Company Quick10K Filing
Ocean Bio Chem
Price3.27 EPS0
Shares9 P/E11
MCap31 P/FCF19
Net Debt0 EBIT4
TEV31 TEV/EBIT8
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-15
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-03-29
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-30
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-31
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-13
10-Q 2015-06-30 Filed 2015-08-14
10-Q 2015-03-31 Filed 2015-05-15
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-14
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-31
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-04-01
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-15
10-K 2011-12-31 Filed 2012-03-30
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-13
10-K 2010-12-31 Filed 2011-03-31
10-Q 2010-09-30 Filed 2010-11-12
10-Q 2010-06-30 Filed 2010-08-13
10-Q 2010-05-13 Filed 2010-05-13
10-K 2009-12-31 Filed 2010-03-30
8-K 2020-07-17 Earnings, Exhibits
8-K 2020-05-29
8-K 2020-05-26
8-K 2020-05-15
8-K 2020-04-27
8-K 2020-04-27
8-K 2020-03-19
8-K 2020-01-28
8-K 2019-11-14
8-K 2019-08-14
8-K 2019-06-03
8-K 2019-03-22
8-K 2018-11-14
8-K 2018-08-31
8-K 2018-08-14
8-K 2018-08-06
8-K 2018-05-18
8-K 2018-05-15
8-K 2018-04-26
8-K 2018-03-30
8-K 2018-03-19
8-K 2018-01-17

OBCI 10Q Quarterly Report

Part 1 - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 f10q0320ex31-1_oceanbio.htm
EX-31.2 f10q0320ex31-2_oceanbio.htm
EX-32.1 f10q0320ex32-1_oceanbio.htm
EX-32.2 f10q0320ex32-2_oceanbio.htm

Ocean Bio Chem Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
45362718902012201420172020
Assets, Equity
151185202012201420172020
Rev, G Profit, Net Income
3.32.31.30.2-0.8-1.82012201420172020
Ops, Inv, Fin

10-Q 1 f10q0320_oceanbiochem.htm QUARTERLY REPORT
 

 

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, 2020

 

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   OBC1   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 14, 2020, 9,458,105 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, 2020 (unaudited) and December 31, 2019 1
     
  Condensed consolidated statements of operations (unaudited) for the three months ended March 31, 2020 and 2019 2
     
  Condensed consolidated statements of comprehensive income (unaudited) for the three months ended March 31, 2020 and 2019 3
     
  Condensed consolidated statements of shareholders’ equity (unaudited) for the three months ended March 31, 2020 and 2019 4
     
  Condensed consolidated statements of cash flows (unaudited) for the three months ended March 31, 2020 and 2019 5
     
  Notes to condensed consolidated financial statements 6-13
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14-17
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
     
Item 4. Controls and Procedures 18
     
PART II Other Information:  
     
Item 1A. Risk Factors 19
     
Item 6. Exhibits 19
     
  Signatures 20

 

i

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31,
2020
   December 31,
2019
 
   (Unaudited)     
ASSETS        
Current Assets:        
Cash  $6,148,351   $6,125,322 
Trade accounts receivable less allowances of approximately $144,000 and $162,000, respectively   6,404,356    7,132,256 
Receivables due from affiliated companies   1,195,584    962,154 
Insurance claim receivable   -    50,520 
Restricted cash   1,891,918    1,885,098 
Inventories, net   11,360,436    9,555,071 
Prepaid expenses and other current assets   1,003,586    935,022 
Total Current Assets   28,004,231    26,645,443 
           
Property, plant and equipment, net   9,590,761    9,338,227 
Operating lease – right to use   331,658    352,190 
Intangible assets, net   1,878,785    1,949,947 
Total Assets  $39,805,435   $38,285,807 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities:          
Current portion of long-term debt, net  $482,467   $483,477 
Current portion of operating lease liability   84,037    83,270 
Accounts payable - trade   1,996,475    1,047,385 
Accrued expenses payable   1,277,909    1,214,938 
Total Current Liabilities   3,840,888    2,829,070 
           
Deferred tax liability   336,689    311,374 
Operating lease liability, less current portion   247,621    268,920 
Long-term debt, less current portion and debt issuance costs   4,021,420    4,142,179 
Total Liabilities   8,446,618    7,551,543 
           
Commitments and contingencies          
Shareholders’ Equity:          
Common stock - $.01 par value, 12,000,000 shares authorized; 9,448,105 and 9,442,809 shares issued and outstanding   94,481    94,428 
Additional paid in capital   10,503,118    10,503,171 
Accumulated other comprehensive loss   (296,819)   (294,491)
Retained earnings   21,058,037    20,431,156 
Total Shareholders’ Equity   31,358,817    30,734,264 
           
Total Liabilities and Shareholders’ Equity  $39,805,435   $38,285,807 

 

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, 
   2020   2019 
         
Net sales  $7,819,503   $9,081,117 
           
Cost of goods sold   4,677,232    5,660,138 
           
Gross profit   3,142,271    3,420,979 
           
Operating Expenses:          
Advertising and promotion   737,673    766,310 
Selling and administrative   1,713,416    1,700,393 
Total operating expenses   2,451,089    2,466,703 
           
Operating income   691,182    954,276 
           

Other (expense) income

          
Interest (expense),  net   (15,874)   (29,827)
Gain on insurance settlement   126,210    -   
           
Income before income taxes   801,518    924,449 
           
Provision for income taxes   (174,637)   (209,279)
           
Net income  $626,881   $715,170 
           
Earnings per common share – basic and diluted  $0.07   $0.08 
           
Dividends declared per common share  $0.00   $0.05 

 

  

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, 
   2020   2019 
         
Net income  $626,881   $715,170 
           
Foreign currency translation adjustment   (2,328)   1,497 
           
Comprehensive income  $624,553   $716,667 

 

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, 2020 AND 2019

(UNAUDITED)

 

       Additional   Accumulated Other         
   Common Stock   Paid In   Comprehensive   Retained     
   Shares   Amount   Capital   Loss   Earnings   Total 
                         
December 31, 2019   9,442,809   $94,428   $10,503,171   $(294,491)  $20,431,156   $30,734,264 
                               
Net income   -    -    -    -    626,881    626,881 
                               
Options exercised   5,296    53    (53)   -    -    - 
                               
Foreign currency
translation adjustment
   -    -    -    (2,328)   -    (2,328)
                               
March 31, 2020   9,448,105   $94,481   $10,503,118   $(296,819)  $21,058,037   $31,358,817 

 

       Additional   Accumulated Other         
   Common Stock   Paid In   Comprehensive   Retained     
   Shares   Amount   Capital   Loss   Earnings   Total 
                         
December 31, 2018   9,338,191   $93,382   $10,235,827   $(295,734)  $17,399,776   $27,433,251 
                               
Net income   -    -    -    -    715,170    715,170 
                               
Dividends, common stock   -    -    -    -    (468,306)   (468,306)
                               
Options exercised   27,928    279    13,520    -    -    13,799 
                               
Adoption of ASU 2016-02 Leases (Topic 842)   -    -    -    -    972    972 
                               
Foreign currency
translation adjustment
   -    -    -    1,497    -    1,497 
                               
March 31, 2019   9,366,119   $93,661   $10,249,347   $(294,237)  $17,647,612   $27,696,383 

 

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, 
   2020   2019 
Cash flows from operating activities:        
Net income  $626,881   $715,170 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
           
Depreciation and amortization   330,374    320,791 
Deferred income taxes   25,315    (5,452)
Provision for bad debts   15,935    (32,700)
Provision for slow moving and obsolete inventory   35,404    - 
Other operating non-cash items   (483)   1,076 
Cash used related to 2019 chemical incident   (200,665)   - 
Gain on insurance settlement   (126,210)   - 
           
Changes in assets and liabilities:          
           
Trade accounts receivable   711,965    (1,001,849)
Receivables due from affiliated companies   (233,430)   (470,895)
Inventories   (1,840,769)   (439,011)
Prepaid expenses and other current assets   (68,564)   (79,447)
Accounts payable – trade   949,090    114,678 
Accrued expenses payable   62,971    271,394 
Net cash provided by (used in) operating activities   287,814    (606,245)
           
Cash flows from investing activities:          
Insurance proceeds received for damaged machinery and equipment   411,657    - 
Purchases of property, plant and equipment   (541,104)   (303,901)
Net cash used in investing activities   (129,447)   (303,901)
           
Cash flows from financing activities:          
Payments on long-term debt   (126,673)   (111,346)
Proceeds from exercise of stock options   -    13,799 
Net cash used in financing activities   (126,673)   (97,547)
           
Effect of exchange rate on cash   (1,845)   421 
           
Net increase (decrease) in cash and restricted cash   29,849    (1,007,272)
           
Cash and restricted cash at beginning of period   8,010,420    3,733,924 
Cash and restricted cash at end of period  $8,040,269   $2,726,652 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest during period  $36,261   $38,065 
Cash paid for income taxes during period  $45,000   $- 
Cash paid under operating lease  $23,700   $23,700 
           
Cash  $6,148,351   $563,426 
Restricted cash   1,891,918    2,163,226 
Total cash and restricted cash  $8,040,269   $2,726,652 
           
Noncash lease activities:          
Operating lease right to use asset exchanged for operating lease liability  $-   $432,466 
Finance lease right to use assets exchanged for finance lease liabilities   -    44,979 
Total lease right to use assets exchanged for lease liabilities  $-   $477,445 

 

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. 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 of 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, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.

 

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, 2019.

 

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.RECENT ACCOUNTING PRONOUNCEMENTS

 

Accounting Guidance Adopted by the Company

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses,” which replaces the “incurred loss” model under current GAAP with a forward-looking “expected loss” model, principally in connection with financial assets subject to credit losses. Under current GAAP, an entity reflects credit losses on financial assets measured on an amortized cost basis only when it is probable that losses have been incurred, generally considering only past events and current conditions in making these determinations. The guidance under ASU 2016-13 prospectively replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, beginning when such assets are first acquired. Under the expected loss model, expected credit losses will be measured based not only on past events and current conditions, but also on reasonable and supportable forecasts. The guidance also expands disclosure requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements.

 

6

 

 

3.INVENTORIES

 

The Company’s inventories at March 31, 2020 and December 31, 2019 consisted of the following:

 

  

March 31,

2020

  

December 31,

2019

 
Raw materials  $4,486,847   $3,872,752 
Finished goods   7,153,199    5,926,525 
Inventories, gross   11,640,046    9,799,277 
           
Inventory reserves   (279,610)   (244,206)
           
Inventories, net  $11,360,436   $9,555,071 

 

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 $547,000 and $562,000 at March 31, 2020 and December 31, 2019, respectively.

 

4.PROPERTY, PLANT & EQUIPMENT

 

The Company’s property, plant and equipment at March 31, 2020 and December 31, 2019 consisted of the following:

 

  

Estimated

Useful Life

  March 31,
2020
  

December 31,

2019

 
            
Land     $278,325   $278,325 
Building and improvements  30 years   9,563,406    9,563,406 
Manufacturing and warehouse equipment  6-20 years   10,916,711    10,699,461 
Office equipment and furniture  3-5 years   1,803,607    1,778,781 
Leasehold improvements  10-15 years   577,068    577,068 
Finance leases – right to use  5 years   45,951    45,951 
Vehicles  3 years   10,020    10,020 
Construction in process      363,051    142,612 
 Property, plant and equipment, gross      23,558,139    23,095,624 
              
Less accumulated depreciation      (13,967,378)   (13,757,397)
              
Property, plant and equipment, net     $9,590,761   $9,338,227 

 

The Company’s wholly-owned subsidiary, KINPAK Inc. (“Kinpak”) has been engaged since 2017 in a project involving the expansion of its manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). Kinpak has completed the construction of, and placed into service, an approximately 85,000 square foot addition to the facilities and an expansion of a tank farm to accommodate an additional 500,000 gallons of tank capacity. The final phase of the Expansion Project entails the evaluation, purchase and installation of additional equipment. The Company is financing the Expansion Project through a $4,500,000 industrial development bond, which is described in Note 8. At March 31, 2020, the Company had unused proceeds from the industrial development bond of approximately $1,892,000 in a custodial account restricted for the use of funding additional capital improvements. The Company intends to utilize the remaining proceeds to purchase machinery and equipment to expand production capacity of its disinfectant/sanitizing product group including Performacide® and its Damp CheckTM mildew and humidity control products in addition to other production equipment.

 

Depreciation expense totaled $254,308 (of which $230,966 is included in cost of goods sold and $23,342 is included in selling and administrative expenses) and $252,408 (of which $224,161 is included in cost of goods sold and $28,247 is included in selling and administrative expenses) for the three months ended March 31, 2020 and 2019, respectively.

 

 

7

 

 

5.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 for each of the three months ended March 31, 2020 and 2019 was approximately $25,000. At March 31, 2020, the Company has a right to use asset and a corresponding liability of $331,658 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,
2021  $94,800 
2022   94,800 
2023   94,800 
2024   71,100 
Total future minimum lease payments   355,500 
Less imputed interest   (23,842)
Total operating lease liability  $331,658 

 

The Company’s two finance leases relate to office equipment. See Note 4 for information regarding the carrying value of the Company’s finance lease right to use assets and Note 8 for information regarding the finance lease payment schedule.

 

Expenses incurred with respect to the Company’s leases during the three months ended March 31, 2020 and 2019 are set forth below.

 

   Three
Months
Ended
March 31,
2020
  

Three

Months

Ended
March 31,
2019

 
Operating lease expense  $25,000   $25,000 
Finance lease amortization   5,752    5,000 
Finance lease interest   173    205 
Total lease expense  $30,925   $30,205 

 

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, 2020 are set forth below:

 

   March 31,
2020
 
Remaining lease term – operating lease   3.75 years 
Weighted average remaining lease term – finance leases   2.84 years 
Discount rate – operating lease   3.7%
Weighted average discount rate – finance leases   3.2%

 

8

 

 

6.INTANGIBLE ASSETS

 

The Company’s intangible assets at March 31, 2020 and December 31, 2019 consisted of the following:

 

March 31, 2020

 

Intangible Assets  Cost   Accumulated
Amortization
   Net 
Patents  $622,733   $505,392   $117,341 
Trade names and trademarks   1,715,325    597,142    1,118,183 
Customer list   584,468    182,541    401,927 
Product formulas   292,234    91,273    200,961 
Royalty rights   160,000    119,627    40,873 
Total intangible assets  $3,374,760   $1,495,975   $1,878,785 

 

December 31, 2019

 

Intangible Assets  Cost   Accumulated
Amortization
   Net 
Patents  $622,733   $492,308   $130,425 
Trade names and trademarks   1,715,325    587,387    1,127,938 
Customer list   584,468    153,319    431,149 
Product formulas   292,234    76,659    215,575 
Royalty rights   160,000    115,140    44,860 
Total intangible assets  $3,374,760   $1,424,813   $1,949,947 

 

Amortization expense related to intangible assets was $71,162 and $63,480 for the three months ended March 31, 2020 and 2019, respectively.

 

7.REVOLVING LINE OF CREDIT

 

On August 31, 2018, the Company and Regions Bank entered into a Business Loan Agreement (the “Business Loan Agreement”), under which the Company was provided a revolving line of credit. Under the Business Loan Agreement, the Company may borrow up to the lesser of (i) $6,000,000 or (ii) a borrowing base equal to 85% of Eligible Accounts (as defined in the Business Loan Agreement) plus 50% of Eligible Inventory (as defined in the Business Loan Agreement). Interest on amounts borrowed under the revolving line of credit is payable monthly at the one month LIBOR rate plus 1.35% per annum, computed on a 365/360 basis. Eligible Accounts do not include, among other things, accounts receivable from affiliated entities.

 

9

 

 

Outstanding amounts under the revolving line of credit are payable on demand. If no demand is made, the Company may repay and reborrow funds from time to time until expiration of the revolving line of credit on August 31, 2021, at which time all outstanding principal and interest will be due and payable. The Company’s obligations under the revolving line of credit are principally secured by the Company’s accounts receivable and inventory. The Business Loan 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 year current maturities of Company long term debt plus interest expense incurred over the most recently completed four fiscal quarters) of 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; “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; “long term debt” generally is defined as “debt instruments with a maturity principal due date of one year or more in length,” including, among other listed contractual debt instruments, “revolving lines of credit” and “capital leases obligations,” and “prior year current maturities of long term debt” generally is defined as the principal portions of long-term debt maturing within one year as listed at the last quarter end of the prior completed four fiscal quarters. At March 31, 2020, the Company was in compliance with these financial covenants. The revolving line of credit is subject to several events of default, including a decline in the majority shareholder’s ownership below 50% of all outstanding shares.

 

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

 

At March 31, 2020 and December 31, 2019, the Company had no borrowings under the revolving line of credit provided by the Business Loan Agreement.

 

8.LONG TERM DEBT

 

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 are being used principally to pay or reimburse costs relating to the Expansion Project.

 

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 in the amount of $1,799,201. 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 1.2 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, 2020, the Company was in compliance with these financial covenants.

 

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Through March 31, 2020, of the $4,500,000 proceeds of the Bond sale, there are unused proceeds of approximately $1,892,000 remaining that are held in a custodial account and may be drawn by Kinpak from time to time to fund additional expenditures related to the Expansion Project. Due to restrictions under, among other things, the Internal Revenue Code and the Lease on Kinpak’s utilization of the funds held in the custodial account, such funds are classified as restricted cash on the Company’s balance sheets. The Company intends to utilize the remaining proceeds to purchase machinery and equipment to expand our production capacity of our disinfectant product group including Performacide® and our Damp CheckTM mildew and humidity control products.

  

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.

 

In connection with the Company’s agreement to purchase assets of Check Corporation, the Company agreed to pay Check Corporation (dba Damp CheckTM) $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. The Company 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 March 31, 2020 and December 31, 2019, the Company was obligated under lease agreements covering equipment utilized in the Company’s operations. The equipment leases, aggregating approximately $20,000 and $26,000 at March 31, 2020 and December 31, 2019, respectively, have maturities through 2024 and carry interest rates ranging from 2% to 4% per annum. The equipment leases are classified as finance leases. During the three months ended March 31, 2020 and 2019, the Company paid $5,925 ($5,752 principal and $173 interest) and $5,205 ($5,000 principal and $205 interest), respectively, under the lease agreements.

 

The following table provides information regarding the Company’s long-term debt at March 31, 2020 and December 31, 2019:

 

   Current Portion   Long Term Portion 
   March 31,
2020
   December 31,
2019
   March 31,
2020
   December 31,
2019
 
Obligations related to industrial development bond financing  $257,773   $255,471   $3,653,196   $3,718,785 
Note payable related to Snappy Marine asset acquisition   184,184    182,869    450,863    497,405 
Obligation related to Check Corporation asset acquisition   50,230    49,930    34,375    47,082 
Equipment leases   9,896    14,823    10,487    11,312 
Total principal of long- term debt   502,083    503,093    4,148,921    4,274,584 
Debt issuance costs   (19,616)   (19,616)   (127,501)   (132,405)
Total long- term debt  $482,467   $483,477   $4,021,420   $4,142,179 

 

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

 

Twelve month period ending March 31,    
2021  $502,083 
2022   493,201 
2023   472,854 
2024   352,615 
2025   291,895 
Thereafter   2,538,356 
Total  $4,651,004 

 

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9.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 $651,000 and $752,000 for the three months ended March 31, 2020 and 2019, respectively; fees for administrative services aggregated approximately $197,000 and $155,000 for the three months ended March 31, 2020 and 2019, respectively; and amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $30,000 and $32,000 for the three month ended March 31, 2020 and 2019, respectively.  The Company had accounts receivable from the affiliated companies in connection with the product sales, administrative services and business related expenditures aggregating approximately $1,196,000 and $962,000 at March 31, 2020 and December 31, 2019, 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 $21,000 ($12,000 for research and development services and $9,000 for charter boat services that the Company used to provide sales incentives for customers) and $27,000 ($10,500 for research and development services and $16,500 for charter boat services that the Company used to provide sales incentives for customers) for the three months ended March 31, 2020 and 2019, respectively. Expenditures for the research and development services are included in the consolidated statements of operations within selling and administrative expenses. Expenditures for the charter boat services are included in the 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 5 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, 2020 and 2019, the Company paid an aggregate of approximately $257,000 and $225,000, respectively, in insurance premiums on policies obtained through the insurance broker.

 

10.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
March 31,

 
   2020   2019 
Earnings per common share –Basic and Diluted        
         
Net income  $626,881   $715,170 
           
Weighted average number of common shares outstanding   9,444,834    9,363,368 
           
Earnings per common share – Basic  $0.07   $0.08 
           
Earnings per common share – Diluted          
           
Net income  $626,881   $715,170 
           
Weighted average number of common shares outstanding   9,444,834    9,363,368 
           
Dilutive effect of outstanding stock options   7,265    10,962 
           
Weighted average number of common shares outstanding – Diluted   9,452,099    9,374,330 
           
Earnings per common share – Diluted  $0.07   $0.08 

 

The Company had no stock options outstanding at March 31, 2020 and 2019, respectively that were antidilutive and therefore not included in the diluted earnings per common share calculation.

 

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11.SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

No stock compensation expense was incurred during the three months ended March 31, 2020 and 2019, and at March 31, 2020, there was no unrecognized compensation expense related to stock options.

 

No stock awards were issued during the three months ended March 31, 2020 and 2019.

 

In 2010, the Company granted, under its 2008 Non-Qualified Stock Option Plan, stock options to purchase 20,000 shares of its common stock at an exercise price per share of $2.07. At March 31, 2020, 10,000 of these shares remained unexercised. The remaining options were exercised on April 24, 2020.

 

12.CASH DIVIDENDS

 

On March 22, 2019, the Company’s Board of Directors declared a special cash dividend of $0.05 per common share payable on April 19, 2019 to all shareholders of record on April 5, 2019. There were 9,366,119 shares of common stock outstanding on April 5, 2019; therefore, dividends aggregating $468,306 were paid on April 19, 2019.

 

No dividends were declared during the three months ending March 31, 2020.

 

13.CUSTOMER CONCENTRATION

 

During the three months ended March 31, 2020, 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 24.4% (14.0% and 10.4%, respectively) of the Company’s net sales for the three months ended March 31, 2020. During the three months ended March 31, 2019, the Company had net sales to one customer that constituted in excess of 10% of its net sales. Net sales to this customer represented approximately 25.6% of the Company’s net sales for the three months ended March 31, 2019.

 

At March 31, 2020 and December 31, 2019, 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 55.3% (27.9%, 14.8%, and 12.6% , respectively) of the Company’s gross trade accounts receivable at March 31, 2020, and 56.8% (28.0%, 15.3%, and 13.5%, respectively) of the Company’s gross trade accounts receivable at December 31, 2019.

 

14.SUBSEQUENT EVENT

 

On April 18, 2020, the Company entered into a promissory note with Regions Bank evidencing a loan under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), administered by the U.S. Small Business Administration (the “SBA Loan”).  The amount outstanding under the SBA Loan is $1,556,800.

 

The Company has determined to return the entire amount of the SBA Loan and is in the process of arranging for this with Regions Bank.  Upon the return of the full outstanding amount, which the Company expects to occur in the near future, the promissory note evidencing the SBA Loan will be terminated.

 

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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, and other factors addressed in Part I, Item 1A (“Risk Factors”) in our annual report on Form 10-K for the year ended December 31, 2019, as well as in Part II Item 1A (“Risk Factors”) of subsequent filing of quarterly reports on Form 10-Q.

 

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.

 

Kinpak has been engaged since 2017 in a project involving a major expansion of its manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). Kinpak has completed the construction of, and placed into service, an approximately 85,000 square foot addition to the facilities and an expansion of a tank farm to accommodate an additional 500,000 gallons of tank capacity. The final phase of the Expansion Project entails the evaluation, purchase and installation of additional equipment. The Company is financing the Expansion Project through a $4,500,000 industrial development bond, which is described in Note 8. At March 31, 2020, the Company had unused proceeds from the industrial development bond of approximately $1,892,000 in a custodial account restricted for the use of funding additional capital improvements. The Company intends to utilize the remaining proceeds to purchase machinery and equipment to expand our production capacity of our disinfectant product group including Performacide® and our Damp CheckTM mildew and humidity control products.

  

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, 2019 for information regarding our critical accounting estimates.

 

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Results of Operations:

 

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019

 

The following table provides a summary of our financial results for the three months ended March 31, 2020 and 2019:

 

   For The Three Months Ended March 31, 
           Percent   Percentage of Net Sales 
   2020   2019   Change   2020   2019 
Net sales  $7,819,503   $9,081,117    (13.9)%   100.0%   100.0%
Cost of goods sold   4,677,232    5,660,138    (17.4)%   59.8%   62.3%
Gross profit   3,142,271    3,420,979    (8.1)%   40.2%   37.7%
Advertising and promotion   737,673    766,310    (3.7)%   9.4%   8.4%
Selling and administrative   1,713,416    1,700,393    0.8%   21.9%   18.7%
Operating income   691,182    954,276    (27.6)%   8.8%   10.5%
Interest (expense), net   (15,874)   (29,827)   (46.8)%   0.2%   0.3%
Gain on insurance settlement   126,210    -    N/A    1.6%   - 
Provision for income taxes   (174,637)   (209,279)   (16.6)%   2.2%   2.3%
Net income  $626,881   $715,170    (12.3)%   8.0%   7.9%

 

Net sales for the three months ended March 31, 2020 decreased by approximately $1,262,000, or 13.9%, as compared to the three months ended March 31, 2019. We believe that the net decrease in sales was caused by the economic shutdown in the United States of retail stores and wholesale marine distributors, in order to comply with the COVID-19 pandemic social distancing restrictions. The decrease of sales was partially offset by strong sales of our Performacide® disinfectant/sanitizer products, which only started increasing in the latter portion of the first quarter of 2020.

 

Cost of goods sold decreased by approximately $983,000, or 17.4%, during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The decrease in cost of goods sold was primarily a result of lower sales volume and lower expenses at our manufacturing subsidiary Kinpak.

 

Gross profit decreased by approximately $279,000 or 8.1% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Gross profit decreased due to our lower sales volume, partially offset by an increase in our gross profit percentage because of lower expenses at our manufacturing subsidiary Kinpak. As a percentage of net sales, gross profit was approximately 40.2% and 37.7% for the three months ended March 31, 2020 and 2019, respectively.

 

Advertising and promotion expenses decreased by approximately $29,000, or 3.7%, during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.    The decrease in advertising and promotion expenses was primarily a result of decreased trade show expenses in the 2020 period as compared to the 2019 period, as a result of the travel and social distancing restrictions implemented in light of the pandemic social distancing policies. As a percentage of net sales, advertising and promotion expenses increased to 9.4% for the three months ended March 31, 2020, from 8.4% for the three months ended March 31, 2019.  

 

Selling and administrative expenses increased by approximately $13,000, or 0.8%, during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. As a percentage of net sales, selling and administrative expenses increased to 21.9% for the three months ended March 31, 2020, from 18.7% for the three months ended March 31, 2019. The Company did not furlough or layoff any employees as a result of the pandemic virus.

 

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Interest (expense), net for the three months ended March 31, 2020 decreased by approximately $14,000 or 46.8%, as compared to the three months ended March 31, 2019. The decrease in interest (expense), net was principally a result of interest income from a money market mutual fund account established in the first quarter of 2020.

 

Gain on insurance settlement was approximately $126,000 during the three months ended March 31, 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. The Company is still evaluating the overall damage. For more information please refer to Recent Developments and Note 16 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Provision for income taxes for the three months ended March 31, 2020 was approximately $175,000, or 21.8% of our pretax income. For the three months ended March 31, 2019 the provision was approximately $209,000, or 22.6% of pretax income.  

 

Liquidity and capital resources:

 

Our cash balance was approximately $6,148,000 at March 31, 2020 and approximately $6,125,000 at December 31, 2019. In addition, we had restricted cash of approximately $1,892,000 at March 31, 2020 and $1,885,000 at December 31, 2019. The restricted cash constitutes amounts held in a custodial account that are to be used from time to time to fund additional capital expenditures in connection with the Expansion Project. See Note 8 to the condensed consolidated financial statements included in this report for additional information.

 

The following table summarizes our cash flows for the three months ended March 31, 2020 and 2019:

 

  

Three Months Ended

March 31,

 
   2020   2019 
Net cash provided by (used in) operating activities  $287,814   $(606,245)
Net cash used in investing activities   (129,447)   (303,901)
Net cash used in financing activities   (126,673)   (97,547)
Effect of exchange rate fluctuations on cash   (1,845)   421
Net increase (decrease) in cash and restricted cash  $29,849   $(1,007,272)

 

Net cash provided by operating activities for the three months ended March 31, 2020 was approximately $288,000, and net cash used in operating activities was approximately $606,000 for the three months ended March 31, 2019. The improvement in our net cash provided by (used) in operating activities was primarily due to changes in our trade accounts receivable and accounts payable balances, partially offset by the change to our inventories balance. In the three months ended March 31, 2020 our trade accounts receivable (excluding allowances) decreased by approximately $712,000, as compared to an increase of approximately $1,002,000 during the three months ended March 31, 2019. Our accounts payable increased by approximately $949,000 during the three months ended March 31, 2020, as compared to an increase of approximately $115,000 for the three months ended March 31, 2019. . Our inventories (excluding reserves) increased by approximately $1,841,000 during the three months ended March 31, 2020, as compared to an increase of approximately $439,000 for the three months ended March 31, 2019. The increases in our net cash provided by (used) in operating activities for the three months ended March 31, 2020 was partially offset by cash used of approximately $201,000 for expenses related to the December 2019 chemical incident and a $126,000 gain from an insurance settlement from the December 2019 chemical incident.

 

Net trade accounts receivable at March 31, 2020 aggregated approximately $6,404,000, a decrease of approximately $728,000, or 10.2%, as compared to approximately $7,132,000 in net trade accounts receivable outstanding at December 31, 2019.  The decrease principally reflects collections received during the three months ended March 31, 2020, as a result of high sales during the latter part of 2019. Receivables due from affiliated companies aggregated approximately $1,196,000 at March 31, 2020, an increase of approximately $233,000, or 24.3%, from receivables due from affiliated companies of approximately $962,000 at December 31, 2019. The increase is principally a result of sales during the three months ended March 31, 2020.

 

Inventories, net were approximately $11,360,000 and $9,555,000 at March 31, 2020 and December 31, 2019, respectively, representing an increase in inventories, net of approximately $1,805,000, or 18.9%, during the three months ended March 31, 2020. The increase in inventories is seasonal and reflects the Company’s anticipation of the lifting of social distancing restrictions and opening of marinas and the resumption of recreational boating.

 

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Net cash used in investing activities for the three months ended March 31, 2020 decreased by approximately $174,000 or 57.4%, as compared to the three months ended March 31, 2019. During the three months ended March 31, 2020, we received insurance proceeds (see Results of Operations) of $411,657. Purchases of property, plant and equipment were approximately $237,000 higher during the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.

 

Net cash used in financing activities for the three months ended March 31, 2020 increased by approximately $29,000, as compared to the three months ended March 31, 2019. The increase was a result of higher debt payments made during the three months ended March 31, 2020, as well that during the three months ended March 31, 2019, we received proceeds from the exercise of stock options, while there were no such proceeds in the current period.

 

See Notes 7 and 8 to the condensed consolidated financial statements included in this report for information concerning our principal credit facilities, consisting of Kinpak’s obligations relating to an industrial development bond financing, the payment of which we have guaranteed, and a revolving line of credit. At March 31, 2020 and December 31, 2019, we had outstanding balances of approximately $3,911,000 and $3,974,000, 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 7 to the condensed consolidated financial statements included in this report.  At March 31, 2020, 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 8 to the condensed consolidated financial statements included in this report. At March 31, 2019, 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, 2020, we had an outstanding balance of $666,666 under the promissory note (including $635,047 recorded as principal and $31,619 to be recorded as interest expense over the remaining term of the note).

 

In connection 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 March 31, 2020, we had an outstanding balance of $86,957 (including $84,606 recorded as principal and $2,351 to be recorded as interest expense over the remaining term of the agreement).

 

We also obtained financing through leases for office equipment, totaling approximately $20,000 and $26,000 at March 31, 2020 and December 31, 2019, 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, 2020, we recorded $2,328 in foreign currency translation adjustments (decreasing shareholders’ equity by $2,328).

 

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.

 

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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 the 2019 Form 10-K 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. 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. Except as set forth below, there have been no material changes to the Company’s risk factors since the 2019 Form 10-K.

 

The Company’s business, results of operations, financial condition, cash flow, and stock price could in the future be materially adversely affected by the ongoing COVID-19 pandemic.

 

The COVID-19 pandemic has caused substantial damage to the national and global economies and remains a significant threat.  The extent to which COVID-19 will impact our business, results of operations, financial condition, cash flow, and stock price is highly uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak.

Our global manufacturing facilities remain open, though a range of external factors related to the pandemic that are not within our control could affect our ability to keep our manufacturing facilities fully operational. Additionally, global or national supply chains may be affected if the pandemic persists for an extended period. Any decline or lower than expected demand in our served markets could diminish demand for our products and services, which would adversely affect our financial condition, results of operations, cash flow, and stock price. Moreover, the  COVID-19 pandemic may adversely affect the financial condition of our customers and suppliers in the future or their ability to purchase Company products, may delay customers’ purchasing decisions, result in a shift away from discretionary products, and may result in longer payment terms or inability to collect customer payments. These issues may also materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition and ability to consummate future acquisitions.

If significant portions of our workforce are unable to work effectively, including because of illness, quarantines or absenteeism; government actions; facility closures; work slowdowns or stoppages; limited supplies or resources; or other circumstances related to COVID-19, our operations could be impacted. We may be unable to perform fully on our customer obligations and we may incur liabilities and suffer losses as a result.

The duration and intensity of the impact of the COVID-19 pandemic and any resulting disruption to our operations is uncertain but could have a material impact on our operations, cash flows, and financial condition. While not yet quantifiable, we will continue to assess the financial impact for the full 2020 fiscal year and beyond. 

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   The following materials from Ocean Bio-Chem, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 and (vi) Notes  to Condensed Consolidated Financial Statements.

 

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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 15, 2020 /s/ Peter G. Dornau
  Peter G. Dornau
  Chairman of the Board, President and
  Chief Executive Officer
   
Dated: May 15, 2020 /s/ Jeffrey S. Barocas
  Jeffrey S. Barocas
  Vice President and
  Chief Financial Officer

 

 

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