UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from _____ to _____
Commission File Number:
.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (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 | ||
| The |
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.
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).
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 | ☐ |
| ☒ | 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 November 11, 2021,
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade accounts receivable less allowances of approximately $ | ||||||||
| Receivables due from affiliated companies | ||||||||
| Restricted cash | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease – right to use | ||||||||
| Intangible assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt, net | $ | $ | ||||||
| Current portion of operating lease liability | ||||||||
| Accounts payable – trade | ||||||||
| Accrued expenses payable | ||||||||
| Total Current Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Operating lease liability, less current portion | ||||||||
| Long-term debt, less current portion and debt issuance costs | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock - $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| Advertising and promotion | ||||||||||||||||
| Selling and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Other (expense) income | ||||||||||||||||
| Interest (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on insurance settlement | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Earnings per common share – basic and diluted | $ | $ | $ | $ | ||||||||||||
| Dividends declared per common share | $ | $ | $ | $ | ||||||||||||
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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
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 SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Dividends, common stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Dividends, common stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
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 SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(UNAUDITED)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Dividends, common stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Dividends, common stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Options exercised | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ||||||||
| Stock based compensation | ||||||||
| Provision for bad debts | ||||||||
| Provision for slow moving and obsolete inventory | ||||||||
| Impairment of equipment | ||||||||
| Other operating non-cash items | ( | ) | ( | ) | ||||
| Cash used related to 2019 chemical incident | ( | ) | ||||||
| Gain on insurance settlement | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Receivables due from affiliated companies | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable – trade | ||||||||
| Income taxes payable | ||||||||
| Accrued expenses payable | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Insurance proceeds received for damaged machinery and equipment | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Proceeds from term loan | ||||||||
| Proceeds from CARES Act note | ||||||||
| Repayment of CARES Act note | ( | ) | ||||||
| Dividends paid to common shareholders | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Effect of exchange rate on cash | ( | ) | ||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest during period excluding capitalized interest | $ | $ | ||||||
| Cash paid for income taxes during period | $ | $ | ||||||
| Cash paid under operating lease | $ | $ | ||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
| Noncash lease activities: | ||||||||
| Finance lease right to use assets exchanged for finance lease liabilities | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
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. Certain prior period data have been reclassified to conform to the current period presentation. 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 and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021.
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, 2020.
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.
7
| 2. | INVENTORIES |
The Company’s inventories at September 30, 2021 and December 31, 2020 consisted of the following:
| September 30, 2021 |
December 31, 2020 |
|||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventories, gross | ||||||||
| Inventory reserves | ( |
) | ( |
) | ||||
| Inventories, net | $ | $ | ||||||
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 $
| 3. | PROPERTY, PLANT & EQUIPMENT |
The Company’s property, plant and equipment at September 30, 2021 and December 31, 2020 consisted of the following:
Estimated Useful | September 30, 2021 | December 31, 2020 | ||||||||
| Land | $ | $ | ||||||||
| Building and improvements | ||||||||||
| Manufacturing and warehouse equipment | ||||||||||
| Office equipment and furniture | ||||||||||
| Leasehold improvements | ||||||||||
| Finance leases – right to use | ||||||||||
| Vehicles | ||||||||||
| Construction in process | ||||||||||
| Property, plant and equipment, gross | ||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||
| Property, plant and equipment, net | $ | $ | ||||||||
8
Depreciation
expense totaled $
| 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
| Twelve-month period ending September 30, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total future minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
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.
Expenses incurred with respect to the Company’s leases during the three and nine months ended September 30, 2021 and 2020 are set forth below.
| Three Months Ended September 30, 2021 | Three Months Ended | |||||||
| Operating lease expense | $ | $ | ||||||
| Finance lease amortization | ||||||||
| Finance lease interest | ||||||||
| Total lease expense | $ | $ | ||||||
9
| Nine Months Ended September 30, 2021 | Nine Months Ended | |||||||
| Operating lease expense | $ | $ | ||||||
| Finance lease amortization | ||||||||
| Finance lease interest | ||||||||
| Total lease expense | $ | $ | ||||||
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 September 30, 2021 and December 31, 2020 are set forth below:
| September 30, 2021 | ||||
| Remaining lease term – operating lease | ||||
| Weighted average remaining lease term – finance leases | ||||
| Discount rate – operating lease | % | |||
| Weighted average discount rate – finance leases | % | |||
| December 31, 2020 | ||||
| Remaining lease term – operating lease | ||||
| Weighted average remaining lease term – finance leases | ||||
| Discount rate – operating lease | % | |||
| Weighted average discount rate – finance leases | % | |||
10
| 5. | INTANGIBLE ASSETS |
The Company’s intangible assets at September 30, 2021 and December 31, 2020 consisted of the following:
September 30, 2021
| Intangible Assets | Cost | Accumulated Amortization | Net | |||||||||
| Patents | $ | $ | $ | |||||||||
| Trade names and trademarks | ||||||||||||
| Customer list | ||||||||||||
| Product formulas | ||||||||||||
| Royalty rights | ||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||
December 31, 2020
| Intangible Assets | Cost | Accumulated Amortization | Net | |||||||||
| Patents | $ | $ | $ | |||||||||
| Trade names and trademarks | ||||||||||||
| Customer list | ||||||||||||
| Product formulas | ||||||||||||
| Royalty rights | ||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||
Amortization
expense related to intangible assets was $
11
| 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 ($
There has been no negative impact in the availability of funds to the Company as a result of the COVID-19 pandemic.
At September 30, 2021 and December 31, 2020, 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 ($
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
The Credit Agreement provides that prepayments
on the Term Loan are subject to a prepayment penalty of
12
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 $
The Credit Agreement also contains negative covenants
restricting the Company’s ability to, among other things, create or assume indebtedness for borrowed money exceeding $
Industrial Development Bond Financing
On September 26, 2017, Kinpak indirectly obtained
a $
The loan was funded by the Lender’s purchase
of a $
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.
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 incurred debt financing costs of $
13
Other Long-Term Obligations
In connection
with
On June
22, 2020,
At September 30, 2021 and December 31, 2020, 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 following table provides information regarding the Company’s long-term debt at September 30, 2021 and December 31, 2020:
| Current Portion | Long Term Portion | |||||||||||||||
| September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | |||||||||||||
| Term loan | $ | $ | $ | $ | ||||||||||||
| Obligations related to industrial development bond financing | $ | $ | $ | |||||||||||||
| Note payable related to Snappy Marine asset acquisition | ||||||||||||||||
| Obligation related to Check Corporation asset acquisition | ||||||||||||||||
| Office equipment finance leases | ||||||||||||||||
| Total principal of long- term debt | ||||||||||||||||
| Debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total long- term debt | $ | $ | $ | $ | ||||||||||||
Required principal payments under the Company’s long- term obligations are set forth below:
| Twelve-month period ending September 30, | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
14
| 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 $
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 $
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 September 30, 2021 and 2020, the Company paid an aggregate of approximately $
15
| 9. | EARNINGS PER SHARE |
Basic earnings per share are calculated by dividing net income by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share reflect additional dilution from potential common stock issuances upon the exercise of outstanding stock options. The following table sets forth the computation of basic and diluted earnings per common share, as well as a reconciliation of the weighted average number of common shares outstanding to the weighted average number of shares outstanding on a diluted basis.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Earnings per common share – Basic | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Earnings per common share – Basic | $ | $ | $ | $ | ||||||||||||
| Earnings per common share – Diluted | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Dilutive effect of outstanding stock options | ||||||||||||||||
| Weighted average number of common shares outstanding - Diluted | ||||||||||||||||
| Earnings per common share – Diluted | $ | $ | $ | $ | ||||||||||||
The Company had no stock options outstanding during any of the three and nine month periods ended September 30, 2021 and 2020 that were antidilutive and therefore not included in the diluted earnings per common share calculation.
16
| 10. | SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS |
| 11. | CASH DIVIDENDS |
The Company’s board of directors declared the following cash dividends during the nine months ended September 30, 2021 and 2020:
Nine months ended September 30, 2021
| Declaration Date | Type | Record Date | Payment Date | Dividends Per Share |
Amount | |||||||||
| $ | $ | |||||||||||||
| $ | $ | |||||||||||||
Nine months ended September 30, 2020
| Declaration Date | Type | Record Date | Payment Date | Dividends Per Share |
Amount | |||||||||
| $ | $ | |||||||||||||
| $ | $ | |||||||||||||
| 12. | CUSTOMER CONCENTRATION |
17
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, 2020.
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, 2020 for information regarding our critical accounting estimates.
18
Results of Operations:
Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020
The following table provides a summary of our financial results for the three months ended September 30, 2021 and 2020:
| For The Three Months Ended September 30, | ||||||||||||||||||||
| Percent | Percentage of Net Sales | |||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | ||||||||||||||||
| Net sales | $ | 21,483,054 | $ | 19,161,372 | 12.1 | % | 100.0 | % | 100.0 | % | ||||||||||
| Cost of goods sold | 14,028,573 | 10,414,131 | 34.7 | % | 65.3 | % | 54.3 | % | ||||||||||||
| Gross profit | 7,454,481 | 8,747,241 | (14.8 | )% | 34.7 | % | 45.7 | % | ||||||||||||
| Advertising and promotion | 955,812 | 723,446 | 32.1 | % | 4.4 | % | 3.8 | % | ||||||||||||
| Selling and administrative | 2,292,301 | 2,030,787 | 12.9 | % | 10.7 | % | 10.6 | % | ||||||||||||
| Operating income | 4,206,368 | 5,993,008 | (29.8 | )% | 19.6 | % | 31.3 | % | ||||||||||||
| Interest (expense), net | (35,776 | ) | (39,615 | ) | (9.7 | )% | 0.2 | % | 0.2 | % | ||||||||||
| Provision for income taxes | (899,731 | ) | (1,296,563 | ) | (30.6 | )% | 4.2 | % | 6.8 | % | ||||||||||
| Net income | $ | 3,270,861 | $ | 4,656,830 | (29.8 | )% | 15.2 | % | 24.3 | % | ||||||||||
Net sales for the three months ended September 30, 2021 increased by approximately $2,322,000, or 12.1%, as compared to the three months ended September 30, 2020. The increase was primarily attributable to increased sales of winterizing products partially offset by decreased sales of chlorine dioxide-based products (Performacide® and private label).
Cost of goods sold increased by approximately $3,614,000, or 34.7%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase was principally a result of higher sales volume, the mix of sales, increased cost of raw materials, freight, and other manufacturing cost increases.
Gross profit decreased by approximately $1,293,000, or 14.8%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. Gross profit decreased due to the mix of sales and the cost of goods sold described above. As a percentage of net sales, gross profit was approximately 34.7% and 45.7% for the three months ended September 30, 2021 and 2020, respectively.
Advertising and promotion expenses increased by approximately $232,000, or 32.1%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase in advertising and promotion expenses was principally a result of increased internet advertising and television advertising, trade show expenses and other marketing expenses partially offset by decreased cooperative advertising. As a percentage of net sales, advertising and promotion expenses increased to 4.4% for the three months ended September 30, 2021, from 3.8% for the three months ended September 30, 2020.
Selling and administrative expenses increased by approximately $262,000, or 12.9%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase in selling and administrative expenses was primarily a result of the higher variable expenses principally higher sales commissions to independent sales representatives and Company salesmen. In addition, the Company had higher employee compensation and benefits and product testing by independent testing laboratories. As a percentage of net sales, selling and administrative expenses increased to 10.7% for the three months ended September 30, 2021, from 10.6% for the three months ended September 30, 2020.
Interest (expense), net for the three months ended September 30, 2021 decreased by approximately $4,000 or 9.7%, as compared to the three months ended September 30, 2020.
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Provision for income taxes for the three months ended September 30, 2021 was approximately $900,000, or 21.6% of our income before taxes. For the three months ended September 30, 2020 the provision was approximately $1,297,000, or 21.8% of our income before taxes.
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
The following table provides a summary of our financial results for the nine months ended September 30, 2021 and 2020:
| For The Nine Months Ended September 30, | ||||||||||||||||||||
| Percent | Percentage of Net Sales | |||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | ||||||||||||||||
| Net sales | $ | 50,303,263 | $ | 42,682,497 | 17.9 | % | 100.0 | % | 100.0 | % | ||||||||||
| Cost of goods sold | 30,195,629 | 23,085,473 | 30.8 | % | 60.0 | % | 54.1 | % | ||||||||||||
| Gross profit | 20,107,634 | 19,597,024 | 2.6 | % | 40.0 | % | 45.9 | % | ||||||||||||
| Advertising and promotion | 3,163,209 | 2,265,382 | 39.6 | % | 6.3 | % | 5.3 | % | ||||||||||||
| Selling and administrative | 6,906,770 | 6,242,862 | 10.6 | % | 13.7 | % | 14.6 | % | ||||||||||||
| Operating income | 10,037,655 | 11,088,780 | (9.5 | )% | 20.0 | % | 26.0 | % | ||||||||||||
| Interest (expense), net | (113,786 | ) | (93,695 | ) | 21.4 | % | 0.2 | % | 0.2 | % | ||||||||||
| Gain on insurance settlement | - | 126,210 | (100.0 | )% | 0.0 | % | 0.3 | % | ||||||||||||
| Provision for income taxes | (2,147,424 | ) | (2,385,263 | ) | (10.0 | )% | 4.3 | % | 5.6 | % | ||||||||||
| Net income | $ | 7,776,445 | $ | 8,736,032 | (11.0 | )% | 15.5 | % | 20.5 | % | ||||||||||
Net sales for the nine months ended September 30, 2021 increased by approximately $7,621,000, or 17.9%, as compared to the nine months ended September 30, 2020. The increase in net sales was principally a result of increased sales of Star brite® branded marine products, private label marine products, and winterizing products, partially offset by a decrease in sales of chlorine dioxide-based products (Performacide® and private label).
Cost of goods sold increased by approximately $7,110,000, or 30.8%, during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in cost of goods sold was a result of higher sales volume, the mix of products sold described above, higher raw materials, freight and other manufacturing costs.
Gross profit increased by approximately $511,000, or 2.6%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Gross profit increased due to our higher sales volume. As a percentage of net sales, gross profit was approximately 40.0% and 45.9% for the nine months ended September 30, 2021 and 2020, respectively.
Advertising and promotion expenses increased by approximately $898,000, or 39.6%, during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in advertising and promotion expenses was principally a result of increased internet and television advertising, partially offset by decreased cooperative advertising with our customers. As a percentage of net sales, advertising and promotion expenses increased to 6.3% for the nine months ended September 30, 2021, from 5.3% for the nine months ended September 30, 2020.
Selling and administrative expenses increased by approximately $664,000, or 10.6%, during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in selling and administrative expenses was primarily a result of our higher net sales which resulted in increased sales commissions and higher employee compensation expenses, increased insurance expenses, and product testing. As a percentage of net sales, selling and administrative expenses decreased to 13.7% for the nine months ended September 30, 2021, from 14.6% for the nine months ended September 30, 2020.
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Interest (expense), net for the nine months ended September 30, 2021 increased by approximately $20,000 or 21.4%, as compared to the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the Company had interest income from a money market mutual fund account which the Company did not have in the nine months ended September 30, 2021.
Gain on insurance settlement was approximately $126,000 during the nine months ended September 30, 2020. The Company received a check for approximately $412,000 from our insurance company to cover losses from a chemical incident at our Kinpak facility that took place in December 2019.
Provision for income taxes for the nine months ended September 30, 2021 was approximately $2,147,000, or 21.6% of our income before taxes. For the nine months ended September 30, 2020 the provision was approximately $2,385,000, or 21.4% of our income before taxes.
Liquidity and capital resources:
Our cash balance was approximately $10,680,000 at September 30, 2021 and approximately $11,124,000 at December 31, 2020. In addition, we had restricted cash of approximately $477,000 at December 31, 2020. The restricted cash constituted amounts held in a custodial account to be used from time to time to fund additional capital expenditures in connection with the 2017 Expansion Project. At September 30, 2021, these amounts have been fully expended. See Note 7 to the condensed consolidated financial statements included in this report for additional information.
The following table summarizes our cash flows for the nine months ended September 30, 2021 and 2020:
Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 412,319 | $ | 1,377,224 | ||||
| Net cash used in investing activities | (4,956,102 | ) | (1,137,420 | ) | ||||
| Net cash provided by (used in) financing activities | 3,622,317 | (928,642 | ) | |||||
| Effect of exchange rate fluctuations on cash | 17 | (602 | ) | |||||
| Net decrease in cash and restricted cash | $ | (921,449 | ) | $ | (689,440 | ) | ||
Net cash provided by operating activities for the nine months ended September 30, 2021 decreased by approximately $965,000, or 70.1%, as compared to the nine months ended September 30, 2020. During the nine months ended September 30, 2021, net income decreased by approximately $960,000, noncash adjustments to net income increased by approximately $260,000, and changes in working capital used approximately $265,000 more in cash, as compared to the nine months ended September 30, 2020.
Net trade accounts receivable at September 30, 2021 aggregated approximately $17,227,000, an increase of approximately $8,900,000, or 106.9%, as compared to approximately $8,327,000 in net trade accounts receivable outstanding at December 31, 2020. The increase was principally a result of our net sales during the third quarter of 2021. Receivables due from affiliated companies aggregated approximately $625,000 at September 30, 2021, a decrease of approximately $871,000, or 58.2%, from receivables due from affiliated companies of approximately $1,496,000 at December 31, 2020. The decrease was a result of payments received during the nine months ended September 30, 2021.
Inventories, net were approximately $16,789,000 and $13,176,000 at September 30, 2021 and December 31, 2020, respectively, representing an increase of approximately $3,613,000, or 27.4%, during the nine months ended September 30, 2021. The increase in inventories is principally due to the combination of anticipated higher costs and availability of raw materials and the continuation of strong sales.
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Net cash used in investing activities for the nine months ended September 30, 2021 increased by approximately $3,819,000, or 335.7%, as compared to the nine months ended September 30, 2020. The increase in cash used was principally to expand our manufacturing, warehouse and distribution facilities at Kinpak. Additionally, the Company received insurance proceeds (see Results of Operations) of approximately $412,000 during the nine months ended September 30, 2020.
Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $3,622,000 as compared to net cash used in financing of approximately $929,000 for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company received proceeds of approximately $4,990,000 from a term loan related to the expansion at Kinpak (see Note 7). In the nine months ended September 30, 2021, the Company paid dividends to common shareholders aggregating approximately $853,000 and made payments on long term debt of approximately $514,000, as compared to dividends paid to common shareholders aggregating approximately $568,000 and payments on long term debt of approximately $382,000 in the nine months ended September 30, 2020. Additionally, the Company received proceeds from the exercise of stock options of approximately $21,000 during the nine months ended September 30, 2020.
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 September 30, 2021 and December 31, 2020, we had outstanding balances of approximately $4,953,000 and $0, respectively under Kinpak’s obligation relating to the term loan, $3,446,000 and $3,719,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility.
The loan agreement pertaining to our revolving credit facility, as amended, has a stated term that expires on August 31, 2021, 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, as amended, contains various covenants, including financial covenants that are described in Note 6 to the condensed consolidated financial statements included in this report. At September 30, 2021, 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 September 30, 2021, 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 September 30, 2021, we had an outstanding balance of $366,667 under the promissory note (including $356,772 recorded as principal and $9,895 to be recorded as interest expense over the remaining term of the note).
In connection with our agreement to purchase assets of Check Corporation (dba Damp CheckTM), we agreed to pay Check Corporation $100,000 in equal installments of approximately $4,348 over a 23-month period that commenced on January 15, 2020 with a final payment due and payable on November 15, 2021. We recorded $97,012 as principal, and the remaining $2,988, representing an imputed interest rate of 3.15% per annum, will be recorded as interest expense over the 23 months). At September 30, 2021, we had an outstanding balance of $8,696 (including $8,662 recorded as principal and $34 to be recorded as interest expense over the remaining term of the agreement).
We also obtained financing through leases for office equipment, totaling approximately $84,000 and $100,000 at September 30, 2021 and December 31, 2020, respectively.
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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 nine months ended September 30, 2021, we recorded $673 in foreign currency translation adjustments (decreasing shareholders’ equity by $673).
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, 2020 (the “2020 Form 10-K”) and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (the “Q1 2021 Form 10-Q”) 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.
We may experience adverse effects from problems associated with supply chain and material costs.
The ongoing supply chain problems in the United States has led to increased costs of raw materials and disruptions in availability of raw materials. We may not be able to obtain the materials we need to manufacture our products on a timely basis or at all, and the higher costs cannot be passed on to customers in a timely manner, affecting profits. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results, cash flow, and stock price.
Item 6. Exhibits
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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: November 12, 2021 | /s/ Peter G. Dornau |
| Peter G. Dornau | |
| Chairman of the Board, President and | |
| Chief Executive Officer | |
| Dated: November 12, 2021 | /s/ Jeffrey S. Barocas |
| Jeffrey S. Barocas | |
| Vice President and | |
| Chief Financial Officer |
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