PART
I
Item
1. Business
General
:
We
are principally 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 Star Tron® brand names. We sell these products within the United States of America 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 disinfectant, sanitizing
and deodorizing products under the Performacide® and Star brite® brand names, utilizing a patented delivery system for
use with products containing chlorine dioxide. Unless the context indicates otherwise, we sometimes refer to Ocean Bio-Chem,
Inc. and its consolidated subsidiaries as “the Company," "we" or "our.”
Ocean
Bio-Chem, Inc. was incorporated in 1973 under the laws of the state of Florida. In 1981, we purchased, from Peter G. Dornau
and Arthur Spector, the co-founders of the Company, rights to the Star brite® trademark and related products for the
United States and Canada. Mr. Dornau, our Chairman, President and Chief Executive Officer, has retained rights
to these assets with respect to all other geographic areas. Accordingly, products we manufacture that are sold outside
of the United States and Canada are purchased from us and distributed by two companies owned by Mr. Dornau. Net
sales to the two companies in 2016 and 2015 totaled approximately $1,850,000 and $2,075,000 or 5.1% and 6.1% of our net sales,
respectively. See Note 9 to the consolidated financial statements included in this report for additional information.
Because
our operations involve, in all material respects, substantially similar manufacturing and distribution processes, our operations
constitute one reportable segment for financial reporting purposes.
Recent
Developments
:
We
are proceeding with a project to expand the manufacturing warehouse and distribution facilities of our subsidiary, Kinpak, Inc.
("Kinpak") in Montgomery, Alabama. As currently contemplated, the project will entail an approximately 85,000 square
feet addition to the facilities and an expansion of Kinpak’s outdoor blended tank farm to accommodate an additional 500,000
gallons in tank capacity, thereby doubling the tank farm’s current capacity. The first phase of the project, involving expansion
of the tank farm, was initiated earlier in 2017. We are using internal funds for this phase, although we currently are in negotiations
to finance the costs of the entire project. Nevertheless, we cannot assure that such financing will be obtained. We currently
estimate that the project cost will be approximately $4.7 million.
Products
:
The
products that we manufacture and market include the following:
Marine
: Our
marine line consists of polishes, cleaners, protectants and waxes under the Star brite
®
brand name, enzyme
fuel treatment under the Star Tron
®
brand name, and private label products sold by some of our customers. The
marine line also includes motor oils, boat washes, vinyl cleaners, protectants, teak cleaners, teak oils, bilge cleaners, hull
cleaners, silicone sealants, polyurethane sealants, polysulfide sealants, gasket materials, lubricants, antifouling additives
and anti-freeze coolants. In addition, we manufacture a line of brushes, poles, tie-downs and other related marine
accessories.
Automotive
: We
manufacture a line of automotive products under the Star brite® and Star Tron® brand names The automotive
line includes fuel treatments for both gas and diesel engines, motor oils, greases and related items. Our Star Tron®
enzyme fuel treatment is designed to eliminate and prevent engine problems associated with fuel containing ethanol (E-10 fuel)
including, among other things, fuel degradation, debris in fuel (gum and varnish formation) and ethanol’s propensity to
attract water (which can adversely affect octane). It also increases fuel economy by cleaning the fuel delivery
system and facilitating more complete and uniform combustion. In addition, we produce anti-freeze and windshield washes
under the Star brite® brand and under private labels for customers. We also produce automotive polishes, cleaners
and other appearance items.
Recreational
Vehicle/Power Sports
: We market Star Tron® fuel treatment and other specialty products to the recreational
vehicle
market, including snow mobiles, all-terrain vehicles and motorcycles. For power sports enthusiasts, Star Tron®
provides a viable solution to a number of problems associated with E-10 fuel, which is fuel containing 10% ethanol. Other
specialty recreational vehicle/power sports products include cleaners, polishes, detergents, fabric cleaners and protectors, silicone
sealants, waterproofers, gasket materials, degreasers, vinyl cleaners and protectors, toilet treatment fluids and anti-freeze/coolant.
Outdoor
Power Equipment/ Lawn & Garden
: We market Star Tron® as a solution to help rectify a number of operating engine
problems associated with E-10 fuel in commercial lawn equipment and other home and garden power equipment.
Disinfectants,
Sanitizers and Deodorizers:
Our line of disinfectant, sanitizing and deodorizing products are marketed under the Performacide
®
and Star brite
®
brand names. Performacide
®
products include disinfectants for hard, non-porous
surfaces, air care products for deodorizing and products to eliminate mold and mildew. The U.S. Environmental Protection Agency
has accepted labeling for Performacide® used in hard surface applications that claims, among other things, effectiveness as
a virucide against a variety of viruses, including HIV-1, Influenza-A, Herpes Simplex-2, Poliovirus-1 norovirus and rotavirus;
as a disinfectant against a number of different types of bacteria; and as a sanitizer against certain types of bacteria that cause
food borne illnesses. We are directing distribution efforts towards the marine, automotive and home restoration markets, to institutions
such as schools and to travel and leisure facilities such as hotels and cruise ships.
Contract
Filling and Blow Molded Bottles
: We blend and package a variety of chemical formulations to our customers’
specifications. In addition, we manufacture for sale to various customers assorted styles of both PVC and HDPE blow
molded bottles.
Manufacturing
:
We
produce the majority of our products at Kinpak’s manufacturing facilities in Montgomery,
Alabama. In addition, we contract with various third party manufacturers to manufacture some of our products,
which are manufactured to our specifications using our provided formulas. Each third party manufacturer enters
into a confidentiality agreement with us.
We
purchase raw materials from a variety of suppliers; all raw materials used in manufacturing are readily available from alternative
sources. We design our own packaging and supply our outside manufacturers with the appropriate design or packaging. We
believe that our internal manufacturing capacity and our arrangements with our current outside manufacturers are adequate for
our present needs.
In
the event that arrangements with any third party manufacturer are discontinued, we believe that we will be able to locate substitute
manufacturing facilities without a substantial adverse effect on our manufacturing and distribution.
Marketing
and Significant Customers:
Our branded and private label products are sold through national retailers such as Wal-Mart,
Tractor Supply, West Marine and Bass Pro Shops. Additionally, we market our products via online retailers. We
also sell to national and regional distributors that resell our products to specialized retail outlets. In the case
of Performacide
®
disinfectant/sanitizing products, we sell to distributors that resell our products, in some cases
under private labels, to end users in the home restoration, automotive, law enforcement and agriculture markets.
Net sales to each of two customers exceeded
10% of our consolidated net sales, and in the aggregate constituted approximately 33.0% and 38.2% of consolidated net sales for
the years ended December 31, 2016 and 2015, respectively. Net sales to our five largest unaffiliated customers for
the years ended December 31, 2016 and 2015 amounted to approximately 48.8% and 49.0% of our consolidated net sales, respectively,
and at December 31, 2016 and 2015, outstanding accounts receivable balances from our five largest unaffiliated customers
aggregated approximately 36.0% and 39.4% of our consolidated accounts receivable, respectively.
We
market our products through both internal salesmen and external sales representatives who work on an independent contractor commission
basis. Our personnel also participate in sales presentations and trade shows. In addition, we market our
brands and products through advertising campaigns in national magazines, on television, on the internet, in newspapers and through
product catalogs. Our products are distributed primarily from Kinpak’s manufacturing and distribution facility
in Montgomery, Alabama. Since 2008, we have participated in a vendor managed inventory program with one major customer.
See Note 2 to the consolidated financial statements included in this report for additional information.
Backlog,
seasonality, and selling terms
: We had no significant backlog of orders at December 31, 2016. We generally
do not give customers the right to return products. The majority of our products is non-seasonal and is sold throughout
the year. Normal trade terms offered to credit customers range from 30 to 180 days depending on the nature of the customer. However,
at times we offer extended payment terms or discount arrangements as purchasing incentives to customers. These initiatives
do not materially affect customary margins.
Competition
:
Competition
with respect to our principal product lines is described below. The principal elements of competition affecting all
of our product lines are brand recognition, price, service and the ability to deliver products on a timely basis.
Marine
: We
have several national and regional competitors in the marine marketplace. We do not believe that any competitor or
small group of competitors hold a dominant market share. We believe that we can increase or maintain our market share
through expenditures directed to our present advertising and distribution channels.
Automotive
: There
are a large number of companies, both national and regional, that compete with us. Many are more established and have
greater financial resources than we do. While our market share is small, the total market size is substantial. We
believe that we have established a reasonable market share through our present advertising and distribution channels, considering
the large size of this market.
Recreational
Vehicle/Power Sports
: We compete with national and regional competitors. We do not believe that any
competitor or small group of competitors hold a dominant market share. We believe that we can increase or maintain
our market share by utilizing similar advertising and distribution channels to those we use in the marine market.
Outdoor
Power Equipment/Lawn & Garden
: We compete with several established national and regional competitors. We
do not believe that any competitor or small group of competitors hold a dominant market share. We have attempted to
make inroads in this market by emphasizing Star Tron®’s unique formulation and by increasing our advertising and
attendance at trade shows.
Disinfectants,
Sanitizers and Deodorants
: There are a large number of companies that compete with us, many of which are much larger, and
have much greater financial resources than we do. We emphasize the effectiveness of chlorine dioxide, coupled with the convenience
in application of our Performacide
®
products.
Trademarks
: We
have obtained registered trademarks for Star brite®, Star Tron®, Performacide
®
and other trade
names used on our products. We view our trademarks as significant assets because they provide product recognition. We
believe that our intellectual property is protected, but we cannot assure that our intellectual property rights can be successfully
asserted in the future or will not be invalidated, circumvented or challenged.
Patents
: We own several
patents, the most significant of which relate to a delivery system for use with products containing chlorine dioxide (the “ClO
2
Patents”). The ClO
2
patents expire in 2022. We have encountered difficulty in protecting the
ClO
2
patents through litigation. See “Risk Factors - If we do not utilize or successfully assert intellectual
property rights, our competitiveness could be materially adversely affected,” in Item 1A of this report for additional information.
A 2014 adverse judgment in patent litigation that was upheld on appeal in 2015 has limited the scope of protection provided
by the patent. To date, we do not believe the judgment has materially impaired our ability to effectively market and distribute
our Performacide
®
products. However, we are unable to predict the long-term competitive effect of the judgment
on these products.
New
Product Development
: We continue to develop specialized products for the marine, automotive, recreational vehicle/power
sports and outdoor power equipment/lawn and garden markets. Expenditures for new product development have not been
significant and are charged to operations in the year incurred.
Personne
l
: At
December 31, 2016, we had 128 full-time employees. The following table provides information regarding personnel working
for the Company and its subsidiaries at December 31, 2016:
Location
|
|
Description
|
|
Full-time Employees
|
|
Fort Lauderdale, Florida
|
|
Administrative, sales, and marketing
|
|
|
41
|
|
Fort Lauderdale, Florida
|
|
Manufacturing and distribution
|
|
|
5
|
|
Montgomery, Alabama
|
|
Manufacturing and distribution
|
|
|
82
|
|
|
|
|
|
|
128
|
|
Item
1A. Risk Factors
If
we do not compete effectively, our business will suffer
.
We
confront aggressive competition in the sale of our products. In each of the markets in which we sell our products,
we compete with a number of national and regional competitors. Competition in the automotive market is particularly
intense, with many national and regional companies marketing competitive products. Many of our competitors in the automotive
market are more established and have greater financial resources than we do. Moreover, we confront intense competition
with respect to our Performacide
®
disinfectant, sanitizing and deodorizing products from a large number of competitors,
many of which are well established and have substantially greater financial resources than we do. Our inability to successfully
compete in our principal markets would have a material adverse effect on our financial condition, results of operations and cash
flows.
Economic
conditions can adversely affect our business
.
We
are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic
slowdown and disruption of credit markets, which may impair the ability of our customers to satisfy obligations due to us. In
addition, we believe that adverse economic conditions in recent years adversely constrained discretionary spending, which we believe
has, at times, adversely affected our product lines, particularly those directed to the marine and recreational vehicle markets. A
future decline in economic conditions could have a material adverse effect on our financial condition, results of operations and
cash flows.
If
we do not effectively utilize or successfully assert intellectual property rights, our competitiveness could be materially adversely
affected.
We
rely on trademarks and trade names in connection with our products, the most significant of which are Star brite® and
Star Tron®. In addition, we own patents we have viewed as providing some degree of competitive support for
our Performacide
®
products. We rely on trademark, trade secret, patent and copyright laws to protect our intellectual
property rights. We cannot assure that these intellectual property rights will be effectively utilized or, if necessary,
successfully asserted. There is a risk that we will not be able to obtain and perfect our own intellectual property
rights, or, where appropriate, license from others intellectual property rights necessary to support new product introductions. Our
intellectual property rights, and any additional rights we may obtain in the future, may be invalidated, circumvented or challenged
in the future, and the legal costs necessary to protect our intellectual property rights could be significant.
In
this regard, in 2013, we filed a patent infringement lawsuit in the United States District Court for the Southern District
of Florida with respect to a U.S. patent relating to a delivery system for use with products containing chlorine dioxide, but
the District Court granted the defendants' motion for summary judgment, which the Federal Circuit Court of Appeals affirmed in
January 2015. As a result, in March 2015, we stipulated to the dismissal with prejudice of our patent infringement claims in another
lawsuit related to the same patent, and, in response, the court dismissed our claims. We are unable to predict the long-term competitive
effect of the adverse outcome in the patent litigation on our Performacide
®
products. Our failure to perfect or
successfully assert intellectual property rights could harm our competitive position and could have a material adverse effect
on our financial condition, results of operations and cash flows.
Environmental
matters may cause potential liability risks.
We
must comply with various environmental laws and regulations in connection with our operations, including those relating to the
handling and disposal of hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous
substances. A release of such substances due to accident or intentional act could result in substantial liability to
governmental authorities or to third parties. In addition, we are subject to reporting requirements with respect to
certain materials we use in our manufacturing operations. In January 2011, Kinpak, which owns our manufacturing facility
in Montgomery, Alabama, became subject to a consent agreement and final order with the United States Environmental Protection
Agency relating to its alleged failure to complete and submit certain required forms with respect to toxic and hazardous chemicals
used at its facilities. Under the consent agreement and final order, Kinpak paid a civil penalty of $110,000. It
is possible that we could become subject to additional environmental liabilities in the future that could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
Our
variable rate indebtedness exposes us to risks related to interest rate fluctuation and matures in August 2017.
We
have a revolving line of credit with a variable interest rate. Interest on the revolving line of credit is payable
at the 30 day LIBOR rate plus 1.50% per annum, computed on a 365/360 basis. During the year ended December 31, 2016, we did not
utilize the revolving line of credit, and at December 31, 2016, we did not have any borrowings outstanding under the revolving
line of credit. However, if we borrow amounts under the revolving line of credit in the future, and if interest
rates were to increase significantly, our financial condition, results of operations and cash flows could be materially adversely
affected. Moreover, we believe, but cannot assure, that we could obtain a renewal of the revolving line of credit or a suitable
replacement facility when the current facility terminates in August 2017. Our failure to renew or obtain a replacement for our
current facility may impair our financial flexibility and have a material adverse effect on our business.
Our
Chairman, President and Chief Executive Officer is a majority shareholder who controls us, and his interest may conflict with
or differ from the Company's interests.
Peter G. Dornau,
our Chairman, President and Chief Executive Officer, together with a family entity he controls, owns approximately 51.9% of our
Common Stock. As a result, Mr. Dornau has the power to elect all of our directors and effectively has the ability
to prevent any transaction that requires the approval of our Board of Directors and our shareholders. Products that
we manufacture and that are sold outside of the United States and Canada are purchased from us and distributed by two companies
owned by Mr. Dornau, which we refer to as the “affiliated companies.” Sales to the affiliated companies
aggregated approximately $1,850,000 and $2,075,000 during the years ended December 31, 2016 and 2015, respectively. An
affiliated company owns the rights to the Star brite® and Star Tron® trademarks and related products outside
of the United States and Canada.
In
addition, we provided administrative services to the affiliated companies for fees aggregating approximately $621,000 and $527,000
during the years ended December 31, 2016 and 2015, respectively. While the terms of the sales to the affiliated
companies differed from the terms of sale to other customers, the affiliated companies bear their own warehousing, distribution,
advertising, selling and marketing costs, as well as their own freight charges (we pay freight charges in connection with sales
to our domestic customers on all but small orders). Moreover, we do not pay sales commissions with respect to products
sold to the affiliated companies. As a result, we believe our profit margins with respect to sales of our products
to the affiliated companies are similar to the profit margins we realize with respect to sales of the same products to our larger
domestic customers. Management believes that the sales to the affiliated companies do not involve more than normal
credit risk or present other unfavorable features. We have entered into other transactions with entities owned by Mr.
Dornau. See Notes 9 and 10 to the consolidated financial statements included in this report for additional information
Trading
in our Common Stock has been limited, and our stock price could potentially be subject to substantial fluctuations.
Our
common stock is listed on the NASDAQ Capital Market, but trading in our stock has been limited. Our stock price could
be affected substantially by a relatively modest volume of transactions.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Our
executive offices and one of our manufacturing facilities are located in Fort Lauderdale, Florida and are leased from an entity
controlled by our Chairman, President and Chief Executive Officer. The lease covers approximately 12,700 square feet
of office, manufacturing, and warehouse space. The lease expires in December 2023. See Note 10 to the consolidated
financial statements included in this report for additional information.
We
own Kinpak’s Alabama manufacturing facility, which currently contains approximately 187,000 square feet of office, plant
and warehouse space on 20 acres of land. The facility also includes a 500,000 gallon outdoor blending tank farm.
In
addition, we lease a 15,000 foot warehouse in Montgomery, Alabama, near the Kinpak manufacturing facility. We use the warehouse
to fabricate and assemble brushes used for cleaning boats, automobiles and recreational vehicles. The lease expires in July 2018.
We
are proceeding with an expansion project relating to Kinpak’s manufacturing and warehouse facilities. See “Business
– Recent Developments” in Item 1 of this report for additional information.
Item
3. Legal Proceedings
Not
applicable
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock is traded on the NASDAQ Capital Market under the symbol OBCI. A summary of the high and low sales prices
during each quarter of 2016 and 2015 is presented below.
|
|
1
st
Qtr.
|
|
|
2
nd
Qtr.
|
|
|
3
rd
Qtr.
|
|
|
4
th
Qtr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
High
|
|
$
|
2.66
|
|
|
$
|
2.57
|
|
|
$
|
3.17
|
|
|
$
|
4.35
|
|
|
|
Low
|
|
$
|
1.93
|
|
|
$
|
2.08
|
|
|
$
|
2.02
|
|
|
$
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
High
|
|
$
|
5.56
|
|
|
$
|
4.45
|
|
|
$
|
3.79
|
|
|
$
|
3.19
|
|
|
|
Low
|
|
$
|
3.76
|
|
|
$
|
3.33
|
|
|
$
|
2.44
|
|
|
$
|
2.02
|
|
On
December 31, 2016, there were 116 holders of record and approximately 1,200 beneficial owners of our common stock.
On
March 25, 2016, the Board of Directors of Ocean Bio-Chem, Inc. declared a special dividend of $0.06 per share payable on April
26, 2016 to shareholders of record on April 12, 2016. The Company did not pay any dividends in 2015. Payment of dividends
in the future will be subject to the discretion of the Board of Directors in light of numerous factors, including the Company's
business performance and operating plans, capital commitments, liquidity and other factors.
Item
6. Selected Financial Data
Not
applicable.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion should be read in conjunction with our consolidated financial statements contained in Item 8 of this report.
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 a line of products including disinfectants,
sanitizers and deodorizers. 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.
Transactions with the affiliated companies were
made in the ordinary course of business. While the terms of the sales to the affiliated companies differed from the terms of
sale 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 to the affiliated companies did not
involve more than normal credit risk or present other unfavorable features.
We
have commenced an expansion of Kinpak’s manufacturing and warehouse facilities in Montgomery, Alabama. See “Business
- Recent Developments” in Item 1 of this report.
Our
operating results for 2016 and 2015 were adversely affected by professional fees and expenses related to litigation against a
competitor in which we and the competitor each claimed that the other was engaged in false advertising and related violations
of law (the “Advertising Litigation”). Following a trial in which it was determined that neither party was liable
to the other, the Advertising Litigation was concluded. Our professional fees and expenses related to the Advertising Litigation
were approximately $1,146,000 in 2016 and $1,174,000 in 2015.
Critical
accounting estimates
:
The
preparation of consolidated financial statements in accordance 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.
We
have identified the following as critical accounting estimates, which are defined as those that are reflective of significant
judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of
operations and, if subject to different assumptions and conditions, could lead to materially different results.
Revenue
recognition and collectability of trade accounts receivable
Revenue
from product sales is recognized when persuasive evidence of a contract exists, the sales price is fixed and determinable, the
title of goods pass to the customer, and collectability of the related receivable is probable. With respect to a customer
for whom the Company manages the inventory at the customer's location, revenue is recognized when the products are sold to a third
party. In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit
terms. In an effort to reduce our credit risk, we perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and customers’ creditworthiness, as determined by our review of their current credit information. We
monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical
experience, specific customer collection issues and reviews of agings of trade receivables based on contractual terms. We
generally do not require collateral on trade accounts receivable. We maintain an allowance for doubtful accounts based
on our historical collection experience and expected collectability of the trade accounts receivable, considering the period the
trade accounts receivable are outstanding, the financial position of the customer and information provided by credit rating services.
The
adequacy of this allowance is reviewed each reporting period and adjusted as necessary. Our allowance for doubtful
accounts was approximately $75,000 and $78,000 at December 31, 2016 and 2015, respectively, which was approximately 1.5%
of gross accounts receivable at December 31, 2016 and 2015. If the financial condition of
our customers were to deteriorate, resulting in increased uncertainty as to their ability to make payments, or if unexpected events
or significant future changes in trends were to occur, we may be required to increase the allowance.
Inventories
Inventories
primarily are composed of raw materials and finished goods and are stated at the lower of cost or market, using the first-in,
first-out method. We maintain a reserve for slow moving and obsolete inventory to reflect the diminution in value resulting
from product obsolescence, damage or other issues affecting marketability in an amount equal to the difference between the cost
of the inventory and its estimated market value. The adequacy of this reserve is reviewed each reporting period and
adjusted as necessary. We regularly compare inventory quantities on hand against historical usage or forecasts related
to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also
qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage.
Our
slow moving and obsolete inventory reserve was $268,159 and $279,882 at December 31, 2016 and 2015, respectively.
Income
taxes
Income
taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities
are recognized to reflect the future tax consequences attributable to the differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured and recorded using currently enacted tax rates, which we expect will apply to taxable income in the years in which the
differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases are recovered
or settled. The differences are attributable to differing methods of financial statement and income tax treatment with
respect to depreciation and reserves for trade accounts receivable and inventories. The likelihood of a material change in our
expected realization of deferred tax assets is dependent on, among other factors, changes in tax law, future taxable income and
settlements with tax authorities. While management believes that its judgments and interpretations regarding income
taxes are appropriate, significant differences in actual experience may require future adjustments to our tax assets and liabilities,
which could be material.
In
assessing the realizability of our deferred tax assets, we evaluate positive and negative evidence and use judgments regarding
past and future events, including operating results and available tax planning strategies that could be implemented to realize
the deferred tax assets. Based on this assessment, we determine when it is more likely than not that all or some portion
of our deferred tax assets may not be realized, in which case we would apply a valuation allowance, in an amount equal to future
tax benefits that may not be realized, to offset our deferred tax assets. We currently do not apply a valuation allowance
to our deferred tax assets. However, if facts and circumstances change in the future, a valuation allowance may be
required.
Significant
judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional
provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions
that do not meet the minimum probability threshold, which is a tax position that is more likely than not to be sustained upon
examination by the applicable taxing authority. In the normal course of business, we and our subsidiaries are examined
by various federal and state tax authorities. We regularly assess the potential outcomes of these examinations and
any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We
adjust the income tax provision, the current tax liability and deferred taxes in any period in which we become aware of facts
that necessitate such an adjustment. The ultimate outcomes of the examinations of our income tax returns could result
in increases or decreases to our recorded tax liabilities, which would affect our financial results.
Intangible
Assets
Intangible assets are acquired assets
that lack physical substance and that meet specified criteria for recognition apart from goodwill. Our intangible assets include
trademarks, tradenames, patents and royalty rights. We own several trademarks and trade names, including Star brite®, and
Performacide®. We have determined that these intangible assets have indefinite lives and, therefore, are not amortized. In
addition, we own several patents, the most significant of which are the ClO
2
Patents, which relate to a device for
producing chlorine dioxide that is incorporated in our deodorizer, sanitizer and disinfectant products. We amortize our patents
over their remaining life on a straight line basis; amortization expense related to these patents was approximately $51,000 for
each of the years ended December 31, 2016 and 2015. In 2013, we acquired royalty rights relating to sales of products encompassing
the ClO
2
Patents’ technology (we purchased these rights from an unaffiliated entity that previously owned the
ClO
2
Patents and retained the royalty rights after selling the patents). We are amortizing the royalty rights over
their remaining life on a straight line basis; amortization expense relating to the royalty rights was approximately $18,000 for
each of the years ended December 31, 2016 and 2015.
We
evaluate our indefinite-lived intangible assets (trademarks and trade names) for impairment annually and at other times if events
or changes in circumstances indicate that an impairment may have occurred. In evaluating our indefinite-lived intangible assets
for impairment, we assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived
intangible asset is less than its carrying value. If, after completing the qualitative assessment, we determine it is more likely
than not that the fair value of the indefinite-lived intangible asset is greater than its carrying amount, the asset is not impaired.
If we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying
value, we would then proceed to a quantitative impairment test, which consists of a comparison of the fair value of the intangible
assets to their carrying amounts. In 2016, we performed a qualitative assessment on all of our indefinite lived assets and determined,
based on the assessment, that their fair values were more likely than not higher than their carrying values.
We assess the remaining useful life
and recoverability of intangible assets having finite lives (patents and royalty rights) whenever events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. Such events may include, for example, the
occurrence of an adverse change with respect to a product line that utilizes the intangible assets. Significant judgments in
this area involve determining whether such an event has occurred. Any impairment loss, if indicated, equals the amount by
which the carrying amount of the asset exceeds the estimated fair value of the asset.
Results
of Operations
:
The
following table provides a summary of our financial results for the years ended December 31, 2016 and 2015:
|
|
For The Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percentage of Net Sales
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
36,205,444
|
|
|
$
|
33,987,487
|
|
|
|
6.5
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
22,331,761
|
|
|
|
22,647,516
|
|
|
|
(1.4
|
)%
|
|
|
61.7
|
%
|
|
|
66.6
|
%
|
Gross profit
|
|
|
13,873,683
|
|
|
|
11,339,971
|
|
|
|
22.3
|
%
|
|
|
38.3
|
%
|
|
|
33.4
|
%
|
Advertising and promotion
|
|
|
3,117,164
|
|
|
|
3,010,758
|
|
|
|
3.5
|
%
|
|
|
8.6
|
%
|
|
|
8.9
|
%
|
Selling and administrative
|
|
|
7,660,377
|
|
|
|
7,579,682
|
|
|
|
1.1
|
%
|
|
|
21.2
|
%
|
|
|
22.3
|
%
|
Operating income
|
|
|
3,096,142
|
|
|
|
749,531
|
|
|
|
313.1
|
%
|
|
|
8.6
|
%
|
|
|
2.2
|
%
|
Interest (expense), net
|
|
|
(17,820
|
)
|
|
|
(33,639
|
)
|
|
|
(47.0
|
)%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
Other (expense)
|
|
|
---
|
|
|
|
(12,522
|
)
|
|
|
N/A
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Provision for income taxes
|
|
|
(983,151
|
)
|
|
|
(242,676
|
)
|
|
|
305.1
|
%
|
|
|
2.7
|
%
|
|
|
0.7
|
%
|
Net income
|
|
$
|
2,095,171
|
|
|
$
|
460,694
|
|
|
|
354.8
|
%
|
|
|
5.8
|
%
|
|
|
1.4
|
%
|
Net sales
for the year ended
December 31, 2016 increased by approximately $2,218,000 or 6.5%, as compared to the year ended December 31, 2015. The increase
principally is a result of increased sales of Star brite® branded marine products to both retailers and wholesale distributors
of our products. In particular, we believe that the increased sales reflect the benefit of the inclusion of our products in more
of our large national “brick and mortar” retail chain customers’ locations, as well as the provision of increased
shelf space for our products by these customers. In addition, our sales to online retailers also increased as a result of higher
consumer demand.
Cost
of goods sold
decreased by approximately $316,000 or 1.4% in 2016, as compared to 2015. The decrease in cost of goods
sold despite the increase in net sales reflects the more favorable product mix resulting from increased sales of Star brite®
branded marine products.
Gross
profit
increased by approximately $2,534,000 or 22.3% during 2016, as compared to 2015. As a percentage of net sales, gross
profit increased to 38.3% in 2016 from 33.4% in 2015. The increases in gross profit and gross profit as a percentage of net sales
is a result of the more favorable product mix discussed above.
Advertising
and promotion expense
increased by approximately $106,000 or 3.5% during 2016, as compared to 2015. As a percentage
of net sales, advertising and promotion expense decreased to 8.6% in 2016 compared to 8.9% in 2015. The gross increase
in advertising and promotion expense is primarily a result of a $176,000 increase in customer cooperative advertising partially
offset by a $66,000 decrease in other marketing expenses.
Selling
and administrative expenses
increased by approximately $81,000 or 1.1%, during 2016, as compared to 2015, reflecting an increase
in noncash stock based compensation expense of approximately $131,000. This increase was partially offset by a decrease of approximately
$28,000 in legal fees and expenses related to the Advertising Litigation; such fees and expenses were approximately $1,146,000
and $1,174,000 during 2016 and 2015, respectively. The Company expects selling and administrative expenses to decline substantially
in 2017 as a result of the conclusion of the Advertising Litigation during 2016. As a percentage of net sales, selling and administrative
expenses decreased to 21.2 % in 2016 from 22.3% in 2015.
Interest
expense, net
decreased by approximately $16,000 or 47.0% in 2016, as compared to 2015. The decrease reflects the
declining principal outstanding under our term loan.
Provision for income taxes
–
Our provision for income taxes for 2016 was approximately $983,000, or 31.9% of our pretax income, compared to approximately $243,000
in 2015 or 34.5% of pretax income. Our lower tax rate in 2016 is attributable primarily to an increased benefit with respect
to a domestic production activities deduction. For additional information, see Note 8 to the consolidated financial statements
included in this report.
Liquidity
and Capital Resources
:
Our
cash balance was approximately $4,070,000 at December 31, 2016 compared to approximately $2,468,000 at December 31, 2015.
The
following table summarizes our cash flows for the years ended December 31, 2016 and 2015:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by operating activities
|
|
$
|
3,025,585
|
|
|
$
|
812,463
|
|
Net cash used in investing activities
|
|
|
(443,892
|
)
|
|
|
(954,663
|
)
|
Net cash used in financing activities
|
|
|
(978,503
|
)
|
|
|
(450,598
|
)
|
Effect of exchange rate fluctuations on cash
|
|
|
(1,160
|
)
|
|
|
(1,516
|
)
|
Net increase (decrease) in cash
|
|
$
|
1,602,030
|
|
|
$
|
(594,314
|
)
|
Net cash provided by operating activities for the
year ended December 31, 2016 increased by approximately $2,213,000 or 272.4%, as compared to the year ended December 31, 2015.
The comparative increase in cash provided by operating activities during the year ended December 31, 2016 is attributable to an
increase in net income of approximately $1,634,000 increased noncash expenses of approximately $61,000, and net favorable changes
in working capital (excluding cash) of $517,000 as compared to the same period in 2015.
Inventories, net were approximately $8,601,000 and $7,915,000 at December 31, 2016 and 2015, respectively,
representing an increase of approximately $686,000 or 8.7% in 2016. The 2016 increase in inventories reflects anticipated demand
in the first quarter of 2017. Moreover, inventory levels at December 31, 2015 reflect the shipment of a large order a major customer
in late December 2016.
Net
trade accounts receivable at December 31, 2016 aggregated approximately $4,932,000, a decrease of approximately $160,000 or 3.1%
compared to approximately $5,092,000 in net trade accounts receivable outstanding at December 31, 2015. Receivables due
from affiliated companies aggregated approximately $1,190,000 at December 31, 2016, an increase of approximately $139,000, or
13.2% over receivables due from affiliated companies of approximately $1,051,000 at December 31, 2015.
Net
cash used in investing activities for the year ended December 31, 2016 decreased by approximately $511,000 or 53.5%, as compared
to the year ended December 31, 2015. Our purchases of property, plant and equipment during 2016, principally consisting of manufacturing
equipment, was considerably below the level of such purchases in 2015. Net cash used in investing activities during the year ended
December 31, 2015 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 for the year ended December 31, 2016 increased by approximately $528,000, or 117.2%, as compared
to the year ended December 31, 2015. The increase in the 2016 period is principally 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 4 and 6 to the 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 December 31, 2016 and 2015, we had no borrowings under our revolving line
of credit and outstanding balances of approximately $260,000 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, EBITDAR (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, calculated
quarterly. At December 31, 2016, our debt coverage ratio was approximately 10.60 to 1.00, and our debt to capitalization ratio
was approximately 0.02 to 1.00.
In
addition to our term loan, we have obtained financing through capital leases for office equipment, totaling approximately $69,000
and $88,000 at December 30, 2016 and December 31, 2015, respectively.
Some
of our assets and liabilities are denominated in Canadian dollars and are subject to currency rate fluctuations. We do not engage
in currency hedging and address currency risk as a pricing issue. In the year ended December 31, 2016, we recorded $2,113 in foreign
currency translation adjustments (decreasing shareholders’ equity by $2,113).
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 capital required to fund any inventory
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.
As noted above, the Company is proceeding
with a project to expand Kinpak’s manufacturing, warehouse and distribution facilities in Montgomery, Alabama. As currently
contemplated, the project will entail an approximately 85,000 square feet addition to the facilities and an expansion of Kinpak’s
outdoor blended tank farm to accommodate an additional 500,000 gallons in tank capacity, thereby doubling the tank farm’s
current capacity. The first phase of the project, involving expansion of the tank farm, was initiated earlier in 2017. We are using
internal funds for this phase, although we currently are in negotiations to finance the costs of the entire project. Nevertheless,
we cannot assure that such financing will be obtained. We currently estimate that the project cost will be approximately $4.7 million.
We
believe that funds provided through operations and other sources of financing will be sufficient to satisfy our cash requirements
over at least the next twelve months. However, in the event that we are not able to obtain additional financing for our expansion
project, completion of the project may be delayed.
Item
7A. Quantitative and Qualitative Disclosure about Market Risk
Not
applicable.
Item
8. Financial Statements and Supplementary Data
The
audited financial statements of the Company required pursuant to this Item 8 are included in a separate section commencing on
page F-1 and are incorporated herein by reference.
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not
applicable.
Item
9A. 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 have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures
are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit 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 required disclosure.
Change
in Internal Controls over Financial Reporting
. No change in internal control over financial reporting (as defined
in Rule 13a-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.
Management’s
Annual Report on Internal Control over Financial Reporting
Management
of Ocean Bio-Chem, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management
evaluated the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment,
management used the framework established in
Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework,
management has concluded that, as of December 31, 2016, the Company’s internal control over financial reporting was
effective.
Item
9B. Other Information
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2016 AND 2015
Note
1
– Organization and summary of significant accounting policies:
Organization
– The Company
was incorporated in November 1973 under the laws of the state of Florida and manufacturers, markets and distributes products, principally
under the Star brite® and Star Tron® brands, for the marine, automotive, power sports, recreational vehicle and
outdoor power equipment markets. In addition, the Company produces private label formulations of many of its products for various
customers and provides custom blending and packaging services for these and other products. The Company also manufactures disinfectants,
sanitizers and deodorizers under the Performacide® and Star brite® brand names.
Basis
of presentation
– The consolidated financial statements include the accounts of the Company 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.
Revenue
recognition
– Revenue from product sales is recognized when persuasive evidence of a contract exists, the sales price
is fixed and determinable, the title of goods passes to the customer, and collectability of the related receivable is probable.
Reported net sales are net of customer prompt pay discounts, contractual allowances, authorized customer returns, consumer rebates
and other sales incentives.
Collectability
of accounts receivable
– Trade accounts receivable at December 31, 2016 and 2015 are net of allowances for doubtful
accounts aggregating approximately $75,000 and $78,000, respectively. Such amounts are based on management's estimates of the
creditworthiness of its customers, current economic conditions and historical information. During the year ended December 31,
2015, the Company recorded bad debt expense of approximately $3,000. During the year ended December 31, 2016, the Company reduced
its bad debt reserve by approximately $3,000, resulting in an increase to net income.
Inventories
– Inventories are primarily composed of raw materials and finished goods and are stated at the lower of cost, using
the first-in, first-out method, or market.
Shipping
and handling costs
– All shipping and handling costs incurred by the Company are included in cost of goods sold in the
consolidated statements of operations. Shipping and handling costs totaled approximately $1,120,000 and $1,367,000 for the years
ended December 31, 2016 and 2015, respectively.
Advertising
and promotion expense
– Advertising and promotion expense consists of advertising costs and marketing expenses, including
catalog costs and expenses relating to participation at trade shows. Advertising costs are expensed in the period in which the
advertising occurs and totaled approximately $3,117,000 and $3,011,000 in 2016 and 2015, respectively.
Property, plant and equipment
– Property,
plant and equipment is stated at cost, net of depreciation. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method. Depreciation expense totaled $904,307 and $846,925 for the years ended December 31, 2016
and 2015, respectively.
Research and development costs
–
Research and development costs are expensed as incurred and recorded in selling and administrative expenses in the consolidated
statements of operations. The Company incurred approximately $46,000 and $78,000 of research and development costs for the years
ended December 31, 2016 and 2015, respectively.
Stock
based compensation
– The Company records stock-based compensation in accordance with the provisions of Financial Accounting
Standards Board Accounting Standards Codification (“ASC") Topic 718, "Accounting for Stock Compensation,"
which establishes accounting standards for transactions in which an entity exchanges its equity instruments for goods or services.
In accordance with guidance provided under ASC Topic 718, we recognize an expense for the fair value of our stock awards at the
time of grant and the fair value of our outstanding stock options as they vest, whether held by employees or others. As of December
31, 2016, all outstanding stock options were vested.
Use
of estimates
– The preparation of financial statements in conformity with U.S. generally accepted accounting principles
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.
Concentration
of cash
– At various times during the year and at December 31, 2016 and 2015, the Company had a concentration of cash
in one bank in excess of prevailing insurance offered through the Federal Deposit Insurance Corporation at such institution. Management
does not consider the excess deposits to be a significant risk.
Fair
value of financial instruments
– ASC Topic 820, “Fair Value Measurements and Disclosures” defines “fair
value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date.
ASC
820 also sets forth a valuation hierarchy of the inputs (assumptions that market participants would use in pricing an asset or
liability) used to measure fair value. The hierarchy prioritizes the inputs into the following three levels:
|
Level
1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
|
|
|
|
Level
2: Inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar
assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or
liability; and inputs that are derived principally from or corroborated by observable market data through correlation or other
means.
|
|
|
|
Level
3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in
management’s best estimate of fair value.
|
The carrying amounts of the Company’s short-term
financial instruments, including cash, accounts receivable, accounts payable, certain accrued expenses and revolving line
of credit, approximate their fair value due to the relatively short period to maturity for these instruments. The
fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities;
the carrying amount of the long-term debt approximates fair value.
Impairment of long-lived assets
– Potential impairments of long-lived assets are reviewed when events or changes in circumstances indicate a potential impairment
may exist. In accordance with ASC Subtopic 360-10, "Property, Plant and Equipment – Overall," impairment
is determined when estimated future undiscounted cash flows associated with an asset are less than the asset’s carrying value.
Income
taxes
– The Company records income taxes under the asset and liability method. The Company recognizes deferred income
tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities. These differences are measured using tax rates that are expected to apply to taxable income in
the years in which those temporary differences are recovered or settled. We recognize in the statement of operations the effect
on deferred income taxes of a change in tax rates in the period in which the change is enacted.
We
record a valuation allowance when necessary to reduce our deferred tax assets to the net amount that we believe is more likely
than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income,
expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the
need for a valuation allowance.
We recognize tax benefits from uncertain
tax positions only if we believe that it is more likely than not that the tax positions will be sustained on examination by the
taxing authorities based on the technical merits of the positions; otherwise, we establish reserves for uncertain tax positions. We
adjust reserves with respect to uncertain tax positions to address developments related to these positions, such as the closing
of a tax audit, the expiration of a statute of limitations or the refinement of an estimate. The provision for income
taxes includes any reserves with respect to uncertain tax positions that are considered appropriate, as well as the related net
interest and penalties. The Company has no uncertain tax positions as of December 31, 2016.
The Company is no longer subject to income tax examinations
for years before 2013.
Intangible assets
– The
Company’s intangible assets consist of trademarks, trade names, patents and royalty rights. The Company evaluates trademarks
and trade names (all of which are indefinite-lived intangible assets) for impairment at least annually or when events or changes
in circumstances indicate a potential impairment may exist. The Company evaluates royalty rights and patents (which are amortized
on a straight-line basis over their useful lives) for impairment when events or changes in circumstances indicate an impairment
may exist. No impairment was recorded in 2016 and 2015.
Foreign currency adjustments
– Translation adjustments
result from translating the Company’s Canadian subsidiary’s financial statements into U.S. dollars. The Company’s
Canadian subsidiary’s functional currency is the Canadian dollar. Assets and liabilities are translated at exchange rates
in effect at the balance sheet date. Income and expenses are translated at average exchange rates during the year. Resulting
translation adjustments for the reporting period are included in our statements of comprehensive income and the cumulative effect
of these adjustments are included in our balance sheet as accumulated other comprehensive loss within Shareholders’ Equity.
Earnings
per share
– The Company computes earnings per share in accordance with the provisions of ASC Topic 260, "Earnings
Per Share," which specifies the computation, presentation and disclosure requirements for earnings (loss) per share for entities
with publicly held common stock. Basic earnings per share are computed by dividing net earnings available to common
shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed
assuming the exercise of dilutive stock options under the treasury stock method and the related income tax effects. See
Note 14 - Earnings per share.
Note
2
– Inventories:
The
composition of inventories at December 31, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Raw
materials
|
|
$
|
3,633,641
|
|
|
$
|
3,749,702
|
|
Finished
goods
|
|
|
5,235,207
|
|
|
|
4,445,130
|
|
Inventories,
gross
|
|
|
8,868,848
|
|
|
|
8,194,832
|
|
|
|
|
|
|
|
|
|
|
Inventory
reserves
|
|
|
(268,159
|
)
|
|
|
(279,882
|
)
|
|
|
|
|
|
|
|
|
|
Inventories,
net
|
|
$
|
8,600,689
|
|
|
$
|
7,914,950
|
|
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
$551,000 and $543,000 at December 31, 2016 and 2015, respectively.
Note
3
– Property, plant and equipment:
The
Company’s property, plant and equipment at December 31, 2016 and 2015 consisted of the following:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
Life
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
$
|
278,325
|
|
|
$
|
278,325
|
|
Building
and Improvements
|
|
30
years
|
|
|
4,652,669
|
|
|
|
4,652,669
|
|
Manufacturing
and warehouse equipment
|
|
6-20
years
|
|
|
9,239,876
|
|
|
|
9,072,162
|
|
Office
equipment and furniture
|
|
3-5
years
|
|
|
1,344,732
|
|
|
|
1,293,609
|
|
Construction
in process
|
|
|
|
|
387,417
|
|
|
|
215,155
|
|
Leasehold
improvements
|
|
10-15
years
|
|
|
558,666
|
|
|
|
544,146
|
|
Vehicles
|
|
3
years
|
|
|
10,020
|
|
|
|
42,283
|
|
Property,
plant and equipment, gross
|
|
|
|
|
16,471,705
|
|
|
|
16,098,349
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
|
|
(11,575,732
|
)
|
|
|
(10,741,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
|
$
|
4,895,973
|
|
|
$
|
5,356,388
|
|
Note 4
– Revolving line of credit:
On November 17, 2016, 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 Business Loan Agreement, the Company may borrow up to the lesser of
(i) $4 million or (ii) a borrowing base equal to 85% of Eligible Accounts (as defined in the Business Loan
Agreement: generally, accounts receivable from unaffiliated entities containing selling terms and conditions acceptable to
Regions Bank, subject to specified exceptions) 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 1.50% per
annum, computed on a 365/360 basis. The interest rate will be increased an additional 2.0% if an event of default occurs.
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, 2017, at which time all outstanding principal and interest will be due and payable.
The Company’s obligations under the revolving line of credit are secured by, among other things, the Company’s accounts
receivable and inventory 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 that the Company
maintain a minimum debt service coverage ratio (generally, EBITDAR (net operating profit plus depreciation, amortization and rent/lease
expense) divided by the sum of current maturities of long-term debt, 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 net
worth and funded debt) of 0.75 to 1.00, calculated quarterly. For the year ended December 31, 2016, our debt service coverage ratio
was approximately 10.60 to 1.00 and at December 31, 2016, our debt to capitalization ratio was approximately 0.02 to 1.00. 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. The Business Loan Agreement is a successor to earlier agreements under which Regions Bank
provided a revolving line of credit to the Company in the maximum amount of $6 million. At December 31, 2016 and December 31, 2015,
the Company had no borrowings under the revolving line of credit then in effect.
Note 5
– Accrued expenses payable:
Accrued
expenses payable at December 31, 2016 and 2015 consisted of the following:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accrued
customer promotions
|
|
$
|
546,127
|
|
|
$
|
491,378
|
|
Accrued
payroll, commissions, and benefits
|
|
|
287,376
|
|
|
|
269,380
|
|
Other
|
|
|
266,416
|
|
|
|
337,963
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses payable
|
|
$
|
1,099,919
|
|
|
$
|
1,098,721
|
|
Note 6
– Long-term debt:
On
July 6, 2011, in connection with a credit agreement among the Company, Kinpak, Regions Bank and Regions Equipment Finance Corporation
(“REFCO”), an Equipment Finance Addendum to the credit agreement (the “Addendum”) was entered into by
the Company, Kinpak and REFCO. Under the Addendum, REFCO provided to the Company a $2,430,000 term loan with a fixed interest
rate of 3.54% per annum. Principal and interest on the term loan are payable in equal monthly installments of $37,511
through July 6, 2017, the date the term loan matures. In the event the Company’s debt service coverage ratio
falls to or below 2.00 to 1.00, interest on the term loan will increase to 4.55% per annum. The proceeds of the term loan were
used to pay Kinpak’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 December 31, 2016, approximately $260,000
was outstanding under the term loan.
At
December 31, 2016 and 2015, the Company was obligated under various capital lease agreements covering equipment utilized in the
Company’s operations. The capital leases aggregating approximately $69,000 and $88,000 at December 31, 2016 and December
31, 2015, respectively, mature on July 1, 2020 and carry an interest rate of 2% per annum.
The
following table provides information regarding the Company’s long-term debt at December 31, 2016 and 2015:
|
|
Current Portion
|
|
|
Long-term Portion
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
loan
|
|
$
|
259,503
|
|
|
$
|
432,601
|
|
|
$
|
---
|
|
|
$
|
259,503
|
|
Capitalized
equipment leases
|
|
|
18,889
|
|
|
|
18,547
|
|
|
|
50,426
|
|
|
|
69,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$
|
278,392
|
|
|
$
|
451,148
|
|
|
$
|
50,426
|
|
|
$
|
328,818
|
|
Required
principal payments under the Company’s term loan and capital lease obligations are set forth below:
Year
ending December 31,
|
|
|
|
2017
|
|
$
|
278,392
|
|
2018
|
|
|
19,238
|
|
2019
|
|
|
19,593
|
|
2020
|
|
|
11,595
|
|
Total
|
|
$
|
328,818
|
|
Note
7
– Intangible Assets:
The
Company’s intangible assets at December 31, 2016 and 2015 consisted of the following:
2016
Intangible
Asset
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
$
|
622,733
|
|
|
$
|
335,300
|
|
|
$
|
287,433
|
|
Trade
names and trademarks
|
|
|
1,131,125
|
|
|
|
549,561
|
|
|
|
581,564
|
|
Royalty
rights
|
|
|
160,000
|
|
|
|
61,309
|
|
|
|
98,691
|
|
Total
intangible assets
|
|
$
|
1,913,858
|
|
|
$
|
946,170
|
|
|
$
|
967,688
|
|
2015
Intangible
Asset
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
$
|
622,733
|
|
|
$
|
282,964
|
|
|
$
|
339,769
|
|
Trade names and trademarks
|
|
|
1,131,125
|
|
|
|
549,561
|
|
|
|
581,564
|
|
Royalty rights
|
|
|
160,000
|
|
|
|
43,365
|
|
|
|
116,635
|
|
Total intangible
assets
|
|
$
|
1,913,858
|
|
|
$
|
875,890
|
|
|
$
|
1,037,968
|
|
At
December 31, 2016 and 2015, the tradenames and trademarks are considered indefinite-lived (the Star brite® trade name and
trademark initially was deemed to have an estimated useful life of 40 years until, pursuant to Statement of Financial Accounting
Standards No. 142 (currently codified in ASC Topic 350, “Intangibles-Goodwill and Other”), the Company determined
that, effective January 1, 2002, the assets had indefinite lives). The patents (the most significant of which (the “ClO
2
Patents”) relate to a device for producing chlorine dioxide (ClO
2
) that is incorporated into the Company’s
disinfectant, sanitizer and deodorizing products
)
had a carrying value, net of amortization, of $287,433 at December
31, 2016 (of which $282,963 is attributable to the ClO
2
Patents). The ClO
2
Patents expire in 2022 and the
other patents expire in 2021. The royalty rights (which the Company purchased from an unaffiliated entity that previously
owned the ClO
2
Patents and retained the royalty rights after selling the patents) expire in December 2021 and are amortized
on a straight line basis over their remaining useful lives.
Amortization
expense related to intangible assets was $70,280 ($52,336 attributable to the patents and $17,944 attributable to the royalty
rights) for the year ended December 31, 2016 and approximately $69,392 ($51,448 attributable to the patents and $17,944 attributable
to the royalty rights) for the year ended December 31, 2015.
Note 8
– Income taxes:
The
components of the Company’s consolidated provision for income taxes are as follows:
|
|
2016
|
|
|
2015
|
|
Federal – current
|
|
$
|
982,298
|
|
|
$
|
136,479
|
|
Federal – deferred
|
|
|
(25,565
|
)
|
|
|
101,290
|
|
State – current
|
|
|
27,163
|
|
|
|
1,842
|
|
State –
deferred
|
|
|
(745
|
)
|
|
|
3,065
|
|
Total provision
for income taxes
|
|
$
|
983,151
|
|
|
$
|
242,676
|
|
The
reconciliation of the provision for income taxes at the statutory rate to the reported provision for income taxes is as follows:
|
|
2016
|
|
|
%
|
|
|
2015
|
|
|
%
|
|
Income Tax computed at statutory rate
|
|
$
|
1,046,629
|
|
|
|
34.0
|
%
|
|
$
|
239,146
|
|
|
|
34.0
|
%
|
State tax, net of federal benefit
|
|
|
17,916
|
|
|
|
0.6
|
%
|
|
|
889
|
|
|
|
0.1
|
%
|
Share based compensation
|
|
|
(2,013
|
)
|
|
|
(0.1
|
)%
|
|
|
(2,881
|
)
|
|
|
(0.4
|
)%
|
Domestic production activities deduction
|
|
|
(97,645
|
)
|
|
|
(3.2
|
)%
|
|
|
(13,905
|
)
|
|
|
(1.9
|
)
|
Other, permanent adjustments
|
|
|
23,991
|
|
|
|
0.8
|
%
|
|
|
19,984
|
|
|
|
2.8
|
%
|
Tax credits and prior year tax adj.
|
|
|
(5,727
|
)
|
|
|
(0.2
|
)%
|
|
|
(557
|
)
|
|
|
(0.1
|
)%
|
Provision for income taxes
|
|
$
|
983,151
|
|
|
|
31.9
|
%
|
|
$
|
242,676
|
|
|
|
34.5
|
%
|
The
Company’s deferred tax (liability) consisted of the following at December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Deferred tax Asset (liability)
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
93,829
|
|
|
$
|
97,931
|
|
Trade accounts receivable allowances
|
|
|
26,259
|
|
|
|
27,404
|
|
Net Operating loss carryforward state
|
|
|
303,784
|
|
|
|
361,488
|
|
Depreciation of property and equipment
|
|
|
(333,455
|
)
|
|
|
(365,012
|
)
|
Net deferred tax asset
|
|
|
90,417
|
|
|
|
121,811
|
|
Valuation allowance
|
|
|
(303,784
|
)
|
|
|
(361,488
|
)
|
Total net deferred tax (liability)
|
|
$
|
(213,367
|
)
|
|
$
|
(239,677
|
)
|
At December 31, 2016 and 2015, the Company has a net operating loss carryforward with the state of Alabama.
The net operating losses of $4,676,600 and $5,561,354 expire between 2020 and 2023. The Company does not expect to be able to utilize
these losses and has recorded a valuation allowance for the full amount of the net operating losses.
Note 9
– Related party transactions:
During
2016, as in previous years, the Company sold products to companies affiliated with Peter G. Dornau, who is 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 $1,850,000 and $2,075,000 during the years ended December 31, 2016 and 2015, respectively, and administrative
fees aggregated approximately $621,000 and $527,000 during the years ended December 31, 2016 and 2015, respectively.
The Company had accounts receivable from the affiliated companies in connection with the product sales and administrative
services aggregating approximately $1,190,000 and $1,051,000 at December 31, 2016 and 2015, respectively.
An entity that is owned by Peter G.
Dornau, the Company’s Chairman, President and Chief Executive Officer provides several services to the Company. Under
this arrangement, the Company paid the entity $42,000 for research and development services in each of the years ended December
31, 2016 and 2015. The research and development expenses are included in our statement of operations as a selling and administrative
expense. In addition, during the year ended December 31, 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. These amounts are included in
our 2016 statement of operations as an advertising and promotion expense.
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 10 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 commercial insurance needs. The Company paid an aggregate
of approximately $697,000 and $925,000 to the entity during the years ended December 31, 2016 and 2015, respectively.
Note 10
– 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 $97,000 and $98,000 for the years ended December 31, 2016 and 2015, respectively. The rent expense is included in our statement of operations as a selling and administrative expense.
The
Company also leases a 15,000 square foot warehouse in Montgomery, AL near its Kinpak manufacturing facility for the purpose of
fabricating and assembling brushes used for cleaning boats, automobiles, and recreational vehicles. The lease commenced on August
1, 2016 and expires on July 31, 2018. The lease requires monthly rent paid in advance of $4,375.
The
following is a schedule of minimum future rentals on the Company’s non-cancelable operating leases.
12 month period ending December
31,
|
2017
|
|
$
|
148,564
|
|
2018
|
|
|
128,610
|
|
2019
|
|
|
99,945
|
|
2020
|
|
|
101,944
|
|
2021
|
|
|
103,983
|
|
Thereafter
|
|
|
214,246
|
|
Total
|
|
$
|
797,292
|
|
Note
11
- Stock options and awards:
On May 29, 2015, the Company’s
shareholders approved the Ocean Bio-Chem, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan provides for grants
of several types of awards at the discretion of the Equity Grant Committee of the Company’s Board of Directors, including
stock options, stock units, stock awards, stock appreciation rights and other stock based awards. The Plan authorizes the issuance
of 630,000 shares of Company common stock, subject to anti-dilution adjustments upon the occurrence of certain events affecting
the common stock. During the years ended December 31, 2016 and 2015, the Company issued stock awards under the Plan,
respectively aggregating 142,000 and 65,500 shares of common stock, to officers, key employees, directors and a consultant Following
the withholding of an aggregate of 3,918 and 4,244 shares of common stock, respectively, in connection with a net exercise feature
of the Plan, 138,082 and 61,256 shares were delivered to the award recipients, for the years ended December 31, 2016 and 2015,
respectively. At December 31, 2016, 422,500 shares remained available for future issuance under the Plan. The shares
vested immediately upon issuance and were fully expensed in the period in which they were awarded. Compensation expense related
to the stock awards was $305,780 and $168,663 for the years ended December 31, 2016 and 2015, respectively. The company withheld
shares, pursuant to net share settlements, with a value of $8,424 and $12,610 respectively for income tax withholding related to
the awards. As a result of the adoption of the Plan, no further stock awards will be made under the Company’s equity compensation
plans previously approved by its shareholders (the “Prior Plans”).
Prior
to the May 29, 2015 effective date of the Plan, stock options were granted under the Prior Plans. Only non-qualified options granted
under the Prior Plans were outstanding on December 31, 2016. Outstanding non-qualified options were granted to outside directors,
have a 10-year term from the date of grant and are immediately exercisable. The last tranche of non-qualified options
previously granted terminate on April 25, 2020. There was no compensation expense attributable to stock options recognized
during the years ended December 31, 2016 and 2015, and at December 31, 2016 and 2015, there was no unrecognized compensation cost
related to share based compensation arrangements
During
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.
During
2015, a former director exercised stock options to purchase 10,000 shares. Following the withholding of 2,156 shares in connection
with the net exercise feature of the stock options, the Company delivered 7,844 shares to the former director.
The
following tables provide information at December 31, 2016 and 2015 regarding outstanding 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.
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Date
Granted
|
|
Options
Outstanding
|
|
|
Exercisable
Options
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Weighted
Average
Remaining Life
|
|
2002 NQ
|
|
12/17/07
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
1.32
|
|
|
12/16/17
|
|
|
1.0
|
|
2008 NQ
|
|
1/11/09
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
0.69
|
|
|
1/10/19
|
|
|
2.1
|
|
2008 NQ
|
|
4/26/10
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2.07
|
|
|
4/25/20
|
|
|
3.4
|
|
|
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
$
|
1.22
|
|
|
|
|
|
1.9
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Date
Granted
|
|
Options
Outstanding
|
|
|
Exercisable
Options
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Weighted
Average
Remaining Life
|
|
2002 NQ
|
|
4/3/06
|
|
|
30,000
|
|
|
|
30,000
|
|
|
$
|
1.08
|
|
|
4/2/16
|
|
|
0.3
|
|
2002 NQ
|
|
12/17/07
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
1.32
|
|
|
12/16/17
|
|
|
2.0
|
|
2008 NQ
|
|
1/11/09
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
0.69
|
|
|
1/10/19
|
|
|
3.1
|
|
2008 NQ
|
|
4/26/10
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2.07
|
|
|
4/25/20
|
|
|
4.4
|
|
|
|
|
|
|
130,000
|
|
|
|
130,000
|
|
|
$
|
1.19
|
|
|
|
|
|
2.3
|
|
The
following table provides information relating to stock option transactions during the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Options
outstanding beginning of the year
|
|
|
130,000
|
|
|
$
|
1.19
|
|
|
|
140,000
|
|
|
$
|
1.18
|
|
Options
exercised
|
|
|
(30,000
|
)
|
|
|
1.08
|
|
|
|
(10,000
|
)
|
|
|
1.08
|
|
Total
|
|
|
100,000
|
|
|
$
|
1.22
|
|
|
|
130,000
|
|
|
$
|
1.19
|
|
Note
12
– Major customers:
The Company had net sales to each of two major
customers that constituted in excess of 10% of the Company’s consolidated net sales for each of the years ended December
31, 2016 and 2015. Net sales to these customers aggregated approximately 33.0% and 38.2% of consolidated net sales
for 2016 and 2015, respectively.
Note
13
– Litigation expense:
During
the years ended December 31, 2015 and 2016, the Company was engaged in litigation with a competitor in which each of the Company
and the competitor claimed that the other was engaged in false advertising and related violations of law. Following a trial in
which it was determined that neither party was liable to the other, the matter was concluded. The Company incurred professional
fees and expenses relating to this matter of $1,146,000 and $1,174,000 during the years ended December 31, 2016 and 2015, respectively.
These amounts are included in selling and administrative expenses.
Note
14
– 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 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.
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Earnings per common
share –Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,095,171
|
|
|
$
|
460,694
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding
|
|
|
9,059,966
|
|
|
|
8,940,593
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share –
Basic
|
|
$
|
0.23
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Earnings per common
share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,095,171
|
|
|
$
|
460,694
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
9,059,966
|
|
|
|
8,940,593
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect
of employee stock-based awards
|
|
|
56,550
|
|
|
|
86,513
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding - assuming dilution
|
|
|
9,116,516
|
|
|
|
9,027,106
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - Diluted
|
|
$
|
0.23
|
|
|
$
|
0.05
|
|
The
Company had no stock options outstanding at December 31, 2016 and 2015, respectively that were anti-dilutive and therefore not
included in the diluted earnings per common share calculation.
Note
15
– 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.
Note
-16
– Recent Accounting Pronouncements:
Accounting
Guidance Adopted by the Company
In November 2015, the Financial Accounting Standards
Board FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The guidance
under ASU 2015-17 is designed to simplify the presentation of deferred tax assets and liabilities within the balance sheet by
requiring generally that all deferred tax assets and liabilities be classified as non-current. Under previously applicable guidance,
an entity was required to separate deferred tax liabilities and assets into a current amount and a noncurrent amount. The guidance
is effective for years beginning after December 15, 2016 with early adoption permitted, and can be applied prospectively or retrospectively.
The Company adopted this guidance in the quarter ended September 30, 2016, retrospectively to January 1, 2016. As a result of
the adoption, we made the following reclassifications to the 2015 consolidated balance sheet: a $125,335 decrease to current deferred
tax asset and a $125,335 decrease to noncurrent deferred tax liability.
Accounting
Guidance Not Yet Adopted by the Company
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) 2014-09, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-19, which has been
modified on several occasions, provides new guidance designed to enhance the comparability of revenue recognition practices across
entities, industries, jurisdictions and capital markets. The core principle of the new guidance is that an entity recognizes revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and services. The new guidance also requires disclosures about the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual
periods beginning after December 15, 2017 and interim periods within those years; early application is permitted for annual periods
beginning after December 15, 2016. We do not expect this new standard to have a material impact on the amount and timing of our
revenue recognition.
In February 2016, the FASB issued ASU
2016-02, “Leases (Topic 842).” The principal change under this new accounting guidance is that lessees under leases
classified as operating leases generally will recognize a right-of-use asset and a lease liability on the balance sheet. Current
lease accounting standards do not require lessees to recognize assets and liabilities arising under operating leases on the balance
sheet. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition approach for leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements; the
guidance provides certain practical expedients. The Company is currently evaluating this guidance to determine its impact on the
Company’s financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “
Inventory”
(Topic 330)
to simplify the measurement of inventory subsequent to its initial measurement and to more closely align the measurement
of inventory under GAAP with the measurement of inventory under International Financial Reporting Standards. The guidance in ASU
2015-11 (which applies to inventory that is measured using the first-in, first-out (FIFO) or average cost method, but not to inventory
measured using the last-in, first-out (LIFO) or the retail inventory method), requires subsequent measurement of inventory to be
at the lower of cost and net realizable value (rather than the lower of cost or market, as under current guidance). Net realizable
value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, and interim periods
within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier application
permitted as of the beginning of an interim or annual reporting period. The Company does not expect the adoption to have a material
impact on its financial statements.