10-Q 1 form10q-0906.txt FORM 10Q-0906 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-11102 OCEAN BIO-CHEM, INC. (Exact name of Registrant as specified in its charter) Florida 59-1564329 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4041 SW 47 Avenue, Fort Lauderdale, Florida 33314-4023 954-587-6280 (Address and telephone number, including area code of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Common stock, par value $.01 per share Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 12, 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 [x] No [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934), or a non-accelerated filer Large Accelerated Filer [ ] Accelerated Filer [ ] Non- Accelerated Filer [x] Indicate by check mark whether the Registrant (1) Is a Shell Company (as Defined In rule 12b-2 of the Exchange Act). Yes [ ] No [x ] Indicate the number of shares outstanding of each class of the Issuer's common stock, as of the latest practicable date: $.01 par value common stock, 10,000,000 shares authorized, 5,978,316 shares issued and outstanding at November 8, 2006 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES INDEX Description Page ------- Part I - Financial Information: Item 1. - Financial Statements: Consolidated balance sheets as of September 30, 2006 and December 31, 2005 3 Consolidated statements of operations for the nine months ended September 30, 2006 and 2005 4 Consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2006 and 2005 5 Consolidated statements of cash flows For the nine months ended September 30, 2006 and 2005 6 Notes to consolidated financial statements 7-13 Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17 Item 4 - Controls and Procedures 17-18 Part II - Other Information: Item 1. - Legal Proceedings 18 Item 1A.- Risk Factors 18 Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 18 Item 3. - Defaults upon Senior Securities 18 Item 4. - Submission of Matters to a Vote of Security Holders 18 Item 5. - Other information 18 Item 6. - Exhibits 18 Signatures 18 Certifications 2 PART I - Financial Information Item l. Financial Statements: OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31, 2006 2005 ------------- ----------- (UNAUDITED) (RESTATED) Current assets: Cash $ 91,101 $ 204,543 Trade accounts receivable net of allowance for doubtful accounts of approximately $192,700 and $131,000 at September 30, 2006 and December 31, 2005, respectively 5,568,412 2,027,162 Inventories 5,867,555 6,260,813 Prepaid expenses and other current assets 211,372 510,074 ----------- ----------- Total current assets 11,738,440 9,002,592 ----------- ----------- Property, plant and equipment, net 6,979,734 7,310,640 ----------- ----------- Other assets: Trademarks, trade names and patents, net of accumulated amortization 330,439 330,439 Due from affiliated companies, net 869 29,022 Deposits and other assets 204,028 230,329 ----------- ----------- Total other assets 535,336 589,790 ----------- ----------- Total assets $19,253,510 $16,903,022 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable - trade $ 974,332 $ 1,256,640 Note payable - bank 5,525,000 4,000,000 Current portion of Long-Term debt 585,575 580,852 Accrued expenses payable 491,979 451,977 ----------- ----------- Total Current Liabilities 7,576,886 6,289,469 ----------- ----------- Due to affiliated companies, net 42,700 - ----------- ----------- Long term debt, less current portion 5,832,628 5,950,958 ----------- ----------- Shareholders' equity: Common stock - $.01 par value, 10,000,000 shares authorized; 5,978,316 and 5,849,316 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively 59,783 58,493 Additional paid-in capital 5,870,197 5,397,845 Foreign currency translation adjustment ( 164,879) ( 179,653) Retained earnings (deficit) 44,390 ( 605,895) ------------ ------------ 5,809,491 4,670,790 Less cost of common stock in treasury, 7,519 shares at September 30, 2006 and December 31, 2005 ( 8,195) ( 8,195) ------------ ------------ 5,801,296 4,662,595 ------------ ------------ Total liabilities and shareholders' equity $19,253,510 $16,903,022 ============ ============
3 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2006 2005 2006 2005 ---------- ---------- ----------- ----------- Gross sales $8,491,859 $6,574,073 $17,939,676 $15,200,391 Allowances 766,770 621,242 1,473,486 1,564,667 ---------- ---------- ----------- ----------- Net sales 7,725,089 5,952,831 16,466,190 13,635,724 Cost of goods sold 5,543,693 4,940,843 11,758,247 10,946,024 ---------- ---------- ----------- ----------- Gross profit 2,181,396 1,011,988 4,707,943 2,689,700 ---------- ---------- ----------- ------------ Costs and expenses: Advertising and promotion 428,254 353,620 900,611 1,025,022 Selling and administrative 889,005 950,143 2,629,776 2,916,683 Interest expense 204,772 132,989 539,874 344,462 ---------- ---------- ----------- ----------- Total cost and expenses 1,522,031 1,436,752 4,070,261 4,286,167 ---------- ---------- ----------- ----------- Operating income (loss) 759,365 ( 424,764) 637,682 ( 1,596,467) Other income 11,316 6,510 12,603 16,270 ---------- ---------- ----------- ------------ Income (Loss) before income taxes 670,681 ( 418,254) 650,285 ( 1,580,197) Income taxes (benefit) - - - ( 274,500) ---------- ----------- ----------- ------------ Net Income (loss) 670,681 ( 418,254) 650,285 ( 1,305,697) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment 1,042 18,177 14,774 22,298 ---------- ----------- ----------- ------------ Comprehensive income (loss) $ 771,723 ($ 400,077) $ 665,059 ($1,283,399) ========== =========== =========== ============ Earnings (loss) per common share - basic $ .11 ($ .07) $ .11 ($ .23) ====== ========= ======= ========= Earnings (loss) per common share - diluted $ .11 ($ .07) $ .10 ($ .23) ====== ========= ======= =========
The Company has adopted Statement of Financial Accounting Standards No. 130 that requires items of comprehensive income to be stated as part of the basic financial statements. The only item of comprehensive income that the Registrant has is its foreign currency translation adjustment. 4 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
Additional Foreign Retained Common stock paid-in currency earnings Treasury Shares Amount capital adjustment (deficit) stock Total --------- -------- ---------- ---------- --------- -------- ---------- January 1, 2006, as previously reported 5,849,316 $ 58,493 $4,908,615 ($179,653) ($ 488,563) ($8,195) $4,290,697 Compensation cost associated with the modification of stock options, net 178,332 ( 117,332) 61,000 Compensation cost associated with stock warrants 310,898 310,898 --------- -------- ---------- ---------- ----------- -------- ----------- January 1, 2006, as restated 5,849,316 58,493 5,397,845 ( 179,653) ( 605,895) ( 8,195) 4,662,595 Net income 650,285 650,285 Debt forgiveness - affiliate 295,752 295,752 Common stock issuance 129,000 1,290 118,132 119,422 Stock based compensation 58,468 58,468 Foreign currency translation adjustment 14,774 14,774 --------- -------- ---------- ---------- ----------- --------- ----------- September 30, 2006 5,978,316 $ 59,783 $5,870,197 ($164,879) $ 44,390 ($8,195) $5,801,296 ========= ======== ========== ========== =========== ========= =========== January 1, 2005 5,417,813 $ 54,178 $4,722,746 ($204,864) $1,324,630 ($8,195) $ 5,888,495 Net (loss) (1,305,697) ( 1,305,697) Common stock issuances 431,503 4,315 185,869 190,184 Foreign currency translation adjustment 22,298 22,298 --------- -------- ---------- ---------- ---------- -------- ----------- September 30, 2005 5,849,316 $ 58,493 $4,908,615 ($182,566) $ 18,933 ($8,195) $ 4,795,280 ========= ======== ========== ========== ========== ======== ===========
5 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
2006 2005 ----------- ----------- Cash flow provided (used) by operating activities: Net income (loss) $ 650,285 ($1,305,698) Adjustments to reconcile net income (loss) to net cash provided (used) by operations: Depreciation and amortization 582,971 555,095 Stock based compensation expense 58,468 - Amortization of imputed interest 46,636 - Changes in assets and liabilities: (Increase) decrease in accounts receivable ( 3,541,251) 413,409 (Increase) decrease in inventories 393,257 ( 1,686,183) Decrease (increase) in prepaid expenses and other current assets 298,704 ( 29,555) Increase (decrease) in accounts payable, accrued expenses and other ( 216,005) 2,257 ------------ ------------ Net cash used by operating activities ( 1,726,935) ( 2,050,675) ------------ ------------ Cash flows from financing activities: Net increases under line of credit 1,525,000 1,275,000 Reduction in due from affiliates, net 323,905 - Increases in due to affiliates, net 42,700 225,632 Additions to long term debt, net 250,000 800,000 Payments on long term debt, net ( 410,243) ( 380,133) Common stock transactions 119,422 190,184 ------------ ------------ Net cash provided by financing activities 1,850,784 2,110,683 ------------ ------------ Cash flow used by investing activities: Purchases of property, plant, equipment, net of funds held in escrow ( 252,065) ( 636,683) ------------ ------------ Net cash used by investing activities ( 252,065) ( 636,683) ------------ ------------ Increase (decrease) in cash prior to effect of foreign currency translation adjustment ( 128,216) ( 576,675) Effect of foreign currency translation adjustment on cash 14,774 22,298 ------------ ------------ Net (decrease) in cash ( 113,442) ( 554,377) Cash at beginning of period 204,543 988,106 ------------ ------------ Cash at end of period $ 91,101 $ 433,729 ============ ============ Supplemental Information: Cash used for payment of interest during period $ 539,874 $ 344,462 ============ ============ Cash used for payment of income taxes during period $ - $ 110,734 ============ ============ Non-cash investing and financing activities: Debt forgiven by affiliated entity $ 295,752 $ - ============ ============
6 OCEAN BIO-CHEM, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Interim Reporting The accompanying unaudited consolidated financial statements include the accounts of Ocean Bio-Chem, Inc. and its subsidiaries ("the Company"). All significant inter-company transactions and balances have been eliminated. The unaudited consolidated financial statements have been prepared in conformity with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the financial statements, have been included. Operating results for the period ended September 30, 2006 are not necessarily indicative of the results that may be expected for the future fiscal quarter in 2006 or the full year ending December 31, 2006 due to seasonal fluctuations in the Company's business, changes in economic conditions and other factors. For further information, please refer to the Consolidated Financial Statements and Notes thereto contained in the Company's Annual Report on Form 10-KA for the year ended December 31, 2005. During August 2006, we filed an amendment to our Form 10-K for the period ended December 31, 2005. The substantive changes reflected in such amendment were (1) the recognition of compensation cost associated with stock options of which certain terms were modified and (2) the reclassification between debt and Additional Paid-Capital of certain of the proceeds from the Revolving Subordinated Obligation to our president and CEO, Peter G. Dornau. Certain financial statement items for the nine months and quarter ended September 30, 2005 have been reclassified to conform to the 2006 presentation. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amount of assets, liabilities, revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery to customer has occurred, the sales price is fixed and determinable, and collectibility of the related receivable is probable. Reported net sales are net of customer prompt pay discounts, contractual allowances, authorized customer returns, consumer rebates and other allowable deductions from our invoices. Cooperative advertising deductions, based on our customers' promotion of our products is recognized as an advertising cost and charged against operations as an operating expense. Cost of goods sold/Selling, general and administrative expenses Cost of Goods Sold include all of the direct and indirect costs of manufacturing our products. Included therein specifically are warehousing costs of both raw and finished materials, in-bound freight, out-bound freight (in those instances that we absorb such costs), purchasing, receiving, and inspection costs. Other costs of the distribution network are reflected in Selling, General and Administrative expenses. Also included therein are managerial and clerical wages and related expenses, office and administrative occupancy costs, taxes, professional fees, insurance coverages and other related expenses. Inventories Inventories are comprised of finished goods and raw materials and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. The composition of inventories at September 30, 2006 and December 31, 2005 were as follows: 2006 2005 ---------- ---------- Raw materials $3,415,180 $3,235,086 Finished goods 2,452,375 3,025,727 ---------- ---------- $5,867,555 $6,260,813 ========== ========== 7 Stock Based Compensation At September 30, 2006, The Company had options outstanding under four stock-based compensation plans, which are described below. On January 1, 2006, The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Shared Based Payment" ("SFAS No. 123R"), which requires the measurement and recognition of compensation cost for all share-based payment awards made to employees and directors based on estimated fair values. Prior to the adoption of SFAS No. 123R, The Company accounted for its stock-based employee compensation related to stock options under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" ("APB 25") and the disclosure alternative prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Accordingly, The Company presents pro- forma information for the periods prior to the adoption of SFAS No 123R and no employee compensation cost was recognized for the stock-based compensation plans other than the grant date intrinsic value, if any, for the options granted prior to January 1, 2006. The Company has elected to use the modified prospective transition method for adopting SFAS No. 123R, which requires the recognition of stock-based compensation cost on a prospective basis; therefore, prior period financial statements have not been restated. Under this method, the provisions of SFAS No. 123R are applied to all awards granted after the adoption date and to awards not yet vested with unrecognized expense at the adoption date based on the estimated fair value at grant date as determined under the original provisions of SFAS No. 123. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes will be recognized as a financing activity rather than an operating activity as in the past. Pursuant to the requirements of SFAS No. 123R, The Company will continue to present the pro-forma information for periods prior to the adoption date. Stock Compensation Plans Under various plans, The Company may grant incentive or non-qualified stock options to employees and directors. The terms of stock options granted under the plans are determined by the Compensation Committee of the Board of Directors at the time of grant, including the exercise price, term and any restrictions on the exercisability of such option. The exercise price of all options granted under the plans equals the market price at the date of grant, except for options granted to Mr. Dornau, our President and CEO, which are generally granted at a premium of 10% above the market price of the underlying common stock, and no option is exercisable after the expiration of five or ten years from the date of grant, depending on the Plan under which it was awarded. The stock options outstanding under our qualified or incentive plans were generally granted for terms of five years and vest on a straight line basis over such period. The stock options outstanding under our 2002 non qualified plan were generally granted for terms of ten years and vested immediately. No employee compensation expense was recognized in our financial statements upon either the grant or exercise of these stock options prior to January 1, 2006. As of September 30, 2006, the number of options outstanding and the number of shares available for grant under each Stock Option Plan and non-plan options is presented below: Plan Options outstanding Options available for grant 1992 Plan 143,000 shares None - terminated 2002 1994 Plan 159,500 shares None - terminated 2004 2002 Qualified Plan 265,000 shares 135,000 shares 2002 Non-qualified Plan 155,000 shares 45,000 shares Non-plan options 231,000 shares N/A Information with respect to our stock option activity is as follows: Weighted average Shares exercise price Outstanding at December 31, 2005 964,500 $1.12 Granted 40,000 $1.08 Exercised - Forfeited 51,000 $1.25 ------- ----- Outstanding at September 30, 2006 953,500 $1.13 ======= ===== 8 For the nine month period ended September 30, 2006, The Company recognized $ 58,468 in stock-based compensation costs, which is reflected in operating expenses. No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets. The Company elected to adopt the alternative method of calculating the historical pool of windfall tax benefits as permitted by FASB Staff Position (FSP) No. SFAS 123R-c, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." This is a simplified method to determine the pool of windfall tax benefits that is used in determining the tax effects of stock compensation in the results of operations and cash flow reporting for awards that were outstanding as of the adoption of SFAS No. 123R. As of September 30, 2006, The Company had approximately $105,800 of unrecognized compensation costs related to non-vested stock option awards that is expected to be recognized over a weighted average period of 2.4 years. The following information applies to options outstanding and exercisable as of September 30, 2006:
Options outstanding Options exercisable Weighted Weighted Weighted average average average remaining exercise exercise Shares life price Shares price ------- ---- ------ ------- ------ Non-Plan options 231,000 2.50 $ .758 231,000 $ .758 1992 Plan 143,000 .25 1.009 123,200 1.009 1994 Plan 159,500 3.08 1.050 31,900 1.050 2002 Plan - qualified 125,000 1.08 1.260 81,000 1.260 2002 Plan - qualified 140,000 2.50 1.520 56,000 1.620 2002 Plan - non-qualified 35,000 3.08 1.260 35,000 1.260 2002 Plan - non-qualified 40,000 7.75 1.030 40,000 1.030 2002 Plan - non-qualified 40,000 8.65 1.460 40,000 1.460 2002 Plan - non-qualified 40,000 9.55 1.080 40,000 1.050 ------- ------- ------- ------ 953,500 $1.110 678,100 $1.045 ======= ====== ======= ======
The Company utilizes a Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company's expected volatility is based on the historical volatility of The Company's stock price over the most recent period commensurate with the expected term of the stock option award. The estimated expected option life is based primarily on historical employee exercise patterns and considers whether and the extent to which the options are in-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of The Company's stock options awards and the selected dividend yield assumption was determined in view of The Company's historical and estimated dividend payout. The Company has no reason to believe that the expected volatility of its stock price or its option exercise patterns will differ significantly from historical volatility or option exercises. No stock options have been granted during the three months ended September 30, 2006. The fair value of each option grant during the three month and nine month periods ended September 30, 2006 and 2005, was estimated on the date of grant using the following weighted-average assumptions:
For the three months ended For the nine months ended ------------------------------------- ------------------------------------------------ September 30, 2006 September 30,2005 September 30, 2006 September 30, 2005 ------------------- ----------------- ------------------- ------------------ Expected dividend yield 00.0% 00.0% 00.0% 00.0% Expected price volatility 33.5% 33.5% 33.5% 33.5% Risk-free interest rate 4.5% 4.0% 4.5% 4.0% Expected life of options in years 5-10 5-10 5-10 5-10
9 The following table illustrates the effect on net loss and basic and diluted loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to options granted under our stock option plans for the three month and nine month period ended September 30, 2005:
For the three For the nine months ended months ended September 30, September 30, 2005 2005 -------------- ------------- Net loss, as reported ($418,254) ($1,305,697) Add: Stock-based employee compensation expense included in net loss - - Deduct: Total stock-based employee compensation expense determined under fair value based method, net of income taxes 7,700 21,500 ---------- ------------ Pro forma net loss $(425,954) ($1,327,197) ========== ============= Loss per share: Basic and diluted as reported $ (0.08) $ (0.23) Basic and diluted pro forma $ (0.08) $ (0.23)
On March 25, 1999, the Company granted two officers a five-year option for 115,000 shares each, as adjusted for the Company's stock dividend distributions of 2000 and 2002, at an exercise price of $.758 representing the market price at the time of grant. Such grants were awarded in consideration of a loan to the Company in the amount of $400,000 from an affiliated company in which they are each 50% co-shareholders. During 2004, the underlying loan was modified to extend the maturity date and, accordingly, the options were extended for an additional five years expiring March 25, 2009. The intrinsic value of these options at the date of term modification aggregated $178,332. Such amount was not originally recorded as a charge against operations in our issued financial statements as contained in our Form 10-K as of December 31, 2005 and 2004 and the years then ended. Accordingly, our Consolidated Statement of Operations was restated for 2004 to reflect such costs along with the corresponding increase to Additional paid-in capital on our Consolidated Balance Sheet and Consolidated Statement of Shareholders' Equity. The amended filing was made during August 2006. 2. PROPERTY, PLANT & EQUIPMENT The Company's property, plant and equipment consisted of the following at September 30, 2006 and December 31, 2005: Estimated Useful Life- Years 2006 2005 ----------- ---------- ---------- Land N/A $ 278,325 $ 278,325 Building 30 4,390,894 4,390,894 Manufacturing and warehouse equipment 6-10 4,669,009 4,384,268 Manufacturing and warehouse equipment 11-20 1,659,870 1,659,870 Office equipment and furniture 3-5 678,537 652,940 Construction in process N/A 219,966 278,239 Leasehold improvement 10-15 145,505 145,505 ---------- ---------- 12,042,106 11,790,041 Less accumulated depreciation 5,062,372 4,479,401 ---------- ---------- Total property, plant and equipment, net $6,979,734 $7,310,640 ========== ========== 10 3. LONG-TERM DEBT Long-term debt at September 30, 2006 consisted of the following: The Company is obligated pursuant to capital leases financed through Industrial Development Bonds. Such obligations were incurred during 1997 and 2002 in connection with building and equipment expansion at the Company's Alabama manufacturing and distribution facility. Both bear interest at tax-free rates that adjust weekly. At September 30, 2006, approximately $1,868,100 and $2,990.000 were outstanding attributable to the 1997 and 2002 series, respectively. During the nine months ended September 30, 2006 interest rates ranged between 3.3% and 3.9%. Principal and accrued interest retiring the underlying bonds are payable quarterly through March, 2012 and July, 2017 for the 1997 and 2002 series, respectively. Repayment of the bonds is guaranteed by a Letter of Credit issued by the Company's primary commercial bank. Security for the Letter of Credit is a priority first mortgage on our Alabama, Kinpak, facility as well as the manufacturing equipment utilized therein.. The Company, through its subsidiary, Kinpak Inc., was obligated pursuant to various capital lease agreements covering equipment utilized in the Company's Alabama plant. Such obligations, aggregating approximately $ 66,000 at September 30, 2006, have varying maturities through 2009 and carry interest rates ranging from 7% to 12%. During April 2005 we entered into a financing obligation with Regions Bank whereby they advanced us $500,000 to finance equipment acquisitions at our Kinpak facility. Such obligation is due in monthly installments of principal aggregating approximately $8,300 plus interest at prevailing rates (the outstanding balance and interest rate on this obligation at September 30, 2006 were approximately $358,300 and 7.83% per annum, respectively) through maturity on April 15, 2010. During the quarter ended December 31, 2005, we finalized a $1.5 million revolving credit facility with our President and CEO, Peter G. Dornau. At September 30, 2006 and December 31, 2005, the gross obligation aggregating $1,400,000 and $1,150,000, respectively was outstanding pursuant to this obligation which is due in October 2010 along with accrued interest at the rate of prime plus 2%. In connection with his offering this financing arrangement to the Company, we issued warrants to Mr. Dornau to purchase a maximum of 1 million shares of our common stock. Such warrants are exercisable 500,000 shares at $1.13 and 500,000 shares at $.863. The exercise prices were determined by the closing bid of our stock plus ten (10) percent on each date of grant. In addition, he has the right, at his sole discretion, to convert such debt into a maximum of 1.5 million shares of our common stock at the rate of $1.00 per share. The gross obligation was reduced by an allocation of imputed interest associated with the warrants issued to Mr. Dornau. The initial amount of such allocation was $310,898 which will be amortized and charged against operations as additional interest expense over the sixty (60) month term of this financing. During the nine months ended September 30, 2006, amortization of approximately $46,600 was charged against operations. This obligation is subordinate to all borrowings from Regions Bank. The composition of these obligations at September 30, 2006 and December 31, 2005 were as follows:
Current Portion Long Term Portion 2006 2005 2006 2005 -------- -------- ---------- ---------- Industrial Development Bonds $460,000 $460,000 $4,398,108 $4,745,000 Notes payable 99,996 99,996 258,343 331,448 Capitalized equipment leases 25,579 20,856 40,439 35,408 Subordinated note payable-P. Dornau - - 1,400,000 1,150,000 -------- -------- ---------- ---------- 585,575 580,852 6,096,890 6,261,856 Less imputed interest - Subordinated note payable-P. Dornau - - ( 264,262) ( 310,898) -------- -------- ----------- ----------- $585,575 $580,852 $5,832,628 $5,950,958 ======== ======== ========== ===========
11 Required principal payment obligations attributable to the foregoing as of December 31, 2005 are tabulated below: Year ending December 31, 2006 $ 580,852 2007 579,279 2008 571,757 2009 564,360 2010 1,643,352 Thereafter 2,903,108 ---------- Total $6,842,708 ========== 4. RELATED PARTY TRANSACTIONS At September 30, 2006 and December 31, 2005, the Company had amounts receivable from and payable to affiliated companies, which are directly or beneficially owned by the Company's president, aggregated a net receivable of approximately $900 and $29,000, respectively. Such amounts result from sales to the affiliates, allocations of expenses incurred by the Company on the affiliates' behalf and funds advanced to or from the Company. Ina addition, at September 30, 2006, the Company was indebted to such affiliates in the approximate amount of 42,700. Sales to our European affiliate aggregated approximately $81,200, $183,200, $485,2009, and $724,000 during the three months ended September 30, 2006 and 2005, and the nine months ended September 30, 2006 and 2005, respectively. During March 2006, our lessor affiliate offered to forgive the Company's indebtedness to such entity in the approximate amount of $295,000. Accordingly, during the first quarter of 2006, such amount was credited to Additional paid-in capital and increased the net amount due from affiliates. On May 1, 1998, the Company entered into a ten year lease for approximately 12,700 square feet of office and warehouse facilities in Fort Lauderdale, Florida from an entity owned by certain officers of the Company. The lease required a minimum rental of $94,800 for the first year and provides for a maximum 2% increase on the anniversary of the lease throughout the term. Additionally, the landlord is entitled to its pro-rata share of all taxes, assessments, and any other expenses that arise from ownership. Rent charged to operations aggregated approximately $75,300, $71,800, $25,100, and $25,100 during the nine months ended September 30, 2006 and 2005, and the three months ended September 30, 2006 and 2005, respectively. The Company has entered into a corporate guaranty of a mortgage note obligation of such affiliate. The obligation aggregating approximately $314,100 and $336,900 at September 30, 2006 and December 31, 2005, respectively is primarily secured by the real estate leased to the Company. The following is a schedule of minimum future rentals on the non-cancelable operating leases. Year ending December 31, 2006 $ 104,507 2007 106,597 2008 108,729 2009 - 2010 - Thereafter - ---------- Total $ 319,833 ========== 12 5. EARNINGS (LOSS) PER SHARE
Nine months Three months ended September 30, ended September 30, 2006 2005 2006 2005 --------- --------- --------- --------- Weighted-average common shares outstanding 5,935,316 5,651,260 5,978,316 5,651,260 Dilutive effect of stock plans, other options & conversion rights 170,898 93,507 391,617 69,818 --------- --------- --------- --------- Diluted weighted-average shares outstanding 6,106,214 5,744,767 6,369,933 5,721,078 ========= ========= ========= =========
6. INCOME TAXES As of September 30, 2006, our potential Deferred Tax Asset aggregated approximately $472,000. Estimated Income Taxes attributable to our earnings for the nine months ended September 30, 2006 and deferred Income Taxes associated with the timing differences between policies reflected in financial reporting and for Income Tax purposes aggregated approximately $221,100 and $247,800, respectively. Accordingly, the result of the foregoing is a net Deferred Tax Asset of approximately $3,000. There is no assurance that the Company will ever avail itself of all or a portion of such credits. We established a valuation allowance of 100% against this deferred asset. 7. SUBSEQUENT EVENT On November 10, 2006, our President and CEO, Peter G. Dornau indicated that he is exercising his right to convert our indebtedness to him into common stock pursuant to the terms of our Revolving Line of Credit. Had this decision been reflected in the accompanying financial statements as of September 30, 2006 our total long-term debt would be reduced and shareholders' equity been increased by approximately $1,250,000, respectively. Net income and related earnings per share for the nine months ended September 30, 2006 would not have been materially impacted by this subsequent event. Forward-looking Statements: Certain statements contained herein, including without limitation expectations as to future sales and operating results, constitute forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigations Reform Act of 1995. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "anticipate", "intend", "could" or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors which may affect the Company's results include, but are not limited to, the highly competitive nature of the Company's industry; reliance on certain key customers; consumer demand for marine recreational vehicle and automotive products; advertising and promotional efforts, and other factors. The Company will not undertake and specifically declines any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Overview: We are a leading manufacturer and distributor of chemical formulations serving the appearance and functional categories of the marine, automotive, recreational vehicle and home care markets. We were founded in 1973 and have conducted operations within the aforementioned categories since then. During 1984, we changed our corporate name to Ocean Bio-Chem, Inc. (the parent company) from our former name, Star brite Corporation. Our operations were conducted as a privately owned company through March, 1981 when we completed our initial public offering of common stock. 13 Critical accounting policies and estimates: Principles of consolidation - Our consolidated financial statements include the accounts of the parent company and its wholly owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation. Revenue recognition - Revenue from product sales is recognized when persuasive evidence of an arrangement exists, delivery to customer has occurred, the sales price is fixed and determinable, and collectibility of the related receivable is probable. Prepaid advertising and promotion - In any given year we introduce certain new products to our customers. In connection therewith, we produce new promotional items to be distributed over a period of time. We follow the policy of amortizing these costs over a one-year basis. Property, plant and equipment - Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method. Stock based compensation - Prior to January 1, 2006 we followed the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, to record compensation costs. Opinion No. 25 requires that compensation cost be based on the difference, if any, between the quoted market price of the stock and the price the employee must pay to acquire the stock depending on the terms of the award. Effective January 1, 2006 we adopted the provisions of Statement of Financial Accounting Standards No. 123R to record such compensation costs. Prior thereto, such matters were disclosed on a pro-forma basis in the notes to our consolidated financial statements. Concentration of credit risk - Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable. Over the past three years, our five largest customers historically represented a range of approximately 45% to 55% of consolidated gross revenues and 25% to 77% of consolidated accounts receivable, respectively. We have experienced a longstanding relationship with each of these entities and have always collected open receivable balances in a timely manner. However, the loss of any of these customers could have an adverse impact on our operations. Fair value of financial instruments - The carrying amount of cash approximates its fair value. The fair value of long-term debt is based on current rates at which we could borrow funds with similar remaining maturities, and the carrying amount approximates fair value. Income taxes - We file consolidated federal and state income tax returns. We have adopted Statement of Financial Accounting Standards No. 109 in the accompanying consolidated financial statements. The only temporary differences included therein are attributable to differing methods of reflecting depreciation for financial statement and income tax purposes. Trademarks, trade names and patents - The Star brite trade name and trademark were purchased in 1980 for $880,000. The cost of such intangible assets was amortized on a straight-line basis over an estimated useful life of 40 years through December 31, 2001. Effective January 1, 2002 and reporting periods thereafter and pursuant to Statement of Financial Accounting Standards No. 142, we have determined that the carrying value of such intangible assets relating to our Star brite brand does not require further amortization. In addition, we own certain patents that we believe are valuable in limited product lines, but not material to our success or competitiveness in general. There are no capitalized costs attributable to our patents. Translation of Canadian currency - The accounts of our Canadian subsidiary are translated in accordance with Statement of Financial Accounting Standards No. 52, which requires that foreign currency assets and liabilities be translated using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rate prevailing throughout the period. The effects of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are accumulated as the translation adjustment in shareholders' equity. Realized gains and losses from foreign currency transactions, if any, are included in Comprehensive earnings of the period. Liquidity and Capital Resources: The primary sources of our liquidity are our operations and short-term borrowings from Regions Bank pursuant to a revolving line of credit aggregating $6 million. Such line matures May 31, 2007, bears interest at the 30 Day LIBOR plus 275 basis points (approximately 8.08% at September 30, 2006) and is secured by our trade receivables, inventory and intangible assets. As of each year-end, December 31, we are required to maintain a minimum working capital of $1.5 million and meet certain other financial covenants during the term of the agreement. As of September 30, 2006, we were obligated under this arrangement in the amount of $5,525,000. 14 In connection with the purchase and expansion of the Alabama facility, we closed on Industrial Development Bonds during 1997 aggregating approximately $5 million. The proceeds were utilized for both the repayment of certain advances used to purchase the Alabama facility and to expand such facility for our future needs. During July 2002, we completed a second Industrial Development Bond ("IDB") financing aggregating $3.5 million through the City of Montgomery, Alabama. Such transaction funded an approximate 70,000 square foot addition to the manufacturing facility as well as the remaining machinery and equipment additions required therein. This project was completed during 2003. In order to market the IBD at favorable rates, we obtained a substitute irrevocable letter of credit for the 1997 issue and a new irrevocable letter of credit for the 2002 issue. Under such letters of credit agreements, maturing on July 31, 2007, we are required to maintain a stipulated level of working capital, a designated maximum debt to tangible ratio, and a required debt service coverage ratio. Such letters of credit are secured by a first priority mortgage on the underlying Alabama facility and equipment. The bonds are marketed weekly at the prevailing rates for such tax-exempt instruments. During the nine months ended September 30, 2006 such bonds carried interest ranging between 3.3% and 3.9% annually. Interest and principal are payable quarterly. We believe current operations are sufficient to meet these obligations. On April 12, 2005 we entered into a financing obligation with Regions Bank whereby they advanced us $500,000 to finance equipment acquisitions at our Kinpak facility. Such obligation is due in monthly installments of principal aggregating approximately $8,300 plus interest at prevailing rates (the outstanding balance and interest rate on this obligation at September 30, 2006 were approximately $358,300 and 7.83% per annum, respectively). The maturity on this obligation is April 15, 2010. During the quarter ended December 31, 2005, we finalized a $1.5 million revolving credit facility with our president and CEO, Peter G. Dornau. At September 30, 2006 and December 31, 2005, the gross obligation aggregating $1,400,000 and $1,150,000, respectively was outstanding pursuant to this obligation which is due in October 2010 along with accrued interest at the rate of prime plus 2%. In connection with his offering this financing arrangement to the Company, we issued warrants to Mr. Dornau to purchase a maximum of 1 million shares of our common stock. Such warrants are exercisable 500,000 shares at $1.13 and 500,000 shares at $.863. The exercise prices were determined by the closing bid of our stock plus ten (10) percent on each date of grant. In addition, he has the right, at his sole discretion, to convert such debt into a maximum of 1.5 million shares of our common stock at the rate of $1.00 per share. The gross obligation was reduced by an allocation of imputed interest associated with the warrants issued to Mr. Dornau. The initial amount of such allocation was $310,898 which will be amortized and charged against operations as additional interest expense over the sixty (60) month term of this financing. During the nine months ended September 30, 2006, amortization of approximately $46,600 was charged against operations. This obligation is subordinate to all borrowings from Regions Bank. We are involved in making sales in the Canadian market and must deal with the currency fluctuations of the Canadian currency. We do not engage in currency hedging and deal with such currency risk as a pricing issue. During the past few years, we have introduced various new products to our customers. At times this has required us to carry greater amounts of overall inventory and has resulted in lower inventory turnover rates. The effects of such inventory turnover have not been material to our overall operations. We believe that all required capital to maintain such increases can continue to be provided by operations and current financing arrangements. Many of the raw materials that we use in the manufacturing process are commodities that are subject to fluctuating prices. We react to long-term increases by passing along all or a portion of such increases to our customers. As of September 30, 2006 and through the date hereof, we did not and do not have any material commitments for capital expenditures, nor do we have any other present commitment that is likely to result in our liquidity increasing or decreasing in any material way. In addition, except for our need for additional capital to finance inventory purchases, we know of no trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, our liquidity increasing or decreasing in any material way. As disclosed in our Form 10-Q for the quarter ended March 31, 2005, our largest customer, West Marine, publicly announced their adoption of a policy to reduce their overall inventory levels. This resulted in an approximate $4,294,000 decrease in sales to them for the year ended December 31, 2005 compared to 2004. Our products have historically sold well at their retail stores and they have indicated to us that such was the case during 2005. Current period sales to West Marine represented an increase of approximately $2.9 million for the nine months ended September 30, 2006 over the comparable period in 2005. 15 Corporate management has enhanced its analysis, supervision and overall involvement with our manufacturing facility. We have identified several areas that require improvement and through increased on-site management presence, major personnel changes, adoption of certain strategic enhancements to our manufacturing process, and a renewed commitment from our team in Alabama to strive for improved efficiency and cost savings, we believe that we will achieve a material reduction in manufacturing cost thereby improving product margins and operating results at Kinpak during 2006. On March 25, 1999, the Company entered into a loan arrangement with an entity owned 50% each by our President and Vice President - Advertising, Messrs. Peter G. Dornau and Jeffrey J. Tieger, respectively whereby we borrowed $400,000 to be repaid in monthly installments of approximately $3,400 plus prevailing interest at prime plus 1%. On March 9, 2006 we received notification from the shareholders of said entity that they were forgiving this obligation and, accordingly, the Company has no further obligation associated with this debt. At that date the principal balance outstanding amounted to $295,752 and such amount is reflected on the accompany consolidated statement of shareholders' equity as an increase to Additional paid-in capital. Results of Operations: For The Three Months Ended September 30, 2006 compared to the Three Months ended September 30, 2005: Net sales increased approximately $1,772,000 or 30% for the quarter ended September 30, 2006 compared to the same quarter of the preceding year. The consolidated net sales aggregated approximately $7,725,000 and $5,952,800, respectively. Management attributes this increase to both timing and increased revenues associated with our Anti-freeze season as well as enhanced sales to West Marine comparing the current period with the same period in 2005. Cost of goods sold amounted to approximately $5,543,700 or 71.8% of net sales compared to $4,940,800 or 83.0% of net sales for the quarters ended September 30, 2006 and 2005, respectively. These results were favorably effected by a sales price increase passed along to substantially all customers effective January, 2006, modifications initiated in certain manufacturing processes however, unfavorably impacted as the result of spreading our fixed element of manufacturing overhead over the reduced sales levels experienced during the current quarter. Selling and administrative expenses decreased approximately $61,100 or 6.4% when comparing the quarters ended September 30, 2006 and 2005. Certain expenses which are components of this grouping increased and others decreased. However, the significant changes were reduced personnel costs, principally at Kinpak, and lower professional fees and other outside services, including consulting and outsourced data processing fees. Advertising and promotion increased approximately $74,600 or approximately 21.1% comparing the three months ended September 30, 2006 and 2005. This was the result of advertising costs associated with our Starton product line and contractual co-operative advertising programs related to the increased sales experienced during the current period. Interest expense increased by approximately $71,800 comparing the quarter ended September 30, 2006 to the corresponding quarter in 2005. This principally resulted from increasing interest rates, the accrual of interest on the revolving line loaned to the Company by our president and CEO, Peter G. Dornau, and the amortization of imputed interest associated with the foregoing obligation. Our net income for the quarter ended September 30, 2006 amounted to approximately $670,700 compared to a loss of $418,300 for the comparable period in 2005. As a result of available Income Tax carryovers, there was no provision or benefit for income taxes in the current quarter. For the Nine Months Ended September 30, 2006 Compared To The Nine Months Ended September 30, 2005 Net sales increased 20.7% to approximately $16,466,200 for the nine months ended September 30, 2006 compared to approximately $13,635,700 for the nine months ended September 30, 2005. Management attributes such increase significantly to our largest customer resuming their purchasing after apparently reaching their inventory goals, new customer development, higher sales associated with our Anti-freeze season, and sales price increases passed along to customer to cover increasing costs. Cost of goods sold decreased to 71.4 % of net sales for the nine months ended September 30, 2006 compared to 80.3% of net sales for the nine months ended September 30, 2005. This change resulted was attributed sales price increases passed along to our customers, certain initiatives adopted in our manufacturing processes, and the result of spreading our fixed element of manufacturing overhead over the higher sales levels experienced during the six month period. Advertising and promotion expenses decreased approximately $124,400 or 12.1% for the 2006 period when compared to comparable expenses in the same time period in the previous year. This resulted primarily from planned advertising programs in media and co-op advertising programs for the current year. 16 Selling and administrative expenses decreased by approximately $286,900 or 9.9% for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. . Certain expenses which are components of this grouping increased and others decreased. However, the significant changes were reduced personnel costs, principally at Kinpak, and lower professional fees and other outside services, including consulting and outsourced data processing fees. Interest expense for the 2006 period increased approximately $195,400 when compared to the same nine month period of 2005. This principally resulted from increasing interest rates, the accrual of interest on the revolving line loaned to the Company by our president and CEO, Peter G. Dornau, and the amortization of imputed interest associated with the foregoing obligation. Our net income was approximately $650,300 for the nine months ended September 30, 2006 compared to a net loss of approximately $1,305,700 for the nine months ended September 30, 2005. As a result of available Income Tax carryovers, there was no provision or benefit for income taxes in the current nine month period. Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity, principally petroleum based raw materials, market prices and interest rates. We are exposed to market risk in the areas of changes in borrowing rates in the United States and changes in foreign currency exchange rates. Historically, and as of September 30, 2006, we have not used derivative instruments or engaged in hedging activities to minimize market risk. Interest rate risk As of September 30, 2006, we had floating interest rates on our industrial development revenue bonds and our working capital line of credit facility. As of September 30, 2006 the interest rate on our approximate $4,858,100 outstanding balance of industrial revenue bonds was approximately 3.9% per annum and the interest rate on our line of credit facility was based on the 30 day LIBOR rate plus 275 basis points (the effective interest rate at September 30, 2006 was 8.08%). We do not expect any changes in interest rates to have a material impact on our operations during the year ending December 31, 2006. Foreign currency risk We sell products in Canada, based on the Canadian dollar. Thereby, we have exposure to changes in exchange rates. Changes in the Canadian dollar/U.S. dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings. We do not believe that near-term changes in the exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows, and therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of the Canadian dollar. Concentration and credit risk We maintain cash balances at several financial institutions, which are insured by the Federal Deposit Insurance Corporation up to $100,000. At times, our cash balances may exceed federally insured limits. We have not experienced any losses in such accounts and we believe the risk related to these deposits is minimal. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures. We have carried out an evaluation under the supervision of management, including the President and Chief Executive Officer ("CEO") and the Chief Operating Officer and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our CEO and CFO have concluded that, as of September 30, 2006, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the SEC, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports was accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. During the past quarter, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 17 Limitations on the Effectiveness of Controls. Our management, including the CEO and CFO, does not expect that our disclosure or internal controls will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Despite these limitations, our CEO and CFO have concluded that our disclosure controls and procedures (1) are designed to provide reasonable assurance of achieving their objectives and (2) do provide reasonable assurance of achieving their objectives. PART II - OTHER INFORMATION Item 1. - Legal Proceedings: We are not a party to any material litigation presently pending nor, to the best knowledge of the Company, have any such proceedings been threatened. Item 1A. - Risk Factors Set forth any material changes from Risk Factors as previously reported in the Registrant's Form 10-K in response to Item 1A. in Part 1 of Form 10-K. There have been no material changes Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds: Not applicable Item 3. - Defaults Upon Senior Securities: Not applicable Item 4 - Submission of Matters to Vote of Security Holders: Not applicable Item 5. - Other Information: (a) Not applicable (b) We have no standing Nominating Committee of the Board of Directors. All members of the Board participate in the consideration of nominees to the Board. Item 6. - Exhibits: 31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley 31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the Undersigned there unto duly authorized. OCEAN BIO-CHEM, INC. Date: November 10, 2006 /s/ Peter G. Dornau Peter G. Dornau Chairman of the Board of Directors and Chief Executive Officer /s/ Edward Anchel Edward Anchel Chief Financial Officer 18 Exhibit 31.1 CERTIFICATION I, Peter G. Dornau certify that: 1. I have reviewed this Form 10-Q of Ocean Bio-Chem, Inc. as of and for the period ended September 30, 2006; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 10, 2006 /s/ Peter G. Dornau Peter G. Dornau Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION I, Edward Anchel certify that: 1. I have reviewed this Form 10-Q of Ocean Bio-Chem, Inc. as of and for the period ended September 30, 2006; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 10, 2006 /s/ Edward Anchel Edward Anchel Chief Financial Officer Exhibit 32.1 CERTIFICATION Pursuant to 18U.S.C.Section 1350, the undersigned officers of Ocean Bio-Chem, Inc. (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Dated: November 10, 2006 /s/ Peter G. Dornau Peter G. Dornau Chairman of the Board of Directors and Chief Executive Officer /s/ Edward Anchel Edward Anchel Chief Financial Officer