Brownie's Marine Group, Inc 10-K

Item 1. Business. General BWMG, through its wholly owned subsidiaries, designs, tests, and manufactures tankless dive systems, yacht-based SCUBA air compressor and nitrox generation fill systems and acts as the exclusive distributor for North and South America for Lenhardt & Wagner GmbH (“L&W”) compressors in the high-pressure breathing air and industrial gas markets. Our wholly owned subsidiaries do business under their respective trade names on both a wholesale and retail basis from our headquarters and manufacturing facility in Pompano Beach, Florida. Our wholly owned subsidiaries and related product lines are as follows: Legacy SSA Products This segment represents our surface supplied air (SSA) product line. Trebor began its business making surface supplied air diving systems in the late 1960s. Our Brownie’s Third Lung systems have long been a dominant figure in gasoline powered, high-performance, and now the battery powered surface supplied air diving 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. After years of inventing, testing and development, in 2010 we introduced our variable-speed battery powered hookah system which provides divers with gasoline-free all day shallow diving experiences. These systems 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. The Legacy SSA segment has experienced growth in units sold for fiscal 2020 as compared to fiscal 2019, as we work to expand our dealer network and the breadth of product that each of the dealers provide. By all appearances, in our business segment, the COVID-19 pandemic has forced the consumer to re-evaluate recreation as a family and gravitate toward activities that can be pursued together and safely. During fiscal 2020 we began focusing on breaking the seasonality curve currently experienced by this segment and began aggressive marketing campaigns in geographic regions that experience diving season when the US market is slowing down due to weather. Additionally, we began to pursue more aggressively the boat builder market to offer our Legacy SSA systems as an option on newly built boats, expanding our market beyond the traditional consumer markets for our products. Our Legacy SSA products include: ● Tankless Dive Systems: The Company produces a line of tankless dive products, commonly called hookah or recreational surface supplied air systems. These systems allow one to four divers to enjoy the marine environment up to a depth of up to 45 feet without the bulk and weight of conventional SCUBA gear. The removal of barriers to entry into the sport of diving and the reduction of complicated and bulky SCUBA gear invites a broader range of the general public to participate more actively and enjoyably at their own pace and schedule. The design of our product also reduces the effort required for both its transport and continued use while exploring, cruising or traveling. A line of land-based systems is available for light-duty commercial applications that demand portability and performance. In addition to the gasoline-powered units and the variable speed battery powered units, a series of AC 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 aquatic maintenance and marine environments. 4 ● BIAS (Boat Integrated Air Systems): The Company developed several tankless products and complimentary accessories that it believes makes boat diving even easier. The BIAS battery powered tankless kit allows boat builders, dealers and end users to seamlessly install a pre-packaged kit directly into the boat. The E-Reel advances this idea by adding a level-winding battery powered hose reel system to provide compact storage of up to 150 feet of hose. Boaters can perform their own in-water maintenance and inspections, or just dive for enjoyment. In addition to supplying air to divers, BIAS is useful for supporting air horns, inflating boat fenders/water toys, activating pneumatically operated doors, and more. The company strategy is to align the easy to install, complete kit packages with boat builders, dealer and end users through a vertically targeted sales and marketing program initiative starting summer of 2020. Ultra Portable Tankless Dive Systems In the continued expansion of our business, in December 2017, we formed a wholly-owned subsidiary BLU3, to develop and market a next generation electric surface supplied air diving systems electric shallow dive system that is completely portable to the user. The BLU3 line currently consists of two models targeting specific performance levels and price points – NEMO and NOMAD. The first generation, NEMO, began shipping in the fourth quarter of 2019, and through December 31, 2020 we have shipped in excess of 1,200 units. Currently, NOMAD is nearing the end of the design phase and it is expected to be in full production during the Spring, 2021. This product will expand the user’s dive capability to over 30 feet and continue to drive the vertical integration of the diving experience. The NEMO has attracted a wide audience of users and is sold through a dealer network that has expanded to more than 20 countries. The products have gotten significant exposure via its marketing partners, who share their user experiences on YouTube, Instagram, Facebook and Tik Tok. These users have expanded the market for BLU3 outside of the traditional dive industry to the metal detector and treasure hunting segments. BLU3 takes the NEMO to market via its online store, its dealer network, and a growing following on Amazon. The BLU3 product lines are changing the way that people get into the water and explore the next atmosphere. The units are ultra-portable and can travel with the consumer to their adventures, wherever they may be. High Pressure Gas Systems Through this segment, we design, manufacture, sell and install SCUBA tank fill systems for on-board yacht use under the brand “Yacht-Pro™”. Our systems provide complete diving solutions for yachts, including 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. We also design 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. Our light duty compressor, the new Yacht Pro Essential is specifically designed as a turn-key kit for the boat builder optimized to integrate to onboard power systems and 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 Variable Speed Frequency Drive reducing the initial start-up power demand typically associated with high pressure compressor systems. 5 In August 2017, we entered into an Exclusive Distribution Agreement with L&W. Under the terms of the Exclusive Distribution Agreement, we were appointed the exclusive distributor of L&W’s complete product line in North America and South America, including the Caribbean. Our wholly-owned subsidiary BHPCS, is party to the agreement. Through BHPCS we are conducting business direct to end-users and establishing sales, distribution and service centers for high pressure air and industrial gas systems in the dive, fire, CNG, military, scientific, recreational and aerospace industries under the brand name “L&W Americas/LWA”. We have experienced encouraging penetration in the diving and yachting markets. Our objective is to maintain that momentum and expand into other markets including industrial gases, fuel gases and specialty gas applications. Our goal is to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships. L&W is one of the leading product development companies in the global market of high-pressure gas applications. We are exclusively developing a sales, distribution and service capability to assist L&W with completing a worldwide network of L&W’s agencies and service centers to further leverage the innovation and value inherent to L&W products. During the last three decades the range of L&W products has advanced as new markets developed by leveraging streamlined and vertically integrated capabilities. In addition to breathing air compressors and related peripheral equipment, L&W also offers compressors, storage and purification systems to meet the high-pressure requirements for natural gas filling stations. High-pressure inert gases such as argon, helium or nitrogen for industrial applications including welding and laser cutting, and for general laboratory use are also among the L&W product and custom engineering capabilities. During 2021 we look to expand this segment of our business’s customer base beyond that of the diving community. We believe the product lines from Lenhardt & Wagner GmbH, will allow LW Americas to put high quality, competitive products into the first responder and industrial market that utilize compressed air for many applications. Our goal will be to build a network of jobbers, dealers, installers and high-pressure compressor distributors throughout the territory by leveraging our know-how, brand awareness, complimentary products and creating sustainable distribution and core product OEM integration relationships. Diving and Boating Markets The diving and boating markets are key to the expansion of the Company’s brands. 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 SCUBA divers for revenue. According to industry data, many newly certified SCUBA divers fail to continue in the sport. Brownie’s and many industry professionals believe this is the result of divers progressing from zero or limited underwater environment experience to full SCUBA too rapidly. We believe that introducing novices to the 5 to 10 foot dive environment through our Ultra-Portable Tankless Dive systems first with limited equipment encumbrances is key to building a sustainable participant base of comfortable. Brownie’s Third Lung and BLU3 are creating product, training and easy access “resort” based dive solutions to address the emerging 10 foot to 30 foot diving market. We continue to work with boaters to make diving easy and enhance their on-water experience by exploiting the many ways our subsidiaries’ innovation can add to their investment in boating. 6 Intellectual Property Trade Names The Company either owns or has licensed from entities in which Robert M. Carmichael, our 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, YachtPro, NitroxMaker™, BLU3, diveBLU3.com, BLU3 Nemo, BLU3-Vent, 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, Garment integrated personal flotation device (GI-PFD). BHPCS operates under the published name LW Americas and LWA. Patents The Company owns multiple patents issued, pending, 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; and ● Active control releasable ballast. License Agreement In April 2018 the Company entered into a Patent License Agreement (the “STS Agreement”) with Setaysha Technical Solutions, LLC (“STS”) pursuant to which the Company licensed certain intellectual property, including patent rights, non-patent rights and know how from STS for use in our Ultra-Portable Tankless Dive system products. Under the STS Agreement, the Company paid an initial license fee in April 2018 through the issuance of 759,422 shares of common stock with a fair value of $30,000 which is being amortized on a straight-line basis over its five year term. The STS Agreement further provides for royalties to be paid based on annual net revenues achieved. In December 2019, the Company entered into Addendum No. 1 to the Patent License Agreement (“Addendum No. 1”) which amended the payments due upon the first commercial sale of Nemo. In accordance with Addendum No. 1, $8,250 was paid in cash and $8,250 which was accrued as of December 31, 2019 and paid in 2020. The Company issued 828,221 shares of common stock with a fair value of $18,635 in satisfaction of $13,500 for the first commercial sale. The Company accrued $13,828 in December 2019 as royalty payments for the fourth quarter commercial sales of Nemo . In June 2020, the Company entered into Amendment No. 2 to the Patent License Agreement (“Addendum No. 2”) which set certain limits and expectations of the assistance from STS related to designing and commercializing certain diving products, and revised the royalty payments due to STS as consideration for uncompensated services. The Company is obligated to pay STS a minimum yearly royalty of $60,000, or $15,000 per fiscal quarter, beginning in December 2019 and increasing by 2.15% per year. The minimum royalty was temporarily increased to $60,000 for fiscal years 2022, 2023 and 2024, with a fourth quarter true up against earned royalties. Royalty recorded in relation to this agreement totaled $53,929 and $48,963 for the years ended December 31, 2020 and 2019. 7 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. In May 2020, we engaged a professional marketing agency to modernize the Brownie’s Third Lung customer acquisition capabilities with Sea Lion and BIAS products as key objectives. Through the fiscal year end, the marketing firm continues to develop and implement strategies to leverage our existing browniedive.com web site and related support materials for the current summer season while a completely new digital strategy is being developed in time for the fall season. Leveraging the range of new battery powered tankless diving technologies and boat builder OEM kits to move the product reach beyond the current regional scope to a global brand is central to the goal. Tradeshows In 2020, the Company was represented at The Fort Lauderdale International Boat Show. Due to the COVID-19 pandemic, most tradeshows in 2020 were cancelled. For 2021, the company’s product will be directly or indirectly represented at the Palm Beach Boat Show, The Annapolis Motor and Sailing Shows, The Fort Lauderdale Boat show, and Diving Equipment and Manufacturing show. Websites The parent Company’s main website is www.browniesmarinegroup.com. Each of our subsidiaries and certain of our products have a unique website: www.BrownieDive.com , www.diveBLU3.com , www.LWAmericas.com , www.Tankfill.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 2020 and 2019, were $115,156 and $67,161, respectively. Government Regulation 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. 8 Customers We have historically been predominantly a wholesale distributor to retail dive stores, marine stores, boat dealers and builders. This includes more than 100 active independent Brownie’s and L&W dealers. In response to modern trends influenced by the “Amazon affect” over the last few years and now more recently with COVID-19, a greater mix of consumer direct engagement is occurring. We anticipate the continuation of consumer direct sales growth stimulated in part by the new marketing efforts and broader consumer appeal of the battery-powered tankless dive systems. We retail our products to include, but not limited to, boat owners, recreational divers and commercial divers. The Company sells to three entities owned by the brother of Robert M. Carmichael, the Company’s Chief Executive officer, and three companies owned by him. Combined sales to these six entities for 2020 and 2019, represented 18% and 22%, respectively, of total net revenues. The majority of L&W high pressure compressors and NitroxMaker™ systems have been sold to commercial dive stores, dive operators (resorts and liveaboard dive boats) and to law enforcement agencies. Sales of YachtPro™ compressor systems have been split between retail sales directly to consumers and wholesale sales to OEM boat builders/resellers/brokers. 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 which are typically purchased on a per order basis. 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. Competition We consider the most significant competitive factors in our business to be innovation, lifestyle, fair prices, shopping convenience, the variety of available products, knowledgeable and prompt customer service, rapid and accurate fulfillment of orders. We currently recognize one significant competitor in gasoline powered hookah sales and a variety of competitors in high-pressure tankfill systems sales. Products from the gasoline powered hookah competitor and those from one of the tankfill competitors appear to be very similar to ours at first glance, but seemingly lack forward moving innovation. The competitors in the high pressure tankfill market are typically focused on traditional dive stores and fire department air service with several being large multi-national companies. We compete with the large multi-national companies by constantly adapting to the yacht market or Nitrox integration. Currently, there is limited competition for our BLU3, Sea Lion and BIAS systems products. Overall, we are operating in a moderately competitive environment. The price structure for all the products we distribute compares favorably with the majority of our competitors based on quality and available features. Our key advantage is in our ability to create new products that are separating us from others in the market and in some cases creating new markets. Human Capital As of December 31, 2020, our full-time count for our and our subsidiaries’ employees was 20. Additionally, we employ 3 full time contract employees. To date, we have not experienced any work stoppages as a result of labor disputes, and we consider our relationship with our employees to be good. None of our employees are subject to collective bargaining agreements or represented by unions. Our key human capital objectives in managing our business include attracting, developing and retaining top talent. We want to attract a pool of diverse and innovative candidates and support their career growth once they become employees. In addition, we seek to hire based on talent rather than solely on educational pedigree. 9 Seasonality Our product lines have historically been seasonal in nature in the U.S. The peak season for Legacy Products is the second and third quarters of the year. The peak season for High Pressure products is the fourth and first quarters of the year. We are able to shift cross-trained factory and warehouse personnel between the two product categories as needed to flatten the seasonal impact. The new BLU3 product line may emerge as less seasonally influenced enterprise due to the global appeal. The Company is able to minimize the down time normally associated with seasonal business cycles. The Company continues to address the seasonality of the business by expanding its reach beyond the traditional markets in the U.S. and reaching to other areas of the world that may somewhat offset the seasonality. Additional information Information on the history of our company can be found in Note 1 to the notes to our consolidated financial statements appearing later in this report. We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission. Other information about the Company can be found on our website www.browniesmarinegroup.com . Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.