UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from _____ to _____
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
954-587-6280
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
At May 13, 2022,
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade accounts receivable less allowances of approximately $ | ||||||||
| Receivables due from affiliated companies | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease – right to use | ||||||||
| Intangible assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Current portion of long-term debt, net | $ | $ | ||||||
| Current portion of operating lease liability | ||||||||
| Accounts payable - trade | ||||||||
| Income taxes payable | ||||||||
| Accrued expenses payable | ||||||||
| Total Current Liabilities | ||||||||
| Deferred tax liability | ||||||||
| Operating lease liability, less current portion | ||||||||
| Long-term debt, less current portion and debt issuance costs | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Shareholders’ Equity: | ||||||||
| Common stock - $ | ||||||||
| Additional paid in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating Expenses: | ||||||||
| Advertising and promotion | ||||||||
| Selling and administrative | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| Other (expense) income | ||||||||
| Interest (expense), net | ( | ) | ( | ) | ||||
| Income before income taxes | ||||||||
| Provision for income taxes | ( | ) | ( | ) | ||||
| Net income | $ | $ | ||||||
| Earnings per common share | $ | $ | ||||||
| Dividends declared per common share | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net income | $ | $ | ||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Comprehensive income | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(UNAUDITED)
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Dividends, common stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Common stock repurchased and retired | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Portion of 2021 stock based compensation for shares issued in 2022 | ||||||||||||||||||||||||
| Foreign currency translation adjustment | - | |||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Additional | Accumulated Other | |||||||||||||||||||||||
| Common Stock | Paid In | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Capital | Loss | Earnings | Total | |||||||||||||||||||
| December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Dividends, common stock | - | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustment | - | ( | ) | ( | ) | |||||||||||||||||||
| March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Provision for bad debts | ||||||||
| Provision for slow moving and obsolete inventory | ||||||||
| Other operating non-cash items | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Trade accounts receivable | ( | ) | ( | ) | ||||
| Receivables due from affiliated companies | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable – trade | ||||||||
| Income taxes payable | ||||||||
| Accrued expenses payable | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Dividends paid to common shareholders | ( | ) | ( | ) | ||||
| Repurchase of common stock | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate on cash | ||||||||
| Net decrease in cash and restricted cash | ( | ) | ( | ) | ||||
| Cash and restricted cash at beginning of period | ||||||||
| Cash and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest during period | $ | $ | ||||||
| Cash paid for income taxes during period | $ | $ | ||||||
| Cash paid under operating lease | $ | $ | ||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Interim reporting
The accompanying unaudited condensed consolidated financial statements include the accounts of Ocean Bio-Chem, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context indicates otherwise, the term “Company” refers to Ocean Bio-Chem, Inc. and its subsidiaries.
The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
The financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
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, 2021.
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. INVENTORIES
The Company’s inventories at March 31, 2022 and December 31, 2021 consisted of the following:
March 31, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventories, gross | ||||||||
| Inventory reserves | ( | ) | ( | ) | ||||
| Inventories, net | $ | $ | ||||||
The inventory reserves shown in the table above reflect slow moving and obsolete inventory.
The Company operates a vendor managed inventory
program with one of its customers to improve the promotion of the Company’s products. The Company manages the inventory levels at
this customer’s warehouses and recognizes revenue as the products are sold by the customer. The inventories managed at the customer’s
warehouses, which are included in inventories, net, amounted to approximately $
6
3. PROPERTY, PLANT & EQUIPMENT
The Company’s property, plant and equipment at March 31, 2022 and December 31, 2021 consisted of the following:
Estimated Useful Life | March 31, 2022 | December 31, 2021 | ||||||||
| Land | $ | $ | ||||||||
| Building and improvements | ||||||||||
| Manufacturing and warehouse equipment | ||||||||||
| Office equipment and furniture | ||||||||||
| Leasehold improvements | ||||||||||
| Finance leases – right to use | ||||||||||
| Vehicles | ||||||||||
| Construction in process (1) | ||||||||||
| Property, plant and equipment, gross | ||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||
| Property, plant and equipment, net | $ | $ | ||||||||
| (1) | In April 2022, the Company’s wholly owned subsidiary, KINPAK Inc. (“Kinpak”), placed into service assets relating to an expansion of its manufacturing and distribution facilities. |
Depreciation
expense totaled $
4. LEASES
The Company has one operating lease and two finance leases.
Under the operating lease, the Company leases
its executive offices and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by Peter G. Dornau, the Company’s
Chairman, President and Chief Executive Officer. The lease, as extended, expires on
| Twelve-month period ending March 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| Total future minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total operating lease liability | $ | |||
The Company’s two finance leases relate to office equipment. See Note 3 for information regarding the carrying value of the Company’s finance lease right to use assets and Note 7 for information regarding the finance lease payment schedule.
7
Expenses incurred with respect to the Company’s leases during the three months ended March 31, 2022 and 2021 are set forth below.
| Three Months Ended March 31, 2022 | Three Months Ended | |||||||
| Operating lease expense | $ | $ | ||||||
| Finance lease amortization | ||||||||
| Finance lease interest | ||||||||
| Total lease expense | $ | $ | ||||||
The remaining lease term with respect to the operating lease, weighted average remaining lease term with respect to the finance leases and discount rate with respect to the operating lease and finance leases at March 31, 2022 and December 31, 2021 are set forth below:
| March 31, 2022 | ||||
| Remaining lease term – operating lease | ||||
| Weighted average remaining lease term – finance leases | ||||
| Discount rate – operating lease | % | |||
| Weighted average discount rate – finance leases | % | |||
| December 31, 2021 | ||||
| Remaining lease term – operating lease | ||||
| Weighted average remaining lease term – finance leases | ||||
| Discount rate – operating lease | % | |||
| Weighted average discount rate – finance leases | % | |||
5. INTANGIBLE ASSETS
The Company’s intangible assets at March 31, 2022 and December 31, 2021 consisted of the following:
March 31, 2022
| Intangible Assets | Cost | Accumulated Amortization | Net | |||||||||
| Patents | $ | $ | $ | |||||||||
| Trade names and trademarks | ||||||||||||
| Customer list | ||||||||||||
| Product formulas | ||||||||||||
| Royalty rights | ||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||
December 31, 2021
| Intangible Assets | Cost | Accumulated Amortization | Net | |||||||||
| Patents | $ | $ | $ | |||||||||
| Trade names and trademarks | ||||||||||||
| Customer list | ||||||||||||
| Product formulas | ||||||||||||
| Royalty rights | ||||||||||||
| Total intangible assets | $ | $ | $ | |||||||||
Amortization
expense related to intangible assets was $
8
6. REVOLVING LINE OF CREDIT
On August 6, 2021, the Company and Regions Bank
(“the “Lender”) entered into a Business Loan Agreement (the “Business Loan Agreement”), effective as of
July 30, 2021, under which the Company was provided a revolving line of credit in the amount of Six Million Dollars ($
There has been no negative impact in the availability of funds to the Company as a result of the COVID-19 pandemic.
At March 31, 2022 and December 31, 2021, the Company had no borrowings under the revolving line of credit provided by the current and former Business Loan Agreements.
7. LONG TERM DEBT
Term Loan
On July 30, 2021, Kinpak and Regions Bank
(the “Lender”) entered into a Credit Agreement (the “Credit Agreement”), effective as of July 20, 2021, under
which the Company was extended a term loan (the “Term Loan”) in the original principal amount of Five Million Dollars ($
The Company has unconditionally guaranteed the payment to the Lender promptly when due, by acceleration or otherwise, of all obligations of Kinpak to the Lender.
The Term Loan bears interest at an annual rate of 3.25% and is due in 119 monthly installments of $35,249 each, plus interest then accrued, beginning on August 20, 2021. The final installment shall be due and payable on July 20, 2031 in an amount equal to all principal and interest then remaining unpaid. Assuming that all amounts due prior to that date are paid in a timely manner, the final installment would be $1,977,047.
The Credit Agreement provides that prepayments
on the Term Loan are subject to a prepayment penalty of
The Credit Agreement contains cross-default and
cross-collateral provisions relating to any other indebtedness with the Lender, including without limitation the Company’s obligations
under its $
The Credit Agreement also contains negative covenants
restricting the Company’s ability to, among other things, create or assume indebtedness for borrowed money exceeding $
Industrial Development Bond Financing
On September 26, 2017, Kinpak indirectly obtained
a $
9
The loan was funded by the Lender’s purchase
of a $
Under the Lease, Kinpak is required to make rental
payments for the account of the IDB to the Lender in such amounts and at such times as are necessary to enable the payment of all principal
and interest due on the Bond and other charges, if any, payable in respect of the Bond. The Lease also provides that Kinpak may redeem
the Bond, in whole or in part, by prepaying its rental payment obligations in an amount sufficient to effect the redemption.
Payment of amounts due and payable under the Bond
and other related agreements are guaranteed by the Company and its other consolidated subsidiaries. In connection with the guarantee agreement
under which the Company provided its guarantee,
The Company incurred debt financing costs of $
Other Long-Term Obligations
On June
22, 2020,
At March 31, 2022 and December 31, 2021, 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 $
10
The following table provides information regarding the Company’s long-term debt at March 31, 2022 and December 31, 2021:
| Current Portion | Long Term Portion | |||||||||||||||
| March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | |||||||||||||
| Term loan | $ | $ | $ | $ | ||||||||||||
| Obligations related to industrial development bond financing | ||||||||||||||||
| Note payable related to Snappy Marine asset acquisition | ||||||||||||||||
| Obligation related to Check Corporation asset acquisition | ||||||||||||||||
| Office equipment finance leases | ||||||||||||||||
| Total principal of long- term debt | ||||||||||||||||
| Debt issuance costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total long- term debt | $ | $ | $ | $ | ||||||||||||
Required principal payments under the Company’s long- term obligations are set forth below:
| Twelve-month period ending March 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
8. RELATED PARTY TRANSACTIONS
The Company sells products to companies affiliated
with Peter G. Dornau, who is the Company’s Chairman, President and Chief Executive Officer. The affiliated companies resell, outside
of the United States and Canada, products they purchase from the Company. The Company also provides administrative services to these companies
and pays certain business-related expenditures for the affiliated companies, for which the Company is reimbursed. Sales to the affiliated
companies aggregated approximately $
An entity that is owned by the Company’s
Chairman, President and Chief Executive Officer provides several services to the Company. Under this arrangement, the Company
paid the entity an aggregate of approximately $
The Company leases office and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. See Note 4 for a description of the lease terms.
A director of the Company is Regional Executive
Vice President of an insurance broker through which the Company sources most of its insurance needs. During the three months
ended March 31, 2022 and 2021, the Company paid an aggregate of approximately $
11
9. EARNINGS PER COMMON SHARE
The Company did not have any potentially dilutive securities during the three months ended March 31, 2022 and 2021. Therefore, the Company’s earnings per share are calculated by dividing net income by the weighted average number of shares outstanding during the reporting period.
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net income | $ | $ | ||||||
| Weighted average number of common shares outstanding | ||||||||
| Earnings per common share | $ | $ | ||||||
10. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
No stock compensation expense was incurred during each of the three months ended March 31, 2022 and 2021, and at March 31, 2022, there were no outstanding stock options or unrecognized compensation expense related to stock options.
11. CASH DIVIDENDS
On February 24, 2022, the Company’s Board
of Directors declared a regular quarterly dividend of $
On February 25, 2021, the Company’s Board
of Directors declared a regular quarterly dividend of $
12. CUSTOMER CONCENTRATION
During the three months ended March 31, 2022 and
2021, the Company had net sales to each of two customers that
At March 31, 2022 and December 31,
2021,
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements:
Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, our ability to provide required capital to support inventory levels, the effect of price increases in raw materials that are petroleum or chemical based or commodity chemicals on our margins, and the sufficiency of funds provided through operations and existing sources of financing to satisfy our cash requirements constitute forward-looking statements. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “believe,” “may,” “will,” “expect,” “anticipate,” “intend,” or “could,” including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking statements. Factors that may affect these results include, but are not limited to, the impact of the COVID-19 pandemic on our business and the economy in general, the highly competitive nature of our industry; reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; expenditures on, and the effectiveness of our advertising and promotional efforts; adverse weather conditions; unanticipated litigation developments; exposure to market risks relating to changes in interest rates, foreign currency exchange rates and prices for raw materials that are petroleum or chemical based, availability in general of raw materials and other factors addressed in the sections entitled “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2021.
Overview:
We are engaged in the manufacture, marketing and distribution of a broad line of appearance, performance, and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite® and other trademarks within the United States and Canada. In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products. We also manufacture, market and distribute chlorine dioxide-based deodorizing, disinfectant and sanitizing products. We sell our products through national retailers and to national and regional distributors. In addition, we sell products to two companies affiliated with Peter G. Dornau, our Chairman, President and Chief Executive Officer; these companies distribute the products outside of the United States and Canada.
Critical accounting estimates:
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for information regarding our critical accounting estimates.
Results of Operations:
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
The following table provides a summary of our financial results for the three months ended March 31, 2022 and 2021:
| For The Three Months Ended March 31, | ||||||||||||||||||||
| Percent | Percentage of Net Sales | |||||||||||||||||||
| 2022 | 2021 | Change | 2022 | 2021 | ||||||||||||||||
| Net sales | $ | 12,737,329 | $ | 13,131,224 | (3.0 | )% | 100.0 | % | 100.0 | % | ||||||||||
| Cost of goods sold | 8,001,347 | 7,750,503 | 3.2 | % | 62.8 | % | 59.0 | % | ||||||||||||
| Gross profit | 4,735,982 | 5,380,721 | (12.0 | )% | 37.2 | % | 41.0 | % | ||||||||||||
| Advertising and promotion | 1,071,579 | 941,814 | 13.8 | % | 8.4 | % | 7.2 | % | ||||||||||||
| Selling and administrative | 2,000,030 | 1,972,812 | 1.4 | % | 15.7 | % | 15.0 | % | ||||||||||||
| Operating income | 1,664,373 | 2,466,095 | (32.5 | )% | 13.1 | % | 18.8 | % | ||||||||||||
| Interest (expense), net | (31,682 | ) | (37,187 | ) | (14.8 | )% | 0.2 | % | 0.3 | % | ||||||||||
| Provision for income taxes | (333,410 | ) | (524,639 | ) | (36.4 | )% | 2.6 | % | 4.0 | % | ||||||||||
| Net income | $ | 1,299,281 | $ | 1,904,269 | (31.8 | )% | 10.2 | % | 14.5 | % | ||||||||||
Net sales for the three months ended March 31, 2022 decreased by approximately $394,000, or 3.0%, as compared to the three months ended March 31, 2021. The three months ended March 31, 2021 benefitted from an unusually high amount of open orders at the end of 2020, which was caused by an increase in demand for marine products as the economy began to open from the pandemic.
Cost of goods sold increased by approximately $251,000, or 3.2%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase was principally a result of the mix of sales, and increases in freight, raw materials and other manufacturing cost increases.
13
Gross profit decreased by approximately $645,000, or 12.0%, for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. Gross profit decreased due to the changes in net sales and cost of goods sold described above. As a percentage of net sales, gross profit was approximately 37.2% and 41.0% for the three months ended March 31, 2022 and 2021, respectively.
Advertising and promotion expenses increased by approximately $130,000, or 13.8%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The increase in advertising and promotion expenses was principally a result of an increased focus on social media and digital marketing. As a percentage of net sales, advertising and promotion expenses increased to 8.4% for the three months ended March 31, 2022, from 7.2% for the three months ended March 31, 2021.
Selling and administrative expenses increased by approximately $27,000, or 1.4%, during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. As a percentage of net sales, selling and administrative expenses increased to 15.7% for the three months ended March 31, 2022, from 15.0% for the three months ended March 31, 2021.
Interest (expense), net for the three months ended March 31, 2022 decreased by approximately $6,000 or 14.8%, as compared to the three months ended March 31, 2021.
Provision for income taxes for the three months ended March 31, 2022 was approximately $333,000, or 20.4% of our income before income taxes. For the three months ended March 31, 2021 the provision was approximately $525,000, or 21.6% of our income before income taxes.
Liquidity and capital resources:
Our cash balance was approximately $10,217,000 at March 31, 2022 and approximately $12,685,000 at December 31, 2021.
The following table summarizes our cash flows for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by operating activities | $ | (238,837 | ) | $ | 1,207,802 | |||
| Net cash used in investing activities | (1,610,684 | ) | (915,899 | ) | ||||
| Net cash used in financing activities | (619,141 | ) | (414,546 | ) | ||||
| Effect of exchange rate fluctuations on cash | 651 | 976 | ||||||
| Net decrease in cash and restricted cash | $ | (2,468,011 | ) | $ | (121,667 | ) | ||
Net cash used in operating activities for the three months ended March 31, 2022 was approximately $238,000, as compared to net cash provided by operating activities of approximately $1,208,000 for the three months ended March 31, 2021. During the three months ended March 31, 2022, net income decreased by approximately $605,000, noncash adjustments to net income increased by approximately $295,000, and changes in working capital used approximately $1,137,000 more in cash, as compared to the three months ended March 31, 2021.
Net trade accounts receivable at March 31, 2022 aggregated approximately $10,261,000, an increase of approximately $717,000, or 7.5%, as compared to approximately $9,544,000 in net trade accounts receivable outstanding at December 31, 2021. The increase was principally a result of our net sales during the first quarter of 2022. Receivables due from affiliated companies aggregated approximately $847,000 at March 31, 2022, a decrease of approximately $365,000, or 30.1%, from receivables due from affiliated companies of approximately $1,212,000 at December 31, 2021. The decrease was a result of payments received during the three months ended March 31, 2022.
Inventories, net were approximately $19,975,000 and $16,819,000 at March 31, 2022 and December 31, 2021, respectively, representing an increase of approximately $3,156,000, or 18.8%, during the three months ended March 31, 2022. We believe the higher levels of inventories were necessary in order to reduce potential supply chain problems and material price increases.
Net cash used in investing activities for the three months ended March 31, 2022 increased by approximately $695,000, or 75.9%, as compared to the three months ended March 31, 2021. The increase in cash used was principally to expand our manufacturing, warehouse and distribution facilities at Kinpak.
Net cash used in financing activities for the three months ended March 31, 2022 increased by approximately $205,000, or 49.4%, as compared to the three months ended March 31, 2021. During the three months ended March 31, 2022, the Company paid dividends to common shareholders aggregating approximately $380,000 and made payments on long term debt of approximately $233,000, as compared to dividends paid to common shareholders aggregating approximately $284,000 and payments on long term debt of approximately $130,000 during the three months ended March 31, 2021.
See Notes 6 and 7 to the condensed consolidated financial statements included in this report for information concerning our principal credit facilities, consisting of Kinpak’s obligations relating to a term loan, the payment of which we have guaranteed, an industrial development bond financing, the payment of which we have guaranteed, and a revolving line of credit. At March 31, 2022 and December 31, 2021, we had outstanding balances of approximately $4,822,000 and $4,888,000, respectively under Kinpak’s obligation relating to the term loan, $3,220,000 and $3,334,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility.
14
The loan agreement pertaining to our revolving credit facility, as amended, has a stated term that expires on August 30, 2024, 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 contains various covenants, including financial covenants that are described in Note 6 to the condensed consolidated financial statements included in this report. At March 31, 2022, we were in compliance with these financial covenants. The revolving credit facility is subject to several events of default, including a decline of the majority shareholder’s ownership below 50% of our outstanding shares.
Our guarantee of Kinpak’s obligations related to the industrial development bond financing are subject to various covenants, including financial covenants that are described in Note 7 to the condensed consolidated financial statements included in this report. At March 31, 2022, we were in compliance with these financial covenants.
In connection with our acquisition of assets of Snappy Marine, we issued a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). At March 31, 2022, we had an outstanding balance of $266,666 under the promissory note (including $261,322 recorded as principal and $5,344 to be recorded as interest expense over the remaining term of the note).
We also obtained financing through leases for office equipment, totaling approximately $73,000 and $79,000 at March 31, 2022 and December 31, 2021, respectively.
Some of our assets and liabilities are denominated in Canadian dollars and are subject to currency exchange rate fluctuations. We do not engage in currency hedging and address currency risk as a pricing issue. For the three months ended March 31, 2022, we recorded $962 in foreign currency translation adjustments (increasing shareholders’ equity by $962).
During the past few years, we have introduced a number of new products. At times, new product introductions have required us to increase our overall inventory and have resulted in lower inventory turnover rates. The effects of reduced inventory turnover have not been material to our overall operations. We believe that all required capital to maintain such increases will continue to be provided by operations and our current revolving line of credit or a renewal or replacement of the facility.
Many of the raw materials that we use in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The nature of our business does not enable us to pass through the price increases to our national retailer customers and to our distributors as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.
We believe that funds provided through operations and our revolving line of credit will be sufficient to satisfy our cash requirements over at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures:
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) at the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act are (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the disclosure.
Change in Internal Controls over Financial Reporting:
No change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
15
PART II - OTHER INFORMATION
Item 1A. Risk Factors
The business, results of operations, financial condition, cash flow, and stock price of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| Period | Total Number of Shares Purchased | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) | ||||||||||||
| January 1 - January 31, 2022 | 600 | $ | 9.41 | 600 | $ | 2,955,243 | ||||||||||
| February 1 - February 28, 2022 | - | - | - | $ | 2,955,243 | |||||||||||
| March 1 - March 31, 2022 | - | - | - | $ | 2,955,243 | |||||||||||
| Total | 600 | 600 | ||||||||||||||
| (1) | Represents approximate dollar value of shares that could have been purchased under the plan in effect at the end of the month. |
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.INS | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OCEAN BIO-CHEM, INC. | |
| Dated: May 16, 2022 | /s/ Peter G. Dornau |
| Peter G. Dornau | |
| Chairman of the Board, President and | |
| Chief Executive Officer | |
| Dated: May 16, 2022 | /s/ Jeffrey S. Barocas |
| Jeffrey S. Barocas | |
| Vice President and | |
| Chief Financial Officer |
17