agreement required the Company issue a convertible debenture for $76,000, and $38,000 of restricted common stock at $.15 per share.  On January 7, 2011, the Company issued a $76,000 convertible debenture for purchase of the product with $28,000 maturing on June 7, 2011, and $48,000 maturing on November 12, 2011.  The debenture bears interest at 5% per annum.  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) deep highest closing bid prices over the preceding five (5) trading days.  On June 1, 2011, the Company issued 253,334 shares of restricted common stock at $.15 per share, or $38,000 as required by the agreement.

The Company valued the BCF of the convertible debenture at $76,000, the “ceiling” of its intrinsic value.  Accordingly, the $76,000 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $34,667, which is $76,000 debenture, less $76,000 discount, plus $58,667 discount accretion, less $24,000 repayment.

On February 10, 2011, the Company borrowed $42,500 in exchange for a convertible debenture.  The debenture bears 8% interest per annum and matures on November 14, 2011.  The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due.  Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same.  Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time.  The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest.  There is a $2,000 per day penalty for not timely delivering shares upon conversion notice.  The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.  The Company issued and reserved 1,465,517, related to this debenture.

The Company valued the BCF of the convertible debenture at $42,500, the “ceiling” of its intrinsic value.  Accordingly, the $42,500 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture through its maturity on November 14, 2011 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $11,416, which is $42,500 debenture, less $42,500 discount, plus $35,416 accretion, less $24,000 conversion.  As of September 30, 2011, the Company issued 2,026,568 shares to lender related to the $24,000 conversion.  The 2,026,568 shares included all 1,465,517 shares reserved related to this debenture, plus an additional 561,051 of 19,600,000 shares reserved for the same lender as part of another debenture issued September 12, 2011 for $42,500, as discussed below.

16

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. CONVERTIBLE DEBENTURES (continued)

On March 9, 2011, the Company borrowed $50,000 in exchange for a convertible debenture maturing on March 9, 2012.  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 50,000 and 100,000 warrants at $.25 and $.35 per share, respectively.  As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants.  The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $50,000, the “ceiling” of its intrinsic value.   Accordingly, the $50,000 debenture is discounted by the BCF and the warrants.  The Company will accrete the discount to the convertible debenture through its maturity on March 9, 2012 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $27,957, which is $50,000 debenture, net $50,000 discount, plus $27,957 discount accretion.

On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture maturing on May 5, 2012.  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 $.25 and $.35 per share, respectively.  As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants.  The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $300,000, the “ceiling” of its intrinsic value.  Accordingly, the $300,000 debenture is discounted by the BCF and the warrants.  The Company will accrete the discount to the convertible debenture through its maturity on May 5, 2012 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $300,000 debenture, less $300,000 discount, plus $125,000 discount accretion.

On August 31, 2011, the Company borrowed $10,000 in exchange for a convertible debenture maturing August 31, 2013.  The debenture bears interest at 5% per annum.  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) deep highest closing bid prices over the preceding five (5) trading days.

The Company valued the BCF of the convertible debenture at $4,286.  Accordingly, the $4,286 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $5,893, which is $10,000 debenture, less $4,286 discount, plus $179 discount accretion.

On September 8, 2011, the Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The debenture bears interest at 10% per annum and matured on September 20, 2011. The lender at thier 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) deep highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $17,025. Because the debenture was issued and matured in the third quarter of 2011, the full amount of the discount, $17,025 was accreted and recognized as interest expense during the period. As of September 30, 2011, the balance of the convertible debenture, net is $39,724.

17

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

10. CONVERTIBLE DEBENTURES (continued)

On September 12, 2011, the Company borrowed $37,500 in exchange for a convertible debenture.  The debenture bears 8% interest per annum and matures on June 14, 2012.  The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due.  Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same.  Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time.  The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest.  There is a $2,000 per day penalty for not timely delivering shares upon conversion notice.  The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.  The Company  issued and reserved 19,600,000 shares related to this debenture.  As of September 30, 2011, the Company converted 561,051 of these reserved shares as part of a conversion by the lender on another debenture due them dated February 10, 2011, as discussed above.  This left a balance of 19,038,949 shares reserved for this lender.

The Company valued the BCF of the convertible debenture at $37,500, the “ceiling” of its intrinsic value.  Accordingly, the $42,500 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture through its maturity on June 12, 2012 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $2,083, which is $37,500 debenture, less $37,500 discount, plus $2,083 discount accretion.

11. STOCK WARRANTS FOR LEGAL SERVICE

Effective December 30, 2009, the Company issued to an outside attorney warrants to purchase 100,000 shares of restricted common stock for certain legal and advisory services to be performed in 2010, as evidenced by a signed proposal.  The warrants are exercisable at fair market value as of the date of grant, and vested in two tranches of 50,000 each, on September 30, 2010 and December 31, 2010, respectively.  In addition, the agreement provides for a cashless exercise of the tranches.  The fair value of the warrants was determined to be $25,000 using the Black-Scholes valuation model.  The stock warrants are in lieu of payment for these services and as such the Company recognized operating expense over the term of the agreement.  Accordingly, the Company recognized operating expense for the three and nine months ended September 30, 2010 of $6,250 and $18,750, respectively.  As of September 30, 2011, the two tranches of warrants were unexercised.

12. EQUITY INCENTIVE PLAN

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”).  Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options.  Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan.  The initial maximum number of shares that may be issued under the Plan shall be 400,000 shares, and no more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period.  Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company.  The term of the Plan shall be ten years.  The Board of Directors may amend, alter, suspend, or terminate the Plan at any time.

18

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12. EQUITY INCENTIVE PLAN (continued)

Effective October 1, 2009 and December 1, 2009 the Company granted 75,000 and 115,000 incentive stock options, respectively, to certain consultants under the Plan. The granting of these options exhausted all the options outstanding for grant under the plan.  The fair value of the options was determined to be $47,500 using the Black-Scholes Model. The options that have a term of five years were issued in conjunction with consulting agreements business and financial advisory services. The stock options are in lieu of payment for these services and as such the Company will recognize operating expense over the term of the agreements. Accordingly, for the three and nine months ended September 30, 2010, the Company recognized operating expense of $7,158 and $21,638, respectively.  Prepaid equity based compensation is reflected as a component of shareholders’ deficit for the related consulting services yet to be provided at the end of the period.  As of September 30, 2011, all consulting services under this plan had been provided.

13. STOCK ISSUED FOR CONSULTING SERVICES

From April 16, 2010, through December 31, 2010, the Company granted a combined 674,932 shares of restricted common stock to eight consultants pursuant to individual consulting agreements.  The consulting services provided for include predominantly management advisory services in the areas of sales, marketing, public relations, financing, and business development. Grant of the stock was in lieu of payment for these services.  The length of consulting services under the agreements ranges from completed during the second quarter of 2010 through one year from effective transaction date, or July 1, 2011.  The majority of the agreements expired on December 31, 2010.  The Company recorded the transactions at the fair market value of the stock on the effective date of each transaction.  The Company is recognizing operating expense over the term of the agreements.  Accordingly, for the three and nine months ended September 30, 2011, the Company recognized $0 and $41,586, respectively, as operating expense under the agreements.  The Company recognized $35,923 and $101,267 as operating expense under the agreements for the three and nine months ended September 30, 2010, respectively

On March 9, 2010, the Company granted 100,000 shares of restricted common stock pursuant to a consulting agreement for assistance in the planning, design, direction, supervision and implementation of Company's web design, marketing and advertising and in such other matters and areas as may be mutually approved by Consultant and Company. This agreement expired on December 31, 2010.  The Company recorded the transaction at the fair market value of the stock on the effective date of the transaction, $.99 per share. The Company will amortize the operating expense over the term of the agreement. Accordingly, the Company recognized $9,900 as operating expense for the three months ended March 31, 2010. The agreement expires on December 31, 2010. This same consultant loaned the Company $100,000 during the first quarter of 2010, accepted a conversion of his loan to common stock in the third quarter of 2010, and became a member of the Board of Directors of the Company in December 2010.

14. STOCK ISSUED UNDER PRIVATE OFFERING

On July 27, 2011, the Company accepted $5,000 under a private offering of shares of restricted common stock at a purchase price per share of $.01.  The Company offered the shares through its officers and directors to “accredited investors” as defined in Rule 501 (as amended on July 21, 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act) of Regulation D promulgated under the Securities Act of 1933, as amended.

15. PATENT INFRINGEMENT SETTLEMENTS

In August 2010, the Company settled several lawsuits for infringement of one of the Company’s patents.  The Company granted non-exclusive license of its patent to the settling parties along with future licensing and purchasing terms.  In exchange, the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others. The Company acquired the subject patent from the Carleigh Rae Corporation, a related party, in 2010, and it is discussed in Note 6. RELATED PARTY TRANSACTIONS, Patent purchase agreements.

19

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16. INCOME TAXES

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

	September 30, 2011			September 30, 2010
Current taxes
Federal	$	—		$	—
State		—			—
Current taxes		—			—
Change in deferred taxes		(851,594	)		(57,749	)
Change in valuation allowance		889,486			18,794
Provision for income tax expense (benefit)	$	37,892		$	(38,955	)

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

	September 30, 2011			September 30, 2010
Current taxes
Federal	$	—		$	—
State		—			—
Current taxes		—			—
Change in deferred taxes		(1,079,982	)		(246,506	)
Change in valuation allowance		1,114,931			111,935
Provision for income tax benefit	$	34,949		$	(134,571	)

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2011:

Deferred tax assets:
Equity based compensation	$	21,743
Allowance for doubtful accounts		8,840
Depreciation and amortization timing differences		(4,151	)
Net operating loss carryforward		1,524,087
On-line training certificate reserve		751
Total deferred tax assets		1,551,270
Valuation allowance		(1,477,441	)
Deferred tax assets net of valuation allowance		73,829
Less deferred tax assets – non-current, net of valuation allowance		73,453
Deferred tax assets – current, net of valuation allowance	$	376

The effective tax rate used for calculation of the deferred taxes as of September 30, 2011 was 34%.  The Company has established a valuation allowance against deferred tax assets of $1,477,441 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 95% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.

20

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16.  INCOME TAXES (continued)

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

	September 30, 2011			September 30, 2010
Statutory tax rate benefit		—	%		—	%
Increase (decrease) in rates resulting from:
Net operating loss carryforward or carryback		(35	)%		(29	)%
Equity based compensation and loss		—	%		1	%
Book/tax depreciation and amortization differences		—	%		(1	)%
Change in valuation allowance		36	%		13	%
Other		—	%		—	%
Effective tax rate benefit		1	%		(16	)%

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2010:

Deferred tax assets:
Equity based compensation	$	21,743
Allowance for doubtful accounts		5,100
Depreciation and amortization timing differences		(6,199	)
Net operating loss carryforward		449,707
On-line training certificate reserve		938
Total deferred tax assets		471,289
Valuation allowance		(362,511	)
Deferred tax assets net of valuation allowance		108,778
Less deferred tax assets – non-current, net of valuation allowance		108,309
Deferred tax assets – current, net of valuation allowance	$	469

The effective tax rate used for calculation of the deferred taxes as of December 31, 2010 was 34%.  The Company has established a valuation allowance against deferred tax assets of $362,511 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 75% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.

17. AUTHORIZATION OF PREFERRED STOCK

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock.  The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes.  Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock.  The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets.  The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock.   See Note 6.  RELATED PARTY TRANSACTIONS – Notes Payable for discussion regarding issuance of 425,000 shares of preferred stock for forgiveness of $42,500 Note payable to Chief Executive Officer of the Company.

21

BROWNIE’S MARINE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

18. LEGAL

On June 23, 2011, a claim was filed in the U.S. District Court of Dallas County, Texas by the Estate of Christopher Logan.  Amount of damages sought were not provided in the claim.  The claim lists eight defendants of which the Company is one.  The claim asserts Mr. Logan died breathing carbon monoxide while diving with a T80G medium duty compressor (“T80G”).  The claim’s cites belief by the plaintiff that the T80G was sold by Brownie’s based on  representations  made by Keene Engineering, Inc. also a manufacturer of dive compressors and also listed as a defendant.  The Company believes the representation is erroneous because Brownie’s does not sell the make/model cited in the claim, and Brownie’s compressors have the brand name forged into the die-casting on the head of each cylinder.  Therefore, Brownie’s believes this claim is without merit, and anticipates being dismissed from the lawsuit.

19. SUBSEQUENT EVENTS

On November 7, 2011, the Company entered into a Joint Venture Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers.

Under the terms of the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products at no cost, and PDC will act as a training and demonstration site for Brownie’s Third Lung products. The inventory will remain the property of BWMG.

In addition, under the terms of the Agreement, the parties have entered into a Non-Binding Letter of Intent for the possible sale of PDC’s business to BWMG.   The premise of the transaction, which is still in discussion phase, is the exchange of BWMG’s stock for the yet to be agreed upon value of PDC.  In anticipation of a purchase transaction, the Agreement provides BWMG with a 33% interest in PDC, and for BWMG to issue 4,581,505 restricted shares of  its common stock to PDC.  Further, PDC is required to remit no later than 45 days from the end of each quarter, a 33% share in pre-tax net profits.  At least 50% of the total pre-tax profits are required for distribution under the Agreement, and BWMG is not required to share in losses.  If PDC decides to sell any inventory provided by the Company, the purchase price will be the same as that offered to other Dealers of the Company’s products.

If this Agreement is terminated by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would be returned to BWMG at that time as well.

On November 7, 2011, the Company issued 657,040 restricted shares of its common stock to a Corporation, which one of the Company's Board of Directors has a financial interest, for approximately $4,000 in consulting services.

On November 3, 2011, the Company converted an aged account payable trade of $5,607 for 683,820 shares of restricted common stock.

22

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 within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.  Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology.

This filing contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital.  These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this prospectus generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this filing generally.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur.

Overview

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

Mr. Carmichael has operated Trebor as its President since 1986.  Since April 16, 2004, Mr. Carmichael has served as President, Principal Accounting Officer and Chief Financial Officer of the Company.  From March 23, 2004 to April 26, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer.  He is the holder or co-holder of numerous patents that are used by Trebor and several other large original equipment manufacturers in the diving industry.

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, 2011, As Compared To the Three Months Ended September 30, 2010

Net revenues.  For the three months ended September 30, 2011, we had net revenues of $659,261 as compared to net revenues of $561,887 for the three months ended September 30, 2010, an increase of $97,374, or 17.33%.  Tankfill system and related sales increased approximately $42,000 for the three months ended September 30, 2011, as compared to the same period in 2010.  Hookah system and related sales increased approximately $54,000, and sales other products increased approximately $1,000 as compared to the three months ended September 30, 2010. The Company believes the depressed state of the economy continues to negatively impact sales. Despite this negative impact, the Company is encouraged by the increase in sales of both hookah system and related, and tankfill system and related sales. The Company believes persistent sales, marketing, and promotion efforts of the Company and its products contributed to the increase. The Company’s products are largely non-essential, disposable income type items, and therefore are more likely to be sacrificed by consumers in preference for essential goods during depressed economic conditions.

Cost of net revenues.  For the three months ended September 30, 2011, we had cost of net revenues of $490,251 as compared with cost of net revenues of $395,121 for the three months ended September 30, 2010, an increase of $95,130, or 24.08%.   The increase in cost of net revenues during the third quarter of 2011, as compared to the third quarter of 2010, is primarily attributable to the increase in net revenues.  As a percentage of net revenues, cost of net revenues for the three months ended September 30, 2011, as compared to the three months ended September 30, 2011, increased approximately 4%.  Of this increase, 3% is attributable to an increase in the cost of raw materials, which is primarily a result of the sales mix.  During the third quarter of 2011 as compared to the third quarter of 2010 there were more tankfill sales in the mix with lower profit margins.

23

Gross profit.  For the three months ended September 30, 2011, we had a gross profit of $169,010 as compared to gross profit of $166,766 for the three months ended September 30, 2010, an increase of $2,244, or 1.35%.  The relatively flat gross profit despite the increase in net revenues is primarily attributable to the increase in cost of net revenues as a percentage of net revenues, which is discussed in Cost of net revenues above.

Operating expenses.  For the three months ended September 30, 2011, we had total operating expenses of $361,341 as compared to total operating expenses of $380,253 for the three months ended September 30, 2010, a decrease of $18,912, or 4.97%.  The $18,912 decrease is due to a decrease in selling, general and administrative costs of $5,650, and $13,262 decrease in research and development costs as compared to the same period in 2010.  The decrease in research and development costs is attributable to less payroll hours spent in this area in the third quarter ended 2011, as compared to the third quarter 2010.

Other expense, net.  For the three months ended September 30, 2011, we had other expense, net of $179,446 as compared to other expense, net of $170,830 for the three months ended September 30, 2010, an increase of $8,616, or 5.04%.  This account is comprised of other (income) expense, net, and interest expense.  Other (income) expense, net, increased by $28,090 expense.  Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature. The increase is primarily due to in the third quarter of 2010, this account included a gain on patent infringement settlement, net of expenses associated with the settlement of approximately $27,000, without comparable activity in the third quarter of 2011. Interest expense for the three months ended September 30, 2011 decreased $19,474 over the three months ended September 30, 2010. The decrease in interest expense of $19,474, is primarily attributable to a net between decrease of approximately $180,000 interest on forgiveness of debt, which occurred in third quarter of 2010 without a comparable transaction in third quarter of 2011, and an increase in interest expense of approximately $157,000 of accretion of discounts (non-cash) on convertible debentures issued during the fourth quarter of 2010 through the second quarter of 2011.

Provision for income tax expense (benefit).  For the three months ended September 30, 2011, we had a provision for income tax expense (benefit) of $37,892, as compared to a provision for income tax expense (benefit) of ($38,955) for the three months ended September 30, 2010, an increase in the provision for income tax expense of $76,847, or 197.27%.  The increase in provision for income tax expense is primarily a result of the increase in  valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward.

Net loss.  For the three months ended September 30, 2011, we had net loss of $409,669 as compared to net loss of $345,362 for the three months ended September 30, 2010, an increase of $64,307, or 18.62%.  The increase in net loss is attributable to $2,244 increase in gross profit, $18,912 decrease in operating expenses, $8,616 increase in other expense, net, and $76,847 increase in provision for income tax expense.

Results of Operations for the Nine months ended September 30, 2011, As Compared To the Nine months ended September 30, 2010

Net revenues.  For the nine months ended September 30, 2011, we had net revenues of $1,619,355 as compared to net revenues of $1,684,135 for the nine months ended September 30, 2010, a decrease of $64,780, or 3.85%.  Tankfill system and related sales declined approximately $190,000 for the nine months ended September 30, 2011, as compared to the same period in 2010.  Hookah system and related sales increased approximately $119,000, and sales of public water safety products (ex. life jackets) increased approximately $10,000 as compared to the nine months ended September 30, 2010. The Company believes the depressed state of the economy continues to negatively impact sales as is seen by the decline in tankfill system sales, but is encouraged by the increased sales of  hookah systems and public water safety products. The Company’s products are largely non-essential, disposable income type items, and therefore are more likely to be sacrificed by consumers in preference for essential goods during depressed economic conditions.

24

Cost of net revenues.  For the nine months ended September 30, 2011, we had cost of net revenues of $1,227,860 as compared with cost of net revenues of $1,279,629 for the nine months ended September 30, 2010, a decrease of $51,769, or 4.05%.   The decrease in cost of net revenues is primarily a result of reduction in quantity of materials used resulting from the 14.45% decrease in net revenues.  Overall, as a percentage of net revenues, cost of net revenues remained consistent from the nine months ended September 30, 2010, to the nine months ended September 30, 2011, changing less than a quarter of 1%.

Gross profit.  For the nine months ended September 30, 2011, we had a gross profit of $391,495 as compared to gross profit of $404,506 for the nine months ended September 30, 2010, a decrease of $13,011, or 3.22%.  The decrease is primarily attributable to the decrease in net revenues.

Operating expenses.  For the nine months ended September 30, 2011, we had total operating expenses of $999,260 as compared to total operating expenses of $1,022,707 for the nine months ended September 30, 2010, a decrease of $23,447, or 2.29%. The net decrease is not attributable to a few items, but rather to numerous accounts with increases and decreases.  Overall, the decrease is due to cost cutting measures to maximize working capital (i.e., elimination of two employee positions).  In some instances where expenses increased, they were non-cash based expenses (i.e. stock based compensation for accounting, advertising, promotion, and other professional services in addition to employee stock based compensation).

Other expense, net.  For the nine months ended September 30, 2011, we had other expense, net of $2,500,022 as compared to other expense, net of $221,626 for the nine months ended September 30, 2010, an increase of $2,278,396, or 1,028.04%.  This account is comprised of other (income) expense, net, and interest expense.   Other (income) expense, net increased by $26,248 expense for the period.  Interest expense for the period increased $2,251,916.  Other (income) expense, net, is comprised of transactions that are generally of a non-recurring nature. The increase in other expense, net from the nine months ended September 30, 2010, to same period in 2011, is primarily due to a gain on patent infringement settlement, net of expenses associated with the settlement of approximately $27,000 during the nine months ended September 30, 2010, without comparable transaction during the same period in 2011.  The increase in interest expense of $2,251,916 for the nine months ended September 30, 2011, over the same period in 2010, is primarily attributable to approximately $267,000 accretion of discounts (non-cash) on convertible debentures issued during the fourth quarter of 2010 through the third quarter of 2011, and approximately $2,000,000  interest expense (non-cash) on forgiveness of debt for preferred stock.

Provision for income tax expense (benefit).  For the nine months ended September 30, 2011, we had a provision for income tax expense (benefit) of 34,949, as compared to a provision for income tax expense (benefit) of ($134,571) for the nine months ended September 30, 2010, an increase in the provision for income tax expense of $169,520, or 125.97%.  The increase in provision for income tax expense is primarily a result of increase in the valuation allowance against the deferred tax asset attributable to realization of the net operating loss carryforward.

Net loss.  For the nine months ended September 30, 2011, we had net loss of $3,142,732 as compared to net loss of $705,256 for the nine months ended September 30, 2010, an increase of $2,437,480 or 345.62%.  The increase in net loss is attributable to $13,011 decrease in gross profit, $23,447 decrease in operating expenses, $2,278,396 increase in other expense, net, and $169,520 increase in provision for income tax expense.

Liquidity and Capital Resources

As of September 30, 2011, the Company had cash and current assets of $905,097 and current liabilities of $2,449,577 or a current ratio of .37 to 1.  This represents a working capital deficit of $1,544,480.  As of December 31, 2010, the Company had cash and current assets of $620,270 and current liabilities of $997,033 or a current ratio of .62 to 1.  As of December 31, 2009, the Company had cash and current assets of $704,629 and current liabilities of $859,066, or a current ratio of .82 to 1.

The accompanying consolidated financial statements included herein have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements.  However, we have incurred losses since 2009, and expect to have losses through 2011.  We have had a working capital deficit since 2009.  Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage further discussed in Note. 9.  NOTES PAYABLE of the Company’s financial statements.

25

In addition, the Company is behind on payments due for accrued payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables.  While the Company has received no formal notices of default and is working out these matters on a case by case basis, there can be no assurance that cooperation the Company has received thus far will continue.  Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS, Note 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 8. OTHER LIABILITIES, Note 9. NOTES PAYABLE, and Note 10.  CONVERTIBLE DEBENTURES.

During the third quarter of 2010, the Company settled several lawsuits for infringement of one of the Company’s patents.  The settlement was in the form of cash and inventory credits, and the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others as further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.

 In addition, the Company introduced some of its own new products to market in mid-2010, including the variable speed electric and battery powered diving units.  We believe the combined addition of these products to complement the sales of our other products will allow us to generate enough sales to supply us with sufficient working capital in the future.  However, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the fourth quarter of 2011.  This raises substantial doubt about our ability to continue as a going concern.

We will need to raise additional funds and are currently exploring alternative sources of financing.  We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 10.  CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities.   We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.

Although we currently seek to raise capital through private equity offerings and debt financing, such financing may not be available when we need it or may not be available on terms that are favorable to us.  If we raise additional capital through the sale of our securities, your ownership interest will be diluted and the terms of the financing may adversely affect your holdings or rights as stockholders.

If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Certain Business Risks

The Company is subject to various risks, which may materially harm its business, financial condition and results of operations.  You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase the Company’s common stock.  These are not the only risks and uncertainties that the Company faces.  If any of these risks or uncertainties actually occurs, the Company’s business, financial condition or operating results could be materially harmed.  In that case, the trading price of the Company’s common stock could decline and you could lose all or part of your investment.

Our auditors have raised substantial doubt about our ability to continue as a going concern.

We do not expect that our existing cash flow will be sufficient to fund our presently anticipated operations beyond the end of 2011.  This raises substantial doubt about our ability to continue as a going concern.  We will need to raise additional funds and are currently exploring alternative sources of financing.  We have issued a number of convertible debentures as an interim measure to finance our working capital needs.  If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection.

26

The issuance of the Company’s stock upon conversion of the convertible debentures, warrants and other securities may result in significant dilution to our shareholders and could encourage short sales by third parties, which could contribute to the future decline of the Company’s stock price and materially dilute existing stockholders' equity and voting rights.

We may issue a significant number of shares in the event of conversion of outstanding debentures, which are convertible at a discount to the market price of our common stock, or conversion of other securities.  If the shares issued upon conversion of debentures or issuable upon exercise of warrants are sold into the market and exceed the market's ability to absorb the increased number of shares of stock, such shares have the potential to cause significant downward pressure on the price of the Company’s common stock. The opportunity exists for short sellers and others to contribute to the future decline of the Company’s stock price. If there are significant short sales of the Company’s stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market. If there is an imbalance on the sell side of the market for the stock, our stock price will decline.

Failure to timely pay obligations as they come due could lead to significant financial obligations

We have issued a series of convertible debentures that convert at a discount to the market price of our common stock. We currently do not have working capital available to satisfy these notes.  Failure to repay the notes could lead to significant penalties including acceleration of the due dates on the notes and penalties payable in both cash and stock. If in the future, if we fail to timely meet our financial obligations as they come due, our operating results, balances sheet and future ability to raise capital could be seriously harmed.  Furthermore, conversion of the notes could result in substantial dilution to our shareholders.

Our Common Stock May Be Affected By Limited Trading Volume and May Fluctuate Significantly

Our common stock is traded on the Over-the-Counter Bulletin Board.  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 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.

27

We Depend On the Services of Our Chief Executive Officer

Our success largely depends on the efforts and abilities of Robert M. Carmichael, our President and Chief Executive Officer.  Mr. Carmichael has been instrumental in securing our existing financing arrangements.  Mr. Carmichael is primarily responsible for the development of our technology and the design of our products.  The loss of the services of Mr. Carmichael could materially harm our business because of the cost and time necessary to recruit and train a replacement.  Such a loss would also divert management attention away from operational issues. We do not presently maintain a key-man life insurance policy on Mr. Carmichael.

We Require Additional Personnel and Could Fail To Attract or Retain Key Personnel

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

Our Failure to Obtain Intellectual Property and Enforce Protection Would Have a Material Adverse Effect on Our Business

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

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

We May Be Unable To Manage Growth

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

Reliance on Vendors and Manufacturers

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

Dependence on Consumer Spending

The success of the our business depends largely upon a number of factors related to consumer spending, including current and future economic conditions affecting disposable consumer income such as employment, business conditions, tax rates, and interest rates.  In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products.  Any significant deterioration in overall economic conditions that diminishes consumer confidence or discretionary income can reduce our sales and adversely affect our financial results.  The impact of weakening consumer credit markets; layoffs; corporate restructurings; higher fuel prices; declines in the value of investments and residential real estate; and increases in federal and state taxation can all negatively affect our results.  There can be no assurance that in this type of environment consumer spending will not decline beyond current levels, thereby adversely affecting our growth, net sales and profitability or that our business will not be adversely affected by continuing or future downturns in the economy, boating industry, or dive industry.  If declines in consumer spending on recreational marine accessories and dive gear are other than temporary, we could be forced to curtail operations.

28

Government Regulations May Impact Us

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

Bad Weather Conditions Could Have an Adverse Effect on Operating Results

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

Investors Should Not Rely On an Investment in Our Stock for the Payment of Cash Dividends

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

The Manufacture and Distribution of Recreational Diving Equipment Could Result In Product Liability Claims

We, like any other retailer, distributor and manufacturer of products that are designed for recreational sporting purposes, face an inherent risk of exposure to product liability claims in the event that the use of our products results in injury.  Such claims may include, among other things, that our products are designed and/or manufactured improperly or fail to include adequate instructions as to proper use and/or side effects, if any.  We do not anticipate obtaining contractual indemnification from parties-supplying raw materials, manufacturing our products or marketing our products.  In any event, any such indemnification if obtained will be limited by our terms and, as a practical matter, to the creditworthiness of the indemnifying party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities relating to defective products could have a material adverse effect on our operations and financial conditions, which could force us to curtail or cease our business operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable to the Smaller Reporting Company

29

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation with the participation of our Chief Executive Officer who serves as our principal executive officer and principal financial and accounting officer, required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”) of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act.

Based on this evaluation, our Chief Executive Officer and principal financial and accounting officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective such that the information relating to our company required to be disclosed in our SEC reports (i) is recorded processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosures. Our management concluded that our disclosure controls and procedures were not effective as described in more detail below.  A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.

The specific weakness identified by our management was a lack of a timely review by corporate management.  The weakness is principally due to lack of working capital to retain the legal, accounting and external audit services, which are integral to the Company’s process for timely disclosure and financial reporting.  This deficiency resulted in failure to timely file a Form 8-K relating to a convertible debenture agreement executed in the third quarter of 2011.  The convertible debenture transaction is discussed below in Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, and is disclosed in the notes to the Company’s Financial Statements for the period covered by this report included herein.

To mitigate the chance for reoccurrence of this noted deficiency, as disclosed in the Liquidity and Capital Resources section of this Form 10-Q Report, the company is currently in the process of addressing its working capital shortfall whereby this would provide the needed funds to retain the legal, accounting, and external audit services required for timely disclosure and financial reporting.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.   Legal Proceedings

None.

Item 1a. Risk Factors

Not Applicable to Smaller Reporting Company.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

During the period covered by this report, the Company sold securities without registration under the Securities Act of 1933 (the “Securities Act”) in reliance upon the exemption provided in Section 4(2) as described below or as otherwise previously disclosed on Form 8-K.  The securities were issued with a legend restricting their transferability absent registration of applicable exemption.

On August 31, 2011, the Company borrowed $10,000 in exchange for a convertible debenture maturing on August 31, 2013.  The debenture bears interest at 5% per annum.  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 may prepay the debenture plus accrued interest at any time before maturity.

On September 8, 2011, the Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The debenture bears interest at 10% per annum and matured on September 20, 2011. The lender at thier 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.

30

On September 12, 2011, the Company borrowed $37,500 in exchange for a convertible debenture.  The debenture bears 8% interest per annum and matures on June 14, 2012.  The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due.  Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same.  Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time.  The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest.  There is a $2,000 per day penalty for not timely delivering shares upon conversion notice.  The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.  The Company issued and reserved 19,600,000 shares of restricted common stock as part of this transaction.

During the three months ended September 30, 2011, the Company issued an aggregate of 2,600,000 shares of its restricted common stock pursuant to the partial conversion of convertible debenture in the principal amount of $20,635 dated October 4, 2010.  The shares were issued in satisfaction of $2,600 outstanding under the convertible debentures.

During the three months ended September 30, 2011, the Company issued an aggregate of 2,026,568 shares of its common stock previously reserved pursuant to a convertible debenture in the principal amount of $37,500 dated February 10, 2011.  Because the holding period for the debt as determined by Rule 144(d)(3)(ii) had been met as of the date of notice of conversion, the stock was not deemed “restricted securities” as defined by Rule 144, and accordingly was issued without any restrictive legend.

Item 3.   Defaults Upon Senior Securities

None.

Item 4.   (Removed and Reserved)

Item 5.   Other Information

On November 7, 2011, the Company entered into a Joint Venture Equity Exchange Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers.  Under the terms of the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products at no cost, and PDC will act as a training and demonstration site for Brownie’s Third Lung products. The inventory will remain the property of BWMG.

In addition, under the terms of the Agreement, the parties have entered into a Non-Binding Letter of Intent for the possible sale of PDC’s business to BWMG.   The premise of the transaction, which is still in discussion phase, is the exchange of BWMG’s stock for the yet to be agreed upon value of PDC.  In anticipation of a purchase transaction, the Agreement provides BWMG with a 33% interest in PDC, and for BWMG to issue 4,581,505 restricted shares of  its common stock to PDC.  Further, PDC is required to remit no later than 45 days from the end of each quarter, a 33% share in pre-tax net profits.  At least 50% of the total pre-tax profits are required for distribution under the Agreement, and BWMG is not required to share in losses.  If PDC decides to sell any inventory provided by the Company, the purchase price will be the same as that offered to other Dealers of the Company’s products.

31

If this Agreement is terminated by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective interests in each other’s business will revert back to the original party.   Accordingly, if this should happen, PDC will relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same.  All property at PDC owned by BWMG would be returned to BWMG at that time as well.  A copy of the Joint Venture Equity Exchange Agreement is included provided herewith as Exhibit 10.21.

On September 12, 2011, the Company borrowed $37,500 in exchange for a convertible debenture.  The debenture bears 8% interest per annum and matures on June 14, 2012.  The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due.  Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same.  Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time.  The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest.  There is a $2,000 per day penalty for not timely delivering shares upon conversion notice.  The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.  The Company issued and reserved 19,600,000 shares shares of restricted common stock as part of this transaction.  A copy of the promissory note is provided herewith as Exhibit 10.20.

32

Item 6.  Exhibits

Exhibit No.	Description	Location
2.2	Merger Agreement, dated June 18, 2002 by and among United Companies Corporation, Merger Co., Inc. and Avid Sportswear & Golf Corp.	Incorporated by reference to Exhibit 2.02 Amendment No. 1 to Form S-4 filed June 24, 2002.
2.3	Articles of Merger of Avid Sportswear & Golf Corp. with and into Merger Co., Inc.	Incorporated by reference to Exhibit 2.03 Amendment No. 1 to Form S-4 filed June 24, 2002.
3.1	Articles of Incorporation	Incorporated by reference to Exhibit 3.1 of 10-Q for the quarter ended September 30, 2009 filed on November 13, 2009.
3.4	Designation of Series A Preferred Stock	Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on April 27, 2011.
3.5	Bylaws	Incorporated by reference to Exhibit 3.04 to the Registration Statement on Form 10-SB.
5.1	2007 Stock Option Plan	Incorporated by reference to the appendix to the Company's Definitive Information Statement on Schedule 14C filed July 31, 2007.
10.1	Share Exchange Agreement, dated March 23, 2004 by and among the Company, Trebor Industries, Inc. and Robert Carmichael	Incorporated by reference to Exhibit 16.1 to Current Report on Form 8-K filed April 9, 2004
10.2	Non-Exclusive License Agreement – BC Keel Trademark	Incorporated by reference to Exhibit 10.18 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.
10.3	Exclusive License Agreement - Brownie's Third Lung, Brownie's Public Safety, Tankfill, and Related Trademarks and Copyrights	Incorporated by reference to Exhibit 10.20 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.
10.4	Non-Exclusive License Agreement - Garment Integrated or Garment Attachable Flotation Aid and/or PFD	Incorporated by reference to Exhibit 10.22 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.
10.5	Non-Exclusive License Agreement – SHERPA Trademark and Inflatable Flotation Aid/Signal Device Technology	Incorporated by reference to Exhibit 10.24 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.
10.6	Non-Exclusive License Agreement - Tank- Mounted Weight, BC or PFD-Mounted Trim Weight or Trim Weight Holding System	Incorporated by reference to Exhibit 10.25 to Form 10QSB for the quarter ended September 30, 2005 filed August 15, 2005.
10.7	Exclusive License Agreement – Brownie’s Third Lung and Related Trademarks and Copyright	Incorporated by reference to Exhibit 10.26 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.

33

Exhibit No.	Description	Location
10.8	Agreement for Purchase and Sale of Property Between Trebor Industries, Inc. and GKR Associates, Inc. dated February 21, 2007	Incorporated by reference to Exhibit 10.28 to Form 10KSB for the year ended December 31, 2006 filed April 4, 2007.
10.9	First Mortgage dated February 22, 2007  between Trebor Industries, Inc. and  Colonial Bank	Incorporated by reference to Exhibit 10.29 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.
10.10	Note dated February 22, 2007 payable to GKR Associates, Inc.	Incorporated by reference to Exhibit 10.30 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.
10.11	Second Mortgage dated February 22, 2007 between Trebor Industries, Inc. and  GKR Associates, LLC.	Incorporated by reference to Exhibit 10.31 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.
10.12	Promissory Note dated January 1, 2007 payable to Robert M. Carmichael.	Incorporated by reference to Exhibit 10.32 to Form 10KSB for the year ended year ended December 31, 2006 filed April 4, 2007.
10.13	Asset Purchase Agreement between Trebor  Industries, Inc. and Robert Carmichael.	Incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 1, 2008.
10.14	Asset Purchase Agreement between Trebor  Industries, Inc. and Robert Carmichael.	Incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 5, 2009.
10.15	Asset Purchase Agreement between Trebor  Industries, Inc. and Robert Carmichael.	Incorporated by reference to Exhibit 10.1 to Form 8-K filed on January 19, 2010.
10.16	Asset Purchase Agreement between Trebor Industries, Inc. and the Carleigh Rae Corporation	Incorporated by reference to  Exhibit 10.1 to Form 8-K filed on January 6, 2011.
10.17	Convertible Promissory Note issued  to Asher Enterprise , Inc.	Incorporated by reference to Exhibit 4.1 to  Form 8-K filed on March 14, 2011.
10.18	Consolidated and Restated Promissory Note issued to BBT.	Incorporated by reference to Exhibit 4.2 to  Form 8-K filed on March 14, 2011.
10.19	BBT Forbearance Agreement	Incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 14, 2011.
10.20	Convertible Promissory Note issued  to Asher Enterprise, Inc.	Provided herewith
10.21	Joint Venture Equity Exchange Agreement with Pompano Dive Center, LLC.	Provided herewith
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a)	Provided herewith.
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a)	Provided herewith.

34

Exhibit No.	Description	Location
32.1	Certification Pursuant to Section 1350	Provided herewith.
32.2	Certification Pursuant to Section 1350	Provided herewith
101	XBRL Interactive Data File **	Provided herewith

** Attached as Exhibit 101 to this report are the following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed "filed" or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

35

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:       November 14, 2011	Brownie’s Marine Group, Inc.
	By:	/s/ Robert M. Carmichael
		Robert M. Carmichael
		President, Chief Executive Officer,
		Chief Financial Officer/
		Principal Accounting Officer

36

EX-10.20

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITITES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITITES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD TRANSFERRED OR ASSIGNED (1) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTHWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LAOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

Principal Amount: $37,500.00 Purchase Price: $37,500.00 Issue Date: September 12, 2011

CONVERTIBLE PROMISSORY NOTE

FOR VALUE RECEIVED, BROWNIE’S MARINE GROUP, INC. , a Nevada corporation (hereinafter called the “Borrower”), hereby promises to pay to the order of ASHER ENTERPRISES, INC., a Delaware corporation, or registered assigned (the “Holder”) the sum of $37,500.00 together with any interest as set forth herein, on June 14, 2012 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof at the rate of eight percent (8%) (the “Interest Rate”) per annum from the date hereof (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. This note may not be prepaid in whole or in part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid (“Default Interest”). Interest shall commence accruing on the date that the Note is fully paid and shall be computed on the basis of a 365-day year and the actual number of days elapsed. All payments due hereunder (to the extent no converted into common stock, $0.001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Whenever an y amount expressed to be due by terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and other otherwise defined, shall have the meaning ascribed thereto in that certain Securities Purchase Agreement dated the date hereof, pursuant to which this Note was originally issued (the “Purchase Agreement”).

This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.

The following terms shall apply to this Note:

ARTICLE I. CONVERSION RIGHTS

1.1  Conversion Right. The Holder shall have the right from time to time, and at any time during the period beginning on the date which is one hundred eighty (180) days following the date of this Note and ending of the later of: (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III, each is respect of the remaining outstanding principal amount of this Note to convert all or any part of the outstanding and unpaid principal amo9unt of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the “Conversion Price”) determine as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note in excess of that portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determine in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso, provide, further, however, that the limitations on conversion may be waived by Holder upon, at the election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion plus (2) at the Borrower’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, plus (3) at the Borrower’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses(1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.

1.2           Conversion Price.

(a) Calculation of Conversion Price.  The conversion price (the “Conversion Price”) shall equal the Viable Conversion Price (as defined herein) (subject to equitable adjustments of stock splits, stock dividends or rights offerings by the Borrower relating to the Borrower’s securities or the securities of any subsidiary of the Borrower, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). The “Variable Conversion Price” shall mean 58% multiplied by the Market Price (as defined herein) (representing a discount rate of 42%). “Market Price” means the average of the lowest three (3) Trading Prices (as defined below) for the common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Trading Price” means, for any security as of any date, the closing bid price on the Over-the Counter Bulletin Board, or applicable trading market (the “OTCBB”) as reported by a reliable reporting service (“Reporting Service”) designated by the Holder (i.e. Bloomberg) or, if the OTCBB is not the principal trading market for such security, the closing bid price of such security on the principal trading market of such security, the closing bid price of such security on the principal securities exchange or the trading market where such security is listed or traded or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc.  If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is required in order to determine the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the OTCBB, or on the principal securities exchange or the securities market on which the Common Stock is then being traded.

(b) Conversion Price During Major Announcements.  Notwithstanding anything contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes a public announcement that it intends to consolidate or merge with any other corporation (other than a merger in which the Borrower is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantially all of the assets of the Borrower or (ii) any person, group or entity (including the Borrower) publicly announces a tender offer to purchase 50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the date of the announcement referred to in clause (i) or (ii) is hereinafter referred to as the “Announcement Date”) then the Conversion Price shall, effective upon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal to the lower of (x) the Conversion Price which would have been applicable for a Conversion occurring on the Announcement Date and (y) the Conversion Price that would otherwise be in effect. From and after the Adjusted Conversion Price Termination Date, the Conversion Price shall be determined as set forth in this Section 1.2(a). For purposes hereof, “Adjusted Conversion Price Termination Date” shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a public announcement as contemplated by this Section 1.2(b) has been made, the date upon which the Borrower (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) consummates or publicly announces the termination or abandonment of the proposed transaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to become operative.

1.3           Authorized Shares.  The Borrower covenants that during the period the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at all times to have authorized and reserved five times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time)(the “Reserved Amount”). The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations pursuant to Section 4(g) of the Purchase Agreement. The Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. The Borrower (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note.

If, at any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of the Note.

1.4           Method of Conversion.

(a) Mechanics of Conversion.  Subject to Section 1.1, this Note may by converted by the Holder in whole or in part at any time from time to time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable mean of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section 1.4(b), surrendering this Note at the principal office of the Borrower.

(b) Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid principal amount of this Note is so converted. The holder and the Borrower shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such records of the Borrower shall, prima facie, be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.

(c)  Payment of Taxes.  The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.

(d)  Delivery of Common Stock Upon Conversion.  Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (but in any event the fifth (5th) business day being hereinafter referred to as the “Deadline”) (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement.

(e) Obligation of Borrower to Deliver Common Stock.  Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with repect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 6:00 p.m., New York, New York time on such date.

(f) Delivery of Common Stock by Electronic Transfer.  In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to eht Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.

(g) Failure to Deliver Common Stock Prior to Deadline.  Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered be the Deadline (other than a failure due to the circumstances described in Section 1.3 above, which failure shall be governed by such Section) the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock.  Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which even interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, interference with such conversion right are difficult if not impossible to qualify. Accordingly the parties acknowledge that the liquidated damages provision contained in this Section 1.4(g) are justified.

1.5           Concerning the Shares.  The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule)(“Rule 144”) ro (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement). Except as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Actor otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securuties as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following for, as appropriate:

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTICIATE NOR THE SECURITEIS INTO WHICH THESE SECUITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (b) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION ISNOT REQUIRED UNDER SIAD ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be accepted by the Company so that the ale or transfer is effected or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. In the event that the Company does not accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default  pursuant to Section 3.2 of the Note.

1.6 Effect of Certain Events.

(a)  Effect of Merger, Consolidation, Etc.  At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. “Person” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.

(b)  Adjustment Due to Merger, Consolidation, Etc.  If, at any time when this Note is issued and outstanding and prior to conversion of all the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Borrowers shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Borrow or another entity, or in the case of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interest of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable as nearly as may b practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not the Borrower) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers of share exchanges.

(c)  Adjustment Due to Distribution.  If the Borrower shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Borrower’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be entailed, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.

(d) Adjustment Due to Dilutive Issuance.  If, at any time when any Notes are issued and outstanding, the Borrower issues or sells, or in accordance with this Sections 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of a reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock( a “Dilutive Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration per share received by the Borrower in such Dilutive Issuance.

The Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights or options (not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants, right and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”) and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share.  For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any , payable to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Option, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Option (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Option or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.

Additionally, the Borrower shall be deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.

(e)  Purchase Rights.  If, at any time when any Notes are issued and outstanding, the Borrower issues any convertible securities or rights to purchase stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(f)  Notice of Adjustments.  Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder a certificate stetting forth such adjustment or readjustment and showing in detail the fact upon which such adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.

1.7           Trading Market Limitations.  Unless permitted by applicable rules and regulations of the principal securities market on which the Common Stock is then listed or traded, in no event shall the Borrower issue upon conversion of or otherwise pursuant to this Note and other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the Common Stock is then traded (the “Maximum Share Amount”), which shall be 4.99% of the total shares outstanding on the Closing Date (as defined in the Purchase Agreement) subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date hereof. Once the Maximum Share Amount has been issued, if the Borrower fails to eliminate any prohibitions under applicable law or the rules or regulation of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Borrower or any of its securities on the Borrower’s ability to issue shares of Common Stock in excess of the Maximum Shares Amount, in lieu of any further right to convert this Note, this will be considered an Event of Default under Section 3.3 of the Note.

1.8           Status as Shareholder.  Upon submission of a Notice of Covnersion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a Failure by the Borrower to comply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of  a Holder of this Note with respect to such unconverted portions of this Note and the Borrower shall, as soon as practicable, return such unconverted Note to the Holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determine in accordance with  Section 1.3) for the Borrower’s failure to convert this Note.

1.9  Prepayment.  Notwithstanding anything to the contrary contained in this Note, so long as the Borrower has not received a Notice of Conversion from the Holder, then at any time during the period beginning on the Issue Date and ending on the date which is sixty (60) days following the issue date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, in accordance with this Section 1.9.  Any notice of prepayment hereunder (an “Optional Prepayment Notice”) shall be delivered to the Holder of the Note at its registered addresses and shall state: (1) that the Borrower is exercising its right to prepay the Note, and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice.  On the date fixed for prepayment (the “Optional Prepayment Date”), the Borrower shall make payment of the Optional Prepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount ins cash (the “Optional Prepayment Amount”) equal to 130%, multiplied by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (x) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Optional Prepayment Amount due to the Holder of the Note within two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

Notwithstanding anything to the contrary contained in the Note, so long as the Borrower has not received a Notice of Conversion from the Holder. Then at any time during the period beginning on the date which is sixty-one (61) days following the issue date and ending on the date which is ninety (90) days following the issue date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, accordance with this Section 1.9. Any Optional Prepayment Notice shall be delivered to the Holder of the Note at its registered address and shall state: (1) that the Borrower is exercising its right to prepay the Note and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower shall make payment of the Second Optional Prepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Second Optional Prepayment Amount”) equal to 135%, multiplied by the sum of: (w)  the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Second Optional prepayment Amount due to the Holder of the Note with two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

Notwithstanding anything to the contrary contained in the Note, so long as the Borrower has not received a Notice of Conversion from the Holder. Then at any time during the period beginning on the date which is ninety-one (91) days following the issue date and ending on the date which is one hundred twenty (120) days following the issue date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, accordance with this Section 1.9. Any Optional Prepayment Notice shall be delivered to the Holder of the Note at its registered address and shall state: (1) that the Borrower is exercising its right to prepay the Note and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower shall make payment of the Third Optional Prepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Third Optional Prepayment Amount”) equal to 140%, multiplied by the sum of: (w)  the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Second Optional prepayment Amount due to the Holder of the Note with two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

Notwithstanding anything to the contrary contained in the Note, so long as the Borrower has not received a Notice of Conversion from the Holder. Then at any time during the period beginning on the date which is on hundred twenty-one (121) days following the issue date and ending on the date which is one hundred fifty (150) days following the issue date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, accordance with this Section 1.9. Any Optional Prepayment Notice shall be delivered to the Holder of the Note at its registered address and shall state: (1) that the Borrower is exercising its right to prepay the Note and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower shall make payment of the Fourth Optional Prepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Fourth Optional Prepayment Amount”) equal to 145%, multiplied by the sum of: (w)  the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Second Optional prepayment Amount due to the Holder of the Note with two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

Notwithstanding anything to the contrary contained in the Note, so long as the Borrower has not received a Notice of Conversion from the Holder. Then at any time during the period beginning on the date which is one hundred fifty-one (151) days following the issue date and ending on the date which is one hundred eighty (180) days following the issue date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, accordance with this Section 1.9. Any Optional Prepayment Notice shall be delivered to the Holder of the Note at its registered address and shall state: (1) that the Borrower is exercising its right to prepay the Note and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower shall make payment of the Fifth Optional Prepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Fifth Optional Prepayment Amount”) equal to 150%, multiplied by the sum of: (w)  the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Second Optional prepayment Amount due to the Holder of the Note with two (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

After the expiration of on hundred eighty (180) following the date of the Note, the Borrower shall have no right of prepayment.

ARTICLE II. CERTAIN COVENANTS

2.1 Distributions on Capital Stock.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of Borrower’s disinterested directors.

2.2  Restriction on Stock Repurchases.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares.

2.3  Borrowings.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, create, incur, assume guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection, or suffer to exist any liability for borrowed money, exact (a) borrowings in existence or committed on the date hereof and of which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors or financial institution incurred in the ordinary course of business or (c) borrowings, the proceeds of which shall be used to repay this Note.

2.4  Sale of Assets.  Son long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.

2.5  Advances and Loans.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’s written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Borrower, except loans, credits or advances (a) in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) not in excess of $100,000.

ARTICLE III. EVENTS OF DEFAULT

If any of the following events of default (each, an “Event of Default”) shall occur:

3.1   Failure to Pay Principal of Interest. The Borrower fails to pay the principal hereof of interest thereon when due on this Note, whether at maturity, upon acceleration of otherwise.

3.2   Conversion and the Shares. The Borrower fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) ( electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this transfer agent in transferring (or issuing)(electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, of fails to remove (Or directs its transfer agent not to remove or impairs, delays and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat no to honor its obligations shall not be rescinded in writing) for three (3) business days after the Holder shall have delivered a Notice of Conversion.

3.3   Breach of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents including but not limited to the Purchase Agreement and such breach continues for a period of ten (10) days after written notice thereof to the Borrower from the Holder.

3.4   Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

3.5   Receive or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.

3.6   Judgments. Any money judgment, writ or similar process shall be entered of filed against the Borrower or any subsidiary of the Borrower or any of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.

3.7   Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.

3.8   Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange.

3.9   Failure to Comply with the Exchange Act. The Borrower shall fail to comply with the reporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.

3.10   Liquidation. Any dissolution, liquidation, or winding up of the Borrower or any substantial portion of its business.

3.11   Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debs as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as an “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.

3.12   Maintenance of Assets. The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future).

3.13   Financial Statement Restatement. The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

3.14   Reverse Splits. The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.

3.15   Replacement of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) assigned by the successor transfer agent to Borrower and the Borrower.

3.16   Cross-Default. Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable notice and cure or grace periods shall, at the option of the Borrower, be considered d a default under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the Borrower, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.

Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due at the Maturity Date)< the Note shall become immediately due and payable and Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein). UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFIEND HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on this Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, and/or 3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and upon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure to pay the principal hereof or interest thereon at the Maturity Date specified in Section 3,1 hereof), the Note shall become immediately due on payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the greater of (i) 150% times the sum of (w) the then outstanding principal amount of the Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y) Default Interest, if any on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4 (g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clause (x), (y) and (z) shall collectively be known as the “Default Sum”) or ii (the “parity value” of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately proceeding the Mandatory Prepayment Date as the “Conversion Date” for purposes of determining the lowest applicable Conversion Price, unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion date shall be the Conversion Date), multiplied by (b) the highest Closing price for the Common Stock during the period beginning on the date of first occurrence for the  Event of Default and ending one day prior to the Mandatory Prepayment Date (the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand presentment or notice, all of which hereby are expressly waived, together with all costs including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.

If the Borrower fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall have the right at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient authorized shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect.

ARTICLE IV. MISCELLANEOUS

4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.

4.2 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received ) or (b) on the second business day following the date of mailing by express courier service fully prepaid, addressed to such address, or upon actual receipt for such mailing, whichever shall first occur. The addresses for such communications shall be:

If to the Borrower, to:

BROWNIE’S MARINE GROUP. INC.

940 NW 1st street

Fort Lauderdale, FL 33311

Attn: ROBERT CARMICHAEL, Chief Executive Officer

Facsimile:

With a copy by fax only to (which copy shall not constitute notice):

[enter name of law firm]

Attn: [attorney name]

[enter address line 1]

[enter city, state, zip]

Facsimile: [enter fax number]

If to the Holder:

ASHER ENTERPRISES, INC.

1 Linden Pl., Suite 207

Great Neck, NY. 11021

Attn: Curt Kramer, President

Facsimile: 516-498-9894

With a copy by fax only to (which copy shall not constitute notice):

Naidich Wurman Birnbaum & Maday, LLP

80 Cuttermill Road, Suite 410

Great Neck, NY 11021

Attn: Bernard S. Feldman. Esq.

Facsimile: 516-466-3555

4.3   Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.

4.4   Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefits of the Holder and its successors and assigns. Each transferee of this Note must be and “Accredited investor” (as defined in rule 501 (a) of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledge as collateral in connection with a bona fide margin account or other lending arrangement.

4.5   Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.

4.6   Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the state courts of New York or in the federal courts located in the state and county of Nassau. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder sand shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Borrower and Holder waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that nay provision of the Note or any other agreements delivered in connections herewith is invalid or unenforceable under any applicable statue or rules of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statue or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process sin any other manner permitted by law.

4.7   Certain Amounts. Whenever pursuant to this Note the Borrower is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on the Note may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensate the Holder in part of loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note. The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss go the Holder from the receipt for a cash payment without the opportunity to convert this Note into shares of Common Stock.

4.8   Purchase Agreement. By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.

4.9   Notice of Corporate Events. Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide the Holder with prior notification of any meeting of the Borrower’s shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Borrower of record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase, or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or winding up of the Borrower shall mail an notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken from the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right tor other event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.9.

4.10   Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under the Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of the Note, that the Holder shall be entitled, in addition to tall other available remedies at law of in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

IN WITNESS WHEROF, Borrower has caused this Note to be singed in its name by its duly authorized officer this September 12, 2011.

BROWNIE’S MARINE GROUP, INC.
By:	/s/ Robert Carmichael
	ROBERT CARMICHAEL
	Chief Executive Officer

EXHIBIT A:  NOTICE OF CONVERSION

The undersigned hereby elects to convert $________________ principal amount of the Note (defined below) into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of BROWNIE’S MARINE GROUP, INC., a Nevada corporation (the “Borrower”) according to the conditions of the convertible note of the Borrower dated September 12, 2011 (the “Note”), as of the date written below. No fee will be charged to the Holder for any conversion, except for the transfer taxes, if any.

Box Checked as to applicable instructions:

o The Borrower shall electronically transmit the Common Stock issuable   pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).

Name of DTC Prime Broker:

Account Number:

o The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:

ASHER ENTERPRISES, INC.

1 Linden Pl., Suite 207

Great Neck, NY. 11021

Attention: Certificate Delivery

(516) 498-9890

Date of Conversion:   ___________________

Applicable Conversion Price: $___________________

Number of Shares of Common Stock to be Issued

Pursuant to Conversion of the Notes:   ____________________

Amount of Principal Balance Due remaining

Under the Note after this conversion: _____________________

ASHER ENTERPRISES, INC.

By: _____________________________

Name: Curt Kramer

Title:  President

Date: ______________

1 Linden Pl., Suite 207

EX-10.21

JOINT VENTURE EQUITY EXCHANGE AGREEMENT

Effective Date 7-November-2011

This Joint Venture Equity Exchange Agreement is made and entered into by and between Pompano Dive Center, LLC., a Florida limited liability company having an address at 101 N Riverside Drive, Suite 111, Pompano Beach, Florida 33062 (hereafter “PDC”) and Brownie’s Marine Group, Inc., a Nevada corporation, together with its wholly owned subsidiary, Trebor Industries, Inc., a Florida corporation d/b/a Brownie’s Third Lung, having an address at 940 N.W. lst Street, Ft. Lauderdale, Florida 33311 (hereafter collectively “BMG”) , for the purpose of engaging in an enterprise for profit, more specifically for the sale of BMG’s products at PDC’s location.

SECTION ONE: PRODUCT PLACEMENT

1.           Placement. BMG will provide a Brownie’s Third Lung product assortment and YachtPro-25/EREEL package to PDC for placement in PDC’s showroom. PDC will act as a full-partner dealer. The product mix may vary according to season and at the sole and absolute direction of BMG.

2.           Ownership. The product and display systems will remain the property of BMG. PDC may elect to purchase the systems under conventional dealer terms/conditions at any time so long as the joint venture remains in full force.

3.           Third Lung/ TOOKA Programs. BMG will provide PDC with the option to offer Third Lung and TOOKA programs from PDC boats and in all approved training programs, advertisements, or the like.

SECTION TWO: CONTROL AND MANAGEMENT

1.           Control. The joint venture will be jointly controlled by the parties whose role will be equivalent to the board of directors of a corporation. The parties (or their designated representative) will meet at mutually agreed upon place and time. The frequency of the meetings will be once every quarter, unless otherwise agreed to by the parties. A special meeting of the parties may be called at any time upon request of either party. A majority of the parties constitutes a quorum to do business, and the decision of a majority of those present at a meeting at which a quorum is present will be the act of the joint venture.

2.           Management. For purposes of managing the operation, business, and day to day affairs of the joint venture, the joint venture will be managed solely by PDC.

SECTION THREE: DIVISION OF PROFITS AND LOSSES

1.           Division or Share of Profits. Any profits of the joint venture will be divided among the parties as follows: PDC agrees to split total pre-tax net profits with BMG on a quarterly basis so long as this agreement remains in place. The split ratio will be 33/67 BMG/PDC, consistent with the split ratio between the parties as set forth in Section Six (4) below. Accounting for the preliminary balance sheet and profit basis (as determined on an accrual basis using generally accepted accounting principles) will be reviewed by an independent accountant. These efforts are also part of preparation for the ultimate integration of PDC into BMG; as such the related cost for the additional accounting will belong to BMG. Pre-tax, quarterly profit distribution will occur no later than 45 days from the end of each quarter. At least 50 of total pre-tax net profits will be offered for distribution.

2.           Division of Losses. At no time will BMG be liable for any operating losses or additional expenses not anticipated by this agreement without prior written approval of BMG on a case-by-case basis.

SECTION FOUR: PROMOTION

The parties will jointly initiate a local press campaign to inform the North Broward- Pompano-Lighthouse Point community about the joint venture. This campaign will include a door-to-door and boat-to-boat element.

SECTION FIVE: ASSIQNMENTS AND TRANSFERS

1.           Either party, for any reason, may cancel this joint venture agreement by providing the other party with thirty (30) days written notice of such cancellation. Upon cancellation, all inventory and display material will be returned to BMG without further demand.

2.           During the term of this agreement, no party may assign or transfer its rights and interest in the joint venture to a party other than a member of the joint venture, without the prior written consent of the other party. Any transfer or assignment of any party’s interest in the joint venture or its profits will be subject to the rights and obligations provided in the agreement. No transfer or assignment will relieve any party of that party’s duties or obligations under this agreement except with the express written consent of the other party.

SECTION SIX: EXCHANGE OF CERTAIN INTEREST IN BUSINESS DURING JOINT VENTURE ANDOTHER MISCELLANEOUS PROVISIONS

1.           The parties have entered into a non-binding Letter of Intent for the possible sale of PDC’s business to BMG. While the terms and conditions of the transaction are currently being discussed between the parties, and are not binding unless and until they are set forth in a written purchase and sales contract signed by PDC and BMG, the parties wish to exchange various interests in their respective business during the term of this Agreement. In the event that this Agreement is terminated and a written purchase and sales agreement is not entered into between PDC and BMG, then the parties’ respective interests in each other’s business will revert back to the original party. In other words, the parties will be restored to their original positions before the execution of this Agreement and PDC will hold no interest in BMG and BMG will hold no interest in PDC.  In the event of termination of this Agreement, the BMG shares shall be cancelled and returned to BMG. Section 6 (1) and 6 (2) are cross-referenced.

2.           Upon the execution of this Agreement, BMG will issue to PDC 4,581,505 shares of common stock of BMG as set forth in Exhibit “1” annexed hereto and titled “Pompano Dive Center Valuation Worksheet”. In the event that a written purchase and sales contact is entered into between the parties for PDC’s business, then the 4,581,505 shares of common stock of BMG provided hereunder will be credited toward the final purchase price of PDC. Valuation of the stock toward the final satisfaction of the purchase will occur at the time of purchase and under the same valuation definition to be agreed upon in the purchase and sales contract.  Section 6 (1) and 6 (2) are cross-referenced.

3.           If applicable, the remaining acquisition of PDC will be paid for in BMG common stock and/or cash at the option of BMG.If BMG elects to purchase PDC using common stock, the weighted trading average discount value defined in the PDC Worksheet will be used or any subsequent valuation method that may be offered to a third party between the date of the signing of a written purchase and sales contract between the parties, and the close of the purchase of PDC will be offered as an alternative; the option will be at the sole discretion of PDC. This valuation/payment method may also include a convertible promissory note structure in the same form/discount as BMG private investors of record; specifically the Perez and Kalayci notes.

4.           Upon the execution of this Agreement, PDC will transfer a thirty-three (33) percent interest in PDC to BMG. PDC agrees to split total pre-tax net profits of PDC with BMG on a quarterly basis so long as this Agreement remains in place. The split ratio will be 33/67 BMG/PDC. Accounting for the preliminary balance sheet and profit basis (as determined on an accrual basis using generally accepted accounting principles) will be reviewed by an independent accountant. These efforts are also part of preparation for the ultimate integration of PDC into BMG; as such the related cost for the additional accounting will belong to BMG. Pre-tax, quarterly profit distribution will occur no later than 45 days from the end of each quarter. At least 50% of total pre-tax net profits will be offered for distribution.

5.           The management, operation, business, decision making and day to day affairs of PDC will remain absolutely and solely with PDC.

6.           BMG accounting department will work with PDC to develop an accounting platform and budget analysis system to translate the current “owner-operator” bookkeeping system into a system that will allow a comprehensive review of the P/L status. The goals of this joint effort are to determine the fair value of the business and use the financial analysis of the ongoing business to increase profitability wherever possible.

7.           BMG will pursue an interim Federal Highway retail store location while continuing the planning and development phase of Brownie’s Adventure Center for the North Broward County area. The scope of this pursuit may include acquisition and/or strategic partnering with other dive and water sports operators/retailers/distributors/etc. in the area under consideration. BMG anticipates PDC management working with BMG to develop and operate any north Broward store operations as a continuation of the strategic partnership.

8.           As part of the purchase and sales contract, the parties intend on entering into an employment agreement for the hiring and integration of PDC’s management into BMG’s business.

SECTION SEVEN: ARBITRATION

The parties intend to avoid major differences among themselves in the conduct of the joint venture. The parties intend that the contract terms will control the parties’ rights and obligations with respect to operations of the joint venture. But as to matters not specifically controlled by the contract terms, or in the event of any dispute arising from or in connection with this joint venture, the parties shall submit any dispute to binding arbitration with the American Arbitration Association. The venue for any arbitration shall be in Broward County, Florida. The prevailing party shall be entitled to recover its reasonable attorney’s fees and costs.

SECTION EIGHT: ENTIRE AGREEMENT

The entire agreement of the parties is contained in this instrument, and in the offer and acceptance. This instrument may not be modified or amended without the agreement of all the parties in writing.

SECTION NINE: NEGATION OF PARTNERSHIP

The parties agree that this joint venture is not a partnership and is not to be governed by the partnership laws of any country or state.

SECTION TEN: LAW GOVERNING

This agreement is to be governed by the laws of Florida.

SECTION EVELVEN: BINDING EFFECT

This agreement is binding upon the parties’ respective heirs, successors, administrators, executors, and assignees, subject to the provisions of this agreement.

SECTION TWELVE: EFFECTIVE DATE AND TERM

1.           Effective Date. This contract will be effective on the date signed by the last party to this agreement.

2.           Term of Agreement. This agreement will continue in effect until September 30, 2013, unless sooner terminated by mutual agreement of all the parties to this agreement; or the impossibility of performance by all the parties.

SECTION THIRTEEN: TERMINATION

Upon the termination of this agreement as provided hereunder, the joint venture will be dissolved and wound up in accordance with law, and its profits distributed among the parties entitled to it or its losses paid by the parties liable for it, as provided for in this agreement.

In witness, the parties have signed this agreement on the dates indicated opposite their names.

POMPANO DIVE CENTER, LLC

By: /s/Jeremy Jarosky                                                        

Printed Title:  Operating Manager/Owner

Dated:

BROWNIE’S MARINE GROUP, INC.

By: /s/Robert M. Carmichael, Pres./CEO

Dated: 7-Nov-11

Dated: 7-Nov-11

Pompano Dive Center Valuation Worksheet ‐Exhibit 1 to Joint Venture Equity Exchange Agreement

Sales (taxable)		Q1		Q2		Q3		Q4	Total Year
2009	$	15,551	$	15,551	$	62,741	$	55,132	$	133,424
2010	$	30,815	$	63,649	$	91,837	$	63,698	$	249,999
		3.53		1.71		2.62	$	2.62
2011 (Jan‐July actual plus projection $108,848)	$	108,848			$	202,592	$	155,740	$	576,028

Assets
(3) Compressors, Fill station, Bottles, Furniture, Display Fixtures, Mixing System, Rental Gear	$	100,000
New/Sellable Inventory at Replacement Cost Value	$	155,000
Total	$	255,000

Purchase Option to Buy and 33% Profit Split					$	84,991.50
Payment in BWMG stock at 3‐month Weighted Trading Average with 30% discount applied (28‐Sept‐2011)			$	0.01855		4,581,505
Total Issued/Outstanding Shares	4.99% Non‐Affiliate Status Thershold
32,262,958		1,609,921.60

Valuation Basics
Total Asset Package (subject to actual inventory count on day of closing)	$	255,000

Good Will and other intangible value formula. Total pre‐tax, net profit multiplied times .0000033 and then mutiplied times the total gross 2011 revenue; examples below

	Pretax Net Profit
				Current		with Brownie		Good Will Value
				Projection		Assistance		Based on
								Projections
	Gross Revenues			$	576,028	$	662,431.80			Total Value		Apply Option Payment to purchase		Cash/Stock Due to Close
Minimum Goal		5.0	%	$	28,801.38	$	33,121.59	$	54,748.30	$	309,748.30	$	84,991.50	$	224,757
Medium Goal		10.0	%	$	57,602.77	$	66,243.18	$	109,496.59	$	364,496.59	$	84,991.50	$	279,505
Good Goal		12.5	%	$	72,003.46	$	82,803.97	$	136,870.74	$	391,870.74	$	84,991.50	$	306,879
High Goal		15.0	%	$	86,404.15	$	99,364.77	$	164,244.89	$	419,244.89	$	84,991.50	$	334,253

EX-31.1

EXHIBIT 31.1

OFFICER’S CERTIFICATE

PURSUANT TO RULE 13A-14(A)/15D-14(A)

I, Robert Carmichael, Chief Executive Officer, certify that:

1.           I have reviewed this Form 10-Q for the quarter ended September 30, 2011, of Brownie’s Marine Group, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.           I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.           I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: November 14, 2011	By:	/s/ Robert M. Carmichael
	Name:	Robert M. Carmichael
	Title:	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

OFFICER’S CERTIFICATE

PURSUANT TO RULE 13A-14(A)/15D-14(A)

I, Robert Carmichael, Chief Financial Officer, certify that:

1.           I have reviewed this Form 10-Q for the quarter ended September 30, 2011, of Brownie’s Marine Group, Inc.;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.           I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant issuer and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or cause such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.           I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: November 14, 2011	By:	/s/  Robert M. Carmichael
	Name:	Robert M. Carmichael
	Title:	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Brownie’s Marine Group, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date:  November 14, 2011	By:	/s/ Robert M. Carmichael
	Name:	Robert M. Carmichael
	Title:	Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Brownie’s Marine Group, Inc. and will be retained by Brownie’s Marine Group, Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Brownie’s Marine Group, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2011 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: November 14, 2011	By:	/s/ Robert M. Carmichael
	Name:	Robert M. Carmichael
	Title:	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Brownie’s Marine Group, Inc. and will be retained by Brownie’s Marine Group, Inc. and furnished to the United States Securities and Exchange Commission or its staff upon request.

XML

CONSOLIDATED BALANCE SHEETS [Parenthetical] (USD $)	Sep. 30, 2011	Dec. 31, 2010
Allowance for accounts receivable (in dollars)	$ 26,000	$ 15,000
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	425,000	0
Preferred stock, shares outstanding	425,000	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	250,000,000	250,000,000
Common stock, shares issued	52,121,579	4,051,502
Common stock, shares outstanding	33,082,630	4,051,502
Common stock payable,Par value (in dollars Per share)	$ 0.001	$ 0.001
Common stock payable,issued	462,694	543,240

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Net revenues
Net revenues	$ 478,012	$ 390,152	$ 1,159,707	$ 1,154,363
Net revenues - related parties	181,249	171,735	459,648	529,772
Total net revenues	659,261	561,887	1,619,355	1,684,135
Cost of net revenues
Cost of net revenues	473,563	378,790	1,187,323	1,232,336
Royalties expense - related parties	16,688	16,331	40,537	47,293
Total cost of net revenues	490,251	395,121	1,227,860	1,279,629
Gross profit	169,010	166,766	391,495	404,506
Operating expenses
Selling, general and administrative	357,907	363,557	954,545	973,365
Research and development costs	3,434	16,696	44,715	49,342
Total operating expenses	361,341	380,253	999,260	1,022,707
Loss from operations	(192,331)	(213,487)	(607,765)	(618,201)
Other expense, net
Other (income) expense, net	1,947	(26,143)	(4,561)	(31,041)
Interest expense	174,440	199,930	411,714	239,098
Interest expense - related parties	3,059	(2,957)	2,092,869	13,569
Total other expense, net	179,446	170,830	2,500,022	221,626
Net loss before provision for income taxes	(371,777)	(384,317)	(3,107,787)	(839,827)
Provision for income tax expense (benefit )	37,892	(38,955)	34,949	(134,571)
Net loss	$ (409,669)	$ (345,362)	$ (3,142,736)	$ (705,256)
Basic loss per common share	$ (0.02)	$ (0.13)	$ (0.11)	$ (0.30)
Diluted loss per common share (in dollars per share)	$ (0.02)	$ (0.13)	$ (0.11)	$ (0.30)
Basic weighted average common shares outstanding (in shares)	18,402,210	2,685,284	28,196,705	2,321,727
Diluted weighted average common shares outstanding (in shares)	18,402,210	2,685,284	28,196,705	2,321,727

XML

PATENT INFRINGEMENT SETTLEMENTS

9 Months Ended

Sep. 30, 2011

Patent Infringement Settlements [Abstract]

Patent Infringement Settlements [Text Block]

15. PATENT INFRINGEMENT SETTLEMENTS

In August 2010, the Company settled several lawsuits for infringement of one of the Company’s patents.  The Company granted non-exclusive license of its patent to the settling parties along with future licensing and purchasing terms.  In exchange, the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others. The Company acquired the subject patent from the Carleigh Rae Corporation, a related party, in 2010, and it is discussed in Note 6. RELATED PARTY TRANSACTIONS, Patent purchase agreements.

XML

DOCUMENT AND ENTITY INFORMATION	9 Months Ended
	Sep. 30, 2011	Nov. 04, 2011
Entity Registrant Name	Brownie's Marine Group, Inc
Entity Central Index Key	0001166708
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	bwmg
Entity Common Stock, Shares Outstanding		37,809,550
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2011

XML

LEGAL

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies Disclosure [Abstract]

Legal Matters and Contingencies [Text Block]

18. LEGAL

On June 23, 2011, a claim was filed in the U.S. District Court of Dallas County, Texas by the Estate of Christopher Logan.  Amount of damages sought were not provided in the claim.  The claim lists eight defendants of which the Company is one.  The claim asserts Mr. Logan died breathing carbon monoxide while diving with a T80G medium duty compressor (“T80G”).  The claim’s cites belief by the plaintiff that the T80G was sold by Brownie’s based on  representations  made by Keene Engineering, Inc. also a manufacturer of dive compressors and also listed as a defendant.  The Company believes the representation is erroneous because Brownie’s does not sell the make/model cited in the claim, and Brownie’s compressors have the brand name forged into the die-casting on the head of each cylinder.  Therefore, Brownie’s believes this claim is without merit, and anticipates being dismissed from the lawsuit.

XML

PROPERTY, PLANT AND EQUIPMENT

9 Months Ended

Sep. 30, 2011

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment Disclosure [Text Block]

4.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following as of:

	September 30, 2011			December 31, 2010
Building, building improvements, and land	$	1,224,962		$	1,224,962
Furniture, fixtures, vehicles and equipment		104,928			124,197
		1,329,890			1,349,159
Less:  accumulated depreciation and amortization		( 214,493	)		( 209,248	)
	$	1,115,397		$	1,139,911

XML

SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events [Text Block]

19. SUBSEQUENT EVENTS

On November 7, 2011, the Company entered into a Joint Venture Agreement (“Agreement”) with Pompano Dive Center, LLC. (“PDC”). PDC owns a retail store, several dive boats, and has a classroom for training divers.

Under the terms of the Agreement, the Company will provide PDC with an assortment of Brownie’s Third Lung products at no cost, and PDC will act as a training and demonstration site for Brownie’s Third Lung products. The inventory will remain the property of BWMG.

In addition, under the terms of the Agreement, the parties have entered into a Non-Binding Letter of Intent for the possible sale of PDC’s business to BWMG.   The premise of the transaction, which is still in discussion phase, is the exchange of BWMG’s stock for the yet to be agreed upon value of PDC.  In anticipation of a purchase transaction, the Agreement provides BWMG with a 33% interest in PDC, and for BWMG to issue 4,581,505 restricted shares of  its common stock to PDC.  Further, PDC is required to remit no later than 45 days from the end of each quarter, a 33% share in pre-tax net profits.  At least 50% of the total pre-tax profits are required for distribution under the Agreement, and BWMG is not required to share in losses.  If PDC decides to sell any inventory provided by the Company, the purchase price will be the same as that offered to other Dealers of the Company’s products.

If this Agreement is terminated by either party and/or a written purchase and sales agreement is not entered into by the parties, then the parties’ respective interests in each other’s business will revert back to the original party. Accordingly, if this should happen, PDC will relinquish the interest acquired in BWMG through this Agreement and BWMG will do the same. All property at PDC owned by BWMG would be returned to BWMG at that time as well.

On November 7, 2011, the Company issued 657,040 restricted shares of its common stock to a Corporation, which one of the Company's Board of Directors has a financial interest, for approximately $4,000 in consulting services.

On November 3, 2011, the Company converted an aged account payable trade of $5,607 for 683,820 shares of restricted common stock.

XML

AUTHORIZATION OF PREFERRED STOCK

9 Months Ended

Sep. 30, 2011

Disclosure Text Block Supplement [Abstract]

Preferred Stock [Text Block]

17. AUTHORIZATION OF PREFERRED STOCK

During the second quarter of 2010, the holder of the majority of the Company’s outstanding shares of common stock approved an amendment to the Company’s Articles of Incorporation authorizing the issuance of 10,000,000 shares of preferred stock.  The preferred stock as authorized has such voting powers, designations, preferences, limitations, restrictions and relative rights as may be determined by our Board of Directors of the Company from time to time in accordance with the provisions of Chapter 78 of the Nevada Revised Statutes.  Before modification, the existing Articles of Incorporation did not authorize the issuance of shares of preferred stock.  The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets.  The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock.   See Note 6.  RELATED PARTY TRANSACTIONS– Notes Payable for discussion regarding issuance of 425,000 shares of preferred stock for forgiveness of $42,500 Note payable to Chief Executive Officer of the Company.

XML

NOTES PAYABLE

9 Months Ended

Sep. 30, 2011

Notes Payable Disclosure [Abstract]

Notes Payable Disclosure [Text Block]

9. NOTES PAYABLE

Notes payable consists of the following as of September 30, 2011:

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,100,420 at September 30, 2011, bearing interest at 7.5% per annum, due in monthly interest only payments beginning on February 22, 2011, maturing on May 22, 2012, with balloon payment of principal and any accrued and unpaid interest.	$	1,053,993
Promissory note payable, secured by third mortgage on real property, having a carrying value of $1,100,420 at September 30, 2011, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.		---
Promissory note payable, unsecured, bearing interest at 5% per annum, due in monthly principal and interest payments of $2000,  maturing on August 31, 2012.		33,314
		1,087,307
Less amounts due within one year		1,087,307
Long-term portion of notes payable	$	—

As of September 30, 2011, principal payments on the notes payable are as follows:

2011	$	18,345
2012		1,068,962
2013		—
2014		—
2015		—
Thereafter		—
	$	1,087,307

On March 18, 2011, the Company's Chief Executive Officer transferred all financial interest in GKR. Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties, and the note payable due them was reclassified to this Note as presented in the table above. On September 18, 2011, the Company and GKR converted this note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.

On February 18, 2011, the Company’s wholly owned subsidiary, Trebor Industries, Inc., entered into a Forbearance Agreement with Branch Banking and Trust Company (“BBT”) for the promissory note in the principal amount of $1,000,000 in favor of BBT (the “Term Loan”) and the promissory note in the principal amount of $199,991 in favor of BBT (the “Second Note”). The Term Loan and Second Note are collectively referred to as the “Secured Notes”.  The Secured Notes are secured by the Company's Fort Lauderdale facilities and personally guaranteed by the Company’s chief executive officer. As previously disclosed, the Company failed to bring the Secured Notes current and in January 2011 BBT accelerated the full principal and accrued interest due under the Secured Notes, as well as initiated collection and legal action.  The Forbearance Agreement effectively extends the maturity date of the Secured Notes to May 22, 2012.  The Secured Notes were consolidated under a Consolidated and Restated Promissory Note in the principal amount of $1,053,993, effective November 22, 2010, (the “Consolidated Note”).  The maturity date of the Consolidated Note is May 22, 2012, and may be prepaid at any time.  The interest rate on the Consolidated Note is 7.5% per annum. Pursuant to the Forbearance Agreement the Company paid $33,000 to BBT at closing.  In addition to the monthly interest only payments required under the Consolidated Note, Trebor was required to pay BBT $6,028 by February 28, 2011, and monthly payments of approximately $3,555 on March 10, 2011, April 10, 2011, and May 10, 2011, to satisfy disbursements, costs and expenses associated with the Forbearance Agreement.

Under the Consolidated note, the Company accrued $10,665 of legal fees and costs as of December 31, 2010, which is reflected in Other liabilities.  In addition, the Company accrued interest through December 31, 2010, and this is reflected in Accounts payable and accrued liabilities.

In February 2011, the Company converted a vendor payable into an unsecured promissory note as reflected above in table summarizing notes payable as of September 30, 2011.   Principal and interest payments of $2,000 per month were to begin on February 28, 2011, and continue through August 31, 2012, maturity.  As of September 30, 2011, the Company was in arrears on approximately four-month’s payments.  No default notice has been received and the Company plans to make payments as soon as it is able.

Notes payable consists of the following as of December 31, 2010:

Promissory note payable secured by a first mortgage on the real property of the Company having a carrying value of $1,120,994 at December 31, 2010, bearing interest at 7.5% per annum, due in monthly interest only payments beginning on February 22, 2011, maturing on May 22, 2012, with balloon payment of principal and any accrued and unpaid interest.	$	1,053,993
Less amounts due within one year		—
Long-term portion of notes payable	$	1,053,993

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL [Parenthetical] (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Interest on Loan Payable	$ 0	$ 181,446
Interest Expenses Convertible Debenture	$ 17,025	$ 0

XML

RELATED PARTIES TRANSACTIONS

9 Months Ended

Sep. 30, 2011

Related Party Transactions [Abstract]

Related Party Transactions Disclosure [Text Block]

6. RELATED PARTIES TRANSACTIONS

Notes payable – related parties

Notes payable – related parties – consists of the following as of September 30, 2011:

Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal  and interest payments of $7,050, maturing on August 1, 2013.	$	249,434
Less amounts due within one year		187,465
Long-term portion of notes payable – related parties	$	61,969

As of September 30, 2011, principal payments on the notes payable – related parties are as follows:

2011	$	129,104
2012		78,246
2013		42,083
2014		—
2015		—
Thereafter		—
	$	249,434

As of September 30, 2011, the Company was approximately twenty-two months in arrears on payments due under the Note payable to the Chief Executive Officer.  No default notice has been received and the Company plans to make payments as able.  See Other liabilities and accrued interest– related parties within this Note for the related accrued interest in arrears.   

On April 21, 2011, the Company issued 425,000 shares of preferred stock, designated as Series “A” Convertible Preferred Stock, to Robert Carmichael in consideration for forgiveness of $42,500 due under the Note payable to Chief Executive Officer.  The Series “A” Convertible Preferred Stock may be converted to common stock at a rate of $.01 per share, or 42,500,000 shares of common stock.  The fair market value per common share upon which the transaction was based was $.05.  Accordingly, the Company recognized $2,082,500 as interest expense – related party as part of the transaction.

On March 18, 2011, the Company's Chief Executive Officer transferred all financial interest in GKR Associates, LLC (GKR). Accordingly, all transactions of the Company with GKR subsequent to March 18, 2011, are not classified with those of related parties. On September 18, 2011, the Company and GKR converted GKR's note payable to a convertible debenture. See Note 10. CONVERTIBLE DEBENTURES for further discussion.

Notes payable – related parties consists of the following as of December 31, 2010:

Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013.	$	291,934
Promissory note payable due an entity in which the Company’s Chief Executive Officer has a financial interest, GKR Associates, LLC., secured by third mortgage on real property, having a carrying value of $1,120,994 at December 31, 2010, bearing 6.99% interest per annum, due in monthly principal and interest payments of $1,980, maturing on February 22, 2012.		37,260
		329,194
Less amounts due within one year		205,180
Long-term portion of notes payable – related parties	$	124,014

Net revenues and accounts receivable  – related parties – The Company sells products to three entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer.  Terms of sale are no more favorable than those extended to any of the Company’s other customers.  Combined net revenues from these entities for three months ended September 30, 2011, and 2010, was $181,249 and $171,682, respectively. Combined net revenues from these entities for nine months ended September 30, 2011, and 2010, was $459,648 and $529,719, respectively.   Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at September 30, 2011, was $30,191, $3,184, and $9,362, respectively.  Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2010, was $13,777, $4,753, and $5,468, respectively.

Royalties expense – related parties  –   The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns.  Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually.  Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement.  Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter.  Total royalty expense for the above agreements for three months ended September 30, 2011, and 2010, is disclosed on the face of the balance sheet. As of September 30, 2011, the Company was approximately twenty-three months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.

Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements.  Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and 371,250 shares of the Company’s common stock.   In addition, the CRC is entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010.  For financial reporting purposes the Company valued the group of patents at $0 which is the lower of CRC’s historical cost as compared to the fair market value of the stock.  Accordingly, the Company realized a $182,250 loss on the transaction comprised of $148,500 fair market value of the stock on the September, 30, 2010 grant date less the $0 historical cost, plus the $25,500 cash, plus the $8,250 liability.  See Other liabilities and accrued interest– related parties below for inclusion of the $8,250. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties. In addition, see Note 15. PATENT INFRINGEMENT SETTLEMENT for further discussion on income earned in the third quarter of 2010, from the Company’s successful settlement of several lawsuits for infringement of one of these patents.

Other liabilities and accrued interest– related parties

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

	September 30, 2011		December 31, 2010
Accrued interest on Notes payable – related parties	$	15,570	$	23,530
Due to Principals of Carleigh Rae Corp., net		8,222		8,222
Other liabilities – related parties	$	23,792	$	31,752

As of September 30, 2011, the Company was approximately twelve months in arrears on accrued interest due under the Note payable to the Chief Executive Officer.  No default notice has been received and the Company plans to make payments as able.  The $8,222 due the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 20,000,000 shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of the first and second mortgages of the Company.  The restrictions on the common stock will expire 50% on April 20, 2012, and 50% on April 20, 2013, if Mr. Carmichael continues his full time employment with the Company.  The company valued the stock at $.05 per share and will record $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expire.     The unearned balance of the compensation is recorded as prepaid compensation as a component of shareholders’ deficit.  As of the three and nine months ended September 30, 2011, the Company recognized $125,001, and $237,501, respectively, as amortization of prepaid compensation under this agreement.  Prepaid compensation remaining under this agreement as of September 30, 2011 is $762,499.

XML

STOCK WARRANTS ISSUED FOR LEGAL SERVICE

9 Months Ended

Sep. 30, 2011

Stock Warrants Issued For Legal Service [Abstract]

Stock Warrants Issued For Legal Service [Text Block]

11. STOCK WARRANTS FOR LEGAL SERVICE

Effective December 30, 2009, the Company issued to an outside attorney warrants to purchase 100,000 shares of restricted common stock for certain legal and advisory services to be performed in 2010, as evidenced by a signed proposal.  The warrants are exercisable at fair market value as of the date of grant, and vested in two tranches of 50,000 each, on September 30, 2010 and December 31, 2010, respectively.  In addition, the agreement provides for a cashless exercise of the tranches.  The fair value of the warrants was determined to be $25,000 using the Black-Scholes valuation model.  The stock warrants are in lieu of payment for these services and as such the Company recognized operating expense over the term of the agreement.  Accordingly, the Company recognized operating expense for the three and nine months ended September 30, 2010 of $6,250 and $18,750, respectively.  As of September 30, 2011, the two tranches of warrants were unexercised.

XML

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

9 Months Ended

Sep. 30, 2011

Payables and Accruals [Abstract]

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities of $538,851 at September 30, 2011, consists of $198,530 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $71,837 accrued payroll and related fringe benefits, $133,415 accrued payroll taxes and withholding, $34,549 accrued real estate taxes, $34,613 accrued interest, and $5,333 other accrued liabilities.  Accrued payroll taxes and withholding were approximately nine months in arrears at September 30, 2011.  Balances due certain vendors are also due in arrears to varying degrees.  The Company is handling both matters and each instance on a case by case basis.

Accounts payable and accrued liabilities of $510,641 at December 31, 2010, consists of $324,560 accounts payable trade, $60,574 balance of legal expense that was a Company expense prior to the reverse merger with Trebor Industries, Inc., $73,689 accrued payroll and related fringe benefits, $18,978 accrued real estate taxes, $28,295  accrued interest, and $4,545 other accrued liabilities.

XML

CUSTOMER CREDIT CONCENTRATIONS

9 Months Ended

Sep. 30, 2011

Risks and Uncertainties [Abstract]

Concentration Risk Disclosure [Text Block]

5. CUSTOMER CREDIT CONCENTRATIONS

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer as further discussed in Note 6 – RELATED PARTIES TRANSACTIONS.  Combined sales to these entities for the three months ended September 30, 2011 and 2010 represented 27.49% and 30.55%, respectively, of total net revenues.  Combined sales to these entities for the nine months ended September 30, 2011 and 2010 represented 30.59% and 31.45%, respectively, of total net revenues. For the three and nine months ended September 30, 2011, sales to one unrelated customer represented 22.10% and 10.00%, respectively, of total net revenues. For the three months ended September 30, 2010, sales to one other unrelated customer represented 12.53% of total net revenues Sales to no other customers represented greater than 10% of net revenues for the three and nine months ended September 30, 2011 and 2010.

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities:
Net loss	$ (3,142,736)	$ (705,256)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation	26,183	25,898
Change in deferred tax asset, net	34,949	(134,571)
Equity based compensation for consulting and legal services	27,298	24,137
Accretion of convertible debt discounts	321,286	0
Forgiveness of debt interest expense - related party	2,082,500	0
Amortization of prepaid equity based compensation expense	279,087	202,888
Stock and warrant interest expense on loan payable conversion	0	181,446
Loss on issuance of stock for purchase of intellectual property	0	148,500
Gain on sale of fixed asset	(5,000)	0
Changes in operating assets and liabilities:
Change in accounts receivable, net	2,854	(17,290)
Change in accounts receivable - related parties	(18,739)	(16,645)
Change in inventory	(37,005)	(35,902)
Change in prepaid expenses and other current assets	(16,480)	(9,407)
Change in other assets	0	4,073
Change in accounts payable and accrued liabilities	28,210	297,300
Change in customer deposits	38,512	6,210
Change in income tax refunds receivable	0	121,802
Change in other liabilities	(11,199)	(754)
Change in other liabilities and accrued interest - related parties	(5,505)	13,173
Change royalties payable - related parties	29,190	35,342
Net cash (used in) provided by operating activities	(366,595)	140,944
Cash flows from investing activities:
Sale of fixed asset	5,000	0
Purchase of fixed assets	(1,669)	(6,786)
Net cash provided by (used in) investing activities	3,331	(6,786)
Cash flows from financing activities:
Proceeds from borrowing on convertible debenture	440,000	0
Proceeds from issuance of stock under private offering	5,000	0
Proceeds from short term loan exchanged for stock	500	0
Proceeds from borrowing on loan payable	10,000	0
Proceeds from borrowings on notes payable	35,764	0
Principal payment on convertible debenture	(24,000)	0
Principal payments on notes payable	(2,450)	(28,167)
Principal payments on notes payable - related parties	0	(27,531)
Net cash provided by (used in) financing activities	464,814	(55,698)
Net change in cash	101,550	78,460
Cash, beginning of period	4,171	2,713
Cash, end of period	105,721	81,173
Supplemental disclosures of cash flow information:
Cash paid for interest	59,833	57,273
Cash paid for income taxes	$ 0	$ 0

XML

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2011

Accounting Policies [Abstract]

Business Description and Accounting Policies [Text Block]

1.  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

Reclassifications – Certain reclassifications have been made to the 2010 financial statement amounts to conform to the 2011 financial statement presentation.

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

Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements.   We have incurred losses since 2009, and expect to have losses through 2011.  We have had a working capital deficit since 2009.  Although cured effective the fourth quarter 2010, the Company defaulted on its first mortgage in the third quarter of 2010, which resulted in an automatic default on its second mortgage further discussed in Note. 9.  NOTES PAYABLE.

In addition, the Company is behind on payments due for accrued payroll taxes and withholding, matured convertible debentures, related party notes payable, accrued liabilities and interest –related parties, a note payable due an unrelated party, and certain vendor payables.  While the Company has received no formal notices of default and is working out these matters on a case by case basis, there can be no assurance that cooperation the Company has received thus far will continue.  Payment delinquencies are further addressed in Note 6. RELATED PARTIES TRANSACTIONS, Note 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES, Note 8. OTHER LIABILITIES, Note 9. NOTES PAYABLE, and Note 10.  CONVERTIBLE DEBENTURES.

During the third quarter of 2010, the Company settled several lawsuits for infringement of one of the Company’s patents.  The settlement was in the form of cash and inventory credits, and the Company was granted exclusive distributor rights in the United States of the products of the settling parties, as well as non-exclusive distributor rights for others as further discussed in Note 15. PATENT INFRINGEMENT SETTLEMENTS.   In addition, the Company introduced some of its own new products to market in mid 2010, including the variable speed electric and battery powered diving units.  We believe the combined addition of these products to complement the sales of our other products will allow us to generate enough sales to supply us with sufficient working capital in the future.  However, the Company does not expect that existing cash flow will be sufficient to fund presently anticipated operations beyond the fourth quarter of 2011.  This raises substantial doubt about our ability to continue as a going concern. We will need to raise additional funds and are currently exploring alternative sources of financing.  We have issued a number of convertible debentures as an interim measure to finance our working capital needs as discussed in Note 10.  CONVERTIBLE DEBENTURES and may continue to raise additional capital through sale of restricted common stock or other securities.   We have implemented some cost saving measures and will continue to explore more to reduce operating expenses.

Going Concern (continued) – If we fail to raise additional funds when needed, or do not have sufficient cash flows from sales, we may be required to scale back or cease operations, liquidate our assets and possibly seek bankruptcy protection. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Inventory – Inventory is stated at the lower of cost or market.  Cost is principally determined by using the average cost method that approximates the First-In, First-Out (FIFO) method of accounting for inventory.  Inventory consists of raw materials as well as finished goods held for sale.  The Company’s management monitors the inventory for excess and obsolete items and makes necessary valuation adjustments when required.

Property, Plant, and Equipment – Property, Plant and Equipment are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 5 years  except for the building that is being depreciated over a life of 39 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).

The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment.  The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.

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

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

Revenue and costs incurred for time and material projects are recognized as the work is performed.

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, 2011, and 2010, was $28,509 and $8,194, respectively.  Advertising and trade show expense incurred for the nine months ended September 30, 2011, and 2010, was $42,981 and $9,802, respectively.

Customer deposits and return policy – The Company takes a minimum 50% deposit against custom and large tankfill systems prior to ordering and/or building the systems.  The remaining balance due is payable upon delivery, shipment, or installation of the system.  There is no provision for cancellation of custom orders once the deposit is accepted, nor return of the custom ordered product.  Additionally, returns of all other merchandise are subject to a 15% restocking fee as stated on each sales invoice.

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

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

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

Comprehensive income – The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods.

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period.  The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees.  Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value.   Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries. 

For the three and nine months ended September 30, 2010, the Company amortized prepaid stock based compensation associated with stock options granted October 1 and December 1, 2009.  See Note 12. EQUITY INCENTIVE PLAN for further discussion.  For the three and nine months ended September 30, 2010, the Company recorded stock based compensation associated with warrants granted on December 31, 2009.  See Note 11. STOCK WARRANTS FOR LEGAL SERVICES for further discussion.  For the three and nine months ended September 30, 2011, the company granted stock for consulting services.  See Note 13.  STOCK ISSUED FOR CONSULTING SERVICES.

Beneficial conversion features on convertible debentures – The fair value of the stock upon which to base the beneficial conversion feature (BCF) computation has been determined either through use of the quoted stock price unless the trading activity is nominal, which may indicate it does not represent the fair value.   Under these circumstances, the Company determines fair value through an analysis of its fair value of net assets and comparable publicly traded companies that have higher trading volumes with similar results of operations and industries.  See Note10.  CONVERTIBLE DEBENTURES for further discussion.

Fair value of financial instruments – The carrying amounts and estimated fair values of the Company’s financial instruments approximate their fair value due to the short-term nature.

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities.  Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period.  Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding during the period.  Common stock equivalent shares are excluded from the computation if their effect is antidilutive.  All common stock equivalent shares were excluded in the computation for the three and nine months ended September 30, 2011, and 2010, since their effect was antidilutive.

New accounting pronouncements –  In January 2011, the FASB released Accounting Standards Update No. 2011-01 (“ASU 2011-01”), Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which deferred the disclosure requirements surrounding troubled debt restructurings. These disclosures are effective for reporting periods ending on or after June 15, 2011. We do not expect the disclosure requirements to have a material impact on our current disclosures.

In April 2011, the FASB released Accounting Standards Update No. 2011-02 (“ASU 2011-02”), Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 clarifies the guidance for determining whether a restructuring constitutes a troubled debt restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must conclude that 1) the restructuring constitutes a concession and 2) the debtor is experiencing financial difficulties. ASU 2011-02 also requires companies to disclose the troubled debt restructuring disclosures that were deferred by ASU 2011-01. The guidance in ASU 2011-02 is effective for public companies in the first reporting period ending on or after June 15, 2011, but the amendment must be applied retrospectively to the beginning of the annual period of adoption. ASU 2011-02 is not expected to materially impact our consolidated financial statements.

XML

INVENTORY

9 Months Ended

Sep. 30, 2011

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

2.  INVENTORY

Inventory consists of the following as of:

	September 30, 2011		December 31, 2010
Raw materials	$	344,243	$	333,107
Work in process		—		—
Finished goods		218,357		192,488
	$	562,600	$	525,595

XML

CONVERTIBLE DEBENTURES

9 Months Ended

Sep. 30, 2011

Convertible Debentures [Abstract]

Convertible Debentures [Text Block]

10. CONVERTIBLE DEBENTURES

The Company has outstanding convertible debentures as of September 30, 2011, as follows:

Effective October 4, 2010, the Company converted an accounts payable for legal services to a $20,635 convertible debenture.  The debenture matured on April 4, 2011, and bears interest at 5% per annum.  At the option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common Stock at the conversion price per share of $.001 by written notice.  The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.  The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.

The Company valued the beneficial conversion feature (BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value.  Accordingly, the $20,635 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture and recognize interest expense through its maturity on April 4, 2011.  At maturity the Company did not redeem the convertible debenture, but rather the holder sold and assigned it to an unrelated third party for the face value of the debenture.  At September 30, 2011, the balance of the convertible debenture, net is $15,135, which is $20,635 debenture, less $20,635 discount, plus $20,635 discount accretion, less $5,500 converted to stock.  At December 31, 2010, the balance of the convertible debenture, net is $10,318 which is $20,635 debenture, less $20,635 discount, plus $10,318 of accretion.

Effective November 27, 2010, the Company purchased exclusive rights for license of certain intellectual property from an unrelated party for an initial sum of $125,000.  Payment was in the form of a convertible debenture bearing simple interest of 10% per annum to accrue until paid in full or converted.  The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention.  The debenture is convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender.  Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price.

The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value.  Accordingly, the $125,000 debenture is discounted by the amount of the BCF.  The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion.  The debenture matured on May 27, 2011.  At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $125,000 debenture, less $53,571 discount, plus $53,571 of accretion.  At December 31, 2010, the balance of the convertible debenture, net is $80,358, which is $125,000 debenture, less $53,571 discount, plus $8,929 of accretion.  Because there is no assurance of success and the invention is still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense.  Both parties have agreed to confidentiality regarding the invention during the pre-prototype stage.  In addition, the Company has agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

Effective January 7, 2011, the Company ratified a technology and license agreement with commitment for purchase of inventory related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met.  Since the Company did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities.  The agreement required the Company issue a convertible debenture for $76,000, and $38,000 of restricted common stock at $.15 per share.  On January 7, 2011, the Company issued a $76,000 convertible debenture for purchase of the product with $28,000 maturing on June 7, 2011, and $48,000 maturing on November 12, 2011.  The debenture bears interest at 5% per annum.  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) deep highest closing bid prices over the preceding five (5) trading days.  On June 1, 2011, the Company issued 253,334 shares of restricted common stock at $.15 per share, or $38,000 as required by the agreement.

The Company valued the BCF of the convertible debenture at $76,000, the “ceiling” of its intrinsic value.  Accordingly, the $76,000 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $34,667, which is $76,000 debenture, less $76,000 discount, plus $58,667 discount accretion, less $24,000 repayment.

On February 10, 2011, the Company borrowed $42,500 in exchange for a convertible debenture.  The debenture bears 8% interest per annum and matures on November 14, 2011.  The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due.  Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same.  Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time.  The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest.  There is a $2,000 per day penalty for not timely delivering shares upon conversion notice.  The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.  The Company issued and reserved 1,465,517, related to this debenture.

The Company valued the BCF of the convertible debenture at $42,500, the “ceiling” of its intrinsic value.  Accordingly, the $42,500 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture through its maturity on November 14, 2011 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $11,416, which is $42,500 debenture, less $42,500 discount, plus $35,416 accretion, less $24,000 conversion.  As of September 30, 2011, the Company issued 2,026,568 shares to lender related to the $24,000 conversion.  The 2,026,568 shares included all 1,465,517 shares reserved related to this debenture, plus an additional 561,051 of 19,600,000 shares reserved for the same lender as part of another debenture issued September 12, 2011 for $42,500, as discussed below.

On March 9, 2011, the Company borrowed $50,000 in exchange for a convertible debenture maturing on March 9, 2012.  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 50,000 and 100,000 warrants at $.25 and $.35 per share, respectively.  As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants.  The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $50,000, the “ceiling” of its intrinsic value.   Accordingly, the $50,000 debenture is discounted by the BCF and the warrants.  The Company will accrete the discount to the convertible debenture through its maturity on March 9, 2012 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $27,957, which is $50,000 debenture, net $50,000 discount, plus $27,957 discount accretion.

On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture maturing on May 5, 2012.  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 $.25 and $.35 per share, respectively.  As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants.  The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $300,000, the “ceiling” of its intrinsic value.  Accordingly, the $300,000 debenture is discounted by the BCF and the warrants.  The Company will accrete the discount to the convertible debenture through its maturity on May 5, 2012 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $300,000 debenture, less $300,000 discount, plus $125,000 discount accretion.

On August 31, 2011, the Company borrowed $10,000 in exchange for a convertible debenture maturing August 31, 2013.  The debenture bears interest at 5% per annum.  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) deep highest closing bid prices over the preceding five (5) trading days.

The Company valued the BCF of the convertible debenture at $4,286.  Accordingly, the $4,286 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $5,893, which is $10,000 debenture, less $4,286 discount, plus $179 discount accretion.

On September 8, 2011, the Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The debenture bears interest at 10% per annum and matured on September 20, 2011. The lender at thier 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) deep highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $17,025. Because the debenture was issued and matured in the third quarter of 2011, the full amount of the discount, $17,025 was accreted and recognized as interest expense during the period. As of September 30, 2011, the balance of the convertible debenture, net is $39,724.

On September 12, 2011, the Company borrowed $37,500 in exchange for a convertible debenture.  The debenture bears 8% interest per annum and matures on June 14, 2012.  The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due.  Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same.  Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time.  The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest.  There is a $2,000 per day penalty for not timely delivering shares upon conversion notice.  The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture.  The Company  issued and reserved 19,600,000 shares related to this debenture.  As of September 30, 2011, the Company converted 561,051 of these reserved shares as part of a conversion by the lender on another debenture due them dated February 10, 2011, as discussed above.  This left a balance of 19,038,949 shares reserved for this lender.

The Company valued the BCF of the convertible debenture at $37,500, the “ceiling” of its intrinsic value.  Accordingly, the $42,500 debenture is discounted by the amount of the BCF.  The Company will accrete the discount to the convertible debenture through its maturity on June 12, 2012 and recognize interest expense until paid in full or converted.  At September 30, 2011, the balance of the convertible debenture, net is $2,083, which is $37,500 debenture, less $37,500 discount, plus $2,083 discount accretion.

XML

PREPAID EXPENSES AND OTHER CURRENT ASSETS

9 Months Ended

Sep. 30, 2011

Prepaid Expenses and Other Current Asset [Abstract]

Prepaid Expenses and Other Current Asset Disclosure [Text Block]

3.  PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets totaling $166,964 at September 30, 2011, consists of $135,402 of prepaid inventory, $15,000 of prepaid advertising and promotion, and $16,562 of prepaid insurance.

Prepaid expenses and other current assets totaling $36,484 at December 31, 2010, consists of $15,435 credit toward inventory resulting from patent infringement settlements, $8,662 of prepaid inventory, $10,736 of prepaid insurance, $1,651 of prepaid software maintenance.

XML

STOCK ISSUED FOR CONSULTING SERVICES

9 Months Ended

Sep. 30, 2011

Stock Issued For Consulting Services [Abstract]

Stock Issued For Consulting Services [Text Block]

13. STOCK ISSUED FOR CONSULTING SERVICES

From April 16, 2010, through December 31, 2010, the Company granted a combined 674,932 shares of restricted common stock to eight consultants pursuant to individual consulting agreements.  The consulting services provided for include predominantly management advisory services in the areas of sales, marketing, public relations, financing, and business development. Grant of the stock was in lieu of payment for these services.  The length of consulting services under the agreements ranges from completed during the second quarter of 2010 through one year from effective transaction date, or July 1, 2011.  The majority of the agreements expired on December 31, 2010.  The Company recorded the transactions at the fair market value of the stock on the effective date of each transaction.  The Company is recognizing operating expense over the term of the agreements.  Accordingly, for the three and nine months ended September 30, 2011, the Company recognized $0 and $41,586, respectively, as operating expense under the agreements.  The Company recognized $35,923 and $101,267 as operating expense under the agreements for the three and nine months ended September 30, 2010, respectively

On March 9, 2010, the Company granted 100,000 shares of restricted common stock pursuant to a consulting agreement for assistance in the planning, design, direction, supervision and implementation of Company's web design, marketing and advertising and in such other matters and areas as may be mutually approved by Consultant and Company. This agreement expired on December 31, 2010.  The Company recorded the transaction at the fair market value of the stock on the effective date of the transaction, $.99 per share. The Company will amortize the operating expense over the term of the agreement. Accordingly, the Company recognized $9,900 as operating expense for the three months ended March 31, 2010. The agreement expires on December 31, 2010. This same consultant loaned the Company $100,000 during the first quarter of 2010, accepted a conversion of his loan to common stock in the third quarter of 2010, and became a member of the Board of Directors of the Company in December 2010.

XML

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (USD $)	Common Stock [Member]	Common Stock Payable [Member]	Preferred Stock [Member]	Prepaid Equity Based Compensation [Member]	Additional Paid-In Capital [Member]	Accumulated Deficit [Member]	Total
Balance at Dec. 31, 2010	$ 4,052	$ 543	$ 0	$ (41,586)	$ 2,233,119	$ (2,499,783)	$ (303,655)
Balance (in shares) at Dec. 31, 2010	4,051,502	543,240	0
Issuance of stock payable from prior reporting periods	337	(337)	0	0	0	0	0
Issuance of stock payable from prior reporting periods (in shares)	337,290	(337,290)	0
Discounts on convertible debentures	0	0	0	0	168,500	0	168,500
Stock granted for consulting and legal services	42	17	0	0	9,831	0	9,890
Stock granted for consulting and legal services (in shares)	41,772	17,333	0
Current period amortization of prepaid equity based compensation	0	0	0	22,250	0	0	22,250
Net loss	0	0	0	0	0	(273,404)	(273,404)
Balance at Mar. 31, 2011	4,431	223	0	(19,336)	2,411,450	(2,773,187)	(376,419)
Balance (in shares) at Mar. 31, 2011	4,430,564	223,283	0
Issuance of stock payable from prior reporting periods	17	(17)	0	0	0	0	0
Issuance of stock payable from prior reporting periods (in shares)	17,333	(17,333)
Discounts on convertible debentures	0	0	0	0	300,000	0	300,000
Stock granted for consulting and legal services	82	50	0	0	10,230	0	10,362
Stock granted for consulting and legal services (in shares)	81,958	50,344	0
Stock issued for prepaid inventory	253	0	0	0	37,747	0	38,000
Stock issued for prepaid inventory (in shares)	253,334	0	0
Issuance of preferred stock for debt forgiveness	0	0	425	0	2,124,575	0	2,125,000
Issuance of preferred stock for debt forgiveness (in shares)	0	0	425,000
Repayment of short term loan in stock	50	0	0	0	450	0	500
Repayment of short term loan in stock (in shares)	50,000	0	0
Issuance of stock in consideration of personal guarantees	20,000	0	0	(1,000,000)	980,000	0	0
Issuance of stock in consideration of personal guarantees (in shares)	20,000,000	0	0
Convertible debentures converted to stock	2,900	0	0	0	0	0	2,900
Convertible debentures converted to stock (in shares)	2,900,000	0	0
Current period amortization of prepaid equity based compensation	0	0	0	131,836	0	0	131,836
Net loss	0	0	0	0	0	(2,459,663)	(2,459,663)
Balance at Jun. 30, 2011	27,733	256	425	(887,500)	5,864,452	(5,232,850)	(227,484)
Balance (in shares) at Jun. 30, 2011	27,733,189	256,294	425,000
Issuance of stock payable from prior reporting periods	50	(50)	0	0	0	0	0
Issuance of stock payable from prior reporting periods (in shares)	50,344	(50,344)	0
Discounts on convertible debentures	0	0	0	0	58,802	0	58,802
Stock granted for consulting and legal services	173	257	0	0	6,616	0	7,046
Stock granted for consulting and legal services (in shares)	172,529	256,744	0
Convertible debentures converted to stock	4,627	0	0	0	21,973	0	26,600
Convertible debentures converted to stock (in shares)	4,626,568	0	0
Stock issued under private offering	500	0	0	0	4,500	0	5,000
Stock issued under private offering (in shares)	500,000	0	0
Current period amortization of prepaid equity based compensation	0	0	0	125,001	0	0	125,001
Net loss	0	0	0	0	0	(409,669)	(409,669)
Balance at Sep. 30, 2011	$ 33,083	$ 463	$ 425	$ (762,499)	$ 5,956,343	$ (5,642,519)	$ (414,704)
Balance (in shares) at Sep. 30, 2011	33,082,630	462,694	425,000

XML

STOCK ISSUED UNDER PRIVATE OFFERING

9 Months Ended

Sep. 30, 2011

Stock Issued Toward Private Offering [Abstract]

Stock Issued Toward Private Offering [Text Block]

14. STOCK ISSUED UNDER PRIVATE OFFERING

On July 27, 2011, the Company accepted $5,000 under a private offering of shares of restricted common stock at a purchase price per share of $.01.  The Company offered the shares through its officers and directors to “accredited investors” as defined in Rule 501 (as amended on July 21, 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act) of Regulation D promulgated under the Securities Act of 1933, as amended.

XML

INCOME TAXES

9 Months Ended

Sep. 30, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

16. INCOME TAXES

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

	September 30, 2011			September 30, 2010
Current taxes
Federal	$	—		$	—
State		—			—
Current taxes		—			—
Change in deferred taxes		(851,594	)		(57,749	)
Change in valuation allowance		889,486			18,794
Provision for income tax expense (benefit)	$	37,892		$	(38,955	)

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

	September 30, 2011			September 30, 2010
Current taxes
Federal	$	—		$	—
State		—			—
Current taxes		—			—
Change in deferred taxes		(1,079,982	)		(246,506	)
Change in valuation allowance		1,114,931			111,935
Provision for income tax benefit	$	34,949		$	(134,571	)

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2011:

Deferred tax assets:
Equity based compensation	$	21,743
Allowance for doubtful accounts		8,840
Depreciation and amortization timing differences		(4,151	)
Net operating loss carryforward		1,524,087
On-line training certificate reserve		751
Total deferred tax assets		1,551,270
Valuation allowance		(1,477,441	)
Deferred tax assets net of valuation allowance		73,829
Less deferred tax assets – non-current, net of valuation allowance		73,453
Deferred tax assets – current, net of valuation allowance	$	376

The effective tax rate used for calculation of the deferred taxes as of September 30, 2011 was 34%.  The Company has established a valuation allowance against deferred tax assets of $1,477,441 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 95% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.

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

	September 30, 2011			September 30, 2010
Statutory tax rate benefit		—	%		—	%
Increase (decrease) in rates resulting from:
Net operating loss carryforward or carryback		(35	)%		(29	)%
Equity based compensation and loss		—	%		1	%
Book/tax depreciation and amortization differences		—	%		(1	)%
Change in valuation allowance		36	%		13	%
Other		—	%		—	%
Effective tax rate benefit		1	%		(16	)%

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2010:

Deferred tax assets:
Equity based compensation	$	21,743
Allowance for doubtful accounts		5,100
Depreciation and amortization timing differences		(6,199	)
Net operating loss carryforward		449,707
On-line training certificate reserve		938
Total deferred tax assets		471,289
Valuation allowance		(362,511	)
Deferred tax assets net of valuation allowance		108,778
Less deferred tax assets – non-current, net of valuation allowance		108,309
Deferred tax assets – current, net of valuation allowance	$	469

The effective tax rate used for calculation of the deferred taxes as of December 31, 2010 was 34%.  The Company has established a valuation allowance against deferred tax assets of $362,511 due to the uncertainty regarding realization, comprised primarily of a 98% reserve against the deferred tax assets attributable to the equity based compensation, a 100% reserve against the allowance for doubtful accounts, a 75% reserve against the net operating carryforward, and a 25% reserve against depreciation and amortization timing differences.

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Supplemental disclosures of non-cash investing activities and future operating activities:
Convertible debenture issued for prepaid inventory	$ 76,000	$ 0
Discounts on convertble debentures	527,302	0
Stock issued for prepaid equity based compensation	20,000	279,000
Stock and additional paid-in capital for purchase of intellectual property	0	148,500
Preferred stock issued for forgiveness of note-payable - related party	42,500	0
Stock issued for prepaid inventory	38,000	0
Write-off of fully depreciated fixed asset sold	20,938	0
Convertible debenture converted to stock	29,500	0
Repayment of short term loan	500	0
Issuance of stock in consideration of personal guarantees	1,000,000	0
Conversion of loan payable for stock and warrants (excluding interest of $181,446)	0	180,000
Conversion of note payable- current portion and related accrued interest to convertible debenture (excluding interest of $17,025)	$ 39,724

XML

OTHER LIABILITIES

9 Months Ended

Sep. 30, 2011

Other Liabilities Disclosure [Abstract]

Other Liabilities Disclosure [Text Block]

8.  OTHER LIABILITIES

Other liabilities of $12,147 at September 30, 2011, consists of $10,000 loan payable, and $2,147 on-line training liability.  The $10,000 short-term loan, unsecured loan is from one of the Board of Directors and is without stated terms.

Other liabilities of  $13,346 at December 31, 2010, consists of $2,681 of on-line training liability, and $10,665 accrued legal fees and costs associated with default under the Company’s first and second mortgages.   See Note 9.  NOTES PAYABLE for discussion related to consolidation and restatement of promissory note.

Effective July 1, 2005, the Company began including on-line training certificates with all hookah units sold.  The training certificates entitle the holder to an on-line interactive course at no additional charge to the holder.  The number of on-line training certificates issued per unit is the same as the number of divers the unit as sold is designed to accommodate (i.e., a three diver unit configuration comes with three on-line training certificates).  The certificates have an eighteen-month redemption life after which time they expire.  The eighteen-month life of the certificates begins at the time the customer purchases the unit.  The Company owes the on-line training vendor the agreed upon negotiated rate for all on-line certificates redeemed payable at the time of redemption.  For certificates that expire without redemption, no amount is due the on-line training vendor.

The Company estimates the on-line training liability based on the historical redemption rate of approximately 10%.  The Company continues to monitor and maintain a reserve for certificate redemption that approximates the historical redemption rate.

XML

EQUITY INCENTIVE PLAN

9 Months Ended

Sep. 30, 2011

Equity Incentive Plan [Abstract]

Equity Incentive Plan [Text Block]

12. EQUITY INCENTIVE PLAN

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”).  Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options.  Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan.  The initial maximum number of shares that may be issued under the Plan shall be 400,000 shares, and no more than 100,000 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period.  Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company.  The term of the Plan shall be ten years.  The Board of Directors may amend, alter, suspend, or terminate the Plan at any time.

Effective October 1, 2009 and December 1, 2009 the Company granted 75,000 and 115,000 incentive stock options, respectively, to certain consultants under the Plan. The granting of these options exhausted all the options outstanding for grant under the plan.  The fair value of the options was determined to be $47,500 using the Black-Scholes Model. The options that have a term of five years were issued in conjunction with consulting agreements business and financial advisory services. The stock options are in lieu of payment for these services and as such the Company will recognize operating expense over the term of the agreements. Accordingly, for the three and nine months ended September 30, 2010, the Company recognized operating expense of $7,158 and $21,638, respectively.  Prepaid equity based compensation is reflected as a component of shareholders’ deficit for the related consulting services yet to be provided at the end of the period.  As of September 30, 2011, all consulting services under this plan had been provided.

XML

CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2011	Dec. 31, 2010
ASSETS
Cash	$ 105,721	$ 4,171
Accounts receivable, net of $26,000 and $15,000 allowance for doubtful accounts, respectively	26,699	29,553
Accounts receivable - related parties	42,737	23,998
Inventory	562,600	525,595
Prepaid expenses and other current assets	166,964	36,484
Deferred tax asset, net - current	376	469
Total current assets	905,097	620,270
Property, plant and equipment, net	1,115,397	1,139,911
Deferred tax asset, net - non-current	73,453	108,309
Other assets	2,895	2,895
Total assets	2,096,842	1,871,385
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued liabilities	538,851	510,641
Customer deposits	96,902	58,390
Royalties payable - related parties	116,238	87,048
Other liabilities	12,147	13,346
Other liabilities and accrued interest - related parties	23,792	31,752
Convertible debentures, net	386,875	90,676
Notes payable - current portion	1,087,307	0
Notes payable - related parties - current portion	187,465	205,180
Total current liabilities	2,449,577	997,033
Long-term liabilities
Notes payable - long-term portion	0	1,053,993
Notes payable - related parties - long-term portion	61,969	124,014
Total liabilities	2,511,546	2,175,040
Commitments and contingencies
Stockholders' deficit
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding	425	0
Common stock; $0.001 par value; 250,000,000 shares authorized; 52,121,579 and 4,051,502 shares issued, respectively; 33,082,630 and 4,051,502 shares outstanding, respectively	33,083	4,052
Common stock payable; $0.001 par value; 462,694 and 543,240 shares, respectively	463	543
Prepaid equity based compensation	(762,499)	(41,586)
Additional paid-in capital	5,956,343	2,233,119
Accumulated deficit	(5,642,519)	(2,499,783)
Total stockholders' deficit	(414,704)	(303,655)
Total liabilities and stockholders' deficit	$ 2,096,842	$ 1,871,385