Item 1.
|
Financial Statements
|
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
2,436,078
|
|
|
$
|
2,468,415
|
|
Trade accounts receivable less allowances of approximately $67,000 and $78,000, respectively
|
|
|
4,090,357
|
|
|
|
5,092,040
|
|
Receivables due from affiliated companies
|
|
|
1,068,430
|
|
|
|
1,051,091
|
|
Inventories, net
|
|
|
9,065,836
|
|
|
|
7,914,950
|
|
Prepaid expenses and other current assets
|
|
|
1,155,669
|
|
|
|
942,820
|
|
Deferred tax asset
|
|
|
122,831
|
|
|
|
125,335
|
|
Total Current Assets
|
|
|
17,939,201
|
|
|
|
17,594,651
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
5,203,611
|
|
|
|
5,356,388
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
1,020,398
|
|
|
|
1,037,968
|
|
Total Other Assets
|
|
|
1,020,398
|
|
|
|
1,037,968
|
|
Total Assets
|
|
$
|
24,163,210
|
|
|
$
|
23,989,007
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable – trade
|
|
$
|
2,119,425
|
|
|
$
|
1,101,720
|
|
Current portion of long-term debt
|
|
|
453,533
|
|
|
|
451,148
|
|
Dividends payable
|
|
|
540,531
|
|
|
|
----
|
|
Accrued expenses payable
|
|
|
893,477
|
|
|
|
1,098,721
|
|
Total Current Liabilities
|
|
|
4,006,966
|
|
|
|
2,651,589
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
356,488
|
|
|
|
365,012
|
|
Long-term debt, less current portion
|
|
|
213,567
|
|
|
|
328,818
|
|
Total Liabilities
|
|
|
4,577,021
|
|
|
|
3,345,419
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
|
|
|
|
|
|
Common stock - $.01 par value, 12,000,000 shares authorized; 9,008,855 shares and 8,983,374 shares issued, respectively
|
|
|
90,089
|
|
|
|
89,834
|
|
Additional paid in capital
|
|
|
9,308,658
|
|
|
|
9,287,313
|
|
Foreign currency translation adjustment
|
|
|
(282,108
|
)
|
|
|
(284,442
|
)
|
Retained earnings
|
|
|
10,469,550
|
|
|
|
11,550,883
|
|
Total Shareholders' Equity
|
|
|
19,586,189
|
|
|
|
20,643,588
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
24,163,210
|
|
|
$
|
23,989,007
|
|
The accompanying notes are
an integral part of these unaudited condensed consolidated financial statements.
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$
|
7,072,535
|
|
|
$
|
6,328,343
|
|
Less: discounts, returns, and allowances
|
|
|
322,455
|
|
|
|
325,914
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
6,750,080
|
|
|
|
6,002,429
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,368,137
|
|
|
|
3,965,780
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,381,943
|
|
|
|
2,036,649
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Advertising and promotion
|
|
|
715,872
|
|
|
|
615,872
|
|
Selling and administrative
|
|
|
2,485,863
|
|
|
|
1,421,546
|
|
Total operating expenses
|
|
|
3,201,735
|
|
|
|
2,037,418
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(819,792
|
)
|
|
|
(769
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense)
|
|
|
|
|
|
|
|
|
Interest, net (expense)
|
|
|
(5,884
|
)
|
|
|
(10,075
|
)
|
Other (expense)
|
|
|
---
|
|
|
|
(12,522
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(825,676
|
)
|
|
|
(23,366
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
284,874
|
|
|
|
7,440
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(540,802
|
)
|
|
$
|
(15,926
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share – basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
---
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.06
|
|
|
$
|
---
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(540,802
|
)
|
|
$
|
(15,926
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
2,334
|
|
|
|
(8,115
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(538,468
|
)
|
|
$
|
(24,041
|
)
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
OCEAN
BIO-CHEM, INC. AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(540,802
|
)
|
|
$
|
(15,926
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
246,841
|
|
|
|
221,559
|
|
Deferred income taxes
|
|
|
(6,020
|
)
|
|
|
(9,012
|
)
|
Loss on sale of property, plant and equipment
|
|
|
---
|
|
|
|
12,522
|
|
Other operating non-cash items
|
|
|
(2,366
|
)
|
|
|
23,874
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
1,012,558
|
|
|
|
1,374,194
|
|
Inventories
|
|
|
(1,154,606
|
)
|
|
|
(2,001,274
|
)
|
Prepaid expenses and other current assets
|
|
|
(212,849
|
)
|
|
|
(219,163
|
)
|
Receivables due from affiliated companies
|
|
|
(17,339
|
)
|
|
|
(332,708
|
)
|
Accounts payable and other accrued expenses
|
|
|
812,461
|
|
|
|
340,462
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
137,878
|
|
|
|
(605,472
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(76,494
|
)
|
|
|
(370,795
|
)
|
Sale of property, plant, and equipment
|
|
|
---
|
|
|
|
55,000
|
|
Net cash used in investing activities
|
|
|
(76,494
|
)
|
|
|
(315,795
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(112,866
|
)
|
|
|
(105,343
|
)
|
Proceeds from exercise of stock options
|
|
|
21,600
|
|
|
|
---
|
|
Net cash used in financing activities
|
|
|
(91,266
|
)
|
|
|
(105,343
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(2,455
|
)
|
|
|
(24,560
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(32,337
|
)
|
|
|
(1,051,170
|
)
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
2,468,415
|
|
|
|
3,062,729
|
|
Cash at end of period
|
|
$
|
2,436,078
|
|
|
$
|
2,011,559
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest during period
|
|
$
|
6,199
|
|
|
$
|
10,379
|
|
Cash paid for income taxes during period
|
|
$
|
---
|
|
|
$
|
87,000
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1.
|
SUMMARY OF ACCOUNTING POLICIES
|
Interim reporting
The accompanying unaudited condensed
consolidated financial statements include the accounts of Ocean Bio-Chem, Inc. and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation. Certain prior period data have been reclassified
to conform to the current period presentation. Unless the context indicates otherwise, the term “Company”
refers to Ocean Bio-Chem, Inc. and its subsidiaries.
The unaudited condensed consolidated
financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements.
The financial information furnished
herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair
presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The
results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for
the year ending December 31, 2016.
The information included in this Form
10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Use of estimates
The preparation of condensed consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and assumptions.
2.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
There have been no accounting pronouncements
or changes in accounting pronouncements during the three months ended March 31, 2016 that are expected to have a material impact
on the Company’s financial position, results of operations or cash flows. Accounting pronouncements that became
effective during the three months ended March 31, 2016 did not have a material impact on disclosures or on the Company’s
financial position, results of operations or cash flows.
The Company’s inventories at March
31, 2016 and December 31, 2015 consisted of the following:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Raw materials
|
|
$
|
3,853,721
|
|
|
$
|
3,749,702
|
|
Finished goods
|
|
|
5,495,717
|
|
|
|
4,445,130
|
|
Inventories, gross
|
|
|
9,349,438
|
|
|
|
8,194,832
|
|
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
|
(283,602
|
)
|
|
|
(279,882
|
)
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
9,065,836
|
|
|
$
|
7,914,950
|
|
The inventory reserves shown in the
table above reflect slow moving and obsolete inventory.
The Company manages an inventory program
for one of its customers to improve the promotion of the Company's products. The Company manages the inventory levels
at the customer’s warehouses and recognizes revenue as the products are sold by the customer. The inventories
managed at the customer’s warehouses amounted to approximately $469,000 and $543,000 at March 31, 2016 and December 31, 2015,
respectively, and are included in inventories, net on the condensed consolidated balance sheets.
4.
|
PROPERTY, PLANT & EQUIPMENT
|
The Company’s property, plant
and equipment at March 31, 2016 and December 31, 2015 consisted of the following:
|
|
Estimate
Useful Life
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Land
|
|
|
|
$
|
278,325
|
|
|
$
|
278,325
|
|
Building and improvements
|
|
30 years
|
|
|
4,652,669
|
|
|
|
4,652,669
|
|
Manufacturing and warehouse equipment
|
|
6-20 years
|
|
|
9,153,057
|
|
|
|
9,072,162
|
|
Office equipment and furniture
|
|
3-5 years
|
|
|
1,268,545
|
|
|
|
1,293,609
|
|
Construction in process
|
|
|
|
|
197,545
|
|
|
|
215,155
|
|
Leasehold improvements
|
|
10-15 years
|
|
|
544,146
|
|
|
|
544,146
|
|
Vehicles
|
|
3 years
|
|
|
42,283
|
|
|
|
42,283
|
|
Property, plant and equipment, gross
|
|
|
|
|
16,136,570
|
|
|
|
16,098,349
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(10,932,959
|
)
|
|
|
(10,741,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
$
|
5,203,611
|
|
|
$
|
5,356,388
|
|
5.
|
REVOLVING LINE OF CREDIT
|
On August 4, 2014, the Company and Regions
Bank entered into a Business Loan Agreement (the“Business Loan Agreement”), under which the Company was provided a
renewed revolving line of credit. Under the renewed revolving line of credit, the Company may borrow up to the lesser of (i) $6
million or (ii) a borrowing base equal to 80% of eligible accounts receivable (as defined in the Business Loan Agreement) plus
50% of eligible inventory (as defined in the Business Loan Agreement). Interest on amounts borrowed under the revolving line of
credit is payable monthly at the 30 day LIBOR rate plus 1.65% per annum, unless the Company’s debt service coverage ratio
(generally, net operating profit plus depreciation, amortization and lease/rent expense divided by current maturities of long-term
debt plus interest and lease/rent expense, calculated on a trailing twelve month basis) falls to or below 2.0 to 1, in which case
interest is payable at the 30 day LIBOR rate plus 2.65% per annum.
Outstanding amounts under the revolving
line of credit are payable on demand. If no demand is made, the Company may repay and reborrow funds from time to time until expiration
of the revolving line of credit on July 6, 2016, 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, inventory, contract rights and general intangibles and, as a result of cross-collateralization of the Company’s
obligations under the term loan described in Note 6 and the revolving line of credit, real property and equipment at the Montgomery,
Alabama facility of the Company’s subsidiary, Kinpak, Inc. ("Kinpak"). The Business Loan Agreement includes financial
covenants requiring a minimum debt service coverage ratio (generally, net operating profit plus depreciation, amortization and
lease/rent expense divided by current maturities of long-term debt plus interest and lease/rent expense) of 1.75 to 1.00, calculated
on a trailing twelve month basis, and a maximum debt to capitalization ratio (generally, funded debt divided by the sum of total
net worth and funded debt) of 0.75 to 1, tested quarterly. The line of credit is subject to several events of default, including
a decline in the majority shareholder’s ownership below 50% of all outstanding shares. At March 31, 2016, the Company was
not in compliance with the financial covenant relating to its minimum debt service coverage ratio, as its debt service coverage
ratio was 1.67. Although the deficiency in the Company’s debt service coverage ratio results in an event of default under
the Business Loan Agreement, the Company had no borrowings under the revolving line of credit at March 31, 2016, and Regions Bank
waived the default through May 9, 2017. The deficiency in the debt service coverage ratio also may have resulted in an event of
default under the term loan described in Note 6 below due to the cross-default provisions of the term loan. However, any resulting
default has been waived through May 9, 2017 by Regions Equipment Financing Corporation (“REFCO”), a subsidiary of Regions
Bank and the lender under the term loan.
On July 6, 2011, REFCO provided to the
Company a $2,430,000 term loan with a fixed interest rate of 3.54%, subject to an increase to 4.55% in the event the Company's
debt service coverage ratio (net profit plus taxes, interest, depreciation, amortization and rent expense divided by debt service
plus interest and lease/rent expense, calculated on a trailing four-quarter basis) falls to or below 2.0 to 1. Principal and interest
on the term loan are payable in equal monthly installments through July 6, 2017, the date on which the term loan matures. The proceeds
of the term loan were used to pay the Company’s remaining obligations under a lease agreement relating to industrial revenue
bonds used to fund the expansion of Kinpak’s facilities and acquisition of related equipment. At March 31, 2016, approximately
$585,000 was outstanding under the term loan. The term loan and the revolving line of credit under the Bank Loan Agreement are
cross-defaulted (i.e., a default under one instrument is a default under the other). See Note 5 for information regarding REFCO’s
waiver of an event of default that may be deemed to have occurred under the cross-default provisions of the term loan as a result
of an event of default under the Business Loan Agreement; REFCO has waived the default through May 9, 2017.
At March 31, 2016 and December 31, 2015,
the Company was obligated under capital lease agreements covering equipment utilized in the Company’s operations. The
capital leases, aggregating approximately $82,000 and $88,000 at March 31, 2016 and December 31, 2015, respectively, mature on
July 1, 2020 and carry an interest rate of 2%.
The following table provides information
regarding the Company’s long term debt at March 31, 2016 and December 31, 2015:
|
|
Current Portion
|
|
|
Long Term Portion
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Term loan
|
|
$
|
436,441
|
|
|
$
|
432,601
|
|
|
$
|
148,942
|
|
|
$
|
259,503
|
|
Capitalized equipment leases
|
|
|
17,092
|
|
|
|
18,547
|
|
|
|
64,625
|
|
|
|
69,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
$
|
453,533
|
|
|
$
|
451,148
|
|
|
$
|
213,567
|
|
|
$
|
328,818
|
|
Required principal payments under the Company’s long
term obligations are set forth below:
12 month period ending March 31,
|
|
|
|
2017
|
|
$
|
453,533
|
|
2018
|
|
|
167,918
|
|
2019
|
|
|
19,326
|
|
2020
|
|
|
19,682
|
|
2021
|
|
|
6,641
|
|
|
|
|
|
|
Total
|
|
$
|
667,100
|
|
7.
|
RELATED PARTY TRANSACTIONS
|
During the three months ended March
31, 2016 and 2015, the Company sold products to companies affiliated with its Chairman, President and Chief Executive Officer.
The affiliated companies distribute the products outside of the United States and Canada. The Company also provides administrative
services to these companies. Sales to the affiliated companies aggregated approximately $546,000 and $725,000 during the three
months ended March 31, 2016 and 2015, respectively. Administrative fees aggregated approximately $123,000 and $107,000 during
the three months ended March 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 $1,068,000 and $1,051,000 at March 31,
2016 and December 31, 2015, respectively. Transactions with the affiliated companies were made in the ordinary course of business. While
the terms of sale to the affiliated companies differed from the terms applicable to other customers, the affiliated companies bear
their own warehousing, distribution, advertising, selling and marketing costs, as well as their own freight charges (the Company
pays freight charges in connection with sales to its domestic customers on all but small orders). Moreover, the Company
does not pay sales commissions with respect to products sold to the affiliated companies. As a result, the Company believes
its profit margins with respect to sales of its products to the affiliated companies are similar to the profit margins it realizes
with respect to sales of the same products to its larger domestic customers. Management believes that the sales transactions
did not involve more than normal credit risk or present other unfavorable features.
A subsidiary of the Company currently
uses the services of an entity that is owned by its Chairman, President and Chief Executive Officer to conduct product research
and development and to assist in the production of television commercials. Under this arrangement, the Company paid
the entity $10,500 for each of the three month periods ended March 31, 2016 and 2015 for research and development services.
The Company leases office and warehouse
facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. The
Company believes that the rental payments are below market rates. See Note 8 for a description of the lease terms.
A director of the Company is Regional
Executive Vice President of an entity from which the Company sources most of its insurance needs at an arm’s length competitive
basis. During the three months ended March 31, 2016 and 2015, the Company paid an aggregate of approximately $60,000
and $216,000, respectively in insurance premiums on policies obtained through the entity. The decrease in 2016 is primarily attributable
to the Company’s prepayment of the entire annual premium for its general liability policy rather than paying the premium
in installments.
8.
|
COMMITMENTS AND CONTINGENCIES
|
The Company leases its executive offices
and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer.
The lease, as extended, expires on December 31, 2023. The lease requires an annual minimum base rent of $94,800 and provides for
a maximum annual 2% increase in subsequent years, although the entity has not raised the minimum rent since the Company entered
into a previous lease agreement in 1998. Additionally, the leasing entity is entitled to reimbursement of all taxes, assessments,
and any other expenses that arise from ownership. Each of the parties to the lease has agreed to review the terms of the lease
every three years at the request of the other party. Rent expense under the lease was approximately $24,000 for each
of the three months ended March 31, 2016 and 2015.
On August 13, 2014, Star-Brite Distributing,
Inc. (“Star-Brite”), a wholly-owned subsidiary of the Company, filed a complaint for injunctive relief and damages
against Gold Eagle Co. (“Gold Eagle”) in the United States District Court for the Southern District of Florida. The
complaint alleged that Gold Eagle, in violation of Section 43(a) of the Lanham Act, the Florida Deceptive and Unfair Trade Practices
Act, and the Florida False Advertising Statute, made false and/or misleading statements in a comparative marketing campaign against
Star Tron® Enzyme Fuel Treatment, an enzyme based fuel additive for the marine market, used to treat ethanol gasoline, commonly
referred to as E10 fuel. The complaint also constitutes a claim for common law unfair competition.
Gold Eagle filed an answer to complaint
and counterclaim, generally denying the allegations in Star-Brite’s complaint and asserting affirmative defenses to Star-Brite’s
claims. Gold Eagle’s counterclaim alleged, among other things, that in various advertising and marketing materials for Star
Tron, which Star-Brite markets for use in various types of engines, Star-Brite makes false and misleading claims that are causing
harm to Gold Eagle, which markets competitive products under the STA-BIL brand, thereby violating the same statutory provisions
as Gold Eagle was alleged to have violated in Star-Brite’s complaint, and also constituting common law unfair competition.
Star-Brite filed an answer to the counterclaim,
generally denying the allegations, and asserting affirmative defenses.
A jury trial was conducted during February
2016. On March 1, 2016, the jury unanimously found that (i) Gold Eagle’s advertising was not literally false; (ii) Gold Eagle
did not commit false advertising under the Florida False Advertising Statute; (iii) Star-Brite’s advertising was not literally
false and (iv) Star-Brite did not commit false advertising under the Florida False Advertising Statute. As a result of the jury’s
verdict, the Court determined that (i) Star-Brite would recover nothing from Gold Eagle, and Star-Brite’s action was dismissed
on the merits and (ii) Gold Eagle would recover nothing from Star-Brite, and Gold Eagle’s counterclaim was dismissed on the
merits. Neither party has filed an appeal.
In post-trial proceedings, Star-Brite
is seeking attorneys’ fees and costs under the Florida False Advertising Statute, which provides that a prevailing party
in a civil action for violation of the statute will be awarded costs, including attorneys’ fees. Star-Brite is asserting,
among other things, that the issues asserted by Gold Eagle in its counterclaim were the significant issues in the case, that Star-Brite
obtained a defense judgment in its favor on the counterclaim, and, therefore, Star-Brite is the prevailing party, entitled to
costs and attorney’s fees under the statute. Star-Brite also asserts that it is entitled to attorney’s fees
and costs as a prevailing party on the counterclaim under the Florida Deceptive and Unfair Trade Practices Act. Gold Eagle
has asserted, among other things, that because both parties were denied the relief they sought, neither party should be deemed
a prevailing party, or, in the event the Court determines that either party is a prevailing party, Gold Eagle, as defendant in
the action, should be deemed the prevailing party. The Court has referred the matter to a Magistrate Judge for appropriate disposition
or report and recommendation.
Basic and diluted loss per share is
calculated by dividing net loss by the weighted average number of shares outstanding during the reported period. The
following table sets forth the computation of basic and diluted loss per common share.
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Loss per common share –Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(540,802
|
)
|
|
$
|
(15,926
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
8,985,858
|
|
|
|
8,920,288
|
|
|
|
|
|
|
|
|
|
|
Loss per common share – Basic and Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended March 31, 2016 and 2015, 57,509 and 99,689 shares underlying outstanding stock awards were not included
in the computation of loss per common share – diluted because their effect would have been antidilutive.
10.
|
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
|
During the three months ended March
31, 2016, stock options to purchase an aggregate of 30,000 shares were exercised. The Company received a total of $21,600, withheld
4,519 shares in connection with the net exercise feature of the stock options and delivered an aggregate of 25,481 shares to the
option holders who exercised their options.
No
stock compensation expense was recognized during the three months ended March 31, 2016 and 2015. At March 31, 2016, there was
no unrecognized compensation expense related to stock
options.
No stock awards were issued during the
three months ended March 31, 2016 and 2015.
The following table provides information
at March 31, 2016 regarding outstanding
stock options under the Company’s stock option plans. As used in the
table below, “2002 NQ” refers to the Company’s 2002 Non-Qualified Stock Option Plan and “2008 NQ”
refers to the Company’s 2008 Non-Qualified Stock Option Plan.
Plan
|
|
Date
Granted
|
|
Shares
Underlying
Options Outstanding
|
|
|
Shares
Underlying Exercisable
Options
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Weighted
Average
Remaining Term
|
|
2002NQ
|
|
12/17/07
|
|
|
40,000
|
|
|
|
40,000
|
|
|
$
|
1.32
|
|
|
12/16/17
|
|
|
1.7
|
|
2008NQ
|
|
1/11/09
|
|
|
40,000
|
|
|
|
40,000
|
|
|
$
|
0.69
|
|
|
1/10/19
|
|
|
2.8
|
|
2008NQ
|
|
4/26/10
|
|
|
20,000
|
|
|
|
20,000
|
|
|
$
|
2.07
|
|
|
4/25/20
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
$
|
1.22
|
|
|
|
|
|
2.6
|
|
11.
|
SPECIAL CASH DIVIDEND
|
On March 25, 2016, the Company’s
Board of Directors declared a special cash dividend of $0.06 per common share payable on April 26, 2016 to all shareholders
of record on April 12, 2016. On April 12, 2016, there were 9,008,855 shares of common stock outstanding; therefore the
Company recorded a $540,531 liability for dividends payable, which is reflected on the March 31, 2016 balance sheet. In
accordance with the action of the Board of Directors, the dividend was paid on April 26, 2016.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-looking Statements:
Certain statements contained in this
Quarterly Report on Form 10-Q, including without limitation, our expectation that legal expenses with respect to the litigation
matter described in Note 8 to the condensed consolidated financial statements included in this report will decline during the second
quarter of 2016, anticipated higher sales volumes in the second quarter of 2016, our projected income tax rate for the full 2016
year, our ability to provide required capital to support inventory levels, the effect of price increases in raw materials that
are petroleum or chemical based or commodity chemicals on our margins, and the sufficiency of funds provided through operations
and existing sources of financing to satisfy our cash requirements constitute forward-looking statements. For this purpose, any
statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "believe," "may," "will," "expect,"
"anticipate," "intend," or "could," including the negative or other variations thereof or comparable
terminology, are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties
and other factors which may cause actual results to be materially different from those expressed or implied by such forward-looking
statements. Factors that may affect these results include, but are not limited to, the highly competitive nature of our industry;
reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; advertising
and promotional efforts; unanticipated litigation developments; exposure to market risks relating to changes in interest rates,
foreign exchange rates, prices for raw materials that are petroleum or chemical based and other factors addressed in Part I, Item
1A (“Risk Factors”) in our annual report on Form 10-K for the year ended December 31, 2015.
Overview:
We are principally engaged in manufacturing,
marketing and distributing
a broad line of appearance, performance and maintenance products for the marine, automotive,
power sports, recreational vehicle and outdoor power equipment markets, under the Star brite®, StarTron® and other trademarks
within the United States of America and Canada. We also manufacture, market and distribute a line of disinfectant, sanitizing and
deodorizing products. In addition, we produce private label formulations of many of our products for various customers and provide
custom blending and packaging services for these and other products. We sell our products to national retailers and to national
and regional distributors who sell our products to specialized retail outlets.
Our operating results for the
quarter ended March 31, 2016 were adversely affected by professional fees and expenses related to the litigation described in
Note 8 to the condensed consolidated financial statements included in this report (the “Advertising Litigation”).
Our professional fees and expenses related to the Advertising Litigation were approximately $1,085,000 and $59,000 during the
three month periods ended March 31, 2016 and 2015, respectively. As explained in more detail in Note 8 to the condensed consolidated
financial statements included in this report, as a result of the jury verdict, neither party to the Advertising Litigation is
liable to the other; however, post-trial proceedings regarding costs and legal expenses are continuing. While we anticipate that
expenditures related to the Advertising Litigation will decline during the second quarter of 2016, we will continue to incur legal
expense with respect to the Advertising Litigation until all post-trial matters are concluded. We are seeking insurance recovery
with respect to a portion of our expenditures with respect to the Advertising Litigation; however we cannot provide assurance
as to whether, or to what extent, we will obtain such recovery.
Critical accounting estimates:
See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Part II, Item 7 of
our Annual Report on Form 10-K for the year ended December 31, 2015 for information regarding our critical accounting estimates.
Results of Operations:
Three Months Ended March 31, 2016
Compared to the Three Months Ended March 31, 2015
The following table provides a summary of our financial results
for the three months ended March 31, 2016 and 2015:
|
|
For
The Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percentage
of Net Sales
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
$
|
6,750,080
|
|
|
$
|
6,002,429
|
|
|
|
12.5
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
4,368,137
|
|
|
|
3,965,780
|
|
|
|
10.1
|
%
|
|
|
64.7
|
%
|
|
|
66.1
|
%
|
Gross profit
|
|
|
2,381,943
|
|
|
|
2,036,649
|
|
|
|
17.0
|
%
|
|
|
35.3
|
%
|
|
|
33.9
|
%
|
Advertising and promotion
|
|
|
715,872
|
|
|
|
615,872
|
|
|
|
16.2
|
%
|
|
|
10.6
|
%
|
|
|
10.3
|
%
|
Selling and administrative
|
|
|
2,485,863
|
|
|
|
1,421,546
|
|
|
|
74.9
|
%
|
|
|
36.8
|
%
|
|
|
23.7
|
%
|
Operating loss
|
|
|
(819,792
|
)
|
|
|
(769
|
)
|
|
|
N/A
|
|
|
|
12.1
|
%
|
|
|
0.0
|
%
|
Interest (expense), net
|
|
|
(5,884
|
)
|
|
|
(10,075
|
)
|
|
|
(41.6
|
)%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
Other (expense)
|
|
|
---
|
|
|
|
(12,522
|
)
|
|
|
N/A
|
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
Income tax benefit
|
|
|
284,874
|
|
|
|
7,440
|
|
|
|
3,729.0
|
%
|
|
|
4.2
|
%
|
|
|
0.1
|
%
|
Net loss
|
|
$
|
(540,802
|
)
|
|
$
|
(15,926
|
)
|
|
|
3,295.7
|
%
|
|
|
8.0
|
%
|
|
|
0.3
|
%
|
Net sales
increased by approximately
$748,000, or 12.5%, to approximately $6,750,000 for the three months ended March 31, 2016 from approximately $6,002,000 during
the same period in 2015. The increase is primarily attributable to sales of marine products to some of our largest customers.
Cost of goods sold
increased
by approximately $402,000, or 10.1%, to approximately $4,368,000 for the three months ended March 31, 2016, from approximately
$3,966,000 for the same period in 2015. The increase in cost of goods sold is a result of higher sales volume partially
offset by a more favorable mix of products sold during the 2016 period.
Gross profit
increased by approximately
$345,000, or 17.0%, to approximately $2,382,000 for the three months ended March 31, 2016, from approximately $2,037,000 for the
same period in 2015. Gross profit increased due to increased sales volume and a more favorable product mix. As a percentage of
net sales, gross profit was approximately 35.3% and 33.9% for the three month periods ended March 31, 2016 and 2015, respectively.
Advertising and promotion expenses
increased by approximately $100,000, or 16.2%, to approximately $716,000 for the three months ended March 31, 2016 from approximately
$616,000 for the same period in 2015. As a percentage of net sales, advertising and promotion expense was approximately
10.6% for the three months ended March 31, 2016 compared to approximately 10.3% for the same period in 2015. The increase
is a result of increased customer cooperative advertising allowances provided to select customers.
Selling and administrative expenses
increased by approximately $1,064,000, or 74.9%, to approximately $2,486,000 during the three months ended March 31, 2016 from
approximately $1,422,000 for the same period in 2015. Legal fees and expenses related to the Advertising Litigation
accounted for approximately $1,026,000 of the increase. As a percentage of net sales, selling and administrative expenses increased
to 36.8% for the three months ended March 31, 2016, compared to 23.7% for the same period in 2015.
Operating loss –
As a result
of the foregoing factors, we incurred an operating loss of approximately $820,000 for the three months ended March 31, 2016, compared
to an operating loss of approximately $1,000 for the same period in 2015, an increase in operating loss of approximately $819,000.
Interest expense, net
decreased
by approximately $4,000 to approximately $6,000 for the three months ended March 31, 2016, compared to approximately $10,000 for
the same period in 2015. The decrease reflects the declining outstanding principal on our term loan.
Income tax benefit –
Our
income tax benefit for the three months ended March 31, 2016 was approximately $285,000, or 34.5% of our pretax income, compared
to an income tax benefit of approximately $7,000, or 31.8% of pretax income, for the same period in 2015. The higher 2016 tax rate
reflects our projected rate for the full year of 2016, which is consistent with the year ended December 31, 2015.
Net loss
. – As a result
of the factors described above, we incurred a net loss of approximately $541,000 for the three months ended March 31, 2016, compared
to a net loss of approximately $16,000 for the same period in 2015.
Liquidity and capital resources:
Our cash balance was approximately $2,436,000
at March 31, 2016 compared to approximately $2,468,000 at December 31, 2015. At March 31, 2016 and December 31, 2015, we had no
borrowings under our revolving line of credit. The cash balance does not reflect a special cash dividend declared by our Board
of Directors on March 25, 2016 and paid to our shareholders on April 26, 2016. See Note 11 to the condensed consolidated financial
statements included in this report for additional information.
Net cash provided by operating activities
during the three months ended March 31, 2016 was approximately $138,000 compared to net cash used in operating activities of approximately
$605,000 for the three months ended March 31, 2015. During the 2016 period, we increased gross inventories by approximately
$1,155,000 compared to $2,001,000 in the 2015 period. We also had an approximately $472,000 larger increase in accounts payable
and other accrued expenses and an approximately $315,000 smaller increase in receivables due from affiliated companies during the
three months ended March 31, 2016, as compared to the 2015 period. These increases were partially offset by our higher net loss
and an approximately $362,000 lower decrease in our trade accounts receivable balance during the three months ended March 31, 2016,
as compared to the 2015 period.
Net trade accounts receivable aggregated
approximately $4,090,000 at March 31, 2016, a decrease of approximately $1,002,000, or 19.7%, compared to net trade accounts receivable
of $5,092,000 at December 31, 2015. The lower trade accounts receivable balance at March 31, 2016 principally reflects lower sales
in the first quarter of 2016 as compared to the fourth quarter of 2015.
Inventories, net increased by approximately
$1,151,000 or 14.5% to approximately $9,066,000 at March 31, 2016 from approximately $7,915,000 at December 31, 2015. We increased
inventories in anticipation of higher sales volumes in the second quarter of 2016.
Net cash used in investing activities
was approximately $76,000 for the three months ended March 31, 2016 compared to approximately $316,000 for the three months
ended March 31, 2015. During the 2016 period, the Company used approximately $76,000 for purchases of property, plant
and equipment as compared to $371,000 of such expenditures in the 2015 period. The 2015 period also included cash proceeds of $55,000
from the sale of a recreational vehicle we used for advertising and exhibiting our products at trade shows and other events.
Net cash used in financing activities
was approximately $91,000 for the three months ended March 31, 2016 compared to approximately $105,000 for the three months ended
March 31, 2015. While cash used in both periods reflect repayments under our term loan, the 2016 period reflects a $21,600 offset
resulting from the exercise of stock options.
See Notes 5 and 6 to the condensed consolidated
financial statements included in this report for information concerning our principal credit facilities, consisting of a revolving
line of credit and a term loan. At March 31, 2016 and December 31, 2015, we had no borrowings under our revolving line of
credit and outstanding balances of approximately $585,000 and $692,000, respectively, under our term loan. The loan agreement related
to our revolving line of credit contains various covenants, including financial covenants requiring a minimum debt coverage ratio
(generally, net operating profit plus depreciation, amortization and lease/rent expense divided by current maturities of long-term
debt plus interest and lease/rent expense) of 1.75 to 1.00, calculated on a trailing twelve month basis, and a maximum debt to
capitalization ratio (generally, funded debt divided by the sum of total net worth and funded debt) of 0.75 to 1, tested quarterly.
At March 31, 2016, our debt coverage ratio was approximately 1.67 to 1, and our debt to capitalization ratio was approximately
0.03 to 1. At March 31, 2016, we were not in compliance with the financial covenant related to the debt service coverage ratio.
Although the deficiency in this ratio constitutes an event of default under the agreement related to our revolving line of credit,
no amounts were outstanding under the revolving line of credit, and the lender has waived the default through May 9, 2017. Moreover,
while the deficiency also may have constituted an event of default under the term loan due to its cross-default provisions, the
lender has waived the default through May 9, 2017. See Note 5 to the condensed consolidated financial statements included in this
report for additional information.
In addition to the revolving line of
credit and term loan, we have obtained financing through capital leases for office equipment, totaling approximately $82,000 and
$88,000 at March 31, 2016 and December 31, 2015, respectively.
Some of our assets and liabilities are
in the Canadian dollars and are subject to currency fluctuations relating to the Canadian dollar. We do not engage in currency
hedging and address currency risk as a pricing issue. In the three months ended March 31, 2016, we recorded approximately $2,000
in foreign currency translation adjustments (increasing shareholders’ equity by $2,000).
During the past few years, we have introduced
a number of new products. At times, new product introductions have required us to increase our overall inventory and
have resulted in lower inventory turnover rates. The effects of reduced inventory turnover have not been material to
our overall operations. We believe that all required capital to maintain such increases will continue to be provided
by operations and, if necessary, our current revolving line of credit or a renewal or replacement of the facility. However,
we cannot assure that we will be able to secure such a renewal or replacement of our revolving line of credit.
Many of the raw materials that we use
in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The
nature of our business does not enable us to pass through the price increases to our national retailer customers and to our distributors
as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.
At March 31, 2016 and through the date
of this report, we did not and do not have any material commitments for capital expenditures.
We believe that funds provided through
operations and our existing sources of financing will be sufficient to satisfy our cash requirements over at least the next twelve
months.