Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - OCEAN BIO CHEM INC | f10q0920ex32-2_oceanbiochem.htm |
| EX-32.1 - CERTIFICATION - OCEAN BIO CHEM INC | f10q0920ex32-1_oceanbiochem.htm |
| EX-31.2 - CERTIFICATION - OCEAN BIO CHEM INC | f10q0920ex31-2_oceanbiochem.htm |
| EX-31.1 - CERTIFICATION - OCEAN BIO CHEM INC | f10q0920ex31-1_oceanbiochem.htm |
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 September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-11102
OCEAN BIO-CHEM, INC.
(Exact name of registrant as specified in its charter)
| Florida | 59-1564329 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 4041 SW 47 Avenue, Fort Lauderdale, Florida | 33314 | |
| (Address of principal executive offices) | (Zip Code) |
954-587-6280
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock, $0.01 par value | OBC1 | The NASDAQ Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
At November 12, 2020, 9,462,105 shares of the registrant’s Common Stock were outstanding.
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
i
PART 1 - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 6,581,944 | $ | 6,125,322 | ||||
| Trade accounts receivable less allowances of approximately $345,000 and $162,000, respectively | 16,262,414 | 7,132,256 | ||||||
| Receivables due from affiliated companies | 1,107,994 | 962,154 | ||||||
| Insurance claim receivable | - | 50,520 | ||||||
| Restricted cash | 739,036 | 1,885,098 | ||||||
| Inventories, net | 12,320,830 | 9,555,071 | ||||||
| Prepaid expenses and other current assets | 978,806 | 935,022 | ||||||
| Total Current Assets | 37,991,024 | 26,645,443 | ||||||
| Property, plant and equipment, net | 10,091,375 | 9,338,227 | ||||||
| Operating lease – right to use | 290,024 | 352,190 | ||||||
| Intangible assets, net | 1,736,461 | 1,949,947 | ||||||
| Total Assets | $ | 50,108,884 | $ | 38,285,807 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt, net | $ | 501,161 | $ | 483,477 | ||||
| Current portion of operating lease liability | 85,590 | 83,270 | ||||||
| Accounts payable - trade | 3,757,132 | 1,047,385 | ||||||
| Income taxes payable | 311,428 | 44,026 | ||||||
| Accrued expenses payable | 2,051,931 | 1,170,912 | ||||||
| Total Current Liabilities | 6,707,242 | 2,829,070 | ||||||
| Deferred tax liability | 399,751 | 311,374 | ||||||
| Operating lease liability, less current portion | 204,434 | 268,920 | ||||||
| Long-term debt, less current portion and debt issuance costs | 3,853,630 | 4,142,179 | ||||||
| Total Liabilities | 11,165,057 | 7,551,543 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock - $.01 par value, 12,000,000 shares authorized; 9,462,105 and 9,442,809 shares issued and outstanding | 94,621 | 94,428 | ||||||
| Additional paid in capital | 10,545,898 | 10,503,171 | ||||||
| Accumulated other comprehensive loss | (296,154 | ) | (294,491 | ) | ||||
| Retained earnings | 28,599,462 | 20,431,156 | ||||||
| Total Shareholders’ Equity | 38,943,827 | 30,734,264 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 50,108,884 | $ | 38,285,807 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net sales | $ | 19,161,372 | $ | 12,502,782 | $ | 42,682,497 | $ | 32,528,596 | ||||||||
| Cost of goods sold | 10,414,131 | 8,096,637 | 23,085,473 | 20,184,359 | ||||||||||||
| Gross profit | 8,747,241 | 4,406,145 | 19,597,024 | 12,344,237 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Advertising and promotion | 723,446 | 782,158 | 2,265,382 | 2,523,829 | ||||||||||||
| Selling and administrative | 2,030,787 | 2,149,333 | 6,242,862 | 6,061,942 | ||||||||||||
| Total operating expenses | 2,754,233 | 2,931,491 | 8,508,244 | 8,585,771 | ||||||||||||
| Operating income | 5,993,008 | 1,474,654 | 11,088,780 | 3,758,466 | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest (expense), net | (39,615 | ) | (31,186 | ) | (93,695 | ) | (96,423 | ) | ||||||||
| Gain on insurance settlement | - | - | 126,210 | - | ||||||||||||
| Income before income taxes | 5,953,393 | 1,443,468 | 11,121,295 | 3,662,043 | ||||||||||||
| Provision for income taxes | (1,296,563 | ) | (318,813 | ) | (2,385,263 | ) | (812,650 | ) | ||||||||
| Net income | $ | 4,656,830 | $ | 1,124,655 | $ | 8,736,032 | $ | 2,849,393 | ||||||||
| Earnings per common share – basic | $ | 0.49 | $ | 0.12 | $ | 0.92 | $ | 0.30 | ||||||||
| Earnings per common share – diluted | $ | 0.49 | $ | 0.12 | $ | 0.92 | $ | 0.30 | ||||||||
| Dividends declared per common share | $ | 0.02 | $ | 0.00 | $ | 0.06 | $ | 0.05 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income | $ | 4,656,830 | $ | 1,124,655 | $ | 8,736,032 | $ | 2,849,393 | ||||||||
| Foreign currency translation adjustment | (281 | ) | (1,232 | ) | (1,663 | ) | 778 | |||||||||
| Comprehensive income | $ | 4,656,549 | $ | 1,123,423 | $ | 8,734,369 | $ | 2,850,171 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| June 30, 2020 | 9,462,105 | $ | 94,621 | $ | 10,545,898 | $ | (295,873 | ) | $ | 24,131,874 | $ | 34,476,520 | ||||||||||||
| Net income | - | - | - | - | 4,656,830 | 4,656,830 | ||||||||||||||||||
| Dividends, common stock | - | - | - | - | (189,242 | ) | (189,242 | ) | ||||||||||||||||
| Foreign currency translation adjustment | - | - | - | (281 | ) | - | (281 | ) | ||||||||||||||||
| September 30, 2020 | 9,462,105 | $ | 94,621 | $ | 10,545,898 | $ | (296,154 | ) | $ | 28,599,462 | $ | 38,943,827 | ||||||||||||
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| June 30, 2019 | 9,370,119 | $ | 93,701 | $ | 10,262,567 | $ | (293,724 | ) | $ | 18,657,180 | $ | 28,719,724 | ||||||||||||
| Net income | - | - | - | - | 1,124,655 | 1,124,655 | ||||||||||||||||||
| Stock based compensation | 79,000 | 790 | 261,490 | - | - | 262,280 | ||||||||||||||||||
| Shares withheld in consideration of employee tax obligations related to stock-based compensation | (6,310 | ) | (63 | ) | (20,886 | ) | - | - | (20,949 | ) | ||||||||||||||
| Foreign currency translation adjustment | - | - | - | (1,232 | ) | - | (1,232 | ) | ||||||||||||||||
| September 30, 2019 | 9,442,809 | $ | 94,428 | $ | 10,503,171 | $ | (294,956 | ) | $ | 19,781,835 | $ | 30,084,478 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019
(UNAUDITED)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| December 31, 2019 | 9,442,809 | $ | 94,428 | $ | 10,503,171 | $ | (294,491 | ) | $ | 20,431,156 | $ | 30,734,264 | ||||||||||||
| Net income | - | - | - | - | 8,736,032 | 8,736,032 | ||||||||||||||||||
| Dividends, common stock | - | - | - | - | (567,726 | ) | (567,726 | ) | ||||||||||||||||
| Options exercised | 15,296 | 153 | 20,547 | - | - | 20,700 | ||||||||||||||||||
| Stock based compensation | 4,000 | 40 | 22,180 | - | - | 22,220 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | (1,663 | ) | - | (1,663 | ) | ||||||||||||||||
| September 30, 2020 | 9,462,105 | $ | 94,621 | $ | 10,545,898 | $ | (296,154 | ) | $ | 28,599,462 | $ | 38,943,827 | ||||||||||||
| 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 | - | - | - | - | 2,849,393 | 2,849,393 | ||||||||||||||||||
| Dividends, common stock | - | - | - | - | (468,306 | ) | (468,306 | ) | ||||||||||||||||
| Options exercised | 27,928 | 279 | 13,520 | - | - | 13,799 | ||||||||||||||||||
| Stock based compensation | 83,000 | 830 | 274,710 | - | - | 275,540 | ||||||||||||||||||
| Shares withheld in consideration of employee tax obligations related to stock-based compensation | (6,310 | ) | (63 | ) | (20,886 | ) | - | - | (20,949 | ) | ||||||||||||||
| Cumulative effect adjustment on adoption of ASU 2016-02 Leases (Topic 842) | - | - | - | - | 972 | 972 | ||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | 778 | - | 778 | ||||||||||||||||||
| September 30, 2019 | 9,442,809 | $ | 94,428 | $ | 10,503,171 | $ | (294,956 | ) | $ | 19,781,835 | $ | 30,084,478 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 8,736,032 | $ | 2,849,393 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 1,020,179 | 967,628 | ||||||
| Deferred income taxes | 88,377 | 54,399 | ||||||
| Stock based compensation | 22,220 | 275,540 | ||||||
| Provision for bad debts | 213,398 | 32,908 | ||||||
| Provision for slow moving and obsolete inventory | 47,146 | - | ||||||
| Impairment of equipment | 65,725 | - | ||||||
| Other operating non-cash items | (1,061 | ) | (884 | ) | ||||
| Cash used related to 2019 chemical incident | (200,665 | ) | - | |||||
| Gain on insurance settlement | (126,210 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts receivable | (9,343,556 | ) | (4,628,183 | ) | ||||
| Receivables due from affiliated companies | (145,840 | ) | 195,963 | |||||
| Inventories | (2,812,905 | ) | 677,828 | |||||
| Prepaid expenses and other current assets | (43,784 | ) | (104,008 | ) | ||||
| Accounts payable – trade | 2,709,747 | 1,068,715 | ||||||
| Income taxes payable | 267,402 | 172,242 | ||||||
| Accrued expenses payable | 881,019 | 26,362 | ||||||
| Net cash provided by operating activities | 1,377,224 | 1,587,903 | ||||||
| Cash flows from investing activities: | ||||||||
| Insurance proceeds received for damaged machinery and equipment | 411,657 | - | ||||||
| Purchases of property, plant and equipment | (1,549,077 | ) | (526,775 | ) | ||||
| Net cash used in investing activities | (1,137,420 | ) | (526,775 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on long-term debt | (381,616 | ) | (335,015 | ) | ||||
| Borrowings on revolving line of credit | - | 1,000,000 | ||||||
| Repayments on revolving line of credit | - | (1,000,000 | ) | |||||
| Payments for taxes related to net share settlements of stock awards | - | (20,949 | ) | |||||
| Proceeds from CARES Act note | 1,556,800 | - | ||||||
| Repayment of CARES Act note | (1,556,800 | ) | - | |||||
| Dividends paid to common shareholders | (567,726 | ) | (468,306 | ) | ||||
| Proceeds from exercise of stock options | 20,700 | 13,799 | ||||||
| Net cash used in financing activities | (928,642 | ) | (810,471 | ) | ||||
| Effect of exchange rate on cash | (602 | ) | 1,662 | |||||
| Net (decrease) increase in cash and restricted cash | (689,440 | ) | 252,319 | |||||
| Cash and restricted cash at beginning of period | 8,010,420 | 3,733,924 | ||||||
| Cash and restricted cash at end of period | $ | 7,320,980 | $ | 3,986,243 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest during period | $ | 107,147 | $ | 120,164 | ||||
| Cash paid for income taxes during period | $ | 2,029,484 | $ | 586,009 | ||||
| Cash paid under operating lease | $ | 71,100 | $ | 71,100 | ||||
| Cash | $ | 6,581,944 | $ | 2,109,439 | ||||
| Restricted cash | 739,036 | 1,876,804 | ||||||
| Total cash and restricted cash | $ | 7,320,980 | $ | 3,986,243 | ||||
| Noncash lease activities: | ||||||||
| Operating lease right to use asset exchanged for operating lease liability | $ | - | $ | 432,466 | ||||
| Finance lease right to use assets exchanged for finance lease liabilities | 96,039 | 44,979 | ||||||
| Total lease right to use assets exchanged for lease liabilities | $ | 96,039 | $ | 477,445 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | SUMMARY OF ACCOUNTING POLICIES |
Interim reporting
The accompanying unaudited condensed consolidated financial statements include the accounts of Ocean Bio-Chem, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period data have been reclassified to conform to the current period presentation. Unless the context indicates otherwise, the term “Company” refers to Ocean Bio-Chem, Inc. and its subsidiaries.
The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
The financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020.
The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
| 2. | RECENT ACCOUNTING PRONOUNCEMENTS |
Accounting Guidance Adopted by the Company
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses,” which replaces the “incurred loss” model under current GAAP with a forward-looking “expected loss” model, principally in connection with financial assets subject to credit losses. Under current GAAP, an entity reflects credit losses on financial assets measured on an amortized cost basis only when it is probable that losses have been incurred, generally considering only past events and current conditions in making these determinations. The guidance under ASU 2016-13 prospectively replaces this approach with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, beginning when such assets are first acquired. Under the expected loss model, expected credit losses will be measured based not only on past events and current conditions, but also on reasonable and supportable forecasts. The guidance also expands disclosure requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial statements.
7
| 3. | INVENTORIES |
The Company’s inventories at September 30, 2020 and December 31, 2019 consisted of the following:
September 30, 2020 | December 31, 2019 | |||||||
| Raw materials | $ | 5,609,324 | $ | 3,872,752 | ||||
| Finished goods | 7,002,858 | 5,926,525 | ||||||
| Inventories, gross | 12,612,182 | 9,799,277 | ||||||
| Inventory reserves | (291,352 | ) | (244,206 | ) | ||||
| Inventories, net | $ | 12,320,830 | $ | 9,555,071 | ||||
The inventory reserves shown in the table above reflect slow moving and obsolete inventory.
The Company operates a vendor managed inventory program with one of its customers to improve the promotion of the Company’s products. The Company manages the inventory levels at this customer’s warehouses and recognizes revenue as the products are sold by the customer. The inventories managed at the customer’s warehouses, which are included in inventories, net, amounted to approximately $749,000 and $562,000 at September 30, 2020 and December 31, 2019, respectively.
| 4. | PROPERTY, PLANT & EQUIPMENT |
The Company’s property, plant and equipment at September 30, 2020 and December 31, 2019 consisted of the following:
Estimated Useful Life | September 30, 2020 | December 31, 2019 | ||||||||
| Land | $ | 278,325 | $ | 278,325 | ||||||
| Building and improvements | 30 years | 9,563,406 | 9,563,406 | |||||||
| Manufacturing and warehouse equipment | 6-20 years | 11,782,276 | 10,699,461 | |||||||
| Office equipment and furniture | 3-5 years | 1,872,721 | 1,778,781 | |||||||
| Leasehold improvements | 10-15 years | 587,183 | 577,068 | |||||||
| Finance leases – right to use | 5 years | 113,741 | 45,951 | |||||||
| Vehicles | 3 years | 10,020 | 10,020 | |||||||
| Construction in process | 361,477 | 142,612 | ||||||||
| Property, plant and equipment, gross | 24,569,149 | 23,095,624 | ||||||||
| Less accumulated depreciation | (14,477,774 | ) | (13,757,397 | ) | ||||||
| Property, plant and equipment, net | $ | 10,091,375 | $ | 9,338,227 | ||||||
The Company’s wholly owned subsidiary, Kinpak Inc. (“Kinpak”), has been engaged since 2017 in a project involving the expansion of its manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). Kinpak has completed the construction of, and placed into service, an approximately 85,000 square foot addition to the facilities and an expansion of a tank farm to accommodate an additional 500,000 gallons of tank capacity. The final phase of the Expansion Project entails the evaluation, purchase and installation of additional equipment. The Company is financing the Expansion Project through a $4,500,000 industrial development bond, which is described in Note 8. At September 30, 2020, the Company had unused proceeds from the industrial development bond of approximately $739,000 in a custodial account restricted for the use of funding additional capital improvements. The Company intends to utilize the remaining proceeds to purchase machinery and equipment to expand production capacity of its disinfectant/sanitizing product group including Performacide® and its Damp Check® mildew and humidity control products in addition to other production equipment.
Depreciation expense totaled $273,490 (of which $248,528 is included in cost of goods sold and $24,962 is included in selling and administrative expenses) and $253,140 (of which $226,395 is included in cost of goods sold and $26,745 is included in selling and administrative expenses) for the three months ended September 30, 2020 and 2019, respectively, and $791,981 (of which $717,907 is included in cost of goods sold and $74,074 is included in selling and administrative expenses) and $762,479 (of which $679,388 is included in cost of goods sold and $83,091 is included in selling and administrative expenses) for the nine months ended September 30, 2020 and 2019, respectively.
8
| 5. | LEASES |
The Company has one operating lease and three finance leases.
Under the operating lease, the Company leases its executive offices and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by Peter G. Dornau, the Company’s Chairman, President and Chief Executive Officer. The lease, as extended, expires on December 31, 2023. The lease requires an annual minimum base rent of $94,800 and provides for a maximum annual 2% increase in subsequent years, although the entity has not raised the minimum base rent since the Company entered into a previous lease agreement in 1998. Additionally, the leasing entity is entitled to reimbursement of all taxes, assessments, and any other expenses that arise from ownership. Each of the parties to the lease has agreed to review the terms of the lease every three years at the request of the other party. Operating lease expense was approximately $25,000 and $25,000 for the three months ended September 30, 2020 and 2019, respectively, and approximately $74,000 and $75,000 for the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and December 31, 2019, the Company had a right to use asset and a corresponding liability of $290,024 and $352,190, respectively, related to the operating lease. Set forth below is a schedule of future minimum rent payments under the operating lease.
| Twelve-month period ending September 30, | ||||
| 2021 | $ | 94,800 | ||
| 2022 | 94,800 | |||
| 2023 | 94,800 | |||
| 2024 | 23,700 | |||
| Total future minimum lease payments | 308,100 | |||
| Less imputed interest | (18,076 | ) | ||
| Total operating lease liability | $ | 290,024 | ||
The Company’s three 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 nine months ended September 30, 2020 and 2019 are set forth below.
| Three Months Ended September 30, 2020 | Three Months Ended | |||||||
| Operating lease expense | $ | 24,521 | $ | 24,858 | ||||
| Finance lease amortization | 5,406 | 5,692 | ||||||
| Finance lease interest | 361 | 234 | ||||||
| Total lease expense | $ | 30,288 | $ | 30,784 | ||||
| Nine Months Ended September 30, 2020 | Nine Months Ended | |||||||
| Operating lease expense | $ | 73,564 | $ | 74,844 | ||||
| Finance lease amortization | 16,938 | 17,037 | ||||||
| Finance lease interest | 679 | 739 | ||||||
| Total lease cost | $ | 91,181 | $ | 92,620 | ||||
9
The remaining lease term with respect to the operating lease, weighted average remaining lease term with respect to the finance leases and discount rate with respect to the operating lease and finance leases at September 30, 2020 and December 31, 2019 are set forth below:
| September 30, 2020 | ||||
| Remaining lease term – operating lease | 3.25 years | |||
| Weighted average remaining lease term – finance leases | 4.9 years | |||
| Discount rate – operating lease | 3.7 | % | ||
| Weighted average discount rate – finance leases | 1.8 | % | ||
| December 31, 2019 |
||||
| Remaining lease term – operating lease | 4.0 years | |||
| Weighted average remaining lease term – finance leases | 2.6 years | |||
| Discount rate – operating lease | 3.7 | % | ||
| Weighted average discount rate – finance leases | 3.0 | % | ||
| 6. | INTANGIBLE ASSETS |
The Company’s intangible assets at September 30, 2020 and December 31, 2019 consisted of the following:
September 30, 2020
| Intangible Assets | Cost | Accumulated Amortization | Net | |||||||||
| Patents | $ | 622,733 | $ | 531,560 | $ | 91,173 | ||||||
| Trade names and trademarks | 1,715,325 | 616,653 | 1,098,672 | |||||||||
| Customer list | 584,468 | 240,988 | 343,480 | |||||||||
| Product formulas | 292,234 | 120,499 | 171,735 | |||||||||
| Royalty rights | 160,000 | 128,599 | 31,401 | |||||||||
| Total intangible assets | $ | 3,374,760 | $ | 1,638,299 | $ | 1,736,461 | ||||||
December 31, 2019
| Intangible Assets | Cost | Accumulated Amortization | Net | |||||||||
| Patents | $ | 622,733 | $ | 492,308 | $ | 130,425 | ||||||
| Trade names and trademarks | 1,715,325 | 587,387 | 1,127,938 | |||||||||
| Customer list | 584,468 | 153,319 | 431,149 | |||||||||
| Product formulas | 292,234 | 76,659 | 215,575 | |||||||||
| Royalty rights | 160,000 | 115,140 | 44,860 | |||||||||
| Total intangible assets | $ | 3,374,760 | $ | 1,424,813 | $ | 1,949,947 | ||||||
Amortization expense related to intangible assets was $71,162 and $63,479 for the three months ended September 30, 2020 and 2019, respectively, and $213,486 and $190,438 for the nine months ended September 30, 2020 and 2019, respectively.
| 7. | REVOLVING LINE OF CREDIT |
On August 31, 2018, the Company and Regions Bank entered into a Business Loan Agreement (the “Business Loan Agreement”), under which the Company was provided a revolving line of credit. Under the Business Loan Agreement, the Company may borrow up to the lesser of (i) $6,000,000 or (ii) a borrowing base equal to 85% of Eligible Accounts (as defined in the Business Loan Agreement) plus 50% of Eligible Inventory (as defined in the Business Loan Agreement). Interest on amounts borrowed under the revolving line of credit is payable monthly at the one-month LIBOR rate plus 1.35% per annum, computed on a 365/360 basis. Eligible Accounts do not include, among other things, accounts receivable from affiliated entities.
10
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 September 30, 2020, the Company was in compliance with these financial covenants. The revolving line of credit is subject to several events of default, including a decline in the majority shareholder’s ownership below 50% of all outstanding shares.
There has been no impact in the availability of funds to the Company as a result of the COVID-19 pandemic.
At September 30, 2020 and December 31, 2019, the Company had no borrowings under the revolving line of credit provided by the Business Loan Agreement.
| 8. | LONG TERM DEBT |
Industrial Development Bond Financing
On September 26, 2017, Kinpak indirectly obtained a $4,500,000 loan from Regions Capital Advantage, Inc. (the “Lender”). The proceeds of the loan are being used principally to pay or reimburse costs relating to the Expansion Project.
The loan was funded by the Lender’s purchase of a $4,500,000 industrial development bond (the “Bond”) issued by The Industrial Development Board of the City of Montgomery, Alabama (the “IDB”). The Bond is a limited obligation of the IDB and is payable solely out of revenues and receipts derived from the leasing or sale of Kinpak’s facilities. In this regard, Kinpak is obligated to fund the IDB’s payment obligations by providing rental payments under a lease between the IDB and Kinpak (the “Lease”), under which Kinpak leases its facilities from the IDB. Kinpak inherited the lease structure when it first acquired its facilities from its predecessor-in-interest in 1996. The Lease provides that prior to the maturity date of the Bond, Kinpak may repurchase the facilities for $1,000 if the Bond has been redeemed or fully paid.
The Bond bears interest at the rate of 3.07% per annum, calculated on the basis of a 360-day year and the actual number of days elapsed (subject to increase to 6.07% per annum upon the occurrence of an event of default), and is payable in 118 monthly installments of $31,324 beginning on November 1, 2017 and ending on August 1, 2027, with a final principal and interest payment to be made on September 1, 2027 in the amount of $1,799,201. The Bond provides that the interest rate will be subject to adjustment if it is determined by the United States Treasury Department, the Internal Revenue Service, or a similar government entity that the interest on the Bond is includable in the gross income of the Lender for federal income tax purposes.
Under the Lease, Kinpak is required to make rental payments for the account of the IDB to the Lender in such amounts and at such times as are necessary to enable the payment of all principal and interest due on the Bond and other charges, if any, payable in respect of the Bond. The Lease also provides that Kinpak may redeem the Bond, in whole or in part, by prepaying its rental payment obligations in an amount sufficient to effect the redemption. In addition, the Lease contains provisions relating to the Expansion Project, including limitations on utilization of Bond proceeds, deposit of unused proceeds into a custodial account (as described below) and investment of monies held in the custodial account.
Payment of amounts due and payable under the Bond and other related agreements are guaranteed by the Company and its other consolidated subsidiaries. In connection with the guarantee agreement under which the Company provided its guarantee, the Company is subject to certain covenants, including financial covenants requiring that the Company maintain (i) a minimum fixed charge ratio (generally, the ratio of (A) EBITDA minus the sum of Company’s distributions to its shareholders, taxes paid and unfunded capital expenditures to (B) current maturities of Company long-term debt plus interest expense) of 1.20 to 1, tested quarterly, and (ii) a ratio of funded debt (as defined in the guaranty agreement) divided by the sum of net worth and funded debt of 0.75 to 1, tested quarterly. For purposes of computing the fixed charge coverage ratio, “EBITDA” generally is defined as net income before taxes and depreciation expense plus amortization expense, plus interest expense, plus non-recurring and/or non-cash losses and expenses, minus non-recurring and/or non-cash gains and income; “unfunded capital expenditures” generally is defined as capital expenditures made from Company funds other than funds borrowed through term debt incurred to finance such capital expenditures. At September 30, 2020, the Company was in compliance with these financial covenants.
11
Through September 30, 2020, of the $4,500,000 proceeds of the Bond sale, there are unused proceeds of approximately $739,000 remaining that are held in a custodial account and may be drawn by Kinpak from time to time to fund additional expenditures related to the Expansion Project. Due to restrictions under, among other things, the Internal Revenue Code and the Lease on Kinpak’s utilization of the funds held in the custodial account, such funds are classified as restricted cash on the Company’s condensed consolidated balance sheets. The Company intends to utilize the remaining proceeds to purchase machinery and equipment to expand its production capacity of its disinfectant product group including Performacide® and our Damp Check® mildew and humidity control products.
The Company incurred debt financing costs of $196,095 in connection with the financing. These costs are shown as a reduction of the debt balance and are being amortized over the life of the Bond.
Other Long-Term Obligations
In connection with the Company’s agreement to purchase assets of Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018, the Company provided to Snappy Marine a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). The note is payable in equal installments of $16,667 over a 60- month period that commenced on August 1, 2018, with a final payment due and payable on July 1, 2023. If the note is prepaid in full, the entire outstanding balance of the note (including all unpaid amounts allocated to interest over the remaining term of the note) must be paid.
In connection with the Company’s agreement to purchase assets of Check Corporation, the Company agreed to pay Check Corporation (dba Damp Check®) $100,000 in equal installments of approximately $4,348 over a 23-month period that commenced on January 15, 2020, with a final payment due and payable on November 15, 2021. The Company recorded $97,012 as principal, and the remaining $2,988, representing an imputed interest rate of 3.15% per annum, will be recorded as interest expense over the 23 months.
On June 22, 2020, the Company entered into a lease agreement with Canon Solutions America, Inc. to lease office equipment. The lease obligates the Company to pay $100,009 in 63 equal monthly payments of $1,587. The lease is classified as a finance lease. The Company recorded a lease liability which is included in long term debt and a corresponding right to use asset that is included in property, plant and equipment of $96,039 based on a discount rate of 1.53%.
At September 30, 2020 and December 31, 2019, the Company was obligated under lease agreements covering office equipment utilized in the Company’s operations (inclusive of the lease referenced in the preceding paragraph). The office equipment leases, aggregating approximately $105,000 and $26,000 at September 30, 2020 and December 31, 2019, respectively, have maturities through 2025 and carry interest rates ranging from approximately 1.53% to 3.86% per annum. The office equipment leases are classified as finance leases. During the three months ended September 30, 2020 and 2019, the Company paid $5,767 ($5,406 principal and $361 interest) and $5,926 ($5,692 principal and $234 interest), respectively, and during the nine months ended September 30, 2020 and 2019, the Company paid $17,617 ($16,938 principal and $679 interest)and $17,776 ($17,037 principal and $739 interest), respectively,under the lease agreements.
The following table provides information regarding the Company’s long-term debt at September 30, 2020 and December 31, 2019:
| Current Portion | Long Term Portion | |||||||||||||||
| September 30, 2020 | December 31, 2019 | September 30, 2020 | December 31, 2019 | |||||||||||||
| Obligations related to industrial development bond financing | $ | 261,844 | $ | 255,471 | $ | 3,521,717 | $ | 3,718,785 | ||||||||
| Note payable related to Snappy Marine asset acquisition | 186,843 | 182,869 | 356,772 | 497,405 | ||||||||||||
| Obligation related to Check Corporation asset acquisition | 51,027 | 49,930 | 8,661 | 47,082 | ||||||||||||
| Office equipment leases | 21,063 | 14,823 | 84,173 | 11,312 | ||||||||||||
| Total principal of long- term debt | 520,777 | 503,093 | 3,971,323 | 4,274,584 | ||||||||||||
| Debt issuance costs | (19,616 | ) | (19,616 | ) | (117,693 | ) | (132,405 | ) | ||||||||
| Total long- term debt | $ | 501,161 | $ | 483,477 | $ | 3,853,630 | $ | 4,142,179 | ||||||||
Required principal payments under the Company’s long- term obligations are set forth below:
| Twelve-month period ending September 30, | ||||
| 2021 | $ | 520,777 | ||
| 2022 | 492,504 | |||
| 2023 | 464,991 | |||
| 2024 | 307,599 | |||
| 2025 | 315,374 | |||
| Thereafter | 2,390,855 | |||
| Total | $ | 4,492,100 | ||
12
| 9. | RELATED PARTY TRANSACTIONS |
The Company sells products to companies affiliated with Peter G. Dornau, who is the Company’s Chairman, President and Chief Executive Officer. The affiliated companies resell, outside of the United States and Canada, products they purchase from the Company. The Company also provides administrative services to these companies and pays certain business-related expenditures for the affiliated companies, for which the Company is reimbursed. Sales to the affiliated companies aggregated approximately $334,000 and $277,000 for the three months ended September 30, 2020 and 2019, respectively, and approximately $1,366,000 and $1,531,000 for the nine months ended September 30, 2020 and 2019, respectively. Fees for administrative services aggregated approximately $166,000 and $221,000 for the three months ended September 30, 2020 and 2019, respectively, and approximately $646,000 and $591,000 for the nine months ended September 30, 2020 and 2019, respectively. Amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $28,000 and $23,000 during the three months ended September 30, 2020 and 2019, respectively, and approximately $79,000 and $80,000 during the nine months ended September 30, 2020 and 2019, respectively. The Company had accounts receivable from the affiliated companies in connection with the product sales, administrative services and business- related expenditures aggregating approximately $1,108,000 and $962,000 at September 30, 2020 and December 31, 2019, respectively.
An entity that is owned by the Company’s Chairman, President and Chief Executive Officer provides several services to the Company. Under this arrangement, the Company paid the entity an aggregate of $12,000 for research and development services and $21,000 ($10,500 for research and development services and $10,500 for charter boat services that the Company used to provide sales incentives for customers) for the three months ended September 30, 2020 and 2019, respectively, and $47,000 ($36,000 for research and development services, $9,000 for charter boat services that the Company used to provide sales incentives for customers and $2,000 for the production of television commercials) and $62,000 ($31,500 for research and development services and $30,500 for charter boat services that the Company used to provide sales incentives for customers) for the nine months ended September 30, 2020 and 2019, respectively. Expenditures for the research and development services are included in the condensed consolidated statements of operations within selling and administrative expenses. Expenditures for the charter boat services are included in the condensed consolidated statements of operations within advertising and promotion expenses.
The Company leases office and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. See Note 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 September 30, 2020 and 2019, the Company paid an aggregate of approximately $471,000 and $674,000, respectively, and during the nine months ended September 30, 2020 and 2019, the Company paid an aggregate of approximately $984,000 and $1,174,000, respectively, in insurance premiums on policies obtained through the insurance broker.
| 10. | EARNINGS PER SHARE |
Basic earnings per share are calculated by dividing net income by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share reflect additional dilution from potential common stock issuances upon the exercise of outstanding stock options. The following table sets forth the computation of basic and diluted earnings per common share, as well as a reconciliation of the weighted average number of common shares outstanding to the weighted average number of shares outstanding on a diluted basis.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Earnings per common share – Basic | ||||||||||||||||
| Net income | $ | 4,656,830 | $ | 1,124,655 | $ | 8,736,032 | $ | 2,849,393 | ||||||||
| Weighted average number of common shares outstanding | 9,462,105 | 9,390,662 | 9,454,639 | 9,373,893 | ||||||||||||
| Earnings per common share – Basic | $ | 0.49 | $ | 0.12 | $ | 0.92 | $ | 0.30 | ||||||||
| Earnings per common share – Diluted | ||||||||||||||||
| Net income | $ | 4,656,830 | $ | 1,124,655 | $ | 8,736,032 | $ | 2,849,393 | ||||||||
| Weighted average number of common shares outstanding | 9,462,105 | 9,390,662 | 9,454,639 | 9,373,893 | ||||||||||||
| Dilutive effect of outstanding stock options | - | 7,970 | 4,708 | 8,700 | ||||||||||||
| Weighted average number of common shares outstanding - Diluted | 9,462,105 | 9,398,632 | 9,459,347 | 9,382,593 | ||||||||||||
| Earnings per common share – Diluted | $ | 0.49 | $ | 0.12 | $ | 0.92 | $ | 0.30 | ||||||||
The Company had no stock options outstanding during any of the three and nine month periods ended September 30, 2020 and 2019 that were antidilutive and therefore not included in the diluted earnings per common share calculation.
13
| 11. | SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS |
Stock compensation expense during the three months ended September 30, 2020 and 2019 was $0 and $262,280, respectively, and during the nine months ended September 30, 2020 and 2019 was $22,220 and $275,540, respectively. At September 30, 2020, there were no outstanding stock options or unrecognized compensation expense related to stock options.
| 12. | CASH DIVIDENDS |
On August 26, 2020, the Company’s Board of Directors declared a regular quarterly dividend of $0.02 per common share payable on September 23, 2020 to all shareholders of record on September 9, 2020. There were 9,462,105 shares of common stock outstanding on September 9, 2020; therefore, dividends aggregating $189,242 were paid on September 23, 2020.
On May 26, 2020, the Company’s Board of Directors declared a regular quarterly dividend of $0.02 per common share and a one-time special cash dividend of $0.02 per common share both payable on June 23, 2020 to all shareholders of record on June 9, 2020. There were 9,462,105 shares of common stock outstanding on June 9, 2020; therefore, dividends aggregating $378,484 were paid on June 23, 2020.
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.
| 13. | CUSTOMER CONCENTRATION |
During the three months ended September 30, 2020, 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 represented approximately 45.0% (17.8%, 13.8% and 13.4%) of the Company’s net sales for the three months ended September 30, 2020. During the three months ended September 30, 2019, the Company had net sales to each of two customers that constituted in excess of 10% of its net sales. Net sales to these two customers represented approximately 38.0% (20.1% and 17.9%) of the Company’s net sales for the three months ended September 30, 2019.
During the nine months ended September 30, 2020, the Company had net sales to each of two customers that constituted in excess of 10% of its net sales. Net sales to these two customers represented approximately 32.8% (17.4% and 15.4%) of the Company’s net sales for the nine months ended September 30, 2020. During the nine months ended September 30, 2019, the Company had net sales to each of four customers that constituted in excess of 10% of its net sales. Net sales to these four customers represented approximately 53.2% (21.7%, 11.0%, 10.5 and 10.0%) of the Company’s net sales for the nine months ended September 30, 2019.
At September 30, 2020, two customers constituted at least 10% of the Company’s gross trade accounts receivable. The gross trade accounts receivable balances for these customers represented approximately 44.1% (25.5% and 18.6%) of the Company’s gross trade accounts receivable. At December 31, 2019, three customers constituted at least 10% of the Company’s gross trade accounts receivable. The gross trade accounts receivable balances for these customers represented approximately 56.8% (28.0%, 15.3% and 13.5%) of the Company’s gross trade accounts receivable.
14
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements:
Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, our ability to provide required capital to support inventory levels, the effect of price increases in raw materials that are petroleum or chemical based or commodity chemicals on our margins, and the sufficiency of funds provided through operations and existing sources of financing to satisfy our cash requirements constitute forward-looking statements. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “believe,” “may,” “will,” “expect,” “anticipate,” “intend,” or “could,” including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking statements. Factors that may affect these results include, but are not limited to, the impact of the COVID-19 pandemic on our business and the economy in general, the highly competitive nature of our industry; reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; expenditures on, and the effectiveness of our advertising and promotional efforts; adverse weather conditions; unanticipated litigation developments; exposure to market risks relating to changes in interest rates, foreign currency exchange rates and prices for raw materials that are petroleum or chemical based, and other factors addressed in the sections entitled “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2019, and Part II, Item 1A (“Risk Factors”) of subsequently filed quarterly reports on Form 10-Q.
Overview:
We are engaged in the manufacture, marketing and distribution of a broad line of appearance, performance, and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite® and other trademarks within the United States and Canada. In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products. We also manufacture, market and distribute chlorine dioxide-based deodorizing, disinfectant and sanitizing products. We sell our products through national retailers and to national and regional distributors. In addition, we sell products to two companies affiliated with Peter G. Dornau, our Chairman, President and Chief Executive Officer; these companies distribute the products outside of the United States and Canada.
Kinpak has been engaged since 2017 in a project involving a major expansion of its manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). Kinpak has completed the construction of, and placed into service, an approximately 85,000 square foot addition to the facilities and an expansion of a tank farm to accommodate an additional 500,000 gallons of tank capacity. The final phase of the Expansion Project entails the evaluation, purchase and installation of additional equipment. The Company is financing the Expansion Project through a $4,500,000 industrial development bond, which is described in Note 8. At September 30, 2020, the Company had unused proceeds from the industrial development bond of approximately $739,000 in a custodial account restricted for the use of funding additional capital improvements. The Company intends to utilize the remaining proceeds to purchase machinery and equipment to expand our production capacity of our disinfectant product group including Performacide® and our Damp Check® mildew and humidity control products.
Critical accounting estimates:
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 for information regarding our critical accounting estimates.
15
Results of Operations:
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
The following table provides a summary of our financial results for the three months ended September 30, 2020 and 2019:
| For The Three Months Ended September 30, | ||||||||||||||||||||
| Percent | Percentage of Net Sales | |||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | ||||||||||||||||
| Net sales | $ | 19,161,372 | $ | 12,502,782 | 53.3 | % | 100.0 | % | 100.0 | % | ||||||||||
| Cost of goods sold | 10,414,131 | 8,096,637 | 28.6 | % | 54.3 | % | 64.8 | % | ||||||||||||
| Gross profit | 8,747,241 | 4,406,145 | 98.5 | % | 45.7 | % | 35.2 | % | ||||||||||||
| Advertising and promotion | 723,446 | 782,158 | (7.5 | )% | 3.8 | % | 6.3 | % | ||||||||||||
| Selling and administrative | 2,030,787 | 2,149,333 | (5.5 | )% | 10.6 | % | 17.2 | % | ||||||||||||
| Operating income | 5,993,008 | 1,474,654 | 306.4 | % | 31.3 | % | 11.8 | % | ||||||||||||
| Interest (expense), net | (39,615 | ) | (31,186 | ) | 27.0 | % | 0.2 | % | 0.2 | % | ||||||||||
| Provision for income taxes | (1,296,563 | ) | (318,813 | ) | 306.7 | % | 6.8 | % | 2.5 | % | ||||||||||
| Net income | $ | 4,656,830 | $ | 1,124,655 | 314.1 | % | 24.3 | % | 9.0 | % | ||||||||||
Net sales for the three months ended September 30, 2020 increased by approximately $6,659,000, or 53.3%, as compared to the three months ended September 30, 2019. The trend of higher year-over-year net sales that began in the second quarter continued through the third quarter. The increase in net sales was principally a result of increased sales of marine products and chlorine dioxide-based products (Performacide® and private label). Our chlorine dioxide-based products are EPA-registered as a disinfectant and sanitizer, are proven to kill previously known strands of human Coronavirus, and meet EPA criteria for use against SARS-CoV-2, the cause of COVID-19. Sales increased to most sectors in which the Company markets its products, including online customers, mass merchandisers, marine retail and distributors and private label distributors of our chlorine dioxide products. The trend of higher year-over-year net sales continued in October 2020. We expect it may continue at least in the near term but can provide no assurance in this regard.
Cost of goods sold increased by approximately $2,317,000, or 28.6%, during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The increase in cost of goods sold was a result of higher sales volume, partially offset by an improved mix of sales and operating efficiencies at our manufacturing subsidiary Kinpak.
Gross profit increased by approximately $4,341,000, or 98.5%, for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. Gross profit increased due to our higher sales volume, a more profitable sales mix, and improved operating efficiencies at our manufacturing subsidiary Kinpak. As a percentage of net sales, gross profit was approximately 45.7% and 35.2% for the three months ended September 30, 2020 and 2019, respectively.
Advertising and promotion expenses decreased by approximately $59,000, or 7.5%, during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The decrease in advertising and promotion expenses was principally a result of decreased trade show expenses as a result of the travel and social distancing restrictions implemented due to the COVID-19 pandemic social distancing policies. As a percentage of net sales, advertising and promotion expenses decreased to 3.8% for the three months ended September 30, 2020, from 6.3% for the three months ended September 30, 2019.
16
Selling and administrative expenses decreased by approximately $119,000, or 5.5%, during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The decrease in selling and administrative expenses was primarily a result of the Company having no stock compensation expense in the three months ended September 30, 2020, as compared to approximately $262,000 of stock compensation expense in the three months ended September 30, 2019. The Company anticipates the issuance of stock awards to key employees in the fourth quarter of 2020. Because of the pandemic our salesmen are not traveling as much in 2020 as they did in 2019, this resulted in the Company having lower expenses for salesmen travel, meals and entertainment during the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The decreases in stock compensation and salesmen travel, meals, and entertainment were partially offset by increases in sales commissions and a higher noncash expense to increase our trade accounts receivable allowance account, which was a result of our higher net sales. As a percentage of net sales, selling and administrative expenses decreased to 10.6% for the three months ended September 30, 2020, from 17.2% for the three months ended September 30, 2019.
Interest (expense), net for the three months ended September 30, 2020 increased by approximately $8,000 or 27.0%, as compared to the three months ended September 30, 2019. The increase was principally a result of lower interest income from a custodial account restricted for the use of funding additional capital improvements because of lower interest rates and a lower account balance.
Provision for income taxes for the three months ended September 30, 2020 was approximately $1,297,000, or 21.8% of our income before taxes. For the three months ended September 30, 2019 the provision was approximately $319,000, or 22.1% of our income before taxes.
Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
The following table provides a summary of our financial results for the nine months ended September 30, 2020 and 2019:
| For The Nine Months Ended September 30, | ||||||||||||||||||||
| Percent | Percentage of Net Sales | |||||||||||||||||||
| 2020 | 2019 | Change | 2020 | 2019 | ||||||||||||||||
| Net sales | $ | 42,682,497 | $ | 32,528,596 | 31.2 | % | 100.0 | % | 100.0 | % | ||||||||||
| Cost of goods sold | 23,085,473 | 20,184,359 | 14.4 | % | 54.1 | % | 62.1 | % | ||||||||||||
| Gross profit | 19,597,024 | 12,344,237 | 58.8 | % | 45.9 | % | 37.9 | % | ||||||||||||
| Advertising and promotion | 2,265,382 | 2,523,829 | (10.2 | )% | 5.3 | % | 7.8 | % | ||||||||||||
| Selling and administrative | 6,242,862 | 6,061,942 | 3.0 | % | 14.6 | % | 18.6 | % | ||||||||||||
| Operating income | 11,088,780 | 3,758,466 | 195.0 | % | 26.0 | % | 11.6 | % | ||||||||||||
| Interest (expense), net | (93,695 | ) | (96,423 | ) | (2.8 | )% | 0.2 | % | 0.3 | % | ||||||||||
| Gain on insurance settlement | 126,210 | - | N/A | 0.3 | % | - | ||||||||||||||
| Provision for income taxes | (2,385,263 | ) | (812,650 | ) | 193.5 | % | 5.6 | % | 2.5 | % | ||||||||||
| Net income | $ | 8,736,032 | $ | 2,849,393 | 206.6 | % | 20.5 | % | 8.8 | % | ||||||||||
Net sales for the nine months ended September 30, 2020 increased by approximately $10,154,000, or 31.2%, as compared to the nine months ended September 30, 2019. The trend of higher year-over-year net sales that began in the second quarter continued through the third quarter. The increase in net sales was principally a result of increased sales of chlorine dioxide-based products (Performacide® and private label) and marine products. The increased sales of the Company’s chlorine dioxide- based products are a result of the COVID-19 pandemic.
Cost of goods sold increased by approximately $2,901,000, or 14.4%, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increase in cost of goods sold was a result of higher sales volume, partially offset by improved operating efficiencies at our manufacturing subsidiary Kinpak.
Gross profit increased by approximately $7,253,000, or 58.8%, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. Gross profit increased due to our higher sales volume, a more profitable sales mix, and improved operating efficiencies at our manufacturing subsidiary Kinpak. As a percentage of net sales, gross profit was approximately 45.9% and 37.9% for the nine months ended September 30, 2020 and 2019, respectively.
17
Advertising and promotion expenses decreased by approximately $258,000, or 10.2%, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The decrease in advertising and promotion expenses was primarily a result of decreased trade show expenses as a result of the travel and social distancing restrictions implemented due to the COVID-19 pandemic social distancing policies, decreased magazine advertising, decreased customer cooperative advertising, and a decrease in product samples used to promote sales, partially offset by increases in internet and television advertising . As a percentage of net sales, advertising and promotion expenses decreased to 5.3% for the nine months ended September 30, 2020, from 7.8% for the nine months ended September 30, 2019.
Selling and administrative expenses increased by approximately $181,000, or 3.0%, during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increase in selling and administrative expenses was primarily a result of a higher noncash adjustment to our trade accounts receivable allowance account, increased sales commissions and increased employee salaries, partially offset by a decrease in stock compensation expense and expenses related to salesmen travel, meals, and entertainment as a result of the COVID-19 pandemic. As a percentage of net sales, selling and administrative expenses decreased to 14.6% for the nine months ended September 30, 2020, from 18.6% for the nine months ended September 30, 2019.
Interest (expense), net for the nine months ended September 30, 2020 decreased by approximately $3,000 or 2.8%, as compared to the nine months ended September 30, 2019.
Gain on insurance settlement was approximately $126,000 during the nine months ended September 30, 2020. The Company received approximately $412,000 from our insurance company to cover losses from a chemical incident at our Kinpak facility that took place in December 2019. For more information please refer to Recent Developments and Note 16 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Provision for income taxes for the nine months ended September 30, 2020 was approximately $2,385,000, or 21.4% of our income before taxes. For the nine months ended September 30, 2019 the provision was approximately $813,000, or 22.2% of our income before taxes.
Liquidity and capital resources:
Our cash balance was approximately $6,582,000 at September 30, 2020 and approximately $6,125,000 at December 31, 2019. In addition, we had restricted cash of approximately $739,000 at September 30, 2020 and $1,885,000 at December 31, 2019. The restricted cash constitutes amounts held in a custodial account that are to be used from time to time to fund additional capital expenditures in connection with the Expansion Project. See Note 8 to the condensed consolidated financial statements included in this report for additional information.
The following table summarizes our cash flows for the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Net cash provided by operating activities | $ | 1,377,224 | $ | 1,587,903 | ||||
| Net cash used in investing activities | (1,137,420 | ) | (526,775 | ) | ||||
| Net cash used in financing activities | (928,642 | ) | (810,471 | ) | ||||
| Effect of exchange rate fluctuations on cash | (602 | ) | 1,662 | |||||
| Net (decrease) increase in cash and restricted cash | $ | (689,440 | ) | $ | 252,319 | |||
Net cash provided by operating activities for the nine months ended September 30, 2020 decreased by approximately $211,000, or 13.3%, as compared to the nine months ended September 30, 2019. The decrease in net cash provided by operating activities was principally a result of higher increases to our trade accounts receivables, inventories, and receivables due from affiliated companies, partially offset by increases in net income, accounts payable and accrued expenses payable during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.
18
Net trade accounts receivable at September 30, 2020 aggregated approximately $16,262,000, an increase of approximately $9,130,000, or 128.0%, as compared to approximately $7,132,000 in net trade accounts receivable outstanding at December 31, 2019. The increase was principally a result of our net sales during the third quarter of 2020. Receivables due from affiliated companies aggregated approximately $1,108,000 at September 30, 2020, an increase of approximately $146,000, or 15.2%, from receivables due from affiliated companies of approximately $962,000 at December 31, 2019. The increase was principally a result of net sales during the third quarter of 2020.
Inventories, net were approximately $12,321,000 and $9,555,000 at September 30, 2020 and December 31, 2019, respectively, representing an increase of approximately $2,766,000, or 28.9%, during the nine months ended September 30, 2020. The increase was necessary in order to meet the anticipated demands of the fourth quarter of 2020.
Net cash used in investing activities for the nine months ended September 30, 2020 increased by approximately $611,000, or 115.9%, as compared to the nine months ended September 30, 2019. The increase in cash used in investing activities was a result of the Company investing approximately $1,022,000 more in property, plant, and equipment in the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increase was partially offset by insurance proceeds (see Results of Operations) of $411,657 that we received during the nine months ended September 30, 2020.
Net cash used in financing activities for the nine months ended September 30, 2020 increased by approximately $118,000, or 14.6%, as compared to the nine months ended September 30, 2019. The increase in cash used in financing activities was a result of increased payments of dividends to common shareholders of approximately $99,000 and increased payments on long-term debt of approximately $47,000 during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increases in cash used in financing activities were partially offset by a decrease in payments for taxes related to net share settlements of stock awards of approximately $21,000 and increased proceeds from the exercise of stock options of approximately $7,000 in the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019.
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 September 30, 2020 and December 31, 2019, we had outstanding balances of approximately $3,784,000 and $3,974,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility.
The loan agreement pertaining to our revolving credit facility, as amended, has a stated term that expires on August 31, 2021, although, as was the case with earlier revolving lines of credit provided to us in recent years, amounts outstanding are payable on demand. Nevertheless, the loan agreement pertaining to our revolving line of credit, as amended, contains various covenants, including financial covenants that are described in Note 7 to the condensed consolidated financial statements included in this report. At September 30, 2020, we were in compliance with these financial covenants. The revolving credit facility is subject to several events of default, including a decline of the majority shareholder’s ownership below 50% of our outstanding shares.
Our guarantee of Kinpak’s obligations related to the industrial development bond financing are subject to various covenants, including financial covenants that are described in Note 8 to the condensed consolidated financial statements included in this report. At September 30, 2020, we were in compliance with these financial covenants.
In connection with our acquisition of assets of Snappy Marine, we issued a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). At September 30, 2020, we had an outstanding balance of $566,666 under the promissory note (including $543,615 recorded as principal and $23,051 to be recorded as interest expense over the remaining term of the note).
19
In connection with our agreement to purchase assets of Check Corporation (dba Damp CheckTM), we agreed to pay Check Corporation $100,000 in equal installments of approximately $4,348 over a 23-month period that commenced on January 15, 2020 with a final payment due and payable on November 15, 2021. We recorded $97,012 as principal, and the remaining $2,988, representing an imputed interest rate of 3.15% per annum, will be recorded as interest expense over the 23 months). At September 30, 2020, we had an outstanding balance of $ 60,870 (including $59,688 recorded as principal and $1,182 to be recorded as interest expense over the remaining term of the agreement).
We also obtained financing through leases for office equipment, totaling approximately $105,000 and $26,000 at September 30, 2020 and December 31, 2019, respectively.
Some of our assets and liabilities are denominated in Canadian dollars and are subject to currency exchange rate fluctuations. We do not engage in currency hedging and address currency risk as a pricing issue. For the nine months ended September 30, 2020, we recorded $1,663 in foreign currency translation adjustments (decreasing shareholders’ equity by $1,663).
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.
20
| 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.
21
| Item 1A. | Risk Factors |
The business, results of operations, financial condition, cash flow, and stock price of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of the 2019 Form 10-K and Part II, Item 1A of the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition, operating results and cash flow to vary materially from past, or from anticipated future, financial condition operating results and cash flow. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results, cash flow, and stock price. There have been no material changes to the Company’s risk factors since the 2019 Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.
| 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 September 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2020 and 2019; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 and (vi) Notes to Condensed Consolidated Financial Statements. |
22
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OCEAN BIO-CHEM, INC. | |
| Dated: November 13, 2020 | /s/ Peter G. Dornau |
| Peter G. Dornau | |
| Chairman of the Board, President and | |
| Chief Executive Officer | |
| Dated: November 13, 2020 | /s/ Jeffrey S. Barocas |
| Jeffrey S. Barocas | |
| Vice President and | |
| Chief Financial Officer |
23