U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(MARK ONE)

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

For the fiscal year ended December 31, 2016

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

For the transition period from _______ to _______.

Commission File No. 333-99393

BROWNIE’S MARINE GROUP, INC.

(Name of Small Business Issuer in Its Charter)

Florida	90-0226181
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
3001 NW 25th Avenue, Suite 1, Pompano Beach, Florida	33069
(Address of Principal Executive Offices)	(Zip Code)

(954) 462-5570

(Issuer’s Telephone Number, Including Area Code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.

Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [  ]

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 file	[  ]
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]

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016 ($0.0048), was $278,758.

There were 73,493,896 shares of common stock outstanding as of April 17, 2017.

PART I

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

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

This filing contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our Company’s growth strategies, (c) our Company’s future financing plans and (d) our Company’s anticipated needs for working capital. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this annual report 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.

Item 1. Business.

Overview

Brownie’s Marine Group, Inc., a Florida corporation (referred to herein as “BWMG”, “the Company”, “we”, or “Brownie’s”), does business through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation. The Company designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products. BWMG sells its products both on a wholesale and retail basis, and does so from its headquarters and manufacturing facility located at 3001 NW 25^th Avenue, Suite 1, Pompano Beach, Florida 33069. The Company’s common stock is quoted on the OTC Markets under the symbol “BWMG”. The Company’s website is www.Browniesmarinegroup.com. Information on the website is not a part of this report.

Mr. Robert Carmichael, our Chief Executive Officer, has operated Trebor as its President since 1986. Since April 16, 2004, Mr. Carmichael has served as President, Acting Principal Accounting Officer and Acting Chief Financial Officer of the Company. From March 23, 2004 to April 16, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer. The Company was organized under the laws of the State of Nevada and effective October 22, 2015, the Company reincorporated to the State of Florida pursuant to a plan of conversion, effective October 22, 2015.

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

Executive Summary and Business Strategy

From a garage based business making hookah diving systems in the late 1960s, the Company has grown into a niche manufacturing and distribution company with dive-oriented products loosely classified into three categories: Brownie’s Third Lung (low pressure hookah systems), Brownie’s Tankfill (high pressure and mixed gas systems), and Brownie’s Public Safety (first-responder/emergency personnel systems). The Company serves middle income boat owners, higher income yacht owners, and recreational, military and public safety divers.

The Company strives for meticulous attention to detail and high quality product innovation. We believe that within the boating/diving industry Brownie’s Marine Group is known as the industry standard for surface supplied “family” dive systems and Scuba Tankfill Systems for yacht diving. Brownie’s products and support services range from shallow-water dive systems and extend into deep-water with mixed gas support systems for exploration divers and submersibles/submarines.

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The Company holds numerous patents and is dedicated to designing and building the world’s finest and most innovative products, and to setting the industry standard for the world’s best yacht-based diving systems. While Brownie’s Third Lung hookah diving units were the very first product sold by the Company, the Company recognized early on that there was a need for tank filling systems and unique diving applications. This realization was the catalyst for the addition of the two product categories: Brownie’s Tankfill and Brownie’s Public Safety. Brownie’s Tankfill designs, builds, and sells diving solutions from marine-ready tank filling compressors, Nitrox Makers™, complete dive lockers, and full submarine support systems. Brownie’s Public Safety features highly specialized diving gear for rescue and safety professionals and a unique automatic floatation device for body-armor that can also be integrated into foul weather jackets, traditional load bearing harnesses and other garments, such as the Garment Integrated Personal Flotation Device (GI-PFD) for use with body armor. The following paragraphs further describe the business and sales models for each of the categories of products sold:

Brownie’s Third Lung hookah systems have long been a dominant figure in gasoline powered, high-performance, and feature rich hookah systems. Taking full advantage of the proprietary compressor system, a complete series of traditional “fixed speed” electric compressors were developed for the built-in-boat market in 2005. Prior to 2010, Brownie’s did not offer for sale a floating battery powered hookah due to the inadequate performance/runtime afforded by previous technology. After years of inventing, testing and development, Brownie’s introduced multiple battery powered models in 2010 that we believe provide performance and runtimes as great as 300% better than the best devices previously on the market by utilizing a variable speed technology that controls battery consumption based on diver demand. Our variable-speed battery powered hookah system provides divers with gasoline-free all day shallow diving experiences.

Brownie’s Tankfill designs, manufactures, sells and installs Scuba tank fill systems for on-board yacht use under the brand “Yacht-Pro™”. Brownie’s Tankfill provides complete diving packages and dive training solutions for yachts. Brownie’s Tank Fill installs Nitrox systems which allow yacht owners to fill tanks with oxygen enriched air on board. The Yacht-Pro™ compressor systems offer a completely marine-prepared, VFD (variable frequency drive)-driven, automated alternative to other compressors on the market. Brownie’s Tankfill also designs complete dive lockers, mixed gas production and distribution systems, and the unique Nitrox Maker™. Nitrox is oxygen-enriched air, which reduces the effects of nitrogen on divers; it is the industry standard for dive professionals. The Nitrox Maker™ continuously generates the oxygen rich breathing gas directly from low-pressure air; no stored oxygen or other gases are required onboard. We believe a parallel product analogy to this device is the fresh water-maker that swept through the yachting industry over the last two-decades. While less yacht owners may opt for diving systems than fresh water-makers, there is a broad market potential for yacht owners that will want to have an uninterrupted supply of the premium breathing gas. Recently, an increase in commercial NitroxMaker™ system sales has been seen as more diving operations and operators are responding to the demand from their customers to provide nitrox at diving destinations. In addition to the traditional yacht-based NitroxMaker™ systems the Company has now established a full line of commercial products to meet this need, the NMCS series.

Brownie’s Public Safety designs, manufactures, distributes, and sells the RES (Rapid Entry System)/ HELO™ system, a complete mini SCUBA system designed for quick water rescues. The HELO™ system can be donned in less than 60 seconds and stored in a briefcase-size padded bag. Brownie’s Public Safety includes the GI-PFD™ (Garment Integrated Personal Flotation Device™) System for body armor flotation. This system can reliably support the distressed or unconscious wearer in a true life-saving position. This patented device addresses a need as law-enforcement, coast guard and military personnel are beginning to wear heavy (life-threatening in the water) body armor during waterborne patrol, inspection, and surveillance missions. The system helps the personnel float in heavy armor, hopefully saving their lives. The Company is not currently pursuing aggressive expansion into this market until it has sufficient working capital to do so.

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Some of the Company’s Products in Depth

Surface Supplied Air Systems: The Company produces a line of Surface Supplied Diving products, commonly called hookah systems. These systems allow one to four divers to enjoy the marine environment up to a depth of 90 feet/27 meters without the bulk and weight of conventional SCUBA gear. We believe that hookah diving holds greater appeal to families with children of diving age than does conventional SCUBA. The reduction of weight by eliminating the tank allows smaller divers, especially children, to participate more actively and enjoyably. The design of our product also reduces the effort required for both its transport and use. We believe the PELETON™ Hose System revolutionizes hose management for recreational surface supplied diving. It reduces the work required of any single diver by dispersing the load over the entire group. We use a single, larger diameter hose as a main downline with up to four individual hoses attached to it. This configuration not only reduces the weight and bulk of the hose required, but also reduces drag and entanglement. An entire line of deck-mounted systems is available for commercial applications that demand extremely high performance. In addition to the gasoline-powered units and the Variable Speed battery powered units mentioned above, a series of electric powered systems is also available for light to commercial duty. Powered by battery for portability or household current for virtually unlimited dive duration, these units are used primarily by businesses that work in a marine environment.

E-Reel and Built-in Battery Systems: The Company developed two surface supplied air products that it believes makes boat diving even easier. The Built-in Battery System builds a battery powered electric unit into the boat, eliminating the need to transport the compressor/motor assembly. The need for a flotation tube is also removed, as the boat itself serves in that capacity. The E-Reel advances this idea by adding a reel system to provide compact storage of up to 150 feet/46 meters of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. The hose is manually pulled from the reel supporting up to two divers to a depth of 50 feet/15 meters. When the dive is complete, the hose is automatically recoiled and stowed by the simple activation of a switch.

Brownie’s Integrated Air Systems (BIAS™): Compressed air can have many uses on a boat. The E-Reel and Built in Battery Systems discussed above are just a few examples of BIAS. In addition to supplying air to divers, integrated air systems provide for the inflating fenders, opening of doors, blowing of air horns, flushing toilets and more.

Kayak Diving Hose Kits: This product allows the use of a conventional SCUBA cylinder, but does not require the diver to wear it. The cylinder remains above the surface, in a kayak or boat, and a hose ranging from 20 feet/6 meters to 150 feet/46 meters allow the diver to explore the surrounding area.

Drop Weight Cummerbelt: The patented Drop Weight Cummerbelt is available with all our diving systems, and brings a new dimension to weighting systems. The belt will accommodate waist sizes from 24 to 54 inches and is depth compensating. It features two pockets, each capable of holding up to 10 pounds of block or shot weight. Each pocket can be instantly released by either hand, allowing the diver to achieve positive buoyancy in an emergency while retaining the belt itself. Additionally, the design of this belt provides for expanded capability. By adding an optional sleeve that zips onto the back of the belt, an egress, or bailout system, can be added. The Egressor Add-on Kit contains the sleeve, a 6 or 13 cubic foot SCUBA cylinder, and a SCUBA regulator. In addition to the added safety inherent in this design, many other uses for this present themselves, such as propeller clearing, overboard item retrieval and pool maintenance, to name only a few.

Tankfill Compressors: Many yacht owners enjoy the convenience and freedom of filling their own diving tanks with air, NITROX or custom mixed gases while out on cruise, freeing them from carrying extra cylinders or the need to locate a reputable source in various ports-of-call. Brownie’s Tankfill specializes in the design and installation of high-end custom systems to do just that. From surveying the vessel for installation requirements to custom fabrication of the necessary components, Tankfill provides all the services necessary to satisfy this market. We believe that every large vessel currently in service, being re-fitted, or being built is a potential customer. Through OEM relationships we have expanded our market to reach these customers. Our light duty compressor, the Yacht Pro™25 is specifically designed and built to withstand the marine environment with all components and hardware impervious to spray from the elements. The Yacht Pro™ series contains models for both medium-duty applications, such as recreational divers and small groups, and heavy-duty use as found on research vessels, commercial operations and live-aboard dive boats. All Yacht Pro™ models come with the Digital Frequency Drive, which is a Brownie’s Tankfill innovation. The Digital Frequency Drive eliminates the spike previously experienced in starting the compressor, eliminating the need to ration the boat’s electrical usage by shutting down components when the compressor is needed. Custom design work is done in-house for major product installations and in conjunction with other entities.

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NitroxMaker™: We believe Nitrox has become the gas of choice for informed recreational divers the world over. What was once only available from land-based gas mixing facilities is now easily accessible to the yacht diver. With a Brownie’s NitroxMaker™, the user dials-in a desired oxygen level from 21% to 40%, eliminating the need to transport and handle pure oxygen. The resulting diving gas mix is monitored with digital oxygen analyzers, removing the calculations required to blend or mix the gas.

Rapid Entry System (RES) and HELO™ System: The Brownie’s Public Safety product line exists to address the needs of the public safety dive market. The inherent speed and ease of donning our patented Drop Weight Cummerbelt with Egressor Add-on Kit identified it as a choice for rapid response for water-related emergencies. A first-responder or officer on-scene can initiate the location and extraction of victims while the dive team is enroute, saving valuable time and increasing the chances for survival of victims. The RES is a small SCUBA system that can be quickly donned over clothes, usually in less than sixty seconds. Its small size allows it to be stored in areas that do not accommodate a full set of SCUBA gear. The 13 cubic foot aluminum tank can provide up to 15 minutes of air at the surface. The air cell remains stowed under the protective cover and can be partially inflated to achieve positive flotation. The cover is a specially designed break-away zipper which bursts open to provide instant inflation yet “heals” and can be repacked and fastened quickly in the field. The HELO offers all the same features, but has been specially designed and modified for rescue divers working from helicopters. By placing the cylinder in the front and adding leg straps, the HELO allows divers to use the standard seating configurations. The advantages of this system over full sized SCUBA rigs are increased mobility for the diver and diminished space requirements for the gear. Since the bottle is mounted at the diver’s waist, the diver can more easily control his gear during deployment, further adding to the comfort and safety.

The Dive Industry and Growth Strategy

Currently, we believe that no company in the dive industry offers a complete line of products and services to serve all divers’ needs. The dive equipment manufacturing industry is highly fragmented with multiple manufacturers producing very similar products. The top-ten volume leaders in the dive manufacturing industry provide the same product mix: Scuba BC’s (buoyancy compensators), regulators, gauges, masks, fins, snorkels, wetsuits, and a few of the necessary accessories. These mature companies offer the product selection to the “diving” market.

New markets and classes of divers have developed over the years. The sport sector of Third Lung and Kayak diving have emerged as a result of snorkel divers that wanted to sustain depth or Scuba divers that wanted more time in shallow waters with enhanced efficiency.

Diving and Boating Markets

The diving and boating markets are key to the expansion of the Brownie’s brand. Each of these industries has experienced growth over the past several decades, but we believe each industry also has significant weaknesses. The dive industry has focused on the initial certification of divers for revenue. According to industry data, follow up has been poor; causing many divers to quit diving after their first experience. When the Company’s working capital reaches a sufficient level, BWMG intends to implement a follow-up program, facilitate proper selection of equipment for divers, and institute mentoring programs.

The boating industry was hard hit a couple years ago by the economic downturn coupled with the increase in fuel prices. We continue to work with boaters to enhance their on-water experience by exploiting the diving activities that they can easily add as an accessory to their investment in boating. Brownie’s OEM BIAS program will improve the overall value at the manufacturing level and consumer experience by elimination of waste during the design/build phase. They can blow their horns, open air-powered doors and dive directly from a BIAS package.

Statistics

According to Global Certification and Membership Statistics as updated February 2014 on the Professional Association of Diver Instructors (PADI) website, www.padi.com, worldwide PADI certifications of divers has grown annually from over 500,000 certifications in 1992, to consistently over 900,000 annual certifications annually from 2003 to 936,149 certifications in 2013. There are other scuba training organizations also issuing scuba dive training certifications, but PADI is the training organization issuing the largest number of certifications annually. (source: PADI)

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Approximately 88.5 million people went boating in the US in 2013; this represents approximately 37% of the adult population in the United States. There were approximately 15.9 million boats in use in 2013, down slightly from approximately 16.0 million in use in 2012. (source: National Marine Manufacturers Association)

Trade names and Patents

The Company has a product development and intellectual property program. It holds numerous patents and trademarks on its own and/or through licensing agreements with its chief executive officer and his affiliates.

Trade names

The Company either owns or has licensed from an entity, which the Chief Executive Officer has an ownership interest, the use of the following registered and unregistered trade names, trademarks and service marks for the terms of their indefinite lives: Brownie’s Third Lung™, browniedive.com, Brownie’s, Brownie’s Third Lung oval symbol, browniedive, NitroxMaker™, HELO, RES, fast float rescue harness, tankfill.com, browniestankfill, browniestankfill.com, browniespublicsafety.com, browniespublicsafety, Peleton Hose System, Twin-Trim, Kayak Diving Hose Kit, Bell Bottom Flag Bag, Brownie’s Dogsnare, SHERPA, BC keel, and Garment integrated personal flotation device (GI-PFD). Use of these trade names, trademarks, and service marks is exclusive to the Company and the Company’s related parties.

Patents

The Company owns multiple patents issued and in process related to the following:

● Water safety and survival

● Garment integrated flotation devices or life jacket

● Collar for improved life jacket performance

● Combined signaling and ballast for personal flotation device

● Inflatable dive marker and collection bag.

● Three dimensional dive flag

● Novel dive raft and float system for divers

● Drop weight Cummerbelt

● Buoyancy compensator

● Utility backpack

● Transport harness or like garment with adjustable one size component for use by a wide range of individuals

● Active control releasable ballast

Marketing

Print Literature, Public Relations, and Advertising

We have in-house graphic design capability to create and maintain product support literature, catalogs, mailings, web-based advertising, newsletters, editorials, advertorials, and press releases. We also, from time-to-time, target specific markets by selectively advertising in journals and magazines that we believe reach our potential customers. In addition, we strive to issue press releases, newsletters, and social media postings periodically to keep the public informed of our latest products and related endeavors.

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Tradeshows

In 2016 and 2015, the Company was represented either through their own presence or by a dealer at the following annual trade shows: The Miami Yacht and Brokerage Show, The Fort Lauderdale International Boat Show, the Palm Beach Boat Show, and the Seattle Boat Show.

Websites

The Company’s main website is www.browniesmarinegroup.com. Additionally, many of our products are marketed on some of our customers’ websites. In addition to these websites, numerous other websites have quick links to the Company’s website. Our products are available both domestically and internationally. Internet sales and inquiries are also supported by the Company.

Distribution

Our products are distributed to our customers primarily by common carrier.

Product Research and Development (R&D)

We continuously work to provide our customers with both new and improved products. We offer research and development services to not only the related entities we license our patents and trademarks from, but also to other customers as well. R&D services for customers and the related entities are invoiced in the normal course of business. In addition, we are working on internal research and development projects as well as collaborating with others toward the goal of developing some of our own patentable products. Research and development costs for the years ended December 31, 2016 and 2015, were $1,973 and $8,739, respectively.

Government Regulations

The SCUBA industry is self-regulating; therefore, the Company is not subject to government industry specific regulation. Nevertheless, the Company strives to be a leader in promoting safe diving practices within the industry and believes it is at the forefront of self-regulation through responsible diving practices. The Company 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 the Company’s operation and profitability will not be subject to more restrictive regulation or increased taxation by federal, state, or local agencies in the future.

Customers

We are predominantly a wholesale distributor to retail dive stores, marine stores, and shipyards. This includes approximately 160 active independent Brownie dealers. We retail our products to including, but not limited to, boat owners, recreational divers and commercial divers. The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and two Company’s owned by the Chief Executive Officer. Combined sales to these five entities for the years ended December 31, 2016 and 2015, represented 33.58% and 31.75%, respectively, of total net revenues. A single non-related party entity represented 18.7% of revenues for 2015.

Raw Materials

Principal raw materials for our business include machined parts such as rods, pistons, bearings; hoses; regulators; compressors; engines; high-pressure valves and fittings; sewn goods; and various plastic parts including pans, covers, intake staffs, and quick release connections. Most materials are readily available from multiple vendors. Some materials require greater lead times than other materials. Accordingly, we strive to avoid out of stock situations through careful monitoring of these inventory lead times, and through avoiding single source vendors whenever possible.

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Competition

We consider the most significant competitive factors in our business to be fair prices, feature advantages, shopping convenience, the variety of available of products, knowledgeable sales personnel, rapid and accurate fulfillment of orders, and prompt customer service. We currently recognize one significant competitor in hookah sales and a variety of competitors in high-pressure tankfill systems sales. Products from the hookah competitor and those from one of the tankfill competitors appear to be very similar to ours at first glance, but lack many of what we believe are our patently superior feature advantages. Brownie’s competitors in the high pressure tankfill market are typically focused on traditional dive stores and fire department air service. Several are large multi-national companies that do not offer adaptation to the yacht market or Nitrox integration; both areas that Brownie’s long-term investments rise to a level to suit the buyer’s needs.

Overall, we are operating in a moderately competitive environment. We believe that the price structure for all the products we distribute compares favorably with the majority of our competitors based on quality and available features.

Personnel

We currently have eleven (11) full time employees and three (3) part time employees at our facility in Pompano Beach, Florida. Three (3) are classified as exempt sales and administrative or management, and eleven (11) are classified as nonexempt factory or administrative support. We utilize consultants when needed in the absence of available in-house expertise. Our employees are not covered by a collective bargaining agreement.

Seasonality

The main product categories of our business, Brownie’s Third Lung and Brownie’s Tankfill, are seasonal in nature. The peak season for Brownie’s Third Lung’s products is the second and third quarters of the year. The peak season for Brownie’s Tankfill’s products is the fourth and first quarters of the year. Since the seasons complement one another, we are able to shift cross-trained factory and warehouse personnel between the two product categories as needed. Thus, the Company is able to avoid the down time normally associated with seasonal business.

Item 1A. Risk Factors.

Not applicable to smaller reporting companies. However, our principal risk factors are described under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 1B. Unresolved Staff Comments

Not applicable to smaller reporting companies.

Item 2. Properties.

Our Pompano Beach facilities are comprised of approximately 8,541 square feet of leased space the bulk of which is factory and warehouse space. Terms of the initial lease include a thirty-seven month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term. We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.

Item 3. Legal Proceedings.

From time to time we are subject to legal proceedings, claims and litigation arising in the ordinary course of business, including matters relating to product liability claims. Such product liability claims sometimes involving wrongful death or injury have historically been covered by product liability insurance, which provided coverage for each claim up to $1,000,000. We currently do not have product liability coverage. See “Risk Factors” below.

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

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

Item 4. Mine Safety Disclosure

None.

PART II

Item 5. Purchases of Equity Securities.

The Company’s common stock is quoted on the OTC Markets under the symbol “BWMG”. The Company’s high and low closing bid prices by quarter during 2016 and 2015, as provided by the OTC Markets (Pink) are provided below. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 17, 2017, the quoted closing price of our common stock was $0.016 per share.

	Calendar Year 2015
	High Bid		Low Bid
First Quarter	$	.004	$	.002
Second Quarter	$	.003	$	.002
Third Quarter	$	.003	$	.001
Fourth Quarter	$	.007	$	.002

	Calendar Year 2016
	High Bid		Low Bid
First Quarter	$	.006	$	.002
Second Quarter	$	.006	$	.003
Third Quarter	$	.006	$	.004
Fourth Quarter	$	.008	$	.001

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Holders of Common Stock

As of April 12, 2017, the Company had in excess of 335 shareholders of record.

Dividends

We have not paid any dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any earnings to finance the growth of the business. We cannot assure you that we will ever pay cash dividends. Whether we pay any cash dividends in the future will depend on the financial condition, results of operations and other factors that the Board of Directors will consider.

Sales of Unregistered Securities

Excluding unregistered securities previously disclosed in reports filed with the Securities and Exchange Commission during the period covered by this report, the Company did not sell any additional securities without registration under the Securities Act of 1933, as amended, during the period covered by this report.

Item 6. Selected Financial Data.

Information not required by smaller reporting company.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company through its wholly owned subsidiary, Trebor Industries, Inc., d/b/a Brownie’s Third Lung, a Florida corporation, designs, tests, manufactures and distributes recreational hookah diving, yacht based scuba air compressor and Nitrox Generation Systems, and scuba and water safety products. We sell our products both on a wholesale and retail basis. Our headquarters and manufacturing facility is located in Pompano Beach, Florida. The Company does business as (dba) Brownie’s Third Lung.

Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a wide variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements. Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increases, these judgments become even more subjective and complex. We have identified certain accounting policies that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are as follows:

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 2015 financial statement amounts to conform to the 2016 financial statement presentation. Effective July 15, 2013, the Company effectuated a reverse stock split (1-for-1,350). Accordingly, the transactional number of shares and per share amounts referenced throughout this report has been retroactively stated unless otherwise noted.

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.

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Going Concern –The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. Although profitable for the years ended December 31, 2016 and 2015, we have incurred several years of losses since 2009.

The Company is behind on payments due for matured convertible debentures, related parties notes payable, accrued liabilities and interest – related party, and certain vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue.

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. The Company has issued a number of convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short term loans. The Company has, in the past, paid for legal and consulting services with restricted stock to maximize working capital, and intends to continue this practice where feasible. In addition, the Company continues to explore additional cost saving measures.

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

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

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

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

Revenue recognition – Revenues from product sales are recognized when the Company’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. As of December 31, 2016 and 2015, there were no ongoing contracts accounted for using the percentage of completion method.

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

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

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Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which they occur.

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

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

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

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

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

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

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Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

At December 31, 2016, and 2015, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive.

New accounting pronouncements

In April 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” ASU 2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

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

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

In August 2014, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-206): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU requires an entity’s management to assess its ability to continue as going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This includes (1) providing a definition of the term substantial doubt, (2) requiring an evaluation every reporting period including interim periods, (3) providing principles for considering then mitigating effect of management’s plans, (4) requiring certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requiring an express statement and other disclosures when substantial doubt is not alleviated, and (6) requiring an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted. The Company elected early adoption for the year ended December 31, 2014, with insignificant impact to both its current process for evaluating ability to continue as going concern and to its existing disclosures.

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

The following discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to allowance for doubtful accounts and deferred income tax assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations for the Year Ended December 31, 2016, as Compared to the Year Ended December 31, 2015

Net revenues. For the year ended December 31, 2016, total revenues declined approximately 18% with net revenues of $2,264,134 as compared to net revenues of $2,759,643 for the year ended December 31, 2015, a decrease of $495,509. Sales to related parties totaled $760,356 and $876,188 for the same periods, respectively. While sales of hookah systems were relatively flat between the periods, the decrease is primarily attributable to a single large tankfill sale in 2015. There was no similar tankfill in 2016. This change in product mix is not believed to be attributable to any particular identifiable sales trend or competitive pressures but rather normal fluctuations in market demand.

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Cost of net revenues. For the year ended December 31, 2016, we had cost of net revenues of $1,664,681 as compared with cost of net revenues of $1,831,989 for the year ended December 31, 2015, a decrease of $167,308, or 9%. This was primarily attributable to the overall drop in net revenues between the periods including the related decrease in materials and direct labor costs.

Gross profit. For the year ended December 31, 2016, we had a gross profit of $599,453 as compared to gross profit of $927,654 for the year ended December 31, 2015, a decrease of $328,201, or 35%. The decrease in gross profit was primarily attributable to the corresponding decline in the level of overall sales activity.

Operating expenses. For the year ended December 31, 2016, we had operating expenses of $617,226 as compared to operating expenses of $679,721, a decrease of $62,495 or approximately 9%. This decrease is predominantly the result of a reduction in our administrative workforce and associated taxes, insurances and benefits between the periods.

Other (income) expense, net. For the year ended December 31, 2016, we had other income, net of $247,779 as compared to other expense, net of $18,280 for the prior year. This account is comprised of other (income), net and interest expense. The overall difference is primarily comprised of the $93,459 debt settlement of a convertible debenture and its associated interest and $140,366 derived from the cancellation of incentive bonuses in the second quarter of 2016. The decline in interest expense reflects the decline in balances of notes payable between the periods.

Net income. For the year ended December 31, 2016, net income remained relatively unchanged between the periods, increasing less than 1%. However, it should be noted that the sharp increase in other (income) as described above, was comprised of a gain on debt settlement and cancellation of the Company’s incentive bonus program, with both transactions being of a non-recurring nature.

Liquidity and Capital Resources

As of December 31, 2016, the Company had current assets (primarily consisting of inventory) of $1,017,870 and current liabilities of $914,885 or a current ratio of 1.1 to 1, representing a working capital balance of $102,985. At December 31, 2015, the Company had cash and current assets of $957,811 and current liabilities of $1,232,943, or a current ratio of .78 to 1. This improvement is due in large part to a settlement in royalties payable to related parties and settlement of the current portion of notes payable to related parties.

The consolidated financial statements included herein have been prepared assuming the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these financial statements. Although we had net income for the years ended December 31, 2016 and 2015, we have otherwise incurred several years of losses since 2009, and expect we may have losses in future periods.

The Company is behind on payments due for matured convertible debentures; accrued liabilities and certain vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue.

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

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Net cash provided by operating activities totaled $75,192 and $147,461 for the years ended December 31, 2016 and 2015, respectively. The cash provided from operations in 2016 of $75,192 was primarily the result of net income of $230,026, a reduction in accounts receivable of $58,448, shares issued for payroll compensation of $36,000 and an increase in accounts payable and accrued liabilities of $65,070, being off-set by a gain recognized on the cancellation of debt of $234,678, a reduction in other liabilities of $54,937. Cash flows in 2015 also increased primarily as a result of net income of $229,610, shares issued for payroll compensation of $54,000, an increase in accounts receivable – related parties of $30,055, a reduction in other assets of $24,400 and an increase in royalties payable – related parties of $24,885. These sources of funds were off-set in part by a decrease in accounts payable and accrued expenses of $112,830 and an increase in inventory of $48,000.

Net cash used in financing activities totaled $17,678 and $12,622 at December 31, 2016 and 2015, respectively, and primarily reflects the repayments during the periods of principal payments on notes payable to related parties of $11,098 and $30,068, respectively. The net cash used in financing activities for 2015 was net of $27,000 proceeds of additional notes payable - related parties.

For both years ending December 31, 2016 and 2015, the Company has heavily depended upon the funding of related parties to maintain its operations.

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.

Risk Factors

The Company is subject to various risks that may materially harm its business, financial condition and results of operations. These may not be the only risks and uncertainties that the Company faces. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our future business operations. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition or operating results could be materially harmed. In that case, the trading price of the Company’s common stock could decline and you could lose all or part of your investment.

Our ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financing and achieving sufficient sales levels.

While we incurred net income in 2016 and 2015, the Company is behind on payments due for matured convertible debentures, notes payable, and certain vendor payables. The Company is working out all matters of delinquency on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue. Our continued existence is dependent upon generating working capital and obtaining adequate new debt or equity financing. Because of our historical losses, we may not have working capital to permit us to remain in business through the end of the year, without improvements in our cash flow from operations or new financing. Working capital limitations continue to impinge on our day-to-day operations.

The optional conversion features of a series of convertible debentures issued by the Company could require the Company to issue a substantial number of shares of common stock, which will cause dilution to the Company’s stockholders and a potentially negative effect on our stock price.

Since October 4, 2010, the Company has issued convertible debentures to several lenders and other third parties. At December 31, 2016 the outstanding principal balance of these debentures was approximately $312,743. The debentures convert under various conversion formulas, all of which are at a significant discount to market price of our common stock. The conversion of any of the debentures will result in the issuance of a significant number of shares of our common stock which will cause dilution to our existing shareholders. Furthermore, the conversion at a significant discount to the market price of our common stock may have a negative effect on our stock price.

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

Our common stock is traded on the OTC Markets. There is a limited public market for our common stock and there can be no assurance that an active trading market for our common stock will develop. As a result, this could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Thinly traded common stock can be more volatile than common stock traded in an active public market. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.

Our company is a voluntary filer with the Securities and Exchange Commission and in the event that we cease reporting under the Exchange Act, investors would have limited information available to them about the company.

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

Our common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due to suitability requirements.

Our common stock is deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Our common stock is covered by an SEC rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000, or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.

Broker/dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.

We depend on the services of our Chief Executive Officer.

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

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We require additional personnel and could fail to attract or retain key personnel.

In addition, 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 to assist the Chief Executive Officer with finance and operations. The loss of the services of these consultants prior to our ability to attract and retain a Chief Financial Officer or Chief Operations Officer or further assistance in these areas 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 and enforce intellectual property protection may 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, 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 or cease operations.

Government regulations may impact us.

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

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Bad weather 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 and we currently lack product liability insurance.

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

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

Our management has previously determined that we did not maintain effective internal controls over financial reporting. For a detailed description of these material weaknesses and our remediation efforts and plans, see “Part II — Item 9A — Controls and Procedures.” If the result of our remediation of the identified material weaknesses is not successful, or if additional material weaknesses are identified in our internal control over financial reporting, our management will be unable to report favorably as to the effectiveness of our internal control over financial reporting and/or our disclosure controls and procedures, and we could be required to further implement expensive and time-consuming remedial measures and potentially lose investor confidence in the accuracy and completeness of our financial reports which could have an adverse effect on our stock price and potentially subject us to litigation.

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

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

19

Our Chief Executive Officer beneficially owns approximately 71% of the combined voting power of our Common Stock and Series A Convertible Preferred Stock and is able to control voting issues and actions that may not be beneficial or desired by minority shareholders.

As of March 17, 2017, Robert Carmichael, our only executive officer, beneficially owns approximately 71% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Not required for smaller reporting companies.

Item 8. Financial Statements.

Our consolidated financial statements appear beginning at page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. The Company’s management, under the supervision and with the participation of Robert Carmichael, the Company’s Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) as of December 31, 2016. Based upon that evaluation and the identification of the material weakness in the Company’s internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting,” the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the 2013 criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2016, our internal control over financial reporting is not effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles because of the Company’s limited resources and limited number of employees. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

20

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

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

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-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.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance.

The following is a list of our executive officers and directors. All directors serve one-year terms or until each of their successors are duly qualified and elected.

Name	Age	Position
Robert M. Carmichael	54	President, Chief Executive Officer, Principal Financial Officer and Director

Robert M. Carmichael. Since April 16, 2004, Mr. Carmichael has served as BWMG’s President, Chief Executive Officer, Principal Financial Officer, and Director. From March 23, 2004 through April 16, 2004, Mr. Carmichael served as the Company’s Executive Vice-President and Chief Operating Officer. Mr. Carmichael has served as president of Trebor Industries since 1986. Mr. Carmichael is the holder and co-holder of numerous patents, some of which are used by Trebor Industries and several other major companies in the diving industry.

Directors

Our Board of Directors may consist of up to five (5) seats. Pursuant to our Bylaws, a majority of directors may appoint a successor to fill any vacancy on the Board of Directors without shareholder vote.

21

Committees

Currently, the Company has not established any committees of the Board of Directors. Because the board of directors consists of only one member, the board has not delegated any of its functions to committees. The entire board of directors acts as our audit committee as permitted under Section 3(a)(58)(B) of the Exchange Act. We do not have any independent directors who would qualify as an audit committee financial expert as defined under item 407 of Regulation S-K. We believe that it has been, and may continue to be, impractical to recruit independent directors unless and until we are significantly larger.

Compensation of Directors

None.

Compliance with Section 16(a) Of the Securities Act Of 1934

Not applicable to our Company.

Code of Ethics

The Company has adopted a formal code of ethics that applies to our principal executive officer and principal accounting officer, all other officers, directors and employees. The code of ethics was provided as an exhibit to the 10-K for the year ended December 31, 2008. The Company undertakes to provide to any person without charge, upon written request to the Company’s Chief Executive Officer, a copy of the code of ethics.

Shareholder Communications

Although we do not have a formal policy regarding communications with our Board, shareholders may communicate with the Board by writing to us at Brownie’s Marine Group, Inc., 3001 NW 25^th Avenue, Suite 1, Pompano Beach, Florida 33069, Attention: Mr. Robert Carmichael. Shareholders who would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.

Item 11. Executive Compensation

The following table shows all the cash compensation paid by the Company, as well as certain other compensation paid or accrued, during the years ended December 31, 2016 and 2015 to the Company’s named executive officer. No restricted stock awards, long-term incentive plan payouts or other types of compensation, other than the compensation identified in the chart below, was paid to this executive officer during these fiscal years. Executive compensation excludes certain transactions, which are disclosed under “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

Summary Compensation Table

Name and Principal Position(s)	Year	Salary		Bonus		Stock Awards		Option Awards		Non-Equity Incentive Plan Compensation		All Other Compensation			Total
Robert M. Carmichael, President, Principal	2016	$	—	$	—	$	—	$	—	$	—	$	20,217	*	$	20,217
Executive Officer	2015	$	—	$	—	$	—	$	—	$	—	$	16,565	*	$	16,565

*       health insurance

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Outstanding Equity Awards at Fiscal Year End

	Option Awards							Stock Awards
Name	Number of securities underlying unexercised options (#) exercisable		Number of securities underlying unexercised option (#) un- exercisable	Equity Incentive plan awards: Number of securities underlying unexercised unearned options (#)	Option exercise price ($) per share		Option expiration date	Number of shares or units of stock that have not vested (#)	Market value of shares of units of stock that have not vested ($)	Equity Incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)	Incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)
Robert M. Carmichael, Principal Executive Officer		234	—	—	$	1,350	March 2, 2019	—	—	—	—

Director Compensation

None.

Employment Agreements

None.

Securities Authorized for Issuance under Equity Compensation Plans

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial maximum number of shares that may be issued under the Plan shall be 297 shares and no more than 71 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. The table below includes information as of December 31, 2016.

Equity Compensation Plan Information as of December 31, 2016

	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted – average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity Compensation Plans Approved by Security Holders		297	$	1,350		0
Equity Compensation Plans Not Approved by Security Holders		—		—		—
Total		297	$	1,350		0

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock by: (1) all persons who are beneficial owners of five percent (5%) or more of any class of our voting securities; (2) each of our directors; (3) each of our Named Executive Officers; and (4) all current directors and executive officers as a group.

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Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them. Robert Carmichael owns 100% of the Company’s Series A Convertible Preferred Stock, each share of which has the number of votes 250 per share. The preferred stock votes with the Company’s common stock, except as otherwise required under Florida law. Accordingly, Mr. Carmichael owns approximately 55% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.

Applicable percentage ownership in the following table is based on 73,493,896 shares of common stock outstanding as of March 17, 2017. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 17, 2017, are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise disclosed these persons’ address is c/o Brownie’s Marine Group, Inc., 3001 NW 25^th Avenue, Suite 1, Pompano Beach, FL 33069.

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Executive Officers and Directors
Common	Robert Carmichael		15,419,242	(*)		21	%
Common	All directors and executive officers as a group (1 person)		15,419,242	(*)		21	%
5% Shareholders
Common	None
Executive Officers and Directors
Series A Convertible Preferred Stock	Robert Carmichael		425,000			100	%
Series A Convertible Preferred Stock	All directors and executive officers as a group (1 person)		425,000			100	%

(*) Includes the following: aggregate of 234 shares of common stock underlying currently exercisable options exercisable at $1,350 per share; and 31,481 shares issuable upon conversion of 425,000 shares of Series A Preferred Stock.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for years ended December 31, 2016 and 2015, totaled $750,338 and $825,491, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2016, was $40,012, $5,809, and $18,410, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2015, was $12,980, $4,678, and $15,221, respectively.

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 940 Associates, Inc. and 3D Buoy, LLC, fully owned by the Company’s Chief Executive Officer. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these three entities for years ended December 31, 2016, and 2015, were $9,130 and $50,697, respectively. Accounts receivable from BGL at December 31, 2016, and December 31, 2015 was $0 and $6,443, respectively. Accounts receivable from 3D Buoy was $3,074 and $1,948 at December 31, 2016 and 2015, respectively. . In addition, the Company has made sales directly to our Chief Executive Officer totaling $888 and $0 in 2016 and 2015, respectively with an accounts receivable balance of $936 at December 31, 2016.

24

The Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the years ended December 31, 2016 and 2015, is $56,054 and $67,848, respectively. As of December 31, 2015, the Company was approximately 27 months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able. On November 21, 2016 the Company and 940A entered into a conversion agreement. Under the agreement the Company issued 940A 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A under that the Exclusive License Agreements. As of the date of the conversion agreement the Company was more than 31 months in arrears on royalty payments due in the aggregate amount of $150,705. In addition, under the conversion agreement 940A agreed to forebear on any default under the Exclusive License Agreements due to the Company’s remaining past due amount and future royalty payments under the Exclusive License Agreement for a period of three (3) months from the date of the conversion agreement. The shares were issued at a price per share of $0.008885, the closing price of the Company’s common stock as reported on the OTC Markets on the date immediately preceding the closing of the conversion agreement.

From 2011 through December 31, 2015, the Company agreed to pay Alexander Purdon, an employee of the Company, employment compensation in restricted shares of stock in lieu of cash. The number of shares paid was based on the weighted average price per share during the months the services were rendered. For the years ended December 31, 2016 and 2015, stock based compensation to Mr. Purdon was $36,000 and $54,000, respectively. Mr. Purdon received an aggregate of 31,238,252 shares of common stock under the agreement. Effective April 15, 2016, Trebor, the wholly-owned subsidiary of the Company, entered into an employment agreement with Mr. Purdon, a former employee of Trebor and affiliate of the Company. Under the terms of the agreement Mr. Purdon agreed to provide business and sales services to the Company through August 31, 2016. Wages due to Mr. Purdon were payable at the sole discretion of the Company in shares of its restricted common stock at a price per share of $0.10 cents per share. Mr. Purdon received 360,000 shares of restricted common stock for services performed under the agreement during 2016 valued at $36,000. Furthermore, as additional consideration for the Company to enter into the agreement, Mr. Purdon tendered 28,403,252 shares of the Company’s common stock beneficially owned by Mr. Purdon to the Company. The shares were retired and returned to the Company’s treasury without further consideration.

Director independence

We currently have no independent directors.

Item 14. Principal Accounting Fees and Services.

Fees to Auditors Fiscal Year ended December 31, 2015

Audit Fees: The aggregate fees, including expenses, billed by principal accountants for professional services rendered for the audit of the Company’s consolidated financial statements during fiscal year ending December 31, 2015 and for the review of the Company’s financial information included in its quarterly reports on Form 10-Q during the fiscal year ending December 31, 2015 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2015 was $37,187.

25

Audit Related Fees: The aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company’s audit or review of the Company’s financial statements during the year ended December 31, 2015 were $-0-.

Tax Fees: The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2015 was $-0-.

All Other Fees: The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2015 was $-0-.

The Company has no audit committee. The Company’s board of directors has considered whether the provisions of the services covered above under the captions is compatible with maintaining the auditor’s independence. All services were approved by the board of directors prior to the completion of the respective audit.

Fees to Auditors Fiscal Year ended December 31, 2016

Audit Fees: The aggregate fees, including expenses, billed by principal accountants for professional services rendered for the audit of the Company’s consolidated financial statements during fiscal year ending December 31, 2016 and for the review of the Company’s financial information included in its quarterly reports on Form 10-Q during the fiscal year ending December 31, 2016 or services that are normally provided in connection with statutory and regulatory filings or engagements during the fiscal year ending December 31, 2016 was $37,187

Audit Related Fees: The aggregate fees, including expenses, billed by principal accountants for assurance and related services reasonably related to the performance of the Company’s audit or review of the Company’s financial statements during the year ended December 31, 2016 were $-0-.

Tax Fees: The aggregate fees, including expenses, billed by principal accountants for tax compliance, tax advice and tax planning during year 2016 was $-0-.

All Other Fees: The aggregate fees, including expenses, billed for all other services rendered to the Company by principal accountants during year 2016 was $-0-.

The Company has no audit committee. The Company’s board of directors has considered whether the provisions of the services covered above under the captions is compatible with maintaining the auditor’s independence. All services were approved by the board of directors prior to the completion of the respective audit.

26

PART IV

Item 15. Exhibits, Financial Statements Schedules

Our consolidated financial statements appear beginning at F-1.

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.
2.4	Plan of Conversion	Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on October 28, 2015
3.1	Articles of Conversion (Nevada)	Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on October 28, 2015.
3.2	Certificate of Conversion (Florida)	Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K filed on October 28, 2015.
3.3	Articles of Incorporation (Florida)	Incorporated by reference to Exhibit 3.3 to Current Report on Form 8-K filed on October 28, 2015.
3.5	Articles of Amendment	Incorporated by reference to Exhibit 3.5 to Current Report on Form 8-K filed on December 16, 2015.
3.6	Bylaws	Incorporated by reference to Exhibit 3.4 to Current Report on Form 8-K filed on October 28, 2015.
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 December 31, 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 December 31, 2005 filed August 15, 2005.
10.4	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.
10.5	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.
10.6	Conversion Agreement effective November 21, 2016	Incorporated by reference to Exhibit 10.1 to Form 8-K filed November 21, 2016.
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.
32.1	Certification Pursuant to Section 1350	Provided herewith.
32.2	Certification Pursuant to Section 1350	Provided herewith.
101	XBRL Interactive Data File *

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Deficit (iv) the Consolidated Statements of Cash Flows, and (iv) related notes to these consolidated financial statements tagged as blocks of text.

27

SIGNATURES

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

Date: April 17, 2017	Brownie’s marine group, Inc.
	By:	/s/ Robert M. Carmichael
		Robert M. Carmichael
		President, Chief Executive Officer, Chief
		Financial Officer and Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: April 17, 2017	By:	/s/ Robert M. Carmichael
		Robert M. Carmichael
		Director

28

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

TABLE OF CONTENTS FOR CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

	PAGE(S)
Report Of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets As Of December 31, 2016 And 2015	F-3
Consolidated Statements Of Operations For The Years Ended December 31, 2016 And 2015	F-4
Consolidated Statements Of Stockholders’ Equity (Deficit) For The Years Ended December 31, 2016 And 2015	F-5
Consolidated Statements Of Cash Flows For The Years Ended December 31, 2016 And 2015	F-6
Notes To The Consolidated Financial Statements	F-8 TO F-21

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Brownie’s Marine Group, Inc.

We have audited the consolidated balance sheets of Brownie’s Marine Group, Inc. and subsidiaries (“The Company”) as of December 31, 2016 and 2015 and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two year period ended December 31, 2016. Brownie’s Marine Group, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brownie’s Marine Group, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ RBSM, LLP

Henderson, Nevada

April 17^th, 2017

F-2

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	December 31,
	2016			2015
ASSETS
Current assets
Cash	$	191,749		$	141,822
Accounts receivable, net of $18,000 and $11,000 allowance for doubtful accounts, respectively		1,026			59,474
Accounts receivable – related parties		68,239			41,270
Inventory		672,520			654,213
Prepaid expenses and other current assets		84,336			58,012
Other current assets – related parties		—			3,020
Total current assets		1,017,870			957,811
Property and equipment, net		56,908			85,712
Deferred tax asset, net		2,520			2,520
Other assets		6,649			6,649
Total assets	$	1,083,947		$	1,052,692
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities	$	323,578		$	349,946
Customer deposits and unearned revenue		31,577			25,238
Royalties payable – related parties		64,240			152,546
Other liabilities		176,614			231,551
Other liabilities and accrued interest – related parties		—			84,500
Convertible debentures, net		312,743			371,965
Notes payable – current portion		6,133			6,099
Notes payable – related parties - current portion		—			11,098
Total current liabilities		914,885			1,232,943
Long-term liabilities
Notes payable – long-term portion		—			6,133
Total liabilities		914,885			1,239,076
Commitments and contingencies
Stockholders’ deficit
Preferred stock; $0.001 par value: 10,000,000 shares authorized; 425,000 issued and outstanding		425			425
Common stock; $0.0001 par value; 1,000,000,000 shares authorized; 68,906,212 and 86,825,138 shares issued and outstanding at December 31, 2016 and 2015, respectively		6,890			8,681
Common stock payable; $0.0001 par value; 138,941 and 195,610 shares, respectively		14			20
Additional paid-in capital		8,792,782			8,665,565
Accumulated deficit		(8,631,049	)		(8,861,075	)
Total stockholders’ equity (deficit)		169,062			(186,384	)
Total liabilities and stockholders’ deficit	$	1,083,947		$	1,052,692

See Accompanying Notes to Consolidated Financial Statements

F-3

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2016			2015
Net revenues
Net revenues	$	1,503,778		$	1,883,455
Net revenues - related parties		760,356			876,188
Total net revenues		2,264,134			2,759,643
Cost of net revenues
Cost of net revenues		1,154,560			1,764,140
Cost of net revenues – related parties		454,064			-
Royalties expense - related parties		56,057			67,849
Total cost of net revenues		1,664,681			1,831,989
Gross profit		599,453			927,654
Operating expenses
Selling, general and administrative		615,253			670,982
Research and development costs		1,973			8,739
Total operating expenses		617,226			679,721
(loss) income from operations		(17,773	)		247,933
Other (income) expense, net
Other (income) expense, net		(44,661	)		(19,753	)
Cancellation of debt		(234,678	)
Interest expense		30,968			37,018
Interest expense - related parties		572			1,015
Total other (income) expense, net		(247,799	)		18,280
Net income before provision for income taxes		230,026			229,653
Provision for income tax expense		—			43
Net income	$	230,026		$	229,610
Basic income per common share	$	0.00		$	0.00
Diluted income per common share	$	0.00		$	0.00
Basic weighted average common shares outstanding		68,485,426			75,892,714
Diluted weighted average common shares outstanding		103,414,928			120,730,254

See Accompanying Notes to Consolidated Financial Statements

F-4

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

	Preferred Stock				Common Stock						Common Stock Payable						Additional Paid-in			Accumulated			Total Stockholders’ Equity
	Shares		Amount		Shares			Amount			Shares			Amount			Capital			Deficit			(Deficit)
Balance, December 31, 2014		425,000	$	425		60,471,929		$	6,047			195,610		$	20		$	8,631,496		$	(9,090,685	)	$	(452,697	)
Conversion of related party employee compensation payable to stock		—		—		19,419,712			1,941			—			—			52,059			—			54,000
Conversion of convertible debentures to stock		—		—		2,340,000			234			—			—			4,446			—			4,680
Conversion of accrued interest on convertible debentures to stock		—		—		4,200,000			420			—			—			5,860			—			6,280
Dissolution of joint venture agreement		—		—		—			—			—			—			(24,740	)		—			(24,740	)
Stock receivable underlying Board of Director fees rescinded		—		—		—			—			—			—			(4,532	)		—			(4,532	)
Conversion of related party interest to stock		—		—		396,891			39			—			—			976			—			1,015
Cancellation of dissolved joint venture shares		—		—		(3,394	)		—			—			—			—			—			—
Net Income		—		—		—			—			—			—			—			229,610			229,610
Balance, December 31, 2015		425,000		425		86,825,138			8,681			195,610			20			8,665,565			(8,861,075	)		(186,384	)
Conversion of related party interest to stock		—		—		124,326			13			—			—			557			—			570
Return of prior employee compensation		—		—		(28,403,252	)		(2,840	)		(56,669	)		(6	)		2,846			—			—
Stock issued for employee compensation		—		—		360,000			36			—			—			35,964			—			36,000
Common stock issued for royalty payable		—		—		10,000,000			1,000			—			—			87,850			—			88,850
Net Income		—		—		—			—			—			—			—			230,026			230,026
Balance, December 31, 2016		425,000	$	425		68,906,212		$	6,890			138,941		$	14		$	8,792,782		$	(8,631,049	)	$	169,062

See Accompanying Notes to Consolidated Financial Statements

F-5

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2016			2015
Cash flows provided by operating activities:
Net income	$	230,026		$	229,610
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		21,798			21,531
Amortization of leasehold improvements		14,593			13,468
Gain on cancellation of debt		(234,678	)		—
Shares issued for interest expense – related party		570			6,280
Shares issued for payroll compensation		36,000			54,000
Forgiveness of share based compensation – related party		—			(4,531	)
Dissolution of joint venture		—			(24,740	)
Shares issued for accrued interest – related party		—			1,104
Change in deferred tax asset, net		—			43
Changes in operating assets and liabilities:
Change in accounts receivable, net		58,448			(17,781	)
Change in accounts receivable - related parties		(26,969	)		30,055
Change in inventory		(18,307	)		(48,000	)
Change in prepaid expenses and other current assets		(26,325	)		(27,817	)
Change in other current assets - related parties		3,020			2,424
Change in other assets		—			24,400
Change in accounts payable and accrued liabilities		65,070			(112,830	)
Change in customer deposits and unearned revenue		6,339			(15,147	)
Change in other liabilities		(54,937	)		(382	)
Change in other liabilities and accrued interest - related parties		—			(9,021	)
Change in royalties payable - related parties		(88,306	)		24,885
Net cash provided by operating activities		75,192			147,461
Cash flows from investing activities:
Purchase of fixed assets		(7,587	)		(12,205	)
Net cash used in investing activities		(7,587	)		(12,205	)
Cash flows from financing activities:
Repayment against short-term loans		—			(805	)
Principal reduction on convertible debentures		(472	)		—
Principal payments on note payable		(6,108	)		(8,749	)
Proceeds from notes payable - related parties		—			27,000
Principal payments on note payable - related parties		(11,098	)		(30,068	)
Net cash (used in) provided by financing activities		(17,678	)		(12,622	)
Net change in cash		49,927			122,634
Cash, beginning of period		141,822			19,188
Cash, end of period	$	191,749		$	141,822

See Accompanying Notes to Consolidated Financial Statements

F-6

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2016		2015
Supplemental disclosures of cash flow information:
Cash paid for interest	$	976	$	10,609
Cash paid for income taxes	$	—	$	—
Supplemental disclosures of non-cash investing activities and future operating activities:
Conversion of convertible debentures to stock	$	—	$	6,280
Conversion of accrued payroll to stock - related party	$	—	$	54,000
Conversion of accrued interest and fees on convertible debentures to stock	$	—	$	6,280
Dissolution of joint venture	$	—	$	24,740
Forgiveness of share based compensation – related party	$	—	$	4,531
Conversion of royalties payable to stock – related party	$	88,850	$	—

See Accompanying Notes to Consolidated Financial Statements

F-7

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of business and summary of significant accounting policies

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

Basis of Presentation – The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).

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.

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. Although profitable for the years ended December 31, 2016 and 2015, we have incurred several years of losses since 2009. The Company has an accumulated deficit as of December 31, 2016 of $8,631,049.

The Company is behind on payments due for matured convertible debentures, related parties notes payable, accrued liabilities and interest – related parties, and certain vendor payables. The Company is handling delinquencies on a case by case basis. However, there can be no assurance that cooperation the Company has received thus far will continue.

Because the Company does not expect that existing operational cash flow will be sufficient to fund presently anticipated operations, this raises substantial doubt about our ability to continue as a going concern. Therefore, the Company will need to raise additional funds and is currently exploring alternative sources of financing. The Company has issued a number of convertible debentures as an interim measure to finance working capital needs and may continue to raise additional capital through sale of restricted common stock or other securities, and obtaining some short term loans. The Company has, in the past, paid for legal and consulting services with restricted stock to maximize working capital, and intends to continue this practice where feasible. In addition, the Company continues to explore additional cost saving measures.

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

Accounts receivable – Accounts receivable consist of amounts due from the sale of all of our products to wholesale and retail customers. The allowance for doubtful accounts are estimated based on historical customer experience and industry knowledge.

F-8

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Revenue recognition – Revenues from product sales are recognized when the Company’s products are shipped or when service is rendered. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, when applicable, measured by the percentage of cost incurred to date to estimated total cost of each contract. This method is used because management considers the percentage of cost incurred to date to estimated total cost to be the best available measure of progress on the contracts. As of December 31, 2016 and 2015, there were no ongoing contracts accounted for using the percentage of completion method.

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

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

Advertising and marketing costs – The Company expenses the costs of producing advertisements and marketing material at the time production occurs, and expenses the costs of communicating advertisements and participating in trade shows in the period in which occur. Advertising and trade show expense incurred for the years ended December 31, 2016, and 2015, totaled $5,800 and $8,497, respectively.

Research and development costs – The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. During the year ended December 31, 2016 and 2015 the Company incurred $1,973 and $8,739 respectively of expenses related to research and development costs.

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

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

F-9

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

Stock-based compensation – The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes valuation model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued on the effective date of the agreement in accordance with generally accepted accounting principles, which includes determination of the fair value of the share-based transaction. The fair value is determined through use of the quoted stock price.

For the years ended December 31, 2016 and 2015, the Company compensated and/or converted all accrued payroll to stock for one related party employee totaling $36,000 and $54,000, respectively.

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 through use of the quoted stock price.

Fair value of financial instruments – Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

F-10

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. An investment’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. Management considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Company’s perceived risk of that investment.

At December 31, 2016, and 2015, the carrying amount of cash, accounts receivable, accounts receivable – related parties, customer deposits and unearned revenue, royalties payable – related parties, other liabilities, other liabilities and accrued interest – related parties, notes payable, notes payable – related parties, and accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments.

Earnings per common share – Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Basic earnings per share is computed using the weighted-average number of outstanding common shares during the applicable period. Diluted earnings per share is computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Common stock equivalent shares are excluded from the computation if their effect is antidilutive. Potentially dilutive shares included in dilutive earnings per share totaled 34,929,502 and 44,837,540 at December 31, 2016 and 2015, respectively. These shares reflect shares potentially issuable under convertible note agreements during the periods and 138,941 shares and 195,610 shares payable to a related party at both December 31, 2016 and 2015, respectively.

New accounting pronouncements

In April 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” ASU 2016- provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted. We do not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.

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

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

F-11

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

In August 2014, the Financial Accounting and Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-206): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU requires an entity’s management to assess its ability to continue as going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. This includes (1) providing a definition of the term substantial doubt, (2) requiring an evaluation every reporting period including interim periods, (3) providing principles for considering then mitigating effect of management’s plans, (4) requiring certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requiring an express statement and other disclosures when substantial doubt is not alleviated, and (6) requiring an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter with early adoption permitted. The Company elected early adoption for the year ended December 31, 2014, with insignificant impact to both its current process for evaluating ability to continue as going concern and to its existing disclosures.

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

2. INVENTORY

Inventory consists of the following as of:

	December 31
	2016		2015
Raw materials	$	402,407	$	422,115
Work in process		—		—
Finished goods		270,113		232,098
	$	672,520	$	654,213

F-12

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following:

	December 31
	2016		2015
Prepaid inventory	$	30,076	$	42,076
Prepaid insurance		6,968		8,819
Prepaid other current assets		47,292		7,117
	$	84,336	$	58,012

4. PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following as of:

	December 31,
	2016			2015
Factory and office equipment	$	62,633		$	62,633
Tooling		59,149			59,149
Computer equipment and software		31,519			23,932
Vehicles		44,160			44,160
Leasehold improvements		43,779			43,779
		241,240			233,653
Less: accumulated depreciation and amortization		(184,332	)		(147,941	)
	$	56,908		$	85,712

Depreciation and amortization expense totaled $21,798 and $14,593 for the year ended December 31, 2016 and $21,531 and $13,468 for the year ended December 31, 2015, respectively.

5. OTHER ASSETS

Other assets of $6,649, at December 31, 2016 and 2015, consisted of refundable deposits.

6. CUSTOMER CREDIT CONCENTRATIONS

The Company sells to three entities owned by the brother of Robert Carmichael, the Company’s Chief Executive officer, and two Company’s owned by the Chief Executive Officer as further discussed in Note 7. RELATED PARTIES TRANSACTIONS. Combined sales to these five entities for the years ended December 31, 2016 and 2015, represented 33.58% and 31.75%, respectively, of total net revenues. A single non-related party entity represented 18.7% of revenues for 2015.

7. RELATED PARTIES TRANSACTIONS

Notes payable – related parties

	December 31,
	2016		2015
Promissory note payable to Chief Executive Officer, unsecured, payable in twelve monthly principal payments of $2,250 beginning June 15, 2015, with interest at 10% per annum with payments monthly in shares of stock based on the monthly weighted average price of the stock, maturing May 15, 2016.	$	—	$	11,098
Less amounts due within one year		—		11,098
Long-term portion of notes payable	$	—	$	—

F-13

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Effective April 22, 2015, the Company issued Mr. Carmichael, Chief Executive Officer of the Company, an unsecured promissory note presented in the table above in consideration for a $27,000 advance. For purposes of calculating the interest due monthly on the note, the weighted average price per share during the monthly period from the historical data as quoted on www.quotemedia.com for BWMG was used. Interest was calculated as the unpaid principal balance times the daily rate for the number of the days in the period times the average weighted price per share for the monthly period. The Company borrowed and is using the proceeds for tooling and inventory of new product. For the years ended December 31, 2016 and 2015, the Company converted $570 and $1,015 accrued interest on the note payable – related party into 124,326 and 396,891 shares of restricted stock respectively.

On October 30, 2013, the Company signed a secured promissory note, with Mikkel Pitzner, a non-employee member of Board of Directors at the date the note was issued for $85,000. As further inducement to make the loan, Mr. Pitzner was granted an option to purchase 1,802,565 shares of the Company’s common stock for $.01 per share. The option expired October 31, 2015 without being exercised, in whole or in part. During the third quarter ended September 30, 2015, the Company paid off the remaining balance due under the note payable – related party.

Net revenues and accounts receivable – related parties – The Company sells products to Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers with similar sales volumes. Combined net revenues from these entities for years ended December 31, 2016 and 2015, totaled $750,338 and $825,491, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2016, was $40,012, $5,809, and $18,410, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2015, was $12,980, $4,678, and $15,221, respectively.

The Company sells products to Brownie’s Global Logistics, LLC. (“BGL”), 940 Associates, Inc. and 3D Buoy,LLC fully owned by the Company’s Chief Executive Officer. Terms of sale are more favorable than those extended to BWMG’s regular customers, but no more favorable than those extended to Brownie’s strategic partners. Terms of sale to BGL approximate cost or include a nominal margin. These terms are consistent with those extended to Brownie’s strategic partners. Strategic partner terms on a per order basis include promotion of BWMG’s technologies and “Brownie’s” brand, offered only on product or services not offered for resale, and must provide for reciprocal terms or arrangements to BWMG on strategic partners’ product or services. BGL is fulfilling the strategic partner terms by providing exposure for BWMG’s technologies and “Brownie’s” brand in the yachting and exploration community world-wide through its operations. Combined net revenues from these three entities for years ended December 31, 2016, and 2015, were $9,130 and $50,697, respectively. Accounts receivable from BGL at December 31, 2016, and December 31, 2015 was $0 and $6,443, respectively. Accounts receivable from 3D Buoy was $3,074 and $1,948 at December 31, 2016 and 2015, respectively. In addition, the Company has made sales directly to our Chief Executive Officer totaling $888 and $0 in 2016 and 2015, respectively with an accounts receivable balance of $936 at December 31, 2016.

Royalties expense – related parties – The Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the years ended December 31, 2016 and 2015, as disclosed on the face of the Company’s Consolidated Statements of Operations totaled $56,054 and $67,849, respectively. As of December 31, 2015, the Company was approximately 27 months in arrears on royalty payments due. In November 2016, the Company entered into a conversion agreement under which the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A has agreed to forebear on any default under the License Agreement due to the Company’s remaining past due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default notice had been received and prior to the conversion agreement.

F-14

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity based compensation – During November 2013, Alexander F. Purdon, then an employee of the Company, exceeded 10% ownership whereby he was reclassified to related party. The Company paid Mr. Purdon’s employment compensation in restricted shares of stock in lieu of cash. The number of shares paid is based on the weighted average price per share during the months the services were rendered. For the years ended December 31, 2016 and 2015, stock based compensation shares issued to Mr. Purdon totaled 360,000 shares and 19,419,712 shares with a fair value of $36,000 and $54,000, respectively. In addition, of the $129,500 employee bonuses declared payable for 2012 year end, which is payable in stock or cash to be determined by the Board of Directors, Mr. Purdon was due $17,500 at December 31, 2015. The agreement with Mr. Purdon terminated August 31, 2016.

In April 2016, the board of directors determined it was not in the best interest of either the Company or the recipients to pay bonuses based on current or foreseeable share prices and cancelled bonuses payable. The result of this action is reflected in a reduction of shares payable on the State of Stockholders’ Equity (Deficit) and Balance Sheet.

Other liabilities – related parties

Other liabilities – related parties consists of the following at:

	December 31,
	2016		2015
Year-end 2012 bonus payable to Chief Executive Officer	$	—	$	67,000
Year-end 2012 bonus payable to employee		—		17,500
Total	$	—	$	84,500

Cancellation of accrued bonuses – In April 2016, the Company determined it was not in the best interest of the Company or the recipients to pay bonuses based on current or foreseeable share prices and cancelled bonuses payable totaling $140,336.

Stock options outstanding from patent purchase – Effective March 3, 2009, the Company entered into a Patent Purchase Agreement with Robert M. Carmichael, the Chief Executive Officer of the Company. The Company purchased several patents it had previously been paying royalties on and several related unissued patents. In exchange for the Intellectual Property (“IP), the Company issued Mr. Carmichael 234 stock options at a $1,350 exercise price expiring ten years from the effective date of grant, or March 2, 2019. None of the options have been exercised to-date.

8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities of $323,578 at December 31, 2016, consists of $110,020 accounts payable trade, $20,416 accrued payroll and fringe benefits, $16,400 accrued payroll taxes and withholding, and $176,742 accrued interest. Balances due certain vendors were also due in arrears to varying degrees.

Accounts payable and accrued liabilities of $349,946 at December 31, 2015, consists of $59,916 accounts payable trade, $27,245 accrued payroll and fringe benefits, $45,000 accrued year-end bonuses, $36,520 accrued payroll taxes and withholding, and $181,266 accrued interest. Balances due certain vendors were also due in arrears to varying degrees. The Company is handling all delinquent accounts on a case by case basis.

9. OTHER LIABILITIES

Other liabilities of $176,614 at December 31, 2016, consists of $160,782 short-term loans, $12,857 payable for assets purchased pursuant to FDI Agreement, and $2,975 on-line training liability. Other liabilities of $231,551 at December 31, 2015, consist of $215,782 short-term loans, $12,857 payable for assets purchased pursuant to FDI Agreement and $2,912 on-line training liability.

F-15

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. NOTES PAYABLE

Notes payable consists of the following:

	December 31,
	2016		2015
Promissory note payable, secured by vehicle underlying loan having carrying value of $6,133 at December 31, 2016, bearing interest at 1.9% per annum, due in monthly principal and interest payments of $523, maturing on December 5, 2017.	$	6,133	$	12,232
Less amounts due within one year		6,133		6,099
Long-term portion of notes payable	$	—	$	6,133

As of December 31, 2016 and 2015, principal payments on the notes payable are as follows:

	December 31,
	2016		2015
2016	$	—	$	6,099
2017		6,133		6,133
2018				—
2019				—
2020				—
Thereafter				—
	$	6,133	$	12,232

11. CONVERTIBLE DEBENTURES

Convertible debentures consist of the following at December 31, 2016:

Origination Date	Maturity Date	Interest Rate			Origination Principal Balance		Origination Discount Balance			Period End Principal Balance		Period End Discount Balance		Period End Balance, Net		Accrued Interest Balance		Reg.
5/3/2011	5/5/2012		5	%		300,000		(206,832	)		300,000		—		300,000		170,000		(2	)
8/31/2011	8/31/2013		5	%		10,000		(4,286	)		10,000		—		10,000		2,687		(3	)
2/10/2012	2/10/2014		10	%		39,724		—			2,743		—		2,743		4,055		(5	)
										$	312,743	$	—	$	312,743	$	176,742

Convertible debentures consist of the following at December 31, 2015:

Maturity Date	Interest Rate			Origination Principal Balance		Origination Discount Balance			Period End Principal Balance		Period End Discount Balance		Period End Balance, Net		Accrued Interest Balance		Ref.
5/27/2011		10	%	$	125,000	$	(53,571	)	$	58,750		-	$	58,750	$	34,709		(1	)
5/5/2012		5	%		300,000		(206,832	)		300,000		-		300,000		140,000		(2	)
8/31/2013		5	%		10,000		(4,286	)		10,000		-		10,000		2,183		(3	)
2/10/2014		10	%		5,500		-			472		-		472		216		(4	)
2/10/2014		10	%		39,724		-			2,743		-		2,743		4,158		(5	)
									$	371,965	$	-	$	371,965	$	181,266

(1) The Company purchased in exchange for convertible debenture exclusive rights for license of certain intellectual property from an unrelated party. 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 was 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 beneficial conversion feature of the convertible debenture at $53,517, its intrinsic value. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the face value of the note. In accordance with this guidance, the intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. Because there was no assurance of success and the invention was still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense during the year ended 2010. Both parties agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

F-16

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	On February 10, 2012, the holder of this debenture entered into an agreement with a third party to sell/assign the $125,000 principal balance, plus accrued interest. The purchase was to be in installments with transfer/assignment of the debenture upon payment, referred to as “Closings”. The first Closing was on or about February 15, 2012 for $7,500, with that amount assigned/transferred. The second Closing, occurred 90 days after the first closing for $11,750 paid/assigned. All subsequent Closings were to be for $11,750 and occur in 30 day increments after the second Closing. This was to continue until the full principal balance of $125,000, plus accrued interest is purchased/assigned.
	The remaining balance under this note of $93,459, inclusive of $34,709, was cancelled by mutual consent of the parties in February 2016. This figure is included in gain on cancellation of debt in the Company’s Statement of Operations.
(2)	On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $337.50 and $472.50 per share, respectively. As a result, the Company allocated fair market value (“FMV”) to both the BCF and to the warrants, or $206,832, which was recorded as a discount against the debenture. The Company accreted the discount to interest expense. The Company recognized the FMV of the related warrants as $45,000 using the Black-Scholes valuation model.
(3)	The Company borrowed $10,000 in exchange for a convertible debenture. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) highest closing bid prices over the preceding five (5) trading days. The Company valued the beneficial conversion feature of the convertible debenture at $4,286, which was accreted to interest expense over the period of the note.
(4)	This line is comprised of the assignment of $5,500 of a previously issued convertible debenture. The notes are convertible at $0.37125 per share.
(5)	The Company entered into three new debenture agreements upon sale/assignment of the original lenders. Because the stated terms of the new debenture agreement and principal amounts were significantly different from the original debenture, including analysis of value of the beneficial conversion feature at the assignment/purchase date, the transactions are treated as extinguishment of the old debentures and recorded as new for accounting purposes.
	The conversion price under the debentures is $0.37125 and the lender may convert at any time until the debenture plus accrued interest is paid in full. Various other fees and penalties apply if payments or conversions are not done timely by the Company. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time.

F-17

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. INCOME TAXES

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

	December 31,
	2016		2015
Current taxes
Federal	$	—	$	—
State		—		—
Current taxes		—		—
Change in deferred taxes		—		82,112
Change in valuation allowance		—		(82,069	)
Provision for income tax expense	$	—	$	43

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2016:

Deferred tax assets:
Equity based compensation	$	210,263
Allowance for doubtful accounts		15,000
Net operating loss carryforward		1,015,748
On-line training certificate reserve		818
Total deferred tax assets		1,241,829
Valuation allowance		(1,239,309	)
Deferred tax assets net of valuation allowance		2,520
Less deferred tax assets – non-current, net of valuation allowance		2,330
Deferred tax assets – current, net of valuation allowance	$	190

The effective tax rate used for calculation of the deferred taxes as of December 31, 2016 was 37.63%. The Company has established a valuation allowance against deferred tax assets of $1,239,309 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 99% reserve against the deferred tax assets attributable to the equity based compensation.

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

	December 31,
	2016			2015
Statutory tax rate		34.00	%		34.00	%
State tax, net of Federal benefits		3.63	%		3.63	%
Change in valuation allowance		(37.63	)%		(37.63	)%
Effective tax rate		—	%		—	%

F-18

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at December 31, 2015, Restated:

Deferred tax assets:
Equity based compensation	$	97,276
Allowance for doubtful accounts		9,520
Depreciation and amortization timing differences		—
Net operating loss carryforward		1,015,748
On-line training certificate reserve		818
Total deferred tax assets		1,123,362
Valuation allowance		(1,120,842	)
Deferred tax assets net of valuation allowance		2,520
Less deferred tax assets – non-current, net of valuation allowance		2,330
Deferred tax assets – current, net of valuation allowance	$	190

The effective tax rate used for calculation of the deferred taxes as of December 31, 2015 was 34%. The Company has established a valuation allowance against deferred tax assets of $1,120,842 or 99.8%, due to the uncertainty regarding realization, comprised primarily of a 100% reserve against the net operating carryforward, 100% reserve against the allowance for doubtful accounts, and 97% reserve against the deferred tax assets attributable to the equity based compensation.

13. 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. The Company authorized the preferred stock for the purpose of added flexibility in seeking capital and potential acquisition targets. The amendment authorizing the issuance of shares of preferred stock grants the Board authority, without further action by our stockholders, to designate and issue preferred stock in one or more series and to designate certain rights, preferences and restrictions of each series, any or all of which may be greater than the rights of the common stock. As of December 31, 2016 and December 31, 2015, the 425,000 shares of preferred stock are owned by the Company’s Chief Executive Officer. The preferred shares have 250 to 1 voting rights over the common stock, and are convertible into 31,481 shares of common stock. The preferred stock votes with the Company’s common stock, except as otherwise required under Florida law. Accordingly, Mr. Carmichael will have approximately 55% of the combined voting power of the Common Stock and Series A Convertible Preferred Stock, voting as a single class and will control the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control.

14. COMMITMENTS AND CONTINGENCIES

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

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

F-19

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On August 14, 2014, the Company entered into a new lease commitment. Terms of the new lease include thirty-seven-month term commencing on September 1, 2014; payment of $5,367 security deposit; base rent of approximately $4,000 per month over the term of the lease plus sales tax; and payment of 10.76% of annual operating expenses (i.e. common areas maintenance), which is approximately $2,000 per month subject to periodic adjustment. On December 1, 2016, we entered into an amendment to the initial lease agreement, commencing on October 1, 2017, extending the term for an additional eighty-four months, expiring September 30, 2024. The base rent was increased to $4,626 per month with a 3% annual escalation throughout the amended term. We believe that the facilities are suitable for their intended purpose, are being efficiently utilized and provide adequate capacity to meet demand for the foreseeable future.

Base rent expense, attributable to the Company’s headquarters facility totaled approximately $48,000 and $48,000 for the years ended December 31, 2016 and 2015, respectively.

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

	Operating lease
year 1	$	49,879
year 2		55,933
year 3		57,611
year 4		59,339
year 5 and thereafter		238,633
	$	461,395

15. EQUITY AND EQUITY INCENTIVE PLAN

Royalties expense – related parties – The Company has Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the years ended December 31, 2016 and 2015, as disclosed on the face of the Company’s Consolidated Statements of Operations totaled $56,054 and $67,849, respectively. As of December 31, 2015, the Company was approximately 27 months in arrears on royalty payments due. In November 2016, the Company entered into a conversion agreement under which the Company issued 10,000,000 shares of restricted common stock in satisfaction of $88,850 past due and payable to 940A. As of the date of the conversion agreement, the Company was more than 31 months in arrears on its royalty payments totaling approximately $151,000. In addition, 940A has agreed to forebear on any default under the License Agreement due to the Company’s remaining past due amount for a period of three months from the effective date of the conversion agreement. The shares issued were valued at $0.008885 per share, the closing price of the stock on the effective date of the conversion agreement. No default notice had been received and prior to the conversion agreement.

F-20

BROWNIE’S MARINE GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On August 22, 2007, the Company adopted an Equity Incentive Plan (the “Plan”). Under the Plan, Stock Options may be granted to Employees, Directors, and Consultants in the form of Incentive Stock Options or Nonstatutory Stock Options. Stock Purchase Rights, time vested and/performance invested Restricted Stock, and Stock Appreciation Rights and Unrestricted Shares may also be granted under the Plan. The initial maximum number of shares that may be issued under the Plan shall be 297 shares, and no more than 75 Shares of Common Stock may be granted to any one Participant with respect to Options, Stock Purchase Rights and Stock Appreciation Rights during any one calendar year period. Common Stock to be issued under the Plan may be either authorized and unissued or shares held in treasury by the Company. The term of the Plan shall be ten years. The Board of Directors may amend, alter, suspend, or terminate the Plan at any time. All 297 options were issued under the plan prior to January 1, 2010, with an exercise price of $1,350 per share and to-date all remain outstanding.

Effective April 15, 2016, Trebor, the wholly-owned subsidiary of the Company, entered into an employment agreement with Mr. Purdon, a former employee of Trebor and affiliate of the Company. Under the terms of the agreement Mr. Purdon agreed to provide business and sales services to the Company through August 31, 2016. Wages due to Mr. Purdon were payable at the sole discretion of the Company in shares of its restricted common stock at a price per share of $0.10 cents per share. Mr. Purdon received 360,000 shares of restricted common stock for services performed under the agreement during 2016 which was valued at $36,000. Furthermore, as additional consideration for the Company to enter into the agreement, Mr. Purdon tendered 28,403,252 shares of the Company’s common stock beneficially owned by Mr. Purdon to the Company. The shares were retired and returned to the Company’s treasury without further consideration.

16. EQUITY BASED INCENTIVE/RETENTION BONUSES

On November 2, 2012, the Board of Directors consented to grant equity based bonuses to certain key employees and consultants as an incentive to retain their services. Stock incentive bonuses were to vest, and be paid out on May 2, 2013, contingent upon continued employment or service. The stock bonus price per share was calculated based on last closing price as reported on per the OTCBB prior to the grant date for a total of $75,100. Shares were set aside and reserved for this transaction. The Company accrued operating expense ratably from the time of the awards through May 2, 2013, when vested. Of the 61,852 vested shares, only 5,185 were issued. On April 29, 2016, the Board of Directors determined it was not in the best interest of either the Company or the recipients to pay bonuses based on the current and foreseeable share price and cancelled the bonuses payable. The results of this action, 56,669 shares to be issued are included in a reduction of shares payable as reflected on the equity (deficit) and balance sheet at December 31, 2016.

17. SUBSEQUENT EVENTS

On March 1, 2017, the Company and 940A entered into a conversion agreement. Under the agreement the Company issued 940A 4,587,190 shares of restricted common stock in satisfaction of $63,303.23, which represented all past due and payable amounts to 940A under that certain Exclusive License Agreement by and between the parties as of March 1, 2017, As of the date of the agreement the Company was more than 3 months in arrears on royalty payments due under the Exclusive License Agreement. The shares were issued at a price per share of $0.0138, which exceeds the closing price of the Company’s common stock as reported on the OTC Markets on the date immediately preceding the closing. The shares issued to the 940A were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended, in reliance on the exemption provided by Section 3(a)(9) of that act.

F-21