Brownie's Marine Group, Inc 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The Company’s common stock is quoted on the OTCQB tier of the OTC Markets under the symbol “BWMG”. On March 30, 2021, the closing sale price of our common stock was $.06 per share. 15 Holders of Common Stock As of March 31, 2021, the Company had approximately 390 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, if any, 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 our financial condition, results of operations and other factors that the board of directors will consider. In addition, under Florida law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Florida statutes, or if there is no such surplus, out of our net profits for the year in which the dividend is declared and/or the preceding year. If, however, the capital of our company computed in accordance with the relevant Florida statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired. Sales of Unregistered Securities In addition to unregistered sales of securities previously disclosed under prior reports, during the period covered by this report we sold the following securities that were not registered under the Securities Act: On December 15, 2020 the Company issued 2,100,000 shares of restricted common stock to an investment bank for investing banking and business advisory services. The shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act. On October 31, 2020, the Company issued 1,050,000 shares of restricted common stock to a consulting entity under the terms of a consulting agreement. The entity is controlled by the Company’s chief executive officer. The shares were issued pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act. On February 22, 2021 the Company issued 422,209 shares of its common stock to the holder of a $10,000 principal amount convertible promissory note in full satisfaction of the principal and interest of $14,777 due thereunder at a conversion price of $0.035 per share. The recipient was an accredited or otherwise sophisticated investor and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 3(a)(9) of such act. On March 1, 2021 the Company entered into an Investor Relations Consulting Agreement with BGM Equity Partners, LLC pursuant to which the Company engaged the firm to provide investor relations services. As compensation the Company issued the consultant 3,000,000 shares of its common stock, valued at $120,000. The recipient was an accredited or otherwise sophisticated investor and the issuance was exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of such act. On March 25, 2021 Charles F. Hyatt, a member of the board of directors, purchased 27,500,000 shares of restricted common stock at a purchase price of $0.01 per shares for aggregate proceeds of $275,000 in a transaction exempt from registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2). The Company did not pay any commissions or finders fees and is using the proceeds for working capital. 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 and 2020 Highlights As can be seen by our 2020 revenue growth, the Company’s mission of providing a platform that encourages innovation and growth in both the people we employ and the companies that we own with a goal of creating sustainable shareholder value is being brought to fruition. We believe that we are changing the way that people will approach the next atmosphere, by providing innovative, portable and easy to use surface supplied air products that will allow the users to explore what is below the surface. 2020 Highlights: ● In 2020, our total revenue increased 53.5% over 2019. This growth includes 12.6% of total revenue coming from the BluVent project, which will not be a recurring revenue source. ● In 2020, BLU3 shipped its 1,000 th Nemo portable dive system. ● In 2020, unit sales from Brownie’s Third Lung increased 24.4% over that of the prior year. ● In 2020, the Company increased its gross margin from 15.1% to 32.1%. ● In 2020, the Company’s common stock was approved for quotation on the OTCQB Venture Marketplace which we believe will increase its visibility to investors and financial professionals. 16 Management Opportunities, Challenges and Risks and 2021 Outlook Impact of COVID-19 Pandemic There continues to be worldwide impact from the COVID-19 pandemic. While we have been relatively successful in navigating such impact to date, we have previously been affected by temporary manufacturing closures, and employment and compensation adjustments. There are also ongoing related risks to our business depending on the progression of the pandemic, and recent trends in certain regions have indicated potential returns to limited or closed government functions, business activities and person-to-person interactions. Global trade conditions and consumer trends may further adversely impact us and our industries. For example, pandemic-related issues have exacerbated port congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to expedite delivery of critical parts. Similarly, increased demand for personal electronics has created a shortfall of microchip supply which are used in our battery powered products, and it is yet unknown how we may be impacted. We cannot predict the duration or direction of current global trends from this pandemic, the sustained impact of which is largely unknown, is rapidly evolving and has varied across geographic regions. Ultimately, we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly. Diving and Snorkeling Industry Revenues increased for the legacy SSA products by 31.3% in 2020 as compared to a reduction in participation in scuba diving 4.7% for 2020 according to a study done by the Sports, Fitness Industry Association (“SFIA”) published in first quarter 2021. The SFIA estimated there were 2.6 million participants in the U.S. scuba diving market in 2020. According to a report published by the Dive Equipment Manufacturing Association (“DEMA”) in first quarter 2021, there were approximately 87,000 new participants in U.S. diving market in 2020 as compared to approximately 151,000 in 2019 . DEMA attributes the drop in new open water certifications in 2020 to the pandemic. In contrast, the SFIA study indicated that participation in snorkeling increased by nearly 1% in 2020 as compared to 2019 with estimated participation of 7.7 million in the U.S. The BLU3 Nemo product was designed to capture this market with its convenience, portability and ease of use. With the further introduction of the next generation product for BLU3, the Nomad, the Company will continue to have the opportunity to grow market share in the U.S. and worldwide. Yachting Industry The global luxury yacht market is estimated to reach $6.5 billion and is poised to grow at a CAGR of 11% from 2020 to 2024, according to Technavio in their industry report dated November 2020. The Company’s BIAS systems have been designed with this industry in mind. The Company markets directly to the yachting industry, by leveraging its relationships with large yacht servicing companies, yacht builders and yacht brokerages. High Pressure Compressor Line The exclusive L&W agreement has been underutilized asset within the Brownie’s product family. According to Allied Market Research report published in February 2018, the North American high pressure compressor market is $880 million growing at an estimated compound annual growth rate (“CAGR”) of 3%. The L&W line of products distributed by LWA, offer superior technology at a very competitive price, showing an ability to gain market share with enhanced efforts to expand distribution beyond the diving and marine industries. The Company expects to continue to distribute the L&W compressors through its YachtPro, and BIAS systems, but will be expanding its distribution footprint into the non-marine related distribution channels that should expand the Company’s market reach in 2021. 17 Results of Operations Overall, our net revenues increased 53.5% in 2020 from 2019, which included an increase of 61.3% in net revenue from sales to third parties and an increase of 26.5% in sales to related parties. Our cost of revenues in 2020 was 67.9% of our total net revenues as compared to 84.9% in 2019. Included in our cost of revenues are royalty expenses we pay to Mr. Robert M. Carmichael which increased 33.9% in 2020 from 2019. We reported a gross profit margin of 32.4% in 2020 as compared to 15.1% in 2019. Net Revenues The following tables provides net revenues, costs of revenues which is exclusive of the royalties we pay Mr. Carmichael, and gross profit margins for our segments for 2020 and 2019. Year Ended December 31, % 2020 2019 change Legacy SSA Products $ 2,721,753 $ 2,073,330 31.3 % High Pressure Gas Systems 489,590 700,654 (30.1 )% Ultra-Portable Tankless Dive Systems 1,344,630 193,724 594.1 % Total revenue $ 4,555,973 $ 2,967,678 53.5 % Cost of revenues as a percentage of net revenues Year Ended December 31, 2020 2019 Legacy SSA Products 65.1 % 84.2 % High Pressure Gas Systems 63.4 % 67.7 % Ultra-Portable Tankless Dive Systems 74.2 % 128.6 % Gross profit(loss) margins Year Ended December 31, 2020 2019 Legacy SSA Products 34.5 % 13.4 % High Pressure Gas Systems 36.6 % 32.3 % Ultra-Portable Tankless Dive Systems 25.8 % (28.6 %) Legacy SSA Products segment The increase in net revenues from this segment for the year ending December 31, 2020 as compared to the same period in 2019 can be attributed to increased demand at the consumer level with a 59.9% increase and the affiliate level with a 47.4% increase. Dealer sales also grew by 16.5% for the year. This is a direct result of our shift to online marketing targeted consumers directly. Additionally, our marketing partnerships targeted consumers and sent them directly to our dealers. The Company improved dealer incentives via extended payment terms up to 120 days to expand the product offering within their stores also attributed to the overall increase of 31.3% in revenue for this segment for the year ended December 31, 2020. Our costs of revenues as a percentage of net revenues in this segment decreased from 84.2% to 65.1% for the year ended December 31, 2019 and 2020 respectively. The improved cost of sales, and in turn product margin, can be attributed to a change in the customer mix to include more profitable, direct to consumer sales. Additionally, dealer margin improved from 15.4% to 25.8% for the years ended December 31, 2019 and 2020, respectively with the restructuring of the dealer programs which increased the margin for the Company. 18 A breakdown of the revenue channels for this segment are below. Direct to Consumer represent items sold via our website, trade shows and walk-ins to our factory store. Dealer revenue represents sales to customers that we have dealer agreements that typically operate with the lowers margin. Affiliates are resellers of our products that are not in a formal dealer arrangement. Other represents all other sales that do not fit in any of the categories. Revenue % Cost of Sales Margin 2020 2019 Change 2020 2019 2020 2019 Direct to Consumer (website included) $ 1,010,527 $ 631,990 59.9 % 51.9 % 48.1 % 48.1 % 35.9 % Dealers 1,570,683 1,348,352 16.5 % 74.2 % 25.8 % 25.8 % 15.4 % Affiliates 98,324 66,728 47.4 % 68.6 % 31.4 % 31.4 % 35.2 % Other 42,219 26,260 60.8 % 61.9 % 787.6 % 38.1 % (687.6) % Total $ 2,721,753 $ 2,073,330 31.3 % 65.1 % 84.2 % 34.5 % 13.4 % High Pressure Gas Systems segment Sales of high-pressure breathing air compressors were suppressed during the year ended December 31, 2020 as compared to 2019, primarily due to the effects of the COVID-19 pandemic. Tourism remained restricted through most of the Caribbean, Central and South America. The majority of our dive resort and dive operator customers’ businesses continued to be severely impacted by the pandemic, and have not committed to equipment purchases during their recovery. For the year ended December 31, 2020 net revenues in this segment declined by 30.1% as compared to the same period in 2019. The largest reduction took place in our resellers category, which represent distributors who would sell through to dive stores or tourist resorts. This segment declined by 45.4%. The direct to consumer segment, which includes yacht owners and direct to dive stores, decreased by 22%. There was a 64.7% increase in the OEM segment. However, we believe that the acceptance of the L&W brand is growing steadily and we expect sales to increase as the customers within this market segment recover from the pandemic. Additionally, with the addition of new marine based products developed by LWA, we look to increase the direct to consumer and OEM segments. Our costs of revenues as a percentage of net revenues in this segment decreased to 63.4% as compared to 67.7% for the years ending December 31, 2020 and 2019 respectively. This can be attributed to significant improvements of in margin to the consumer. This margin improvement is primarily due to improved product mix and improvements in the bidding process. The overall reduction in margin in this segment can be attributed to the cost of labor during the first six months of 2020 that was fixed, despite the reductions in revenue during the pandemic. Revenue % Cost of Sales Margin 2020 2019 Change 2020 2019 2020 2019 Resellers $ 217,150 $ 397,711 (45.4 )% 73.6 % 68.7 % 26.4 % 31.3 % Direct to Consumers 203,702 261,219 (22.0 )% 54.4 % 68.4 % 45.6 % 31.6 % Original Equipment Manufacturers 68,738 41,724 64.7 % 57.9 % 54.3 % 42.1 % 45.7 % Total $ 489,590 $ 700,654 (30.1 )% 63.4 % 67.7 % 36.6 % 32.3 % Ultra Portable Tankless Dive Systems We started building and shipping our Ultra Portable Tankless Dive Systems (NEMO) in the Third Quarter 2019. During the year ended December 31, 2020, the sales channels were still developing, however, the company focused on direct to consumer via our website, dealers and Amazon. Direct to consumer sales accounted for 66.2%, dealers accounted for 30.9% and Amazon 2.8% of total revenue, net of Ventilator revenue, for the year ended December 31, 2020. During the second quarter of 2020, BLU3 received a purchase order from a third-party to mature the design of the NEMO into a functional ventilator prototype, to potentially help with the ventilator shortage that the country was facing due to the COVID–19 pandemic. BLU3 Vent emerged as the first in the Hack-a-Vent challenge to pass through preliminary testing at Uniformed Services University to confirm feasibility to treat an ARDS inflicted patient. BLU3 Vent has been submitted initial documents for a review with the FDA at the direction and with the support of the Wright Brothers Institute (WBI). This project is currently suspended as urgent demand for emergency use ventilators has declined. Revenue from this contract totaled $570,060 for the year ended December 31, 2020. Our aggregate cost of revenue from this segment as percentage of net revenues for the year ended December 31, 2020 may not be reflective of our margins on this segment in future periods. The BLU3 Vent project, the COVID-19 pandemic, along with the inefficiencies in production of a new product line, have partially offset positive trends of cost of sales and Margins. Revenue % Cost of Sales Margin 2020 2019 Change 2020 2019 2020 2019 Direct to Consumer $ 512,892 $ 193,558 165.0 % 43.5 % 128.6 % 56.5 % (28.6 )% Dealers 239,682 166 144,287 % 49.8 % 121.6 % 50.2 % (21.6 )% Amazon 21,996 - 100.0 % 46.2 % - 53.8 % - Ventilator 570,060 - 100.0 % 127.7 % - ( 27.7 )% - Total $ 1,344,630 $ 193,724 594.1 % 74.2 % 128.6 % 25.8 % (28.6 )% 19 Operating Expenses Operating expenses, consisting of SG&A and research and development costs, and are reported on a consolidated basis for our operating segments. Overall, our operating expenses increased 61.5% for 2020 from 2019. SG&A increased 61.1% for 2020 from 2019 which is primarily attributable to an increase in non-cash compensation expenses. Non-cash compensation expenses, consisting for stock and option grants to the officers and employees, was $1,408,844 as compared to $474,954, for the year ended December 31, 2020 and 2019, respectively. In addition employee compensation costs increased approximately $102,000 from the year ended December 31, 2020 to the same period in 2019, primarily due to increased staffing in our engineering departments and administrative departments. Research and development costs increased 71.5% for 2020 from 2019. BLU3 had an increase of approximately $11,000 or 16% for the year ended December 31, 2020, as it continued to develop the NOMAD. The legacy SSA segment increased its research and development costs by 100% or approximately $37,000, as it further developed its battery operated surface supplied air systems. Total Other Expense Total other expense declined 86.6% in 2020 from 2019, which is primarily attributable to a decrease in loss on extinguishment of debt of $131,000 related to the modification for conversion price of convertible notes in 2019 that did not occur in 2020. Additionally, interest expense increased from approximately $7,000 in 2019 to $18,600 in 2020. The increase in interest expense is attributable to the Marlin note that was executed in the fourth quarter of 2019 for the purchase of tooling for BLU3. Liquidity and Capital Resources Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. The following table summarized total current assets, total current liabilities and working capital (deficit) at December 31, 2020 as compared to December 31, 2019. December 31, December 31, % of 2020 2019 change Total current assets $ 1,469,037 $ 998,304 47.2 % Total current liabilities $ 1,029,204 $ 1,402,941 (26.6 )% Working capital (deficit) $ 439,833 $ (404,637 ) 208.7 % The increase in our current assets at December 31, 2020 from December 31, 2019 principally reflects increases in cash of approximately $275,000, inventory of approximately $145,000 and prepaid assets of approximately $63,000 for the year ended December 31, 2020. The increase in inventory was due to increased purchasing in late 2020 in concern over supply chain disruptions due to COVID19. These increases are offset by a decrease in accounts receivable and accounts receivable - related parties of approximately $11,000 for the year ended December 31, 2020 as compared to the same period in 2019, The decrease in our total current liabilities principally reflects decreases in accounts payable and accrued liabilities of approximately $132,000, accounts payable – related parties of approximately $161,000, customer deposits of approximately $101,000 and Notes payable of approximately $60,000 for the year ended December 31, 2020 as compared to the year ended December 31, 2019. These reductions in current liabilities were offset by increases in current maturities of long term debt of approximately $121,000 and the current portion of lease liabilities of approximately $10,000, for the year ended December 31, 2020 as compared to the same period in 2019. The company was able to reduce overall current liabilities via improved operating results concurrently with increases in cash balances as a result of the sales of securities and the funding of the PPP loan that took place during the year ended December 31, 2020. 20 Summary Cash Flows Year Ended December 31, 2020 2019 Net cash (used) by operating activities $ (556,108 ) $ (509,639 ) Net cash (used) by investing activities $ (5,500 ) $ (96,725 ) Net cash provided by financing activities $ 836,175 $ 598,200 Net cash used in operating activities for 2020 was primarily the result of a net loss of $1,351,619, an increase in our inventory balances of $196,383, increases in prepaid expenses and other current assets of $62,641, and total decreases in all liabilities of $542,728 for the year ended December 31, 2020 as compared to December 31, 2019. The cash used related to net loss was offset by $1,100,365 in non-cash stock related compensation expenses and $308,479 non-cash expenses for shares issued for professional fees during the year ended December 31, 2020. Net cash used in investing activities in 2020 of $5,500 reflects the cash and trade-in value utilized to purchase a delivery vehicle in our legacy SSA products segment. Net cash provided by financing activities in 2020 reflect $770,000 in proceeds related to the sale of the company’s common stock and the exercise of warrants. Additionally, the Company received loan proceeds of $159,600 from a PPP loan offset by debt repayments of $93,425 during the year ended December 31, 2020. The Company has applied for forgiveness through its lender, and the application has been processed. The Company expects the entire balance of the loan to be forgiven under the parameters of the CARES Act. The loan balance as of December 31, 2020 was $159,600. Going Concern and Management’s Liquidity Plans As set forth in Note 1 of the audited consolidated financial statements appearing in this report were prepared assuming we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of issuance of these consolidated financial statements. The report of our independent registered public accounting firm on our audited consolidated financial statements for the year ended December 31, 2020 contained a going concern qualification. We have a history of losses, and an accumulated deficit of $12,956,137 as of December 31, 2020. Despite a working capital surplus of $439,833 at December 31, 2020, the continued losses and cash used in operations raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to continue to increase revenues, control expenses, raise capital, and to continue to sustain adequate working capital to finance its operations. The failure to achieve the necessary levels of profitability and cash flows would be detrimental to the Company. As set forth in Note 10 to the notes to the financial statements accompanying this report, we owe third parties approximately $110,000 under the terms of convertible debentures, of which a $10,000 convertible debenture was converted to common stock in February 2021 and the remaining $100,000 of convertible debentures become due in December 2021. In addition, we have an additional $35,000 in loans which are due on demand. We are continuing to engage in discussions with potential sources for additional capital, however, our ability to raise capital is somewhat limited based upon our revenue levels, net losses and limited market for our common stock. If we fail to raise additional funds when needed, or if we do not have sufficient cash flows from operations, we may be required to scale back or cease certain of our operations. 21 Critical Accounting Estimates The Company’s management discussion and analysis of its 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 U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures. On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, income taxes, warranty obligations, litigation and other subjective matters impacting the financial statements. 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. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Management has discussed these policies with the Audit Committee of the Company’s Board of Directors. Allowance for Doubtful Accounts Allowances for doubtful accounts are estimated based on estimates of losses related to customer accounts receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances. Inventories The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances. Deferred Taxes The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made. Warranties The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations. 22 Off balance Sheet Arrangements As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not required for smaller reporting companies. Item 8. Financial Statements and Supplementary Data. Our consolidated financial statements appear beginning at page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.