Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2022

 

or

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number: 0-11102

 

OCEAN BIO-CHEM, INC.

(Exact name of registrant as specified in its charter)

 

Florida		59-1564329
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

4041 SW 47 Avenue, Fort Lauderdale, Florida		33314
(Address of principal executive offices)		(Zip Code)

 

954-587-6280

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act.

 

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, $0.01 par value		OBCI		The NASDAQ Stock Market

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

At May 13, 2022, 9,509,799 shares of the registrant’s common stock were outstanding.

 

 

 

 

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

		Page
PART I	Financial Information:
Item 1.	Financial Statements	1
	Condensed consolidated balance sheets at March 31, 2022 (unaudited) and December 31, 2021	1
	Condensed consolidated statements of operations (unaudited) for the three months ended March 31, 2022 and 2021	2
	Condensed consolidated statements of comprehensive income (unaudited) for the three months ended March 31, 2022 and 2021	3
	Condensed consolidated statements of shareholders’ equity (unaudited) for the three months ended March 31, 2022 and 2021	4
	Condensed consolidated statements of cash flows (unaudited) for the three months ended March 31, 2022 and 2021	5
	Notes to condensed consolidated financial statements	6-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15
Item 4.	Controls and Procedures	15
PART II	Other Information:
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 6.	Exhibits	16
	Signatures	17

 

i

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2022				December 31, 2021
		(Unaudited)
ASSETS
Current Assets:
Cash		$	10,216,924			$	12,684,935
Trade accounts receivable less allowances of approximately $712,000 and $632,000, respectively			10,261,547				9,544,133
Receivables due from affiliated companies			847,026				1,211,999
Inventories, net			19,974,898				16,819,253
Prepaid expenses and other current assets			1,585,477				2,093,971
Total Current Assets			42,885,872				42,354,291
Property, plant and equipment, net			17,642,008				16,360,218
Operating lease – right to use			160,449				182,543
Intangible assets, net			1,309,683				1,380,652
Total Assets		$	61,998,012			$	60,277,704
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt, net		$	743,740			$	736,531
Current portion of operating lease liability			90,424				89,600
Accounts payable - trade			3,376,982				2,877,623
Income taxes payable			208,342				45,295
Accrued expenses payable			1,120,234				900,982
Total Current Liabilities			5,539,722				4,650,031
Deferred tax liability			453,086				347,723
Operating lease liability, less current portion			70,025				92,943
Long-term debt, less current portion and debt issuance costs			7,515,735				7,750,889
Total Liabilities			13,578,568				12,841,586
COMMITMENTS AND CONTINGENCIES
Shareholders’ Equity:
Common stock - $0.01 par value, 12,000,000 shares authorized; 9,509,799 shares and 9,503,999 shares issued and outstanding, respectively			95,098				95,040
Additional paid in capital			11,141,123				11,077,706
Accumulated other comprehensive loss			(291,374	)			(292,336	)
Retained earnings			37,474,597				36,555,708
Total Shareholders’ Equity			48,419,444				47,436,118
Total Liabilities and Shareholders’ Equity		$	61,998,012			$	60,277,704

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2022				2021
Net sales		$	12,737,329			$	13,131,224
Cost of goods sold			8,001,347				7,750,503
Gross profit			4,735,982				5,380,721
Operating Expenses:
Advertising and promotion			1,071,579				941,814
Selling and administrative			2,000,030				1,972,812
Total operating expenses			3,071,609				2,914,626
Operating income			1,664,373				2,466,095
Other (expense) income
Interest (expense), net			(31,682	)			(37,187	)
Income before income taxes			1,632,691				2,428,908
Provision for income taxes			(333,410	)			(524,639	)
Net income		$	1,299,281			$	1,904,269
Earnings per common share		$	0.14			$	0.20
Dividends declared per common share		$	0.04			$	0.03

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2022				2021
Net income		$	1,299,281			$	1,904,269
Foreign currency translation adjustment			962				(596	)
Comprehensive income		$	1,300,243			$	1,903,673

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(UNAUDITED)

 

										Additional				Accumulated Other
		Common Stock								Paid In				Comprehensive				Retained
		Shares				Amount				Capital				Loss				Earnings				Total
December 31, 2021			9,503,999			$	95,040			$	11,077,706			$	(292,336	)		$	36,555,708			$	47,436,118
Net income			-				-				-				-				1,299,281				1,299,281
Dividends, common stock			-				-				-				-				(380,392	)			(380,392	)
Common stock repurchased and retired			(600	)			(6	)			(5,639	)			-				-				(5,645	)
Portion of 2021 stock based compensation for shares issued in 2022			6,400				64				69,056				-				-				69,120
Foreign currency translation adjustment			-				-				-				962				-				962
March 31, 2022			9,509,799			$	95,098			$	11,141,123			$	(291,374	)		$	37,474,597			$	48,419,444

 

										Additional				Accumulated Other
		Common Stock								Paid In				Comprehensive				Retained
		Shares				Amount				Capital				Loss				Earnings				Total
December 31, 2020			9,481,799			$	94,818			$	10,816,100			$	(294,324	)		$	29,290,477			$	39,907,071
Net income			-				-				-				-				1,904,269				1,904,269
Dividends, common stock			-				-				-				-				(284,454	)			(284,454	)
Foreign currency translation adjustment			-				-				-				(596	)			-				(596	)
March 31, 2021			9,481,799			$	94,818			$	10,816,100			$	(294,920	)		$	30,910,292			$	41,526,290

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended
		March 31,
		2022				2021
Cash flows from operating activities:
Net income		$	1,299,281			$	1,904,269
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization			405,022				357,594
Deferred income taxes			105,363				(88,566	)
Provision for bad debts			80,003				88,289
Provision for slow moving and obsolete inventory			70,049				9,756
Other operating non-cash items			311				(1,572	)
Changes in assets and liabilities:
Trade accounts receivable			(797,417	)			(2,110,546	)
Receivables due from affiliated companies			364,973				358,826
Inventories			(3,225,694	)			(1,068,795	)
Prepaid expenses and other current assets			508,494				(162,596	)
Accounts payable – trade			499,359				1,174,548
Income taxes payable			163,047				576,626
Accrued expenses payable			288,372				169,969
Net cash (used in) provided by operating activities			(238,837	)			1,207,802
Cash flows from investing activities:
Purchases of property, plant and equipment			(1,610,684	)			(915,899	)
Net cash used in investing activities			(1,610,684	)			(915,899	)
Cash flows from financing activities:
Payments on long-term debt			(233,104	)			(130,092	)
Dividends paid to common shareholders			(380,392	)			(284,454	)
Repurchase of common stock			(5,645	)			-
Net cash used in financing activities			(619,141	)			(414,546	)
Effect of exchange rate on cash			651				976
Net decrease in cash and restricted cash			(2,468,011	)			(121,667	)
Cash and restricted cash at beginning of period			12,684,935				11,601,152
Cash and restricted cash at end of period		$	10,216,924			$	11,479,485
Supplemental disclosure of cash flow information:
Cash paid for interest during period		$	28,786			$	32,606
Cash paid for income taxes during period		$	65,000			$	-
Cash paid under operating lease		$	23,700			$	23,700
Cash		$	10,216,924			$	11,161,761
Restricted cash			-				317,724
Total cash and restricted cash		$	10,216,924			$	11,479,485

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF ACCOUNTING POLICIES

 

Interim reporting

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Ocean Bio-Chem, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context indicates otherwise, the term “Company” refers to Ocean Bio-Chem, Inc. and its subsidiaries.

 

The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission Regulation S-X.  Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

 

The financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.

 

The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

Use of estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP 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 revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

 

2. INVENTORIES

 

The Company’s inventories at March 31, 2022 and December 31, 2021 consisted of the following:

 

		March 31, 2022				December 31, 2021
Raw materials		$	8,745,696			$	7,465,011
Finished goods			11,552,825				9,669,073
Inventories, gross			20,298,521				17,134,084
Inventory reserves			(323,623	)			(314,831	)
Inventories, net		$	19,974,898			$	16,819,253

 

The inventory reserves shown in the table above reflect slow moving and obsolete inventory.

 

The Company operates a vendor managed inventory program with one of its customers to improve the promotion of the Company’s products. The Company manages the inventory levels at this customer’s warehouses and recognizes revenue as the products are sold by the customer. The inventories managed at the customer’s warehouses, which are included in inventories, net, amounted to approximately $987,000 and $1,051,000 at March 31, 2022 and December 31, 2021, respectively.

 

6

 

 

3. PROPERTY, PLANT & EQUIPMENT

 

The Company’s property, plant and equipment at March 31, 2022 and December 31, 2021 consisted of the following:

 

		Estimated Useful Life		March 31, 2022				December 31, 2021
Land				$	278,325			$	278,325
Building and improvements		30 years			15,180,235				9,710,244
Manufacturing and warehouse equipment		6-20 years			13,577,478				12,858,638
Office equipment and furniture		3-5 years			1,941,521				1,805,002
Leasehold improvements		10-15 years			621,903				587,183
Finance leases – right to use		5 years			113,741				113,741
Vehicles		3 years			10,020				10,020
Construction in process (1)					1,883,726				6,633,112
Property, plant and equipment, gross					33,606,949				31,996,265
Less accumulated depreciation					(15,964,941	)			(15,636,047	)
Property, plant and equipment, net				$	17,642,008			$	16,360,218

 

(1)

In April 2022, the Company’s wholly owned subsidiary, KINPAK Inc. (“Kinpak”), placed into service assets relating to an expansion of its manufacturing and distribution facilities.

 

Depreciation expense totaled $328,893 (of which $303,992 is included in cost of goods sold and $24,901 is included in selling and administrative expenses) and $281,529 (of which $257,140 is included in cost of goods sold and $24,389 is included in selling and administrative expenses) for the three months ended March 31, 2022 and 2021, respectively.

 

4. LEASES

 

The Company has one operating lease and two finance leases.

 

Under the operating lease, the Company leases its executive offices and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by Peter G. Dornau, the Company’s Chairman, President and Chief Executive Officer. The lease, as extended, expires on December 31, 2023. The lease requires an annual minimum base rent of $94,800 and provides for a maximum annual 2% increase in subsequent years, although the entity has not raised the minimum base rent since the Company entered into a previous lease agreement in 1998. Additionally, the leasing entity is entitled to reimbursement of all taxes, assessments, and any other expenses that arise from ownership. Each of the parties to the lease has agreed to review the terms of the lease every three years at the request of the other party. Operating lease expense was $24,553 and $24,339 for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022 and December 31, 2021, the Company had a right to use asset and a corresponding liability of $160,449 and $182,543, respectively, related to the operating lease. Set forth below is a schedule of future minimum rent payments under the operating lease.

 

Twelve-month period ending March 31,
2023		$	94,800
2024			71,100
Total future minimum lease payments			165,900
Less imputed interest			(5,451	)
Total operating lease liability		$	160,449

 

The Company’s two finance leases relate to office equipment. See Note 3 for information regarding the carrying value of the Company’s finance lease right to use assets and Note 7 for information regarding the finance lease payment schedule.

 

7

 

 

Expenses incurred with respect to the Company’s leases during the three months ended March 31, 2022 and 2021 are set forth below.

 

		Three Months Ended March 31, 2022				Three Months Ended March 31, 2021
Operating lease expense		$	24,553			$	24,339
Finance lease amortization			5,350				5,254
Finance lease interest			337				433
Total lease expense		$	30,240			$	30,026

 

The remaining lease term with respect to the operating lease, weighted average remaining lease term with respect to the finance leases and discount rate with respect to the operating lease and finance leases at March 31, 2022 and December 31, 2021 are set forth below:

 

		March 31, 2022
Remaining lease term – operating lease			1.75 years
Weighted average remaining lease term – finance leases			3.4 years
Discount rate – operating lease			3.7	%
Weighted average discount rate – finance leases			1.8	%

 

		December 31, 2021
Remaining lease term – operating lease			2.0 years
Weighted average remaining lease term – finance leases			3.7 years
Discount rate – operating lease			3.7	%
Weighted average discount rate – finance leases			1.8	%

 

5. INTANGIBLE ASSETS

 

The Company’s intangible assets at March 31, 2022 and December 31, 2021 consisted of the following:

 

March 31, 2022

 

Intangible Assets		Cost				Accumulated Amortization				Net
Patents		$	622,733			$	609,871			$	12,862
Trade names and trademarks			1,715,325				675,195				1,040,130
Customer list			584,468				416,328				168,140
Product formulas			292,234				208,168				84,066
Royalty rights			160,000				155,515				4,485
Total intangible assets		$	3,374,760			$	2,065,077			$	1,309,683

 

December 31, 2021

 

Intangible Assets		Cost				Accumulated Amortization				Net
Patents		$	622,733			$	596,980			$	25,753
Trade names and trademarks			1,715,325				665,440				1,049,885
Customer list			584,468				387,105				197,363
Product formulas			292,234				193,554				98,680
Royalty rights			160,000				151,029				8,971
Total intangible assets		$	3,374,760			$	1,994,108			$	1,380,652

 

Amortization expense related to intangible assets was $70,969 and $71,161 for the three months ended March 31, 2022 and 2021, respectively.

 

8

 

 

6. REVOLVING LINE OF CREDIT

 

On August 6, 2021, the Company and Regions Bank (“the “Lender”) entered into a Business Loan Agreement (the “Business Loan Agreement”), effective as of July 30, 2021, under which the Company was provided a revolving line of credit in the amount of Six Million Dollars ($6,000,000). The Business Loan Agreement supersedes the Company’s previous $6,000,000 revolving line of credit from the Lender, entered into on August 31, 2018, that was scheduled to expire on August 31, 2021. The revolving line of credit under the Business Loan Agreement is evidenced by a promissory note and is secured principally by the Company’s inventory and accounts receivable.

 

The Business Loan Agreement bears interest at a variable annual rate of LIBOR plus 1.35%, computed on a 365/360 basis. All outstanding principal plus all accrued unpaid interest is due upon Lender’s demand or when the Business Loan Agreement expires on August 30, 2024.

 

There has been no negative impact in the availability of funds to the Company as a result of the COVID-19 pandemic.

 

At March 31, 2022 and December 31, 2021, the Company had no borrowings under the revolving line of credit provided by the current and former Business Loan Agreements.

 

7. LONG TERM DEBT

 

Term Loan

 

On July 30, 2021, Kinpak  and Regions Bank (the “Lender”) entered into a Credit Agreement (the “Credit Agreement”), effective as of July 20, 2021, under which the Company was extended a term loan (the “Term Loan”) in the original principal amount of Five Million Dollars ($5,000,000). The Company is using the proceeds of the Term Loan for a 69,000 square foot expansion of Kinpak’s manufacturing, warehouse and distribution facilities in Montgomery, Alabama. The Term Loan is evidenced by a promissory note (the “Note”) and is secured by a second priority mortgage of the assets pledged in Kinpak’s industrial development bond financing obtained on September 26, 2017 (see below for further information).

 

The Company has unconditionally guaranteed the payment to the Lender promptly when due, by acceleration or otherwise, of all obligations of Kinpak to the Lender.

 

The Term Loan bears interest at an annual rate of 3.25% and is due in 119 monthly installments of $35,249 each, plus interest then accrued, beginning on August 20, 2021. The final installment shall be due and payable on July 20, 2031 in an amount equal to all principal and interest then remaining unpaid. Assuming that all amounts due prior to that date are paid in a timely manner, the final installment would be $1,977,047.

 

The Credit Agreement provides that prepayments on the Term Loan are subject to a prepayment penalty of 5% during the first year the Term Loan is outstanding, with such penalty declining 1% each year thereafter until there is no prepayment penalty after five years. However, the Lender has agreed to waive the prepayment provisions.

 

The Credit Agreement includes financial covenants requiring that the Company maintain a minimum fixed charge coverage ratio (generally, the ratio of (A) EBITDA for the most recently completed four fiscal quarters minus the sum of the Company’s distributions to its shareholders, taxes paid and unfunded capital expenditures during such period to (B) prior period current maturities of Company long term debt plus interest expense incurred over the most recently completed four fiscal quarters) of at least 1.20 to 1, tested quarterly, and a maximum “debt to cap” ratio (generally, funded debt divided by the sum of net worth and funded debt) of 0.75 to 1, as of the end of each fiscal quarter. For purposes of computing the fixed charge coverage ratio, “EBITDA” generally is defined as net income before taxes and depreciation expense plus amortization expense, plus interest expense, plus non-recurring and/or non-cash losses and expenses, minus non-recurring and/or non-cash gains and income. The Credit Agreement also requires that the majority shareholder’s ownership does not drop below 50% of the outstanding shares of Kinpak.

 

The Credit Agreement contains cross-default and cross-collateral provisions relating to any other indebtedness with the Lender, including without limitation the Company’s obligations under its $6,000,000 revolving line of credit from the Lender.

 

The Credit Agreement also contains negative covenants restricting the Company’s ability to, among other things, create or assume indebtedness for borrowed money exceeding $250,000 other than trade payables incurred in the normal course of business, create liens other than permitted liens (as defined in the Credit Agreement), acquire an interest in another entity or incur any obligation as surety or guarantor other than in the ordinary course of business.

 

Industrial Development Bond Financing

 

On September 26, 2017, Kinpak indirectly obtained a $4,500,000 loan from Regions Capital Advantage, Inc. (the “Lender”). The proceeds of the loan have been used in full as of June 30, 2021, principally to pay or reimburse costs relating to the expansion of Kinpak’s manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”).

 

9

 

 

The loan was funded by the Lender’s purchase of a $4,500,000 industrial development bond (the “Bond”) issued by The Industrial Development Board of the City of Montgomery, Alabama (the “IDB”). The Bond is a limited obligation of the IDB and is payable solely out of revenues and receipts derived from the leasing or sale of Kinpak’s facilities. In this regard, Kinpak is obligated to fund the IDB’s payment obligations by providing rental payments under a lease between the IDB and Kinpak (the “Lease”), under which Kinpak leases its facilities from the IDB. Kinpak inherited the lease structure when it first acquired its facilities from its predecessor-in-interest in 1996. The Lease provides that prior to the maturity date of the Bond, Kinpak may repurchase the facilities for $1,000 if the Bond has been redeemed or fully paid.

 

The Bond bears interest at the rate of 3.07% per annum, calculated on the basis of a 360-day year and the actual number of days elapsed (subject to increase to 6.07% per annum upon the occurrence of an event of default), and is payable in 118 monthly installments of $31,324 beginning on November 1, 2017 and ending on August 1, 2027, with a final principal and interest payment to be made on September 1, 2027. The amount of the final payment was originally scheduled to be $1,799,201, however at March 31, 2022 the final payment is scheduled to be $1,600,861 because the Company has made additional debt payments. The Bond provides that the interest rate will be subject to adjustment if it is determined by the United States Treasury Department, the Internal Revenue Service, or a similar government entity that the interest on the Bond is includable in the gross income of the Lender for federal income tax purposes.

 

Under the Lease, Kinpak is required to make rental payments for the account of the IDB to the Lender in such amounts and at such times as are necessary to enable the payment of all principal and interest due on the Bond and other charges, if any, payable in respect of the Bond. The Lease also provides that Kinpak may redeem the Bond, in whole or in part, by prepaying its rental payment obligations in an amount sufficient to effect the redemption. In addition, the Lease contains provisions relating to the Expansion Project, including limitations on utilization of Bond proceeds, deposit of unused proceeds into a custodial account (as described below) and investment of monies held in the custodial account.

 

Payment of amounts due and payable under the Bond and other related agreements are guaranteed by the Company and its other consolidated subsidiaries. In connection with the guarantee agreement under which the Company provided its guarantee, the Company is subject to certain covenants, including financial covenants requiring that the Company maintain (i) a minimum fixed charge ratio (generally, the ratio of (A) EBITDA minus the sum of Company’s distributions to its shareholders, taxes paid and unfunded capital expenditures to (B) current maturities of Company long-term debt plus interest expense) of 1.20 to 1, tested quarterly, and (ii) a ratio of funded debt (as defined in the guaranty agreement) divided by the sum of net worth and funded debt of 0.75 to 1, tested quarterly. For purposes of computing the fixed charge coverage ratio, “EBITDA” generally is defined as net income before taxes and depreciation expense plus amortization expense, plus interest expense, plus non-recurring and/or non-cash losses and expenses, minus non-recurring and/or non-cash gains and income; “unfunded capital expenditures” generally is defined as capital expenditures made from Company funds other than funds borrowed through term debt incurred to finance such capital expenditures. At March 31, 2022, the Company was in compliance with these financial covenants.

  

The Company incurred debt financing costs of $196,095 in connection with the financing. These costs are shown as a reduction of the debt balance and are being amortized over the life of the Bond.

 

Other Long-Term Obligations

 

In connection with the Company’s agreement to purchase assets of Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018, the Company provided to Snappy Marine a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). The note is payable in equal installments of $16,667 over a 60- month period that commenced on August 1, 2018, with a final payment due and payable on July 1, 2023. If the note is prepaid in full, the entire outstanding balance of the note (including all unpaid amounts allocated to interest over the remaining term of the note) must be paid.

 

On June 22, 2020, the Company entered into a lease agreement with Canon Solutions America, Inc. to lease office equipment. The lease obligates the Company to pay $100,009 in 63 equal monthly payments of $1,587. The lease is classified as a finance lease. The Company recorded a lease liability which is included in long term debt and a corresponding right to use asset that is included in property, plant and equipment of $96,039 based on a discount rate of 1.53%.

 

At March 31, 2022 and December 31, 2021, the Company was obligated under lease agreements covering office equipment utilized in the Company’s operations (inclusive of the lease referenced in the preceding paragraph). The office equipment leases, aggregating approximately $73,000 and $79,000 at March 31, 2022 and December 31, 2021, respectively, have maturities through 2025 and carry interest rates ranging from approximately 1.53% to 3.86% per annum. The office equipment leases are classified as finance leases. During the three months ended March 31, 2022 and 2021, the Company paid $5,687 ($5,350 principal and $337 interest) and $5,687 ($5,254 principal and $433 interest), respectively, under the lease agreements.

 

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The following table provides information regarding the Company’s long-term debt at March 31, 2022 and December 31, 2021:

 

		Current Portion								Long Term Portion
		March 31, 2022				December 31, 2021				March 31, 2022				December 31, 2021
Term loan		$	268,085			$	265,918			$	4,553,837			$	4,622,204
Obligations related to industrial development bond financing			279,585				276,036				2,940,566				3,057,773
Note payable related to Snappy Marine asset acquisition			195,052				193,660				66,270				115,558
Obligation related to Check Corporation asset acquisition							-				-				-
Office equipment finance leases			21,655				21,554				51,841				57,292
Total principal of long- term debt			764,377				757,168				7,612,514				7,852,827
Debt issuance costs			(20,637	)			(20,637	)			(96,779	)			(101,938	)
Total long- term debt		$	743,740			$	736,531			$	7,515,735			$	7,750,889

 

Required principal payments under the Company’s long- term obligations are set forth below:

 

Twelve-month period ending March 31,
2023		$	764,377
2024			653,179
2025			602,545
2026			613,847
2027			622,381
Thereafter			5,120,562
Total		$	8,376,891

 

8. RELATED PARTY TRANSACTIONS

 

The Company sells products to companies affiliated with Peter G. Dornau, who is the Company’s Chairman, President and Chief Executive Officer. The affiliated companies resell, outside of the United States and Canada, products they purchase from the Company. The Company also provides administrative services to these companies and pays certain business-related expenditures for the affiliated companies, for which the Company is reimbursed. Sales to the affiliated companies aggregated approximately $492,000 and $513,000 for the three months ended March 31, 2022 and 2021, respectively. Fees for administrative services aggregated approximately $188,000 and $168,000 for the three months ended March 31, 2022 and 2021, respectively. Amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $29,000 and $36,000 during the three months ended March 31, 2022 and 2021, respectively.  The Company had accounts receivable from the affiliated companies in connection with the product sales, administrative services and business- related expenditures aggregating approximately $847,000 and $1,212,000 at March 31, 2022 and December 31, 2021, respectively.

 

An entity that is owned by the Company’s Chairman, President and Chief Executive Officer provides several services to the Company.  Under this arrangement, the Company paid the entity an aggregate of approximately $35,000 ($12,000 for research and development services and $6,000 for charter boat services that the Company used to provide sales incentives to customers and $17,000 for the production of television commercials) and $23,000 ($12,000 for research and development services, $7,000 for charter boat services that the Company used to provide sales incentives for customers and $4,000 for the production of television commercials ) for the three months ended March 31, 2022 and 2021, respectively. Expenditures for the research and development services are included in the condensed consolidated statements of operations within selling and administrative expenses. Expenditures for the charter boat services are included in the condensed consolidated statements of operations within advertising and promotion expenses.

 

The Company leases office and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. See Note 4 for a description of the lease terms.

 

A director of the Company is Regional Executive Vice President of an insurance broker through which the Company sources most of its insurance needs.  During the three months ended March 31, 2022 and 2021, the Company paid an aggregate of approximately $283,000 and $397,000, respectively, in insurance premiums on policies obtained through the insurance broker.

 

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9. EARNINGS PER COMMON SHARE

 

The Company did not have any potentially dilutive securities during the three months ended March 31, 2022 and 2021. Therefore, the Company’s earnings per share are calculated by dividing net income by the weighted average number of shares outstanding during the reporting period.

 

		Three Months Ended March 31,
		2022				2021
Net income		$	1,299,281			$	1,904,269
Weighted average number of common shares outstanding			9,509,670				9,481,799
Earnings per common share		$	0.14			$	0.20

 

10. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

No stock compensation expense was incurred during each of the three months ended March 31, 2022 and 2021, and at March 31, 2022, there were no outstanding stock options or unrecognized compensation expense related to stock options. 

 

11. CASH DIVIDENDS

 

On February 24, 2022, the Company’s Board of Directors declared a regular quarterly dividend of $0.04 per common share payable on March 25, 2022 to all shareholders of record on March 10, 2022. There were 9,509,799 shares of common stock outstanding on March 10, 2022; therefore, dividends aggregating $380,392 were paid on March 25, 2022.

 

On February 25, 2021, the Company’s Board of Directors declared a regular quarterly dividend of $0.03 per common share payable on March 25, 2021 to all shareholders of record on March 11, 2021. There were 9,481,799 shares of common stock outstanding on March 11, 2021; therefore, dividends aggregating $284,454 were paid on March 25, 2021.

 

12. CUSTOMER CONCENTRATION

 

During the three months ended March 31, 2022 and 2021, the Company had net sales to each of two customers that constituted in excess of 10% of its net sales. Net sales to these two customers represented approximately 38.7% (22.6% and 16.1%) and 43.2% (29.5% and 13.7%) of the Company’s net sales for the three months ended March 31, 2022 and 2021, respectively.

 

  At March 31, 2022 and December 31, 2021, three customers constituted at least 10% of the Company’s gross trade accounts receivable. The gross trade accounts receivable balances for these customers represented approximately 65.5% (26.9%, 24.9%, and 13.7%) and 60.1% (22.2%, 19.0%, and 18.9%) of the Company’s gross trade accounts receivable at March 31, 2022 and December 31, 2021, respectively.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-looking Statements:

 

Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, our ability to provide required capital to support inventory levels, the effect of price increases in raw materials that are petroleum or chemical based or commodity chemicals on our margins, and the sufficiency of funds provided through operations and existing sources of financing to satisfy our cash requirements constitute forward-looking statements. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “believe,” “may,” “will,” “expect,” “anticipate,” “intend,” or “could,” including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking statements. Factors that may affect these results include, but are not limited to, the impact of the COVID-19 pandemic on our business and the economy in general, the highly competitive nature of our industry; reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; expenditures on, and the effectiveness of our advertising and promotional efforts; adverse weather conditions; unanticipated litigation developments; exposure to market risks relating to changes in interest rates, foreign currency exchange rates and prices for raw materials that are petroleum or chemical based, availability in general of raw materials and other factors addressed in the sections entitled “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2021.

 

Overview:

 

We are engaged in the manufacture, marketing and distribution of a broad line of appearance, performance, and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite® and other trademarks within the United States and Canada. In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products.  We also manufacture, market and distribute chlorine dioxide-based deodorizing, disinfectant and sanitizing products. We sell our products through national retailers and to national and regional distributors. In addition, we sell products to two companies affiliated with Peter G. Dornau, our Chairman, President and Chief Executive Officer; these companies distribute the products outside of the United States and Canada.

 

Critical accounting estimates:

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for information regarding our critical accounting estimates.

 

Results of Operations:

 

Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

 

The following table provides a summary of our financial results for the three months ended March 31, 2022 and 2021:

 

		For The Three Months Ended March 31,
										Percent				Percentage of Net Sales
		2022				2021				Change				2022				2021
Net sales		$	12,737,329			$	13,131,224				(3.0	)%			100.0	%			100.0	%
Cost of goods sold			8,001,347				7,750,503				3.2	%			62.8	%			59.0	%
Gross profit			4,735,982				5,380,721				(12.0	)%			37.2	%			41.0	%
Advertising and promotion			1,071,579				941,814				13.8	%			8.4	%			7.2	%
Selling and administrative			2,000,030				1,972,812				1.4	%			15.7	%			15.0	%
Operating income			1,664,373				2,466,095				(32.5	)%			13.1	%			18.8	%
Interest (expense), net			(31,682	)			(37,187	)			(14.8	)%			0.2	%			0.3	%
Provision for income taxes			(333,410	)			(524,639	)			(36.4	)%			2.6	%			4.0	%
Net income		$	1,299,281			$	1,904,269				(31.8	)%			10.2	%			14.5	%

 

Net sales for the three months ended March 31, 2022 decreased by approximately $394,000, or 3.0%, as compared to the three months ended March 31, 2021. The three months ended March 31, 2021 benefitted from an unusually high amount of open orders at the end of 2020, which was caused by an increase in demand for marine products as the economy began to open from the pandemic.

 

Cost of goods sold increased by approximately $251,000, or 3.2%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was principally a result of the mix of sales, and increases in freight, raw materials and other manufacturing cost increases.

 

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Gross profit decreased by approximately $645,000, or 12.0%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Gross profit decreased due to the changes in net sales and cost of goods sold described above. As a percentage of net sales, gross profit was approximately 37.2% and 41.0% for the three months ended March 31, 2022 and 2021, respectively.

 

Advertising and promotion expenses increased by approximately $130,000, or 13.8%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase in advertising and promotion expenses was principally a result of an increased focus on social media and digital marketing. As a percentage of net sales, advertising and promotion expenses increased to 8.4% for the three months ended March 31, 2022, from 7.2% for the three months ended March 31, 2021.  

 

Selling and administrative expenses increased by approximately $27,000, or 1.4%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. As a percentage of net sales, selling and administrative expenses increased to 15.7% for the three months ended March 31, 2022, from 15.0% for the three months ended March 31, 2021. 

 

Interest (expense), net for the three months ended March 31, 2022 decreased by approximately $6,000 or 14.8%, as compared to the three months ended March 31, 2021.

 

Provision for income taxes for the three months ended March 31, 2022 was approximately $333,000, or 20.4% of our income before income taxes. For the three months ended March 31, 2021 the provision was approximately $525,000, or 21.6% of our income before income taxes.  

 

Liquidity and capital resources:

 

Our cash balance was approximately $10,217,000 at March 31, 2022 and approximately $12,685,000 at December 31, 2021.

 

The following table summarizes our cash flows for the three months ended March 31, 2022 and 2021:

 

		Three Months Ended March 31,
		2022				2021
Net cash (used in) provided by operating activities		$	(238,837	)		$	1,207,802
Net cash used in investing activities			(1,610,684	)			(915,899	)
Net cash used in financing activities			(619,141	)			(414,546	)
Effect of exchange rate fluctuations on cash			651				976
Net decrease in cash and restricted cash		$	(2,468,011	)		$	(121,667	)

 

Net cash used in operating activities for the three months ended March 31, 2022 was approximately $238,000, as compared to net cash provided by operating activities of approximately $1,208,000 for the three months ended March 31, 2021. During the three months ended March 31, 2022, net income decreased by approximately $605,000, noncash adjustments to net income increased by approximately $295,000, and changes in working capital used approximately $1,137,000 more in cash, as compared to the three months ended March 31, 2021.

 

Net trade accounts receivable at March 31, 2022 aggregated approximately $10,261,000, an increase of approximately $717,000, or 7.5%, as compared to approximately $9,544,000 in net trade accounts receivable outstanding at December 31, 2021.  The increase was principally a result of our net sales during the first quarter of 2022. Receivables due from affiliated companies aggregated approximately $847,000 at March 31, 2022, a decrease of approximately $365,000, or 30.1%, from receivables due from affiliated companies of approximately $1,212,000 at December 31, 2021. The decrease was a result of payments received during the three months ended March 31, 2022.

 

Inventories, net were approximately $19,975,000 and $16,819,000 at March 31, 2022 and December 31, 2021, respectively, representing an increase of approximately $3,156,000, or 18.8%, during the three months ended March 31, 2022. We believe the higher levels of inventories were necessary in order to reduce potential supply chain problems and material price increases.

   

Net cash used in investing activities for the three months ended March 31, 2022 increased by approximately $695,000, or 75.9%, as compared to the three months ended March 31, 2021. The increase in cash used was principally to expand our manufacturing, warehouse and distribution facilities at Kinpak.

 

Net cash used in financing activities for the three months ended March 31, 2022 increased by approximately $205,000, or 49.4%, as compared to the three months ended March 31, 2021. During the three months ended March 31, 2022, the Company paid dividends to common shareholders aggregating approximately $380,000 and made payments on long term debt of approximately $233,000, as compared to dividends paid to common shareholders aggregating approximately $284,000 and payments on long term debt of approximately $130,000 during the three months ended March 31, 2021.

 

See Notes 6 and 7 to the condensed consolidated financial statements included in this report for information concerning our principal credit facilities, consisting of Kinpak’s obligations relating to a term loan, the payment of which we have guaranteed, an industrial development bond financing, the payment of which we have guaranteed, and a revolving line of credit. At March 31, 2022 and December 31, 2021, we had outstanding balances of approximately $4,822,000 and $4,888,000, respectively under Kinpak’s obligation relating to the term loan, $3,220,000 and $3,334,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility.

 

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The loan agreement pertaining to our revolving credit facility, as amended, has a stated term that expires on August 30, 2024, although as was the case with earlier revolving lines of credit provided to us in recent years, amounts outstanding are payable on demand. Nevertheless, the loan agreement pertaining to our revolving line of credit contains various covenants, including financial covenants that are described in Note 6 to the condensed consolidated financial statements included in this report.  At March 31, 2022, we were in compliance with these financial covenants. The revolving credit facility is subject to several events of default, including a decline of the majority shareholder’s ownership below 50% of our outstanding shares.

 

Our guarantee of Kinpak’s obligations related to the industrial development bond financing are subject to various covenants, including financial covenants that are described in Note 7 to the condensed consolidated financial statements included in this report. At March 31, 2022, we were in compliance with these financial covenants.

 

In connection with our acquisition of assets of Snappy Marine, we issued a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). At March 31, 2022, we had an outstanding balance of $266,666 under the promissory note (including $261,322 recorded as principal and $5,344 to be recorded as interest expense over the remaining term of the note).

 

We also obtained financing through leases for office equipment, totaling approximately $73,000 and $79,000 at March 31, 2022 and December 31, 2021, respectively.

 

Some of our assets and liabilities are denominated in Canadian dollars and are subject to currency exchange rate fluctuations. We do not engage in currency hedging and address currency risk as a pricing issue. For the three months ended March 31, 2022, we recorded $962 in foreign currency translation adjustments (increasing shareholders’ equity by $962).

 

During the past few years, we have introduced a number of new products.  At times, new product introductions have required us to increase our overall inventory and have resulted in lower inventory turnover rates.  The effects of reduced inventory turnover have not been material to our overall operations.  We believe that all required capital to maintain such increases will continue to be provided by operations and our current revolving line of credit or a renewal or replacement of the facility.

 

Many of the raw materials that we use in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The nature of our business does not enable us to pass through the price increases to our national retailer customers and to our distributors as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.

 

We believe that funds provided through operations and our revolving line of credit will be sufficient to satisfy our cash requirements over at least the next twelve months.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures:

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) at the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act are (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the disclosure.

 

Change in Internal Controls over Financial Reporting:

 

No change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1A. Risk Factors

 

The business, results of operations, financial condition, cash flow, and stock price of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition, operating results and cash flow to vary materially from past, or from anticipated future, financial condition operating results and cash flow.

 

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

 

Period		Total Number of Shares Purchased				Weighted Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Program				Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1)
January 1 - January 31, 2022			600			$	9.41				600			$	2,955,243
February 1 - February 28, 2022			-				-				-			$	2,955,243
March 1 - March 31, 2022			-				-				-			$	2,955,243
Total			600								600

 

(1)

Represents approximate dollar value of shares that could have been purchased under the plan in effect at the end of the month.

 

Item 6. Exhibits

 

Exhibit No.		Description
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
101.INS		XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

	OCEAN BIO-CHEM, INC.
Dated: May 16, 2022	/s/ Peter G. Dornau
	Peter G. Dornau
	Chairman of the Board, President and
	Chief Executive Officer
Dated: May 16, 2022	/s/ Jeffrey S. Barocas
	Jeffrey S. Barocas
	Vice President and
	Chief Financial Officer

 

 

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