RELATED PARTY TRANSACTIONS

Notes payable – related parties

Notes payable – related parties – consists of the following as of September 30, 2013:

Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013.	$	66,508

Less amounts due within one year		66,508

Long-term portion of notes payable – related parties	$	--

As of September 30, 2013, principal payments on the notes payable – related parties are as follows:

2013	$	66,508
2014		--
2015		--
2016		--
2017		--
Thereafter		--

	$	66,508

As of September 30, 2013, the Company was approximately thirteen months in arrears on principal payments due under the Note payable to the Chief Executive Officer. On May 13, 2013, the Company granted the Chief Executive Officer 370,371 (restated for reverse stock split, see Note 18. CHANGE IN CAPITAL STRUCTURE) in satisfaction of $50,000 of note payable – related party. The shares of stock were issued at the fair market value, or trading price, on the date of the transaction. No default notice has been received and the Company makes monthly payments to not fall further behind until it is able address past due payments.

Notes payable – related parties – consists of the following as of December 31, 2012:

Promissory note payable to the Chief Executive Officer of the Company, unsecured, bearing interest at 7.5% per annum, due in monthly principal and interest payments of $7,050, maturing on August 1, 2013.	$	168,384

Less amounts due within one year		168,384

Long-term portion of notes payable – related parties	$	--

As of December 31, 2012, principal payments on the notes payable – related parties are as follows:

2013	$	168,384
2014		--
2015		--
2016		--
2017		--
Thereafter		--

	$	168,384

As of December 31, 2012, the Company was approximately twenty months in arrears on principal payments due under the Note payable to the Chief Executive Officer.

Net revenues and accounts receivable – related parties– The Company sells products to three entities, Brownie’s Southport Divers, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys, owned by the brother of the Company’s Chief Executive Officer. Terms of sale are no more favorable than those extended to any of the Company’s other customers. Combined net revenues from these entities for three months ended September 30, 2013 and 2012, was $208,543 and $190,384, respectively. Combined net revenues from these entities for nine months ended September 30, 2013 and 2012, was $623,015 and $551,360, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at September 30, 2013, was $39,950, $11,879, and $19,071, respectively. Accounts receivable from Brownie’s SouthPort Diver’s, Inc., Brownie’s Palm Beach Divers, and Brownie’s Yacht Toys at December 31, 2012, was $27,759, $15,226, and $8,457, respectively. Sales to Pompano Dive Center for the three months ended September 30, 2013, and 2012, was $17,124 and $8,661, respectively. Sales to Pompano Dive Center for the nine months ended September 30, 2013, and 2012, was $23,322 and $14,394, respectively. Accounts Receivable from Pompano Dive Center at September 30, 2013, and December 31, 2012, was $31,932, and $5,863, respectively. See Note 18. JOINT VENTURE EQUITY EXCHANGE AGREEMENT for further discussion regarding Pompano Dive Center. Sales to the Company’s Chief Executive Officer for the nine months ended September 30, 2013, and September 30, 2012 was $25 and $50, respectively. Sales to 940 Associates, Inc., a Company owned by the Chief Executive Officer, were $3,000 and $0, for the nine months ended September 30, 2013, and 2012, respectively.

Royalties expense – related parties – The Company has Non-Exclusive License Agreements with 940 Associates, Inc. (hereinafter referred to as “940A”), an entity owned by the Company’s Chief Executive Officer, to license product patents it owns. Under the terms of the license agreements effective January 1, 2005, the Company pays 940A $2.00 per licensed product sold, rates increasing 5% annually. Also with 940A, the Company has an Exclusive License Agreement to license the trademark “Brownies Third Lung”, “Tankfill”, “Brownies Public Safety” and various other related trademarks as listed in the agreement. Based on this license agreement, the Company pays 940A 2.5% of gross revenues per quarter. Total royalty expense for the above agreements for the three and nine months ended September 30, 2013 and 2012, is disclosed on the face of the Company’s Consolidated Statements of Operations. As of September 30, 2013, and December 31, 2012, the Company was approximately and twenty-one months in arrears on royalty payments due. No default notice has been received and the Company plans to make payments as able.

Non-employee Board of Director Fees and Bonus – Non-employee Board of Director (BOD) compensation is $2,500 per month. Non-Employee BOD fees for the three months ended September 30, 2013 and 2012, was $7,500 and $7,500, respectively. Non-Employee BOD fees (related and unrelated party) for the nine months ended September 30, 2013 and 2012, was $22,500 and $30,000, respectively. One of the two non-employee Board of Directors (“BOD”), of the three person BOD, which included the Chief Executive Officer, resigned his position on April 18, 2012. As of December 31, 2012, $22,500 of the accrued BOD fees had been converted to stock, leaving $15,000 still due and unpaid, $7,500 due from first quarter of 2012 to the BOD who resigned, and $7,500 due Mikkel Pitzner from fourth quarter of 2012. Because the remaining non-employee BOD, Mikkel Pitzner, now accounts for 50% of the BODs, the Company reclassified him to related party as of April 2012. See Other liabilities and accrued interest - related parties below for inclusion of the $7,500 payable to him as of December 31, 2102. Prior to April 2012, the two non-employee BOD were not classified as related parties.

During the three months ended March 31, 2013, the liability due both non-employee BODs from 2012 was satisfied with stock. Further, during the three and nine months ended September 30, 2013, BOD fees due Mr. Pitzner for 2013 were satisfied with stock. On June 20, 2012, Mr. Pitzner converted a $20,000 short-term loan to restricted shares per BOD consent at fair market value of the stock. In addition, on February 23, 2013, the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, Mikkel Pitzner was awarded restricted shares of common stock with $73,000 fair market value. This amount is included on the statement of stockholders’ deficit as shares payable as of and for the year ended December 31, 2012. The shares were issued to Mr. Pitzner during the first quarter ended March 31, 2013.

Patent purchase agreements – In the first quarter of 2010, the Carleigh Rae Corporation (herein referred to as “CRC”), an entity that the Company’s Chief Executive Officer has an ownership interest, transferred ownership rights to the Company of patents previously subject to Non-Exclusive License Agreements. Effective September 24, 2010, the Company finalized and executed terms of the purchase from CRC for payment of $25,500 and nominal shares of the Company’s common stock. In addition, the principals of CRC were entitled to a percentage of future sales amounting to $8,250 of products the Company is to receive in conjunction with two patent infringement lawsuits settled in the third quarter of 2010. See Other liabilities and accrued interest– related parties below for inclusion of $6,017 remaining from the original $8,250 liability due the Principals of CRC. By acquiring the IP the Company (i) has an opportunity to further develop the IP, (ii) has the ability to incorporate the IP into current and future products, and (iii) has the opportunity to license the IP to third parties.

Other liabilities and accrued interest– related parties

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

	September 30, 2013		December 31, 2012

Year-end bonus payable to Chief Executive Officer	$	67,000	$	67,000
BOD fee payable to non-employee – related party		--		7,500
Due to Principals of Carleigh Rae Corp., net		6,017		6,017
Other liabilities – related parties	$	73,017	$	80,517

The $6,017 due to the Principals of the Carleigh Rae Corp. resulted as part of the patent infringement settlements received by the Company and is discussed above as is the non-employee BOD Fee.

Restricted common stock issued for personal guarantee – On April 21, 2011, the Company granted Robert Carmichael, the Chief Executive Officer, 14,815 shares of restricted common stock in consideration of personal guarantees he provided to secure restatement and consolidation of the first and second mortgages of the Company. The restrictions on the common stock expired 50% on April 20, 2012, and 50% on April 20, 2013, since Mr. Carmichael continued his full time employment with the Company. The company valued the stock at determined fair market value per share on the date of the transaction and has recorded $1,000,000 of compensation expense to Mr. Carmichael ratably over the two-year term in which the restrictions expired. The unearned balance of the compensation was recorded as prepaid compensation as a component of shareholders’ deficit. For the three months ended September 30, 2013 and 2012, the Company recognized $0 and $125,001, respectively, as amortization of prepaid compensation under this agreement. For the nine months ended September 30, 2013 and 2012, the Company recognized $137,494 and $375,003, respectively, as amortization of prepaid compensation under this agreement. Prepaid compensation remaining under this agreement as of September 30, 2013, and December 31, 2012, was $0 and $137,494, respectively, and is reflected as a component of Stockholders’ Deficit.

Equity based compensation for Chief Executive Officer– On November 2, 2012, the BOD approved a stock incentive bonus to certain key employees and consultants to vest and pay out on May 2, 2013, contingent upon continued employment or services. The stock bonus price per share was calculated based on last closing price per the OTCBB on the effective date of the transaction, or for a total of $75,100. Shares were set aside and reserved for this transaction. Of the $75,100 bonus, $45,000 was awarded to the Chief Executive Officer of the Company. The Company recorded compensation expense ratably over the vesting period. See Note 21. EQUITY BASED INCENTIVE/RETENTION BONUSES for further discussion. In addition, on February 23, 2013, the Company declared a bonus payable for the year ended 2012 for certain employees, service providers, and consultants. As part of this bonus, the Chief Executive Officer was awarded $67,000 to be paid out in cash or stock based on later determination by the BOD. This amount is included in operating expense for the year ended December 31, 2012. See table above for inclusion in other liabilities and accrued interest – related parties. Further, pursuant to a Written Consent of the BOD of the Company on June 11, 2012, clarifying a meeting held on May 31, 2012, the BOD declared an $83,333 bonus due the Chief Executive Officer payable in shares of restricted stock. The shares vested as of January 2, 2013. The grant price per share was based on the closing price of the stock on May 31, 2012. For accounting purposes, the Company recognized $83,333 operating expense ratably over the seven months the share vested. Lastly, the Chief Executive Officer’s monthly salary was increased by $16,667 per month beginning in June 2012, payable in restricted stock calculated based on a monthly weighted average share factor of .70, or a 30% discount. The shares will not vest until six months after the last day of each month, continued employment is also a requirement for vesting, and shares will not be issuable until vested. The Company is recording $23,801 operating expense each month related to the salary increase, which is $16,667 with the discount added back to record at full monthly weighted average price per market. All equity based compensation to the Chief Executive Officer is reflected on the face of the Statement of Stockholders’ Deficit.

Security Purchase Agreement– On April 9, 2013, the Company entered into a security purchase agreement for up to $5,000,000. On July 16, 2013, the Company issued 462,963 shares of restricted common stock representing 50%, or $125,000, of the commitment fee under the agreement. The Company advised the party to the agreement that issuance of the shares violated terms of the agreement in that the number of shares exceeded 9.99% of the outstanding shares of common stock of the Company rendering the party an affiliate. The party has not returned any of the shares, is now classified as an affiliate, and as such violates the terms the Securities Purchase Agreement. Accordingly, the $125,000 security purchase commitment fee capitalized in second quarter, which the Company began amortizing over the life of the agreement, was fully amortized in the third quarter. Therefore, for the three and nine months ended September 30, 2013, amortization expense was $116,320, and $125,000, respectively.