10-Q 1 f10q0619_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 June 30, 2019

 

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 August 13, 2019, 9,370,119 shares of the registrant’s Common Stock were outstanding.

 

 

 

 

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

    Page
PART I Financial Information: 1
     
Item 1. Financial Statements 1
     
  Condensed consolidated balance sheets at June 30, 2019 (unaudited) and December 31, 2018 1
     
  Condensed consolidated statements of operations (unaudited) for the three and six months ended June 30, 2019 and 2018 2
     
  Condensed consolidated statements of comprehensive income (unaudited) for the three and six months ended June 30, 2019 and 2018 3
     
  Condensed consolidated statements of shareholders’ equity (unaudited) for the three and six months ended June 30, 2019 and 2018 4-5
     
  Condensed consolidated statements of cash flows (unaudited) for the six months ended June 30, 2019 and 2018 6
     
  Notes to condensed consolidated financial statements 7-15
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16-20
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
     
Item 4. Controls and Procedures 21
     
PART II Other Information:  
     
Item 1A. Risk Factors 22
     
Item 6. Exhibits 22
     
  Signatures 23

  

i

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,
2019		   December 31, 2018 
   (UNAUDITED)     
ASSETS        
Current Assets:        
Cash  $1,111,427   $1,401,047 
Trade accounts receivable less allowances of approximately $156,000 and $171,000, respectively   8,554,453    5,658,686 
Receivables due from affiliated companies   939,751    1,045,990 
Restricted cash   2,175,963    2,332,877 
Inventories, net   11,682,975    12,085,813 
Prepaid expenses and other current assets   820,280    1,010,641 
Total Current Assets   25,284,849    23,535,054 
           
Property, plant and equipment, net   9,587,836    9,649,237 
Operating lease – right to use   392,695    --- 
Intangible assets, net   1,923,253    2,050,212 
Total Assets  $37,188,633   $35,234,503 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities:          
Current portion of long-term debt, net  $435,115   $425,663 
Revolving line of credit   400,000    --- 
Current portion of operating lease liability   81,759    --- 
Accounts payable - trade   1,480,557    1,472,230 
Accrued expenses payable   1,146,733    1,108,905 
Total Current Liabilities   3,544,164    3,006,798 
           
Deferred tax liability   304,408    280,349 
Operating lease liability, less current portion   310,936    --- 
Long-term debt, less current portion and debt issuance costs   4,309,401    4,514,105 
Total Liabilities   8,468,909    7,801,252 
           
COMMITMENTS AND CONTINGENCIES          
Shareholders’ Equity:          
Common stock - $.01 par value, 12,000,000 shares authorized; 9,370,119 shares and 9,338,191 shares issued, respectively   93,701    93,382 
Additional paid in capital   10,262,567    10,235,827 
Accumulated other comprehensive loss   (293,724)   (295,734)
Retained earnings   18,657,180    17,399,776 
Total Shareholders’ Equity   28,719,724    27,433,251 
           
Total Liabilities and Shareholders’ Equity  $37,188,633   $35,234,503 

 

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   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
                 
Net sales  $10,944,697   $11,398,539   $20,025,814   $19,782,752 
                     
Cost of goods sold   6,427,584    6,744,504    12,087,722    12,150,621 
                     
Gross profit   4,517,113    4,654,035    7,938,092    7,632,131 
                     
Operating Expenses:                    
Advertising and promotion   975,361    893,744    1,741,671    1,645,144 
Selling and administrative   2,212,216    2,289,070    3,912,609    3,843,847 
Total operating expenses   3,187,577    3,182,814    5,654,280    5,488,991 
                     
Operating income   1,329,536    1,471,221    2,283,812    2,143,140 
                     
Other expense                    
Interest, net (expense)   (35,410)   (33,670)   (65,237)   (26,284)
                     
Income before income taxes   1,294,126    1,437,551    2,218,575    2,116,856 
                     
Provision for income taxes   (284,558)   (316,200)   (493,837)   (472,125)
                     
Net income  $1,009,568   $1,121,351   $1,724,738   $1,644,731 
                     
Earnings per common share – basic and diluted  $0.11   $0.12   $0.18   $0.18 
                     
Dividends declared per common share  $0.00   $0.00   $0.05   $0.06 

 

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   Six Months Ended 
   June 30,   June 30, 
   2019   2018   2019   2018 
                 
Net income  $1,009,568   $1,121,351   $1,724,738   $1,644,731 
Foreign currency translation adjustment   513    (378)   2,010    (3,844)
                     
Comprehensive income  $1,010,081   $1,120,973   $1,726,748   $1,640,887 

 

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 JUNE 30, 2019 AND 2018

(UNAUDITED)

 

       Additional   Accumulated Other         
   Common Stock   Paid In   Comprehensive   Retained     
   Shares   Amount   Capital   Loss   Earnings   Total 
                         
March 31, 2019   9,366,119   $93,661   $10,249,347   $(294,237)  $17,647,612   $27,696,383 
                               
Net income   -    -    -    -    1,009,568    1,009,568 
                               
Stock based compensation   4,000    40    13,220    -    -    13,260 
                               
Foreign currency translation adjustment   -    -    -    513    -    513 
                               
June 30, 2019   9,370,119   $93,701   $10,262,567   $(293,724)  $18,657,180   $28,719,724 

 

       Additional   Accumulated Other         
   Common Stock   Paid In   Comprehensive   Retained     
   Shares   Amount   Capital   Loss   Earnings   Total 
                         
March 31, 2018   9,254,580   $92,546   $9,931,634   $(291,517)  $15,127,907   $24,860,570 
                               
Net income   -    -    -    -    1,121,351    1,121,351 
                               
Stock based compensation   4,000    40    13,830    -    -    13,870 
                               
Foreign currency translation adjustment   -    -    -    (378)   -    (378)
                               
June 30, 2018   9,258,580   $92,586   $9,945,464   $(291,895)  $16,249,258   $25,995,413 

 

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

 

4

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(UNAUDITED)

 

       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   -    -    -    -    1,724,738    1,724,738 
                               
Dividends, common stock   -    -    -    -    (468,306)   (468,306)
                               
Options exercised   27,928    279    13,520    -    -    13,799 
Stock based compensation   4,000    40    13,220    -    -    13,260 
                               
Cumulative effect adjustment on adoption of ASU 2016-02 Leases (Topic 842)   -    -    -    -    972    972 
                               
Foreign currency translation adjustment   -    -    -    2,010    -    2,010 
                               
June 30, 2019   9,370,119   $93,701   $10,262,567   $(293,724)  $18,657,180   $28,719,724 

 

       Additional   Accumulated Other         
   Common Stock   Paid In   Comprehensive   Retained     
   Shares   Amount   Capital   Loss   Earnings   Total 
                         
December 31, 2017   9,254,580   $92,546   $9,931,634   $(288,051)  $15,159,802   $24,895,931 
                               
Net income   -    -    -    -    1,644,731    1,644,731 
                               
Dividends, common stock   -    -    -    -    (555,275)   (555,275)
                               
Stock based compensation   4.000    40    13,830    -    -    13,870 
                               
Foreign currency translation adjustment   -    -    -    (3,844)   -    (3,844)
                               
June 30, 2018   9,258,580   $92,586   $9,945,464   $(291,895)  $16,249,258   $25,995,413 

 

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

 

5

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended 
   June 30, 
   2019   2018 
Cash flows from operating activities:        
         
Net income  $1,724,738   $1,644,731 
Adjustments to reconcile net income to net cash provided by (used in) provided by operating activities:          
           
Depreciation and amortization   646,105    522,513 
Deferred income taxes   24,059    126,918 
Stock based compensation   13,260    13,870 
Provision for bad debts   942    74,872 
Other operating non-cash items   1,151    246 
           
Changes in assets and liabilities:          
           
Trade accounts receivable   (2,896,709)   (4,182,717)
Receivables due from affiliated companies   106,239    696,684 
Inventories   402,838    (1,063,096)
Prepaid expenses and other current assets   190,361    (105,370)
Accounts payable – trade   8,327    738,441 
Accrued expenses payable   37,828    557,793 
Net cash provided by (used in) provided by operating activities   259,139    (975,115)
           
Cash flows from investing activities:          
Purchases of property, plant and equipment   (429,264)   (916,096)
Net cash used in investing activities   (429,264)   (916,096)
           
Cash flows from financing activities:          
Payments on long-term debt   (222,761)   (130,629)
Borrowings on revolving line of credit   1,000,000    1,100,000 
Repayments on revolving line of credit   (600,000)   - 
Dividends paid to common shareholders   (468,306)   (555,275)
Proceeds from exercise of stock options   13,799    - 

Net cash (used in) provided by financing activities

   (277,268)   414,096 
           
Effect of exchange rate on cash and restricted cash   859    (398)
           
Net decrease in cash and restricted cash   (446,534)   (1,477,513)
           
Cash and restricted cash at beginning of period   3,733,924    5,165,844 
Cash and restricted cash at end of period  $3,287,390   $3,688,331 
           
Supplemental disclosure of cash flow information:          
Cash paid for interest during period  $80,594   $35,987 
Cash paid for income taxes during period  $411,009   $364,000 
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   $- 
Cash paid under operating lease  $47,400   $47,400 
           
Cash  $1,111,427   $922,985 
Restricted cash   2,175,963    2,765,346 
Total cash and restricted cash  $3,287,390   $3,688,331 

 

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

 

6

 

 

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.SUMMARY OF ACCOUNTING POLICIES

 

Interim reporting

 

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

 

The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission Regulation S-X.  Accordingly, they do not include all 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 and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.

 

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, 2018.

 

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 February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842).” Under this new guidance, lessees (including lessees under leases classified as finance leases, which are to be classified based on criteria similar to that applicable to capital leases under the previous guidance, and leases classified as operating leases) recognize a right-to-use asset and a lease liability on the balance sheet, initially measured as the present value of lease payments under the lease. Under previous guidance, operating leases were not recognized on the balance sheet. The Company adopted ASU 2016-02 on January 1, 2019 utilizing a modified retrospective method, under which the Company recorded an immaterial cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods. As a result, the Company’s balance sheet presentation at June 30, 2019 is not comparable to the presentation at December 31, 2018.  The adoption of ASU 2016-02 resulted in the recognition of approximately $432,000 as an operating lease right to use asset and a corresponding operating lease liability, and the reclassification of office equipment with a net book value of approximately $27,000 to a finance lease – right to use asset within property, plant and equipment.

 

As permitted under the new guidance, the Company has made an accounting policy election not to apply the recognition provisions of the new guidance to short term leases (leases with a lease term of 12 months or less that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise); instead, the Company will recognize the lease payments for short term leases on a straight-line basis over the lease term. The Company did not have any short term leases at June 30, 2019.

 

Accounting Guidance Not Yet 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. Early adoption is permitted as of January 1, 2019. The Company is currently evaluating the impact the adoption of this new standard will have on the Company’s financial statements.

 

7

 

 

3.INVENTORIES

 

The Company’s inventories at June 30, 2019 and December 31, 2018 consisted of the following:

 

  

June 30,

2019

  

December 31,

2018

 
Raw materials  $4,223,671   $4,320,131 
Finished goods   7,743,413    8,049,791 
Inventories, gross   11,967,084    12,369,922 
           
Inventory reserves   (284,109)   (284,109)
           
Inventories, net  $11,682,975   $12,085,813 

 

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 $430,000 and $495,000 at June 30, 2019 and December 31, 2018, respectively.

 

4.PROPERTY, PLANT & EQUIPMENT

 

The Company’s property, plant and equipment at June 30, 2019 and December 31, 2018 consisted of the following:

 

  

Estimated

Useful Life

  June 30,
2019		  

December 31,

2018

 
            
Land     $278,325   $278,325 
Building and Improvements  30 years   9,565,791    9,548,922 
Manufacturing and warehouse equipment  6-20 years   11,085,125    10,736,161 
Office equipment and furniture  3-5 years   1,804,159    1,838,360 
Leasehold improvements  10-15 years   577,068    577,068 
Finance leases – right to use  5 years   45,951    - 
Vehicles  3 years   10,020    10,020 
Construction in process      87,871    80,682 
Property, plant and equipment, gross      23,454,310    23,069,538 
              
Less accumulated depreciation      (13,866,474)   (13,420,301)
              
Property, plant and equipment, net     $9,587,836   $9,649,237 

 

The Company is engaged in a project involving the expansion of the manufacturing, warehouse and distribution facilities of the Company’s wholly-owned subsidiary, KINPAK Inc. (“Kinpak”) in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). As of June 30, 2019, the remaining work on the Expansion Project involves the purchase and installation of additional equipment. At June 30, 2019, the Company’s expenditures on the Expansion Project aggregated approximately $6.1 million. The total cost of the Expansion Project is estimated to be approximately $6.7 million. Construction in progress at June 30, 2019 and December 31, 2018 includes $43,201 and $46,996, respectively, relating to the expansion of Kinpak’s manufacturing, warehouse and distribution facilities.

 

8

 

 

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 the three months ended June 30, 2019 was approximately $25,000, compared to rent expense of approximately $25,000 for the three months ended June 30, 2018. Operating lease expense for the six months ended June 30, 2019 was approximately $50,000, compared to rent expense of approximately $49,000 for the six months ended June 30, 2019. At June 30, 2019, the Company has a right to use asset and a corresponding liability of $392,695 related to the operating lease. Set forth below is a schedule of future minimum rent payments under the operating lease.

 

Twelve month period ending June 30,
2020  $94,800 
2021   94,800 
2022   94,800 
2023   94,800 
2024   47,400 
Total future minimum lease payments   426,600 
Less imputed interest   (33,905)
Total operating lease liability  $392,695 

 

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 and six months ended June 30, 2019 are set forth below.

 

   Three
Months
Ended
June 30,
2019		   Six Months Ended
June 30,
2019		 
Operating lease expense  $25,000   $50,000 
Finance lease amortization   6,345    11,345 
Finance lease interest   300    505 
Total lease expense  $31,645   $61,850 

 

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 June 30, 2019 are set forth below:

 

   June 30,
2019		 
Remaining lease term – operating lease   4.50 years 
Weighted average remaining lease term – finance  leases   2.66 years 
Discount rate – operating lease   3.7%
Weighted average discount rate – finance leases   2.7%

 

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6.INTANGIBLE ASSETS

 

The Company’s intangible assets at June 30, 2019 and December 31, 2018 consisted of the following:

 

June 30, 2019

 

Intangible Assets  Cost   Accumulated
Amortization		   Net 
Patents  $622,733   $466,140   $156,593 
Trade names and trademarks   1,649,880    574,418    1,075,462 
Customer list   525,663    100,752    424,911 
Product formulas   262,832    50,377    212,455 
Royalty rights   160,000    106,168    53,832 
Total intangible assets  $3,221,108   $1,297,855   $1,923,253 

 

December 31, 2018 

 

Intangible Assets  Cost   Accumulated
Amortization		   Net 
Patents  $622,733   $439,972   $182,761 
Trade names and trademarks   1,649,880    561,449    1,088,431 
Customer list   525,663    48,186    477,477 
Product formulas   262,832    24,093    238,739 
Royalty rights   160,000    97,196    62,804 
Total intangible assets  $3,221,108   $1,170,896   $2,050,212 

 

Amortization expense related to intangible assets was $63,479 and $17,570 for the three months ended June 30, 2019 and 2018, respectively, and $126,959 and $35,140 for the six months ended June 30, 2019 and 2018, 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.

 

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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 June 30, 2019, 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.

 

At June 30, 2019 and December 31, 2018, the Company had $400,000 and no borrowings, respectively, 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 June 30, 2019, the Company was in compliance with these financial covenants.

 

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Through June 30, 2019, of the $4,500,000 proceeds of the Bond sale, approximately $2,343,000 has been applied to reimburse Kinpak for Expansion Project expenditures and approximately $54,000 was paid directly to other parties for certain transaction costs. The remaining amount is held in a custodial account and may be drawn by Kinpak from time to time to fund additional expenditures related to the Expansion Project. Because the Lease contains limitations on the manner in which Kinpak may utilize funds held in the custodial account, such funds are classified as restricted cash on the Company’s balance sheets.

 

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.

 

At June 30, 2019 and December 31, 2018, the Company was obligated under lease agreements covering equipment utilized in the Company’s operations.  The equipment leases, aggregating approximately $38,000 and $31,000 at June 30, 2019 and December 31, 2018, 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 six months ended June 30, 2019 and 2018, the Company paid approximately $11,850 ($11,345 principal and $505 interest) and $11,667 ($11,179 principal and $488 interest), respectively, under the lease agreements.

 

The following table provides information regarding the Company’s long-term debt at June 30, 2019 and December 31, 2018:

 

   Current Portion   Long Term Portion 
   June 30,
2019		   December 31,
2018		   June 30,
2019		   December 31,
2018		 
Obligations related to industrial development bond financing  $251,521   $247,985   $3,847,516   $3,974,256 
Note payable related to Snappy Marine asset acquisition   180,267    177,701    589,495    680,274 
Equipment leases   22,943    19,593    14,603    11,596 
Total principal of long term debt   454,731    445,279    4,451,614    4,666,126 
Debt issuance costs   (19,616)   (19,616)   (142,213)   (152,021)
Total long term debt  $435,115   $425,663   $4,309,401   $4,514,105 

 

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

 

Twelve month period ending June 30,    
2020  $454,731 
2021   450,257 
2022   462,310 
2023   476,446 
2024   304,303 
Thereafter   2,758,298 
Total  $4,906,345 

 

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9.RELATED PARTY TRANSACTIONS

 

During the three and six months ended June 30, 2019 and 2018, the Company sold 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 $502,000 and $369,000 for the three months ended June 30, 2019 and 2018, respectively, and approximately $1,254,000 and $1,189,000 for the six months ended June 30, 2019 and 2018, respectively. Fees for administrative services aggregated approximately $215,000 and $227,000 for the three months ended June 30, 2019 and 2018, respectively, and approximately $370,000 and $376,000 for the six months ended June 30, 2019 and 2018, respectively. Amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $25,000 and $24,000 during the three months ended June 30, 2019 and 2018, respectively, and approximately $57,000 and $53,000 during the six months ended June 30, 2019 and 2018, respectively.  The Company had accounts receivable from the affiliated companies in connection with the product sales, administrative services and business related expenditures aggregating approximately $940,000 and $1,046,000 at June 30, 2019 and December 31, 2018, 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 $14,000 ($10,500 for research and development services and $3,500 for charter boat services that the Company used to provide sales incentives for external sales representatives) and $37,500 ($10,500 for research and development services, $6,000 for charter boat services that the Company used to provide sales incentives for external sales representatives, and $21,000 for the production of television commercials) for the three months ended June 30, 2019 and 2018, respectively, and $41,000 ($21,000 for research and development services and $20,000 for charter boat services that the Company used to provide sales incentives for external sales representatives) and $52,500 ($21,000 for research and development services, $10,500 for charter boat services that the Company used to provide sales incentives for external sales representatives, and $21,000 for the production of television commercials) for the six months ended June 30, 2019 and 2018, 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 expenditures made in the 2018 period for the production of television commercials were included in the consolidated statements of operations within advertising and promotion expenses over a twelve month period ending on March 31, 2019.

 

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 June 30, 2019 and 2018, the Company paid an aggregate of approximately $275,000 and $261,000, respectively, and during in the six months ended June 30, 2019 and 2018, the Company paid an aggregate of approximately $500,000 and $449,000, respectively in insurance premiums on policies obtained through the insurance broker.

 

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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
June 30,		   Six Months Ended
June 30,		 
   2019   2018   2019   2018 
Earnings per common share – Basic                
                 
Net income  $1,009,568   $1,121,351   $1,724,738   $1,644,731 
                     
Weighted average number of common shares outstanding   9,367,350    9,256,206    9,365,370    9,255,398 
                     
Earnings per common share – Basic  $0.11   $0.12   $0.18   $0.18 
                     
Earnings per common share – Diluted                    
                     
Net income  $1,009,568   $1,121,351   $1,724,738   $1,644,731 
                     
Weighted average number of common shares outstanding   9,367,350    9,256,206    9,365,370    9,255,398 
                     
Dilutive effect of outstanding stock options   7,157    40,483    9,069    41,638 
                     
Weighted average number of common shares outstanding - Diluted   9,374,507    9,296,689    9,374,439    9,297,036 
                     
Earnings per common share – Diluted  $0.11   $0.12   $0.18   $0.18 

 

The Company had no stock options outstanding during each of the three and six month periods ended June 30, 2019 and 2018, 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

 

Stock compensation expense during the three and six months ended June 30, 2019 and 2018 was $13,260 and $13,870, respectively, all of which relates to the shares of Company common stock issued to the Company’s non-employee directors as part of their compensation for service on the Board of Directors. At June 30, 2019, there was no unrecognized compensation expense related to stock options.

 

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 that remained outstanding at June 30, 2019. The stock options expire on April 25, 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.

 

On March 19, 2018, the Company’s Board of Directors declared a special cash dividend of $0.06 per common share payable on April 16, 2018 to all shareholders of record on April 2, 2018.  There were 9,254,580 shares of common stock outstanding on April 2, 2018; therefore, dividends aggregating $555,275 were paid on April 16, 2018.

 

13.CUSTOMER CONCENTRATION

 

During the three months ended June 30, 2019 and 2018, the Company had net sales to each of three customers that constituted in excess of 10% of its net sales. Net sales to these three customers respectively represented approximately 51.0% (20.4%, 17.5%, and 13.1%) and 50.5% (26.0%, 14.3%, 10.2%) of the Company’s net sales, respectively, for the three months ending June 30, 2019 and 2018. During the six months ended June 30, 2019 and 2018 these customers respectively represented approximately 47.5% (22.8%, 13.2%, and 11.5%) and 43.6% (24.3%, 10.8%, and 8.5%) of the Company’s net sales. At June 30, 2019, three customers constituted in excess of 10% of the Company’s gross trade accounts receivable and at December 31, 2018 two customers constituted in excess of 10% of the Company’s gross trade accounts receivable. The gross trade accounts receivable balances for these customers represented approximately 70.4% (28.1%, 24.7%, and 17.6%) of the Company’s gross trade accounts receivable at June 30, 2019. One of the three customers and another customer accounted for 41.0% (25.2% and 15.8%) of the Company’s gross trade accounts receivable at December 31, 2018.

 

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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, estimated costs of an expansion project with respect to facilities operated by our wholly-owned subsidiary, KINPAK Inc. (“Kinpak”), 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 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, 2018.

 

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.

 

We have been engaged in a project involving the expansion of Kinpak’s manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). The remaining work on the Expansion Project involves the purchase and installation of additional equipment. We are conducting operations in the expanded facilities. At June 30, 2019, we have spent an aggregate of approximately $6.1 million, and the total cost of the project is estimated to be approximately $6.7 million.

 

We have enhanced our manufacturing efficiencies at Kinpak, with an additional new high speed filling line which allowed us to reduce man power accordingly. This improvement became effective in late July of 2019.

 

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, 2018 for information regarding our critical accounting estimates.

 

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Results of Operations:

 

Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

 

The following table provides a summary of our financial results for the three months ended June 30, 2019 and 2018:

 

   For The Three Months Ended
June 30,		 
           Percent   Percentage of Net Sales 
   2019   2018   Change   2019   2018 
Net sales  $10,944,697   $11,398,539    (4.0)%   100.0%   100.0%
Cost of goods sold   6,427,584    6,744,504    (4.7)%   58.7%   59.2%
Gross profit   4,517,113    4,654,035    (2.9)%   41.3%   40.8%
Advertising and promotion   975,361    893,744    9.1%   8.9%   7.8%
Selling and administrative   2,212,216    2,289,070    (3.4)%   20.2%   20.1%
Operating income   1,329,536    1,471,221    (9.6)%   12.1%   12.9%
Interest, net (expense)   (35,410)   (33,670)   5.2%   0.3%   0.3%
Provision for income taxes   (284,558)   (316,200)   (10.0)%   2.6%   2.8%
Net income  $1,009,568   $1,121,351    (10.0)%   9.2%   9.8%

 

Net sales for the three months ended June 30, 2019 decreased by approximately $454,000, or 4.0%, as compared to the three months ended June 30, 2018. We believe the decrease in net sales principally reflects adverse weather conditions in some regions of the United States, which curtailed boating activity in those regions.

 

Cost of goods sold decreased by approximately $317,000, or 4.7%, during the three months ended June 30, 2019, as compared to the three months ended June 30, 2018.  The decrease in cost of goods sold is primarily a result of lower sales volume.

 

Gross profit decreased by approximately $137,000 for the three months ended June 30, 2019, as compared to the three months ended June 30, 2019. Gross profit decreased due to our lower sales volume, partially offset by a more favorable sales mix. As a percentage of net sales, gross profit was approximately 41.3% and 40.8% for the three month periods ended June 30, 2019 and 2018, respectively.

 

Advertising and promotion expenses increased by approximately $82,000, or 9.1%, during the three months ended June 30, 2019, as compared to the three months ended June 30, 2018.    The increase in advertising and promotional expenses is primarily a result of increased internet advertising and increased cooperative advertising with certain key customers, partially offset by lower magazine advertising expenses. As a percentage of net sales, advertising and promotion expenses increased to 8.9% for the three months ended June 30, 2019, from 7.8% for the three months ended June 30, 2018.  

 

Selling and administrative expenses decreased by approximately $77,000, or 3.4%, during the three months ending June 30, 2019, as compared to the three months ended June 30, 2018. The decrease in selling and administrative expenses is principally a result of lower sales commissions due to decreased sales and a decreased proportion of sales to accounts for which we utilize external sales representatives, as well as lower employee compensation and a decrease in our provision for bad debts, partially offset by an increase in amortization expense related to intangible assets acquired from Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018. As a percentage of net sales, selling and administrative expenses increased to 20.2% for the three months ended June 30, 2019, from 20.1% for the three months ended June 30, 2018. 

 

Interest, net (expense) for the three months ended June 30, 2019 increased by approximately $2,000 or 5.2%, as compared to the three months ended June 30, 2018.

 

Provision for income taxes for the three months ended June 30, 2019 was approximately $284,000, or 22.0% of our pretax income. For the three months ended June 30, 2018 the provision was approximately $316,000, or 22.0% of pretax income.  

 

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Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

 

The following table provides a summary of our financial results for the six months ended June 30, 2019 and 2018:

 

   For The Six Months Ended
June 30,		 
           Percent   Percentage of Net Sales 
   2019   2018   Change   2019   2018 
Net sales  $20,025,814   $19,782,752    1.2%   100.0%   100.0%
Cost of goods sold   12,087,722    12,150,621    (0.5)%   60.4%   61.4%
Gross profit   7,938,092    7,632,131    4.0%   39.6%   38.6%
Advertising and promotion   1,741,671    1,645,144    5.9%   8.7%   8.3%
Selling and administrative   3,912,609    3,843,847    1.8%   19.5%   19.4%
Operating income   2,283,812    2,143,140    6.6%   11.4%   10.8%
Interest, net (expense)   (65,237)   (26,284)   148.2%   0.3%   0.1%
Provision for income taxes   (493,837)   (472,125)   4.6%   2.5%   2.4%
Net income  $1,724,738   $1,644,731    4.9%   8.6%   8.3%

 

Net sales for the six months ended June 30, 2019 increased by approximately $243,062, or 1.2%, as compared to the six months ended June 30, 2018. The increase primarily reflects higher sales of Star brite® branded products to large national retailers, partially offset by decreased sales of the Company’s lower margin products.

 

Cost of goods sold decreased by approximately $63,000, or 0.5%, during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018, reflecting the more favorable sales mix described above.

 

Gross profit increased by approximately $306,000, or 4.0%, during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. Gross profit increased due to higher sales volume and a more favorable product mix. As a percentage of net sales, gross profit was approximately 39.6% and 38.6% for the six month periods ended June 30, 2019 and 2018, respectively. 

 

Advertising and promotion expenses increased by approximately $97,000, or 5.9%, during the six months ended June 30, 2019, as compared to the six months ended June 30, 2018. The increase is principally a result of increased internet advertising, marketing expenses, and cooperative advertising with certain key customers, partially offset by lower magazine advertising expenses. As a percentage of net sales, advertising and promotion expenses increased to approximately 8.7% for the six months ended June 30, 2019, from 8.3% for the six months ended June 30, 2018.

 

Selling and administrative expenses increased by approximately $69,000, or 1.8%, during the six months ended June 30, 2019, as compared to the six months ended June 30, 2018. The increase in selling and administrative expenses is principally a result of increased employee payroll and benefits, professional services for information technology and an increase in amortization expense related to intangible assets we acquired from Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018, partially offset by a decrease in the Company’s provision for bad debts. As a percentage of net sales, selling and administrative expenses increased to 19.5% for the six months ended June 30, 2019, from 19.4% for the six months ended June 30, 2018. 

 

Interest, net (expense) – Interest expense for the six months ended June 30, 2019 increased by approximately $39,000, as compared to the six months ended June 30, 2018. The increase principally results from interest incurred with respect to our obligations under the industrial development bond financing relating to the Expansion Project. Because construction was ongoing during the three months ended March 31, 2018, interest related to the industrial development bond financing was capitalized rather than charged to interest expense.

 

Provision for income taxes – Our income tax provision for the six months ended June 30, 2019 was approximately $494,000, or 22.3% of our pretax income, compared to approximately $472,000, or 22.3% of pretax income, for the six months ended June 30, 2018.

 

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Liquidity and capital resources:

 

Our cash balance was approximately $1,111,000 at June 30, 2019 and approximately $1,401,000 at December 31, 2018. In addition, we had restricted cash of approximately $2,176,000 at June 30, 2019 and $2,333,000 at December 31, 2018. 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 six months ended June 30, 2019 and 2018:

 

  

Six Months Ended

June 30,

 
   2019   2018 
Net cash  provided by (used in) operating activities  $259,139   $(975,115)
Net cash used in investing activities   (429,264)   (916,096)
Net cash (used in) provided by financing activities   (277,268)   414,096 
Effect of exchange rate fluctuations on cash   859    (398)
Net decrease  in cash and restricted cash  $(446,534)  $(1,477,513)

 

Net cash provided by operating activities for the six months ended June 30, 2019 was approximately $259,000, and net cash used in operating activities was approximately $975,000 for the six months ended June 30, 2018. The change is due principally to a lower increase in trade accounts receivable during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. In addition, during the six months ended June 30, 2019 inventories decreased while inventories increased during the six months ended June 30, 2018. The changes to trade accounts receivable and inventories were partially offset by other changes in working capital.

 

Net trade accounts receivable at June 30, 2019 aggregated approximately $8,554,000, an increase of approximately $2,895,000, or 51.2%, as compared to approximately $5,659,000 in net trade accounts receivable outstanding at December 31, 2018.  The increase principally reflects the timing of payments in accordance with applicable payment terms. Receivables due from affiliated companies aggregated approximately $940,000 at June 30, 2019, a decrease of approximately $106,000, or 10.1%, from receivables due from affiliated companies of approximately $1,046,000 at December 31, 2018.

 

Inventories, net were approximately $11,683,000 and $12,086,000 at June 30, 2019 and December 31, 2018, respectively, representing a decrease in inventories, net of approximately $403,000, or 3.3%, during the six months ended June 30, 2019.

 

Net cash used in investing activities for the six months ended June 30, 2019 decreased by approximately $487,000 or 53.1%, as compared to the six months ended June 30, 2018. The decrease reflects a lower amount of expenditures on the Expansion Project, as most of the work on the project is completed. See “Overview” above for additional information.

 

Net cash used in financing activities for the six months ended June 30, 2019 was approximately $277,000, while net cash provided by financing activities during the six months ended June 30, 2018 was approximately $414,000. The principal reason for the change is that net borrowings on the credit line were $700,000 lower for the six months June 30, 2019 as compared to the six months ended June 30, 2018. The increase in cash used during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 is also a result of higher debt payments, partially offset by a lower dividend payment and proceeds from the exercise of stock options.

 

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 June 30, 2019 and December 31, 2018, we had outstanding balances of approximately $4,099,000 and $4,222,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and $400,000 and no borrowings under our revolving credit facility, respectively.

 

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 June 30, 2019, 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.

 

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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. As of June 30, 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). As of June 30, 2019, we had an outstanding balance of $816,666 under the promissory note (including $769,762 recorded as principal and $46,904 to be recorded as interest expense over the remaining term of the note). We also obtained financing through leases for office equipment, totaling approximately $38,000 and $31,000 at June 30, 2019 and December 31, 2018, 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 six months ended June 30, 2019, we recorded $2,010 in foreign currency translation adjustments (increasing shareholders’ equity by $2,010).

 

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

 

In addition to the information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect the Company’s business, financial condition or future results. 

 

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 June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018; (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 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: August 14, 2019 /s/ Peter G. Dornau
  Peter G. Dornau
  Chairman of the Board, President and
  Chief Executive Officer
   
Dated: August 14, 2019 /s/ Jeffrey S. Barocas
  Jeffrey S. Barocas
  Vice President and
  Chief Financial Officer

  

 

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