The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 inter-company 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 Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements.
The
financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of
management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows
for the interim periods. The results of operations for the three and six months ended June 30, 2016 are not necessarily
indicative of the results to be expected for the year ending December 31, 2016.
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, 2015.
Use
of estimates
The
preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America 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
|
There have been no accounting pronouncements
or changes in accounting pronouncements during the six months ended June 30, 2016 that are expected to have a material impact on
the Company’s financial position, results of operations or cash flows. Accounting pronouncements that became effective
during the six months ended June 30, 2016 did not have a material impact on the Company’s financial position, results of
operations or cash flows, or on disclosures made by the Company.
The
Company’s inventories at June 30, 2016 and December 31, 2015 consisted of the following:
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
3,678,023
|
|
|
$
|
3,749,702
|
|
Finished goods
|
|
|
5,483,305
|
|
|
|
4,445,130
|
|
Inventories, gross
|
|
|
9,161,328
|
|
|
|
8,194,832
|
|
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
|
(360,866
|
)
|
|
|
(279,882
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
8,800,462
|
|
|
$
|
7,914,950
|
|
The
inventory reserves shown in the table above reflect slow moving and obsolete inventory.
The
Company manages an inventory program for one of its customers to improve the promotion of the Company's products. The
Company manages the inventory levels at the customer’s warehouses and recognizes revenue as the products are sold by the
customer. The inventories managed at the customer’s warehouses amounted to approximately $459,000 and $543,000
at June 30, 2016 and December 31, 2015, respectively, and are included in inventories, net on the condensed consolidated balance
sheets.
4.
|
PROPERTY,
PLANT & EQUIPMENT
|
The
Company’s property, plant and equipment at June 30, 2016 and December 31, 2015 consisted of the following:
|
|
Estimate
Useful Life
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Land
|
|
|
|
$
|
278,325
|
|
|
$
|
278,325
|
|
Building and improvements
|
|
30 years
|
|
|
4,652,669
|
|
|
|
4,652,669
|
|
Manufacturing and warehouse equipment
|
|
6-20 years
|
|
|
9,192,385
|
|
|
|
9,072,162
|
|
Office equipment and furniture
|
|
3-5 years
|
|
|
1,283,045
|
|
|
|
1,293,609
|
|
Construction in process
|
|
|
|
|
224,558
|
|
|
|
215,155
|
|
Leasehold improvements
|
|
10-15 years
|
|
|
544,146
|
|
|
|
544,146
|
|
Vehicles
|
|
3 years
|
|
|
42,283
|
|
|
|
42,283
|
|
Property, plant and equipment, gross
|
|
|
|
|
16,217,411
|
|
|
|
16,098,349
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(11,160,043
|
)
|
|
|
(10,741,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
$
|
5,057,368
|
|
|
$
|
5,356,388
|
|
5.
|
REVOLVING
LINE OF CREDIT
|
On August 4, 2014, the Company and Regions
Bank entered into a Business Loan Agreement (the“Business Loan Agreement”), under which the Company was provided a
renewed revolving line of credit. Under the renewed revolving line of credit, the Company may borrow up to the lesser of (i) $6
million or (ii) a borrowing base equal to 80% of eligible accounts receivable (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 30 day LIBOR rate plus 1.65% per annum, unless the Company’s debt service coverage ratio
(generally, net operating profit plus depreciation, amortization and lease/rent expense divided by current maturities of long-term
debt plus interest and lease/rent expense, calculated on a trailing twelve month basis) falls to or below 2.0 to 1, in which case
interest is payable at the 30 day LIBOR rate plus 2.65% per annum.
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, at which time all outstanding principal and interest will be due and payable. The revolving line
of credit, which was to expire on July 6, 2016, has been extended through August 30, 2016 on substantially the same terms as previously
in effect (the Company currently is engaged in negotiations with Regions Bank with regard to a new revolving line of credit facility).
The Company’s obligations under the revolving line of credit are secured by, among other things, the Company’s accounts
receivable, inventory, contract rights and general intangibles and, as a result of cross-collateralization of the Company’s
obligations under the term loan described in Note 6 and the revolving line of credit, real property and equipment at the Montgomery,
Alabama facility of the Company’s subsidiary, Kinpak, Inc. ("Kinpak"). The Business Loan Agreement includes financial
covenants requiring a minimum debt service coverage ratio (generally, net operating profit plus depreciation, amortization and
lease/rent expense divided by current maturities of long-term debt plus interest and lease/rent expense) of 1.75 to 1.00, calculated
on a trailing twelve month basis, and a maximum debt to capitalization ratio (generally, funded debt divided by the sum of total
net worth and funded debt) of 0.75 to 1, tested quarterly. At June 30, 2016 and December 31, 2015, the Company was in compliance with these covenants. The line of credit
is subject to several events of default, including a decline in the majority shareholder’s ownership below 50% of all outstanding
shares. At June 30, 2016, the Company had no borrowings under the revolving line of credit. (As previously disclosed, the Company
was not in compliance with the debt service coverage ratio covenant at March 31, 2016, which resulted in an event of default under
the Business Loan Agreement. However, Regions Bank waived the default through May 9, 2017 and, as indicated above, at June 30,
2016, the Company regained compliance with the covenant.)
On
July 6, 2011, REFCO provided to the Company a $2,430,000 term loan with a fixed interest rate of 3.54%, subject to an increase
to 4.55% in the event the Company's debt service coverage ratio (net profit plus taxes, interest, depreciation, amortization and
rent expense divided by debt service plus interest and lease/rent expense, calculated on a trailing four-quarter basis) falls
to or below 2.0 to 1. Principal and interest on the term loan are payable in equal monthly installments through July 6, 2017,
the date on which the term loan matures. The proceeds of the term loan were used to pay the Company’s remaining obligations
under a lease agreement relating to industrial revenue bonds used to fund the expansion of Kinpak’s facilities and acquisition
of related equipment. At June 30, 2016, approximately $478,000 was outstanding under the term loan. The term loan and the revolving
line of credit under the Bank Loan Agreement are cross-defaulted (i.e., a default under one instrument is a default under the
other).
At
June 30, 2016 and December 31, 2015, the Company was obligated under capital lease agreements covering equipment utilized in the
Company’s operations. The capital leases, aggregating approximately $77,000 and $88,000 at June 30, 2016 and
December 31, 2015, respectively, mature on July 1, 2020 and carry an interest rate of 2%.
The
following table provides information regarding the Company’s long term debt at June 30, 2016 and December 31, 2015:
|
|
Current Portion
|
|
|
Long Term Portion
|
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
Term loan
|
|
$
|
440,315
|
|
|
$
|
432,601
|
|
|
$
|
37,400
|
|
|
$
|
259,503
|
|
Capitalized equipment leases
|
|
|
17,170
|
|
|
|
18,547
|
|
|
|
59,914
|
|
|
|
69,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
$
|
457,485
|
|
|
$
|
451,148
|
|
|
$
|
97,314
|
|
|
$
|
328,818
|
|
Required
principal payments under the Company’s long term obligations are set forth below:
12 month period ending June 30,
|
|
|
|
2017
|
|
$
|
457,485
|
|
2018
|
|
|
56,463
|
|
2019
|
|
|
19,414
|
|
2020
|
|
|
19,773
|
|
2021
|
|
|
1,664
|
|
|
|
|
|
|
Total
|
|
$
|
554,799
|
|
7.
|
RELATED
PARTY TRANSACTIONS
|
During
the three and six months ended June 30, 2016 and 2015, the Company sold products to companies affiliated with its Chairman, President
and Chief Executive Officer. The affiliated companies distribute the products outside of the United States and Canada. The Company
also provides administrative services to these companies. Sales to the affiliated companies aggregated approximately $460,000
and $493,000 during the three months ended June 30, 2016 and 2015, respectively, and approximately $1,006,000 and $1,218,000 for
the six months ended June 30, 2016 and 2015, respectively. Administrative fees aggregated approximately $179,000 and
$162,000 during the three months ended June 30, 2016 and 2015, respectively, and $302,000 and $269,000 for the six months
ended June 30, 2016 and 2015, respectively. The Company had accounts receivable from the affiliated companies in connection
with the product sales and administrative services aggregating approximately $1,073,000 and $1,051,000 at June 30, 2016 and December
31, 2015, respectively. Transactions with the affiliated companies were made in the ordinary course of business. While
the terms of sale to the affiliated companies differed from the terms applicable to other customers, the affiliated companies
bear their own warehousing, distribution, advertising, selling and marketing costs, as well as their own freight charges (the
Company pays freight charges in connection with sales to its domestic customers on all but small orders). Moreover,
the Company does not pay sales commissions with respect to products sold to the affiliated companies. As a result, the Company
believes its profit margins with respect to sales of its products to the affiliated companies are similar to the profit margins
it realizes with respect to sales of the same products to its larger domestic customers. Management believes that the sales
transactions did not involve more than normal credit risk or present other unfavorable features.
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 $10,500 for each of the three month periods ended June 30, 2016 and 2015, and $21,000 for each of the six month
periods ended June 30, 2016 and 2015, for research and development services. In addition, during the three and six month periods
ending June 30, 2016, the Company paid this entity $25,000 for the production of television commercials and $9,000 for providing
charter boat services for entertainment of Company customers.
The Company leases office and warehouse
facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. The
Company believes that its rental payments under the lease are below market rates. See Note 8 for a description of the
lease terms.
A director of the Company is Regional
Executive Vice President of an entity from which the Company sources most of its insurance needs at an arm’s length competitive
basis. During the three months ended June 30, 2016 and 2015, the Company paid an aggregate of approximately $121,000
and $177,000, respectively, and during the six months ended June 30, 2016 and 2015, the Company paid an aggregate of approximately
$181,000 and $393,000, respectively, in insurance premiums on policies obtained through the entity. The decrease in 2016 is primarily
attributable to the Company’s prepayment of the entire annual premium for its general liability policy rather than paying
the premium in installments.
8.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company leases its executive offices and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by its 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 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. Rent expense under the
lease was approximately $25,000 for each of the three months ended June 30, 2016 and 2015, respectively, and was approximately
$49,000 for each of the six month periods ended June 30, 2016 and 2015, respectively.
Basic
earnings per share is 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 issuable upon the exercise
of outstanding stock options. The following table sets forth the computation of basic and diluted earnings per common
share, as well as a reconciliation of the weighted average number of common shares outstanding to the weighted average number
of shares outstanding on a diluted basis.
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Earnings per common share – Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
656,541
|
|
|
$
|
113,697
|
|
|
$
|
115,739
|
|
|
$
|
97,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
9,008,855
|
|
|
|
8,922,118
|
|
|
|
8,997,357
|
|
|
|
8,921,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – Basic
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
656,541
|
|
|
$
|
113,697
|
|
|
$
|
115,739
|
|
|
$
|
97,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
9,008,855
|
|
|
|
8,922,118
|
|
|
|
8,997,357
|
|
|
|
8,921,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of employee stock-based awards
|
|
|
47,931
|
|
|
|
89,603
|
|
|
|
53,061
|
|
|
|
94,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
9,056,786
|
|
|
|
9,011,721
|
|
|
|
9,050,418
|
|
|
|
9,016,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – Diluted
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
The
Company had no stock options outstanding during each of the three and six month periods ended June 30, 2016 and 2015, respectively,
that were anti-dilutive and therefore not included in the diluted earnings per common share calculation.
10.
|
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
|
During
the three months ended June 30, 2016 no stock options were exercised.
During
the six months ended June 30, 2016, stock options to purchase an aggregate of 30,000 shares were exercised. The Company received
a total of $21,600, withheld 4,519 shares in connection with the net exercise feature of the stock options and delivered an aggregate
of 25,481 shares to the option holders who exercised their options.
No
stock compensation expense was recognized during the three and six months ended June 30, 2016 and 2015. At June 30, 2016, there
was no unrecognized compensation expense related to stock
options.
No
stock awards were issued during the three and six months ended June 30, 2016 and 2015.
The
following table provides information at June 30, 2016 regarding outstanding
stock options under the Company’s
stock option plans. As used in the table below, “2002 NQ” refers to the Company’s 2002 Non-Qualified Stock Option
Plan and “2008 NQ” refers to the Company’s 2008 Non-Qualified Stock Option Plan.
Plan
|
|
Date
Granted
|
|
Shares
Underlying
Options Outstanding
|
|
|
Shares
Underlying Exercisable
Options
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Weighted
Average
Remaining Term
|
|
2002NQ
|
|
12/17/07
|
|
|
40,000
|
|
|
|
40,000
|
|
|
$
|
1.32
|
|
|
12/16/17
|
|
|
1.5
|
|
2008NQ
|
|
1/11/09
|
|
|
40,000
|
|
|
|
40,000
|
|
|
$
|
0.69
|
|
|
1/10/19
|
|
|
2.6
|
|
2008NQ
|
|
4/26/10
|
|
|
20,000
|
|
|
|
20,000
|
|
|
$
|
2.07
|
|
|
4/25/20
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
$
|
1.22
|
|
|
|
|
|
2.4
|
|
11.
|
SPECIAL
CASH DIVIDEND
|
On
April 26, 2016, the Company paid a special cash dividend of $0.06 per common share to all shareholders of record on April
12, 2016. The dividend aggregated $540,531.
On August 4, 2016, the Company issued
stock awards under the Ocean Bio-Chem, Inc. 2015 Equity Compensation Plan to officers, other employees and a consultant. The stock
awards aggregated 139,000 shares of Company common stock.
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 projected income tax rate for the full 2016 year, our belief that
we will be able to negotiate a new revolving credit facility to replace our current facility, 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 involve known and unknown risks, uncertainties and other factors that may cause actual
results to be materially different from those expressed or implied by such forward-looking statements. Factors that may affect
these results include, but are not limited to, the highly competitive nature of our industry; reliance on certain key customers;
changes in consumer demand for marine, recreational vehicle and automotive products; advertising and promotional efforts; unanticipated
litigation developments; exposure to market risks relating to changes in interest rates, foreign exchange rates, prices for raw
materials that are petroleum or chemical based and other factors addressed in Part I, Item 1A (“Risk Factors”) in our
annual report on Form 10-K for the year ended December 31, 2015.
Overview:
We
are principally engaged in manufacturing, marketing and distributing
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®,
StarTron® and other trademarks within the United States of America and Canada. We also manufacture, market and distribute
a line of disinfectant, sanitizing and deodorizing products. 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 sell our products
to national retailers and to national and regional distributors who sell our products to specialized retail outlets.
Our operating results for the six months
ended June 30, 2016 and 2015 were adversely affected by professional fees and expenses related to the litigation described in Note
8 to the condensed consolidated financial statements included in our quarterly report on Form 10-Q for the quarter ended March
31, 2016 (the “Advertising Litigation”). Our professional fees and expenses related to the Advertising Litigation were
approximately $1,127,000 and $270,000 for the six month periods ended June 30, 2016 and 2015, respectively. Following the conclusion
of the trial and a jury verdict in the Advertising Litigation, as a result of which neither party is liable to the other, only
post-trial proceedings related to our entitlement to an award of attorneys’ fees and costs continued during the second quarter
of 2016. Our legal expenses related to the Advertising Litigation declined to $42,000 during the three months ended June 30, 2016
(such expenses were $211,000 during the three months ended June 30, 2015). As a result of the post-trial proceedings, it was determined
that neither party to the Advertising Litigation is entitled to an award of attorneys’ fees and costs; the Advertising Litigation
is now concluded. We sought insurance recovery with respect to a portion of our expenditures in connection with the Advertising
Litigation, but our insurer has denied our claim, and we are not contesting the denial.
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, 2015 for information regarding
our critical accounting estimates.
Results
of Operations:
Three
Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015
The
following table provides a summary of our financial results for the three months ended June 30, 2016 and 2015:
|
|
For The Three Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percentage of Net Sales
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
8,724,343
|
|
|
$
|
8,738,705
|
|
|
|
(0.2
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
5,053,439
|
|
|
|
5,574,607
|
|
|
|
(9.3
|
)%
|
|
|
57.9
|
%
|
|
|
63.8
|
%
|
Gross profit
|
|
|
3,670,904
|
|
|
|
3,164,098
|
|
|
|
16.0
|
%
|
|
|
42.1
|
%
|
|
|
36.2
|
%
|
Advertising and promotion
|
|
|
869,648
|
|
|
|
931,633
|
|
|
|
(6.7
|
)%
|
|
|
10.0
|
%
|
|
|
10.7
|
%
|
Selling and administrative
|
|
|
1,793,962
|
|
|
|
2,056,828
|
|
|
|
(12.8
|
)%
|
|
|
20.6
|
%
|
|
|
23.5
|
%
|
Operating income
|
|
|
1,007,294
|
|
|
|
175,637
|
|
|
|
473.5
|
%
|
|
|
11.5
|
%
|
|
|
2.0
|
%
|
Interest (expense), net
|
|
|
(4,913
|
)
|
|
|
(8,820
|
)
|
|
|
(44.3
|
)%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Provision for income taxes
|
|
|
(345,840
|
)
|
|
|
(53,120
|
)
|
|
|
551.1
|
%
|
|
|
4.0
|
%
|
|
|
0.6
|
%
|
Net income
|
|
$
|
656,541
|
|
|
$
|
113,697
|
|
|
|
477.4
|
%
|
|
|
7.5
|
%
|
|
|
1.3
|
%
|
Net sales
were approximately $8,724,000 during the three months ended June 30, 2016, compared to approximately $8,739,000 for the three
months ended June 30, 2015. Although sales volumes declined, the effect of the decline was offset by increased sales of higher
margin Star brite® branded products.
Cost of goods sold
d
e
creased
by approximately $521,000, or 9.3%, to approximately $5,053,000 for the three months ended June 30, 2016, from approximately
$5,574,000 for the same period in 2015. The decrease in cost of goods sold reflects a more favorable mix of products sold
during the 2016 period.
Gross profit
increased by approximately
$507,000, or 16.0%, to approximately $3,671,000 for the three months ended June 30, 2016, from approximately $3,164,000 for the
same period in 2015. Gross profit increased due to the more favorable mix of products sold during the 2016 period. As a percentage
of net sales, gross profit was approximately 42.1% and 36.2% for the three month periods ended June 30, 2016 and 2015, respectively.
Advertising and promotion expenses
decreased by approximately $62,000, or 6.7%, to approximately $870,000 for the three months ended June 30, 2016 from approximately
$932,000 for the same period in 2015. As a percentage of net sales, advertising and promotion expenses were approximately
10.0% for the three months ended June 30, 2016 compared to approximately 10.7% for the same period in 2015. The decrease
is a result of decreased internet advertising and customer cooperative advertising allowances partially offset by increased magazine
advertising with national distribution.
Selling and administrative expenses
decreased by approximately $263,000, or 12.8%, to approximately $1,794,000 during the three months ended June 30, 2016 from approximately
$2,057,000 for the same period in 2015. Legal fees and expenses accounted for approximately $238,000 of the decrease,
of which $169,000 relates to the Advertising Litigation. As a percentage of net sales, selling and administrative expenses decreased
to 20.6% for the three months ended June 30, 2016, compared to 23.5% for the same period in 2015.
Interest expense, net
decreased
by approximately $4,000 to approximately $5,000 for the three months ended June 30, 2016, compared to approximately $9,000 for
the same period in 2015. The decrease reflects the declining outstanding principal on our term loan.
Provision for income taxes –
Our provision for income taxes for the three months ended June 30, 2016 was approximately $346,000, or 34.5% of our pretax income,
compared to approximately $53,000, or 31.8% of pretax income, for the same period in 2015. The higher 2016 tax rate reflects our
projected rate for the full year of 2016, which is consistent with the year ended December 31, 2015.
Six
Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015
The
following table provides a summary of our financial results for the six months ended June 30, 2016 and 2015:
|
|
For The Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percentage of Net Sales
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
15,474,423
|
|
|
$
|
14,741,134
|
|
|
|
5.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
9,421,576
|
|
|
|
9,540,387
|
|
|
|
(1.2
|
)%
|
|
|
60.9
|
%
|
|
|
64.7
|
%
|
Gross profit
|
|
|
6,052,847
|
|
|
|
5,200,747
|
|
|
|
16.4
|
%
|
|
|
39.1
|
%
|
|
|
35.3
|
%
|
Advertising and promotion
|
|
|
1,585,520
|
|
|
|
1,547,505
|
|
|
|
2.5
|
%
|
|
|
10.2
|
%
|
|
|
10.5
|
%
|
Selling and administrative
|
|
|
4,279,825
|
|
|
|
3,478,374
|
|
|
|
23.0
|
%
|
|
|
27.7
|
%
|
|
|
23.6
|
%
|
Operating income
|
|
|
187,502
|
|
|
|
174,868
|
|
|
|
7.2
|
%
|
|
|
1.2
|
%
|
|
|
1.2
|
%
|
Interest (expense), net
|
|
|
(10,797
|
)
|
|
|
(18,895
|
)
|
|
|
(42.9
|
)%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Other (expense)
|
|
|
---
|
|
|
|
(12,522
|
)
|
|
|
(100.0
|
)%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
Provision for income taxes
|
|
|
(60,966
|
)
|
|
|
(45,680
|
)
|
|
|
33.5
|
%
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
Net income
|
|
$
|
115,739
|
|
|
$
|
97,771
|
|
|
|
18.4
|
%
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
Net sales
increased by approximately $733,000, or 5.0% for the six months ended June 30, 2016 to approximately $15,474,000 from approximately
$14,741,000 during the same period in 2015. The increase primarily reflects higher sales of marine products.
Cost of goods sold
decreased
by approximately $119,000, or 1.2%, to approximately $9,421,000 for the six months ended June 30, 2016, from approximately
$9,540,000 for the same period in 2015. Cost of goods sold decreased despite the increase in net sales due to a larger proportion
of sales of higher margin Star brite® branded products.
Gross profit
increased by approximately
$852,000, or 16.4%, to approximately $6,053,000 for the six months ended June 30, 2016, from approximately $5,201,000 for the same
period in 2015. Gross profit increased due to the more favorable mix of products sold during the 2016 period, as discussed above.
As a percentage of net sales, gross profit was approximately 39.1% and 35.3% for the six month periods ended June 30, 2016 and
2015, respectively.
Advertising and promotion expenses
increased by approximately $38,000, or 2.5%, to approximately $1,586,000 for the six months ended June 30, 2016 from approximately
$1,548,000 for the same period in 2015. As a percentage of net sales, advertising and promotion expenses were approximately
10.2% for the six months ended June 30, 2016 compared to approximately 10.5% for the same period in 2015. The increase
is a result of increased customer cooperative advertising allowances provided to select customers.
Selling and administrative expenses
increased by approximately $801,000, or 23.0%, to approximately $4,279,000 during the six months ended June 30, 2016 from approximately
$3,478,000 for the same period in 2015. Legal fees and expenses related to the Advertising Litigation increased by
approximately $857,000 in the 2016 period compared to the 2015 period. As a percentage of net sales, selling and administrative
expenses increased to 27.7% for the six months ended June 30, 2016, compared to 23.6% for the same period in 2015.
Interest expense, net
decreased
by approximately $8,000 to approximately $11,000 for the six months ended June 30, 2016, compared to approximately $19,000 for
the same period in 2015. The decrease reflects the declining outstanding principal on our term loan.
Provision for income taxes –
Our provision for income taxes for the six months ended June 30, 2016 was approximately $61,000, or 34.5% of our pretax income,
compared to approximately $46,000, or 31.8% of pretax income, for the same period in 2015. The higher 2016 tax rate reflects our
projected rate for the full year of 2016, which is consistent with the year ended December 31, 2015.
Liquidity and capital resources:
Our cash balance was approximately $1,796,000 at June 30, 2016 compared to approximately $2,468,000 at December
31, 2015. At June 30, 2016 and December 31, 2015, we had no borrowings under our revolving line of credit. The decline in our cash
balance largely reflects the special cash dividend of $0.06 per common share, aggregating approximately $541,000, that we paid
to our shareholders on April 26, 2016.
Net cash provided by operating activities during
the six months ended June 30, 2016 was approximately $234,000, a decrease of approximately $406,000 from approximately
$640,000 during the six months ended June 30, 2015. The decrease is due primarily to an increase of approximately $480,000 in
our balance of trade accounts receivable (which do not include receivables due from affiliated companies) during the six
months ended June 30, 2016 compared to a decrease of approximately $853,000 during the 2015 period. The effect of the change
in our trade accounts receivable balance was partially offset by other working capital changes, particularly an increase in
accounts payable and other accrued expenses, and, to a lesser extent, by our net income and noncash adjustments.
Net trade accounts receivable
aggregated approximately $5,566,000 at June 30, 2016, an increase of approximately $474,000, or 9.3%, compared to net trade accounts
receivable of $5,092,000 at December 31, 2015. The higher trade accounts receivable balance at June 30, 2016 is the result of
sales to a large national retailer and stronger sales late in the second quarter.
Inventories, net increased by approximately
$885,000 or 11.2% to approximately $8,800,000 at June 30, 2016 from approximately $7,915,000 at December 31, 2015. The inventory
balance was low at the end of 2015 because of high sales volume late in the year.
Net cash used in investing activities
was approximately $157,000 for the six months ended June 30, 2016 compared to approximately $622,000 for the three months
ended June 30, 2015. During the 2016 period, the Company used approximately $157,000 for purchases of property, plant
and equipment as compared to approximately $670,000 of such expenditures in the 2015 period. Net cash used in investing activities
in the 2015 period was offset in small part by cash proceeds of $55,000 from the sale of a recreational vehicle we used for advertising
and exhibiting our products at trade shows and other events.
Net cash used in financing activities
was approximately $744,000 for the six months ended June 30, 2016 compared to approximately $215,000 for the six months ended
June 30, 2015. The increase in the 2016 period is entirely due to our payment of a special cash dividend aggregating approximately
$541,000, partially offset by approximately $22,000 we received as a result of the exercise of stock options.
See Notes 5 and 6 to the condensed consolidated
financial statements included in this report for information concerning our principal credit facilities, consisting of a revolving
line of credit and a term loan. At June 30, 2016 and December 31, 2015, we had no borrowings under our revolving line of credit
and outstanding balances of approximately $478,000 and $692,000, respectively, under our term loan. The loan agreement related
to our revolving line of credit contains various covenants, including financial covenants requiring a minimum debt coverage ratio
(generally, net operating profit plus depreciation, amortization and lease/rent expense divided by current maturities of long-term
debt plus interest and lease/rent expense) of 1.75 to 1.00, calculated on a trailing twelve month basis, and a maximum debt to
capitalization ratio (generally, funded debt divided by the sum of total net worth and funded debt) of 0.75 to 1, tested quarterly.
As previously disclosed, we were not in compliance with our debt service coverage ratio requirement under our revolving line of
credit at March 31, 2016, resulting in an event of default under both of our principal credit facilities. However, the lender waived
the default through May 9, 2017 and, after giving effect to our improved operating results in the quarter ended June 30, 2016,
we regained compliance with the debt coverage ratio requirement. At June 30, 2016, our debt coverage ratio was approximately 3.16
to 1, and our debt to capitalization ratio was approximately 0.03 to 1.
We are negotiating a new revolving credit
facility to replace our current facility. While we believe that we will be able to negotiate a suitable facility with our lending
bank, we cannot assure that our negotiations will be successful.
In addition to the revolving line of
credit and term loan, we have obtained financing through capital leases for office equipment, totaling approximately $77,000 and
$88,000 at June 30, 2016 and December 31, 2015, respectively.
Some of our assets and liabilities are
in the Canadian dollars and are subject to currency fluctuations relating to the Canadian dollar. We do not engage in currency
hedging and address currency risk as a pricing issue. In the six months ended June 30, 2016, we recorded $206 in foreign currency
translation adjustments (increasing shareholders’ equity by $206).
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, if necessary, our current revolving line of credit or a renewal or replacement of the facility. However,
we cannot assure that we will be able to secure such a renewal or replacement of our revolving line of credit.
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.
At June 30, 2016 and through the date
of this report, we did not and do not have any material commitments for capital expenditures.
We believe that funds provided through
operations and our existing sources of financing 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.
PART
II - OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
The following information updates and
amends information incorporated in Part II, Item 1, “Legal Proceedings” in our quarterly report on Form 10-Q for the
quarter ended March 31, 2016 (the “Form 10-Q”) by reference to the description of litigation between our subsidiary,
Star-Brite Distributing Inc. (“Star-Brite”), and Gold Eagle Co. (“Gold Eagle”) included in Note 8 to the
condensed consolidated financial statements included in the Form 10-Q. As described in the Form 10-Q, in post-trial proceedings,
Star-Brite was seeking an award of attorneys’ fees and costs related to the litigation, which Gold Eagle contested. The Court
referred the matter to a magistrate judge, who, on July 14, 2016, issued a report and recommendation concluding that neither party
was entitled to attorneys’ fees and costs. Neither party filed written objections with the Court pertaining to the report
and recommendation by the August 1, 2016 deadline for such filing, and the matter is now concluded.
In
addition to the information set forth in this report, you should carefully consider the factors discussed in Part I -Item 1A,
“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, which could
materially affect the Company’s business, financial condition or future results.
Exhibit
No.
|
|
Description
|
|
|
|
10.1
|
|
Ocean Bio-Chem, Inc. 2015 Equity Compensation Plan, as amended.
|
|
|
|
23.1
|
|
Independent Auditors’ Consent
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
|
|
|
|
101
|
|
The
following materials from Ocean Bio-Chem, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted
in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2016 and December
31, 2015, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015,
(iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015;
(iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) Notes to
Condensed Consolidated Financial Statements.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the Undersigned thereunto duly authorized.
|
OCEAN
BIO-CHEM, INC.
|
|
|
Dated:
August 12, 2016
|
/s/
Peter G. Dornau
|
|
Peter
G. Dornau
|
|
Chairman
of the Board, President and
|
|
Chief
Executive Officer
|
|
|
Dated:
August 12, 2016
|
/s/
Jeffrey S. Barocas
|
|
Jeffrey
S. Barocas
|
|
Vice
President and
|
|
Chief
Financial Officer
|
18