☒ ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant as of June 29, 2018 was $10,837,621, based upon the closing price of the
registrant’s common stock on such date as reported by the NASDAQ Capital Market. For purposes of making this computation
only, all executive officers, directors and beneficial owners of more than five percent of the registrant’s common stock are
deemed to be affiliates.
Certain statements contained in this Annual
Report on Form 10-K, including without limitation, estimated costs of expansion of facilities operated by our wholly-owned subsidiary,
KINPAK Inc. (“Kinpak”), our ability to locate substitute third party manufacturing facilities without a substantial
adverse effect on our manufacturing and distribution, the effect of price increases in raw materials that are petroleum or chemical
based or commodity chemicals on our margins, the sufficiency of funds provided through operations and existing sources of financing
to satisfy our cash requirements and our expectation that we will be able to maintain borrowings, if any, under our current revolving
line of credit facility until the end of its stated term constitute forward-looking statements. For this purpose, any statements
contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as “believe,” “may,” “will,” “expect,”
“anticipate,” “intend,” or “could,” including the negative or other variations thereof or comparable
terminology, are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties
and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking
statements. Factors that may affect these results include, but are not limited to, the highly competitive nature of our industry;
reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; expenditures
on, and the effectiveness of our advertising and promotional efforts; unanticipated litigation developments; exposure to market
risks relating to changes in interest rates, foreign currency exchange rates and prices for raw materials that are petroleum or
chemical based, and other factors discussed below under Item 1A, “Risk Factors.”
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 chlorine dioxide-based deodorizing disinfectant, and sanitizing
products under the Star brite® and Performacide® 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 2018 and 2017 totaled approximately $2,190,000 and $2,070,000 or 5.2% and 5.5% of our net sales,
respectively. See Note 10 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 nearing completion of a project
involving the expansion of the manufacturing, warehouse and distribution facilities of our subsidiary, KINPAK Inc. (“Kinpak”),
in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”).
The remaining work on the Expansion Project involves completion of a bottle filling line and the purchase and installation of additional
equipment. We currently are operating in the expanded facilities. At December 31, 2018, we have spent an aggregate of approximately
$6.0 million on the Expansion Project, and the total cost of the Expansion Project is estimated to be approximately $6.7 million.
Pursuant to an asset acquisition agreement dated July 13, 2018,
we acquired assets of Snappy Marine, Inc. (“Snappy Marine”), a Florida corporation that marketed and distributed Snappy
Teak-NU
®
, a cleaning product for teak surfaces on boats, for an aggregate purchase price of $1,358,882. See Note
4 to the consolidated financial statements included in this report for additional information. We have added Snappy Teak-NU
®
to our product portfolio.
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, brush handles, 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 10% 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). Star Tron® fuel treatment 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. Other specialty recreational vehicle/power
sports products include cleaners, polishes, detergents, fabric cleaners and protectants, silicone sealants, waterproofers, gasket
materials, degreasers, vinyl cleaners and protectants, 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.
Disinfectant Group:
Our
disinfectant group includes chlorine dioxide based deodorizers, disinfectants and sanitizers, which we sell under
the Star brite
®
and Performacide
®
brand names, and which our customers sell using private
label brands. Star Brite
®
products include NosGUARD mildew odor control bags and boat
odor sanitizers. Performacide
®
products include disinfectants for hard, non-porous surfaces, air care products
for deodorizing and products to eliminate mold and mildew. These products are sold in both a gas and liquid form. 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
with respect to our disinfectant group principally towards the marine, automotive, home restoration, pet care and
agriculture markets, and to institutions such as schools.
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 most 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 principally in the marine, automotive, home restoration, 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 33.1%
and 34.4% of our consolidated net sales for the years ended December 31, 2018 and 2017, respectively. Net sales to
our five largest unaffiliated customers for the years ended December 31, 2018 and 2017 amounted to approximately 52.7% and 52.1%
of our consolidated net sales, respectively, and at December 31, 2018 and 2017, outstanding accounts receivable balances
from our five largest unaffiliated customers aggregated approximately 60.5% and 50.9% 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, 2018. 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 customers range from 30 to 180 days. However, at times we offer
extended payment terms or discount arrangements as purchasing incentives to customers. Historically, these initiatives
have not materially affected our overall profit 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
seek to maintain and possibly increase our market share through our present advertising and distribution channels.
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 advertising and distribution channels similar 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.
Disinfectant Group
: 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 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 trademarks provide protection in the geographic markets we serve, 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, 2018, we had 151 full-time employees and one part-time employee. The following table provides information
regarding personnel working for the Company and its subsidiaries at December 31, 2018:
Location
|
|
Description
|
|
Number of Employees
|
|
Fort Lauderdale, Florida
|
|
Administrative, sales, and marketing
|
|
|
43
|
|
Fort Lauderdale, Florida
|
|
Manufacturing and distribution
|
|
|
6
|
|
Montgomery, Alabama
|
|
Manufacturing and distribution
|
|
|
103
|
*
|
|
|
|
|
|
152
|
|
*
Includes one part-time employee.
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.
Our
business is, to a significant extent, dependent on a small number of major customers, and the loss of any of these customers could
adversely affect our financial condition, results of operations and cash flows.
Net
sales to our five largest unaffiliated customers accounted for 52.7% of our consolidated net sales in 2018; the two largest unaffiliated
customers accounted for 33.1% of our consolidated net sales in 2018. The loss of any of these customers would have a material
adverse effect on our financial condition, results of operations and cash flows.
Our
Chairman, President and Chief Executive Officer is a majority shareholder who controls us, and his interests 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 51.1% 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.” The affiliated companies also collectively own the rights
to the Star brite® and Star Tron® trademarks and related products outside of the United States and Canada. Sales
to the affiliated companies aggregated approximately $2,190,000 and $2,070,000 during the years ended December 31, 2018 and
2017, respectively. In addition, we provided administrative services and advances for business related expenditures
to the affiliated companies. During the years ended December 31, 2018 and 2017, fees for administrative services aggregated approximately
$760,000 and $764,000, respectively, and amounts billed to the affiliated companies to reimburse the Company for business related
expenditures made on behalf of the affiliated companies aggregated approximately $151,000 and $120,000 during the years ended
December 31, 2018 and 2017, respectively. Receivables due from the affiliated companies in connection with product
sales, administrative services, and advances for business related expenditures totaled approximately $1,046,000 and $1,584,000
at December 31, 2018 and 2017, respectively. The accounts receivable turnover ratio for the year ended December 31, 2018 with
respect to sales to the affiliated companies was approximately 3.5 and with respect to administrative services and advances for
business related expenditures was approximately 1.3. Management believes that the sales and provision of administrative services
to the affiliated companies do not involve more than normal credit risk.
We
have entered into other transactions with entities owned by Mr. Dornau. See Notes 10 and 11 to the consolidated financial
statements included in this report for additional information.
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 sales, particularly with respect to products directed to the marine and recreational vehicle markets. While published
reports indicate that economic conditions, particularly in the United States, generally have improved over the past several years,
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 competiveness 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, 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 2021.
We
have a revolving line of credit with a variable interest rate. Interest on the revolving line of credit is payable
at the one month LIBOR rate plus 1.35% per annum, computed on a 365/360 basis. At December 31, 2018, 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 2021. 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.
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 11 to the consolidated financial statements included in this report for additional
information.
Kinpak leases its Alabama manufacturing facilities from The Industrial Development Board of the City of
Montgomery, Alabama (the “IDB”). Kinpak entered into the lease in its current form in connection with an industrial
development bond financing related to the Expansion Project; Kinpak’s lease payments are used to fund repayment of the IDB’s
obligations under the bond it issued in connection with the industrial development bond financing. See Note 8 to the consolidated
financial statements included in this report for additional information. Kinpak inherited the lease structure when it first acquired its facilities from its predecessor-in-interest
in 1996. The lease provides that prior to the maturity date of
the bond, Kinpak may repurchase the facilities for $1,000 if the bond has been redeemed or fully paid. As a result of the Expansion
Project, the facilities contain approximately 272,000 square feet of office, plant and warehouse space on 20 acres of land.
Item
3. Legal Proceedings
Not
applicable
Item
4. Mine Safety Disclosures
Not
applicable.
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2018 AND 2017
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® brand names, for the marine, automotive,
power sports, recreational vehicle and outdoor power equipment markets in the United States and Canada. 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 and consolidation
– The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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
–
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, “
Revenue from Contracts
with Customers
” (Topic 606). The Company adopted the new guidance using the full retrospective method, under which the
Company applies the new guidance to each comparative period presented. Under the new guidance, the Company’s performance
obligation to its customers under agreements currently in force is satisfied when the goods are shipped or picked up by the customer
and title of the goods is transferred (generally upon such shipment or pick up); with regard to a customer for which the Company’s
inventory is held at the customer’s warehouses, the Company’s performance obligation is deemed satisfied when the
Company is notified of sales by the customer.
While the timing of the Company’s revenue recognition did not change,
certain allowances provided by the Company to customers, primarily for cooperative advertising and freight, are now considered
a reduction of net sales instead of an expense. The changes to the Company’s 2017 statement of operations are as follows:
|
|
Originally
Reported
|
|
|
Topic 606
Adjustment
|
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
38,933,458
|
|
|
$
|
(992,480
|
)
|
|
$
|
37,940,978
|
|
Cost of goods sold
|
|
|
24,436,780
|
|
|
|
(127,648
|
)
|
|
|
24,309,132
|
|
Gross profit
|
|
|
14,496,678
|
|
|
|
(864,832
|
)
|
|
|
13,631,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and promotion
|
|
|
3,523,710
|
|
|
|
(864,832
|
)
|
|
|
2,658,878
|
|
Selling and administrative
|
|
|
7,297,538
|
|
|
|
-
|
|
|
|
7,297,538
|
|
Total operating expenses
|
|
|
10,821,248
|
|
|
|
(864,832
|
)
|
|
|
9,956,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,675,430
|
|
|
|
-
|
|
|
|
3,675,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,065
|
|
|
|
-
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,677,495
|
|
|
|
-
|
|
|
|
3,677,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
(1,073,961
|
)
|
|
|
-
|
|
|
|
(1,073,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,603,534
|
|
|
$
|
-
|
|
|
$
|
2,603,534
|
|
Collectability of accounts receivable
– Trade accounts receivable at December 31, 2018 and 2017 are net of allowances for doubtful accounts aggregating approximately
$171,000 and $79,000, respectively. Such amounts are based on expected collectability of the trade accounts receivable, after considering
the Company’s historical collection experience, the length of time an account is outstanding, the financial position of the
customer, if known, and information provided by credit rating services. During the years ended December 31, 2018 and 2017, the
Company recorded bad debt expense of approximately $35,000 and $199,000, respectively.
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 $1,273,000 and $1,099,000 for the years
ended December 31, 2018 and 2017, 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 $3,051,000 and $2,659,000 in 2018 and 2017, 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 $1,001,206
(of which $837,478 is included in cost of goods sold and $163,728 is included in selling and administrative expenses) and $884,881
(of which $695,184 is included in cost of goods sold and $189,697 is included in selling and administrative expenses) for the
years ended December 31, 2018 and 2017, 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 $49,000 and $42,000 of research and
development costs for the years ended December 31, 2018 and 2017, respectively.
Stock
based compensation
– The Company records stock-based compensation in accordance with the provisions of Financial
Accounting Standards Board (“FASB”) 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, the
Company recognizes an expense for the fair value of its stock awards at the time of grant and the fair value of its
outstanding stock options as they vest, whether held by employees or others. As of December 31, 2018, all outstanding stock
options were vested.
Use
of estimates
– The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Concentration of cash
– During
the years ended and at December 31, 2018 and 2017, 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
Topic 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 three levels of inputs as follows:
|
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 data
in connection with fair value measurements.
|
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. Under this method, the Company recognizes deferred income tax assets and liabilities
for the expected future consequences attributable to 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. The Company recognizes in the consolidated statements of operations the
effect on deferred income taxes of a change in tax rates in the period in which the change is enacted.
The Company records a valuation
allowance when necessary to reduce its deferred tax assets to the net amount that the Company believes is more likely than not
to be realized. The Company considers available evidence, both positive and negative, and use judgments regarding past and
future events, including operating results and available tax planning strategies, in assessing the need for a valuation
allowance.
The Company recognizes tax benefits from uncertain
tax positions only if the Company believes 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, the Company establishes reserves for uncertain
tax positions. The Company adjusts 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, 2018.
The
Company is no longer subject to income tax examinations for years before 2015.
Intangible
assets
– The Company’s intangible assets consist of trademarks, trade names, customer lists, product formulas,
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 intangible assets for impairment when events or changes in circumstances indicate an impairment may exist. No impairment
was recorded in 2018 or 2017.
Foreign
currency translation
– Assets and liabilities of the Company’s Canadian subsidiary are translated from
Canadian dollars to United States dollars at exchange rates in effect at the balance sheet date. Income and
expenses are translated at average exchange rates during the year. The translation adjustments for the reporting period are
included in the Company’s consolidated statements of comprehensive income, and the cumulative effect of these
adjustments are reported in the Company’s consolidated balance sheets as accumulated other comprehensive loss within
Shareholders’ Equity.
Earnings per share
– 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. See Note 14.
Note
2
– Inventories:
The composition of the Company’s inventories at December
31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
4,320,131
|
|
|
$
|
3,994,624
|
|
Finished goods
|
|
|
8,049,791
|
|
|
|
5,354,097
|
|
Inventories, gross
|
|
|
12,369,922
|
|
|
|
9,348,721
|
|
Inventory reserves
|
|
|
(284,109
|
)
|
|
|
(274,295
|
)
|
Inventories, net
|
|
$
|
12,085,813
|
|
|
$
|
9,074,426
|
|
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
$495,000 and $494,000 at December 31, 2018 and 2017, respectively.
Note
3
– Property, Plant and Equipment:
The
Company’s property, plant and equipment at December 31, 2018 and 2017 consisted of the following:
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful Life
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
$
|
278,325
|
|
|
$
|
278,325
|
|
Building and Improvements
|
|
30 years
|
|
|
9,548,922
|
|
|
|
4,673,409
|
|
Manufacturing and warehouse equipment
|
|
6-20 years
|
|
|
10,736,161
|
|
|
|
9,616,086
|
|
Office equipment and furniture
|
|
3-5 years
|
|
|
1,838,360
|
|
|
|
1,367,244
|
|
Leasehold improvements
|
|
10-15 years
|
|
|
577,068
|
|
|
|
567,898
|
|
Vehicles
|
|
3 years
|
|
|
10,020
|
|
|
|
10,020
|
|
Construction in process
|
|
|
|
|
80,682
|
|
|
|
5,197,780
|
|
Property, plant and equipment, gross
|
|
|
|
|
23,069,538
|
|
|
|
21,710,762
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
|
|
(13,420,301
|
)
|
|
|
(12,419,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
$
|
9,649,237
|
|
|
$
|
9,291,667
|
|
The Company is nearing completion of a
project involving the expansion of the manufacturing, warehouse and distribution facilities of the Company’s wholly-owned
subsidiary, KINPAK Inc. (“Kinpak”) in Montgomery, Alabama, as well as the purchase and installation of associated machinery
and equipment (the “Expansion Project”). As of December 31, 2018, the remaining work on the Expansion Project involves
the completion of a bottle filling line and the purchase and installation of additional equipment. At December 31, 2018, the
Company’s expenditures on the Expansion Project aggregated approximately $6.0 million. The total cost of the Expansion Project
is estimated to be approximately $6.7 million. Construction in progress at December 31, 2018 and 2017 includes $46,996 and $5,087,897,
respectively, relating to the expansion of Kinpak’s manufacturing, warehouse and distribution facilities.
Note
4
– Snappy Marine Asset Acquisition:
Pursuant to an asset acquisition agreement dated July 13, 2018,
the Company acquired assets of Snappy Marine, Inc. (“Snappy Marine”), a Florida corporation that marketed and distributed
Snappy Teak – NU
®
, a cleaning product for teak surfaces on boats. The acquired assets consist of, among other
things, Snappy Marine’s trademarks, tradenames and other intellectual property used in its business, including trademarks
with respect to “Snappy Marine
®
” and “Snappy Teak – NU
®
,” and specified
marketing, sales and distribution contracts. In addition, the Company acquired limited quantities of product inventory and raw
materials. The purchase price for the assets set forth in the asset purchase agreement is $1,358,882 ($1,350,000 for intellectual
property and $8,882 for inventory). The Company paid $345,882 to Snappy Marine at the closing of the transaction on July 13, 2018
and deposited an additional $13,000 in escrow; the escrow amount may be used by the Company to procure registrations with respect
to certain intellectual property rights. Any unused escrow amounts generally will be provided to Snappy Marine. In addition, the
Company provided to Snappy Marine a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of
the note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum
is being recorded as interest expense over the term of the note). The note is payable in equal installments of $16,667 over a 60
month period that commenced on August 1, 2018, with a final payment due and payable on July 1, 2023. If the note is prepaid in
full, the entire outstanding balance of the note (including all unpaid amounts allocated to interest over the remaining term of
the note) must be paid. Under circumstances set forth in the asset purchase agreement, the Company may be obligated to pay
certain customer refunds, price adjustments and warranty claims asserted through January 31, 2019 with regard to teak products
sold by Snappy Marine. The Company may offset such payments against amounts payable under the promissory note, subject to
an aggregate maximum offset of $25,000. In addition to the amounts paid to Snappy Marine, the Company also incurred $39,722 in
legal costs directly related to the asset acquisition.
Pro forma information with respect to the asset acquisition
is not presented as the operations of the acquired business are not material to the Company’s operations.
Note
5
– Intangible Assets:
The
Company’s intangible assets at December 31, 2018 and 2017 consisted of the following:
December
31, 2018
Intangible Assets
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
$
|
622,733
|
|
|
$
|
439,972
|
|
|
$
|
182,761
|
|
Trade names and trademarks
|
|
|
1,649,880
|
|
|
|
561,449
|
|
|
|
1,088,431
|
|
Customer list
|
|
|
525,663
|
|
|
|
48,186
|
|
|
|
477,477
|
|
Product formulas
|
|
|
262,832
|
|
|
|
24,093
|
|
|
|
238,739
|
|
Royalty rights
|
|
|
160,000
|
|
|
|
97,196
|
|
|
|
62,804
|
|
Total intangible assets
|
|
$
|
3,221,108
|
|
|
$
|
1,170,896
|
|
|
$
|
2,050,212
|
|
December
31, 2017
Intangible Assets
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Patents
|
|
$
|
622,733
|
|
|
$
|
387,636
|
|
|
$
|
235,097
|
|
Trade names and trademarks
|
|
|
1,131,125
|
|
|
|
549,561
|
|
|
|
581,564
|
|
Royalty rights
|
|
|
160,000
|
|
|
|
79,253
|
|
|
|
80,747
|
|
Total intangible assets
|
|
$
|
1,913,858
|
|
|
$
|
1,016,450
|
|
|
$
|
897,408
|
|
On July 13, 2018, the Company acquired
assets of Snappy Marine, principally consisting of intangible assets (see Note 4).
The allocated cost of the intangible assets
acquired from Snappy Marine and their respective useful lives are set forth in the table below:
Intangible Assets
|
|
Amount
|
|
|
Life
|
Trademarks and trade names
|
|
$
|
518,755
|
|
|
20 years
|
Customer list
|
|
|
525,663
|
|
|
5 years
|
Product formulas
|
|
|
262,832
|
|
|
5 years
|
Total intangible assets acquired from Snappy Marine
|
|
$
|
1,307,250
|
|
|
|
Amortization
expense related to intangible assets aggregated $154,446 and $70,280 for the years ended December 31, 2018 and 2017, respectively.
Note 6
– Revolving Line of Credit:
On August 31, 2018, the Company and Regions
Bank entered into a Business Loan Agreement (the “Business Loan Agreement”), under which the Company was provided a
revolving line of credit. Under the revolving line of credit, the Company may borrow up to the lesser of (i) $6,000,000 or (ii)
a borrowing base equal to 85% of Eligible Accounts (as defined in the Business Loan Agreement) plus 50% of Eligible Inventory (as
defined in the Business Loan Agreement). Interest on amounts borrowed under the revolving line of credit is payable monthly at
the one month LIBOR rate plus 1.35% per annum, computed on a 365/360 basis. Eligible Accounts do not include, among other things,
accounts receivable from affiliated entities.
Outstanding
amounts under the revolving line of credit are payable on demand. If no demand is made, the Company may repay and reborrow funds
from time to time until expiration of the revolving line of credit on August 31, 2021, at which time all outstanding principal
and interest will be due and payable. The Company’s obligations under the revolving line of credit are principally secured
by the Company’s accounts receivable and inventory. The Business Loan Agreement includes financial covenants requiring that
the Company maintain a minimum fixed charge coverage ratio (generally, the ratio of (A) EBITDA for the most recently completed
four fiscal quarters minus the sum of the Company’s distributions to its shareholders, taxes paid and unfunded capital expenditures
during such period to (B) prior year current maturities of Company long term debt plus interest expense incurred over the most
recently completed four fiscal quarters) of 1.20 to 1, tested quarterly, and a maximum “debt to cap” ratio (generally,
funded debt divided by the sum of net worth and funded debt) of 0.75 to 1, as of the end of each fiscal quarter. For purposes
of computing the fixed charge coverage ratio, “EBITDA” generally is defined as net income before taxes and depreciation
expense plus amortization expense, plus interest expense, plus non-recurring and/or non-cash losses and expenses, minus non-recurring
and/or non-cash gains and income; “unfunded capital expenditures” generally is defined as capital expenditures made
from Company funds other than funds borrowed through term debt incurred to finance such capital expenditures; “long term
debt” generally is defined as “debt instruments with a maturity principal due date of one year or more in length,”
including, among other listed contractual debt instruments, “revolving lines of credit” and “capital leases
obligations” and “prior year current maturities of long term debt” generally is defined as the principal portions
of long-term debt maturing within one year as listed at the last quarter end of the prior completed four fiscal quarters. At December
31, 2018, the Company was in compliance with these financial covenants. The revolving line of credit is subject to several events
of default, including a decline in the majority shareholder’s ownership below 50% of all outstanding shares.
On
August 31, 2017, the Company and Regions Bank entered into a Business Loan Agreement (the “Predecessor Agreement’),
under which the Company was provided a revolving line of credit in the maximum amount of $6,000,000. The Predecessor Agreement,
as amended, was substantially similar to the Business Loan Agreement, with the following exceptions: (i) if no demand for
payment was made by Regions Bank, all outstanding amounts were due and payable one year from the date of the Predecessor Agreement;
(ii) Interest on amounts borrowed under the Predecessor Agreement was payable monthly at the one month LIBOR rate plus 1.5% per
annum, computed on a 365/360 basis. The Predecessor Agreement expired on August 31, 2018 and was replaced by the Business
Loan Agreement.
At December 31, 2018 and 2017, the
Company had no borrowings under the revolving line of credit provided by the Business Loan Agreement and the Predecessor Agreement,
respectively.
Note 7
– Accrued Expenses Payable:
Accrued
expenses payable at December 31, 2018 and 2017 consisted of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued customer promotions
|
|
$
|
485,472
|
|
|
$
|
343,172
|
|
Accrued payroll, commissions, and benefits
|
|
|
373,895
|
|
|
|
280,783
|
|
Other
|
|
|
249,538
|
|
|
|
188,107
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses payable
|
|
$
|
1,108,905
|
|
|
$
|
812,062
|
|
Note 8
– Long Term Debt:
Industrial
Development Bond Financing
On September 26, 2017, Kinpak indirectly
obtained a $4,500,000 loan from Regions Capital Advantage, Inc. (the “Lender”). The proceeds of the loan are being
used principally to pay or reimburse costs relating to the Expansion Project.
The loan was funded by the Lender’s
purchase of a $4,500,000 industrial development bond (the “Bond”) issued by The Industrial Development Board of the
City of Montgomery, Alabama (the “IDB”). The Bond is a limited obligation of the IDB and is payable solely out of revenues
and receipts derived from the leasing or sale of Kinpak’s facilities. In this regard, Kinpak is obligated to fund the IDB’s
payment obligations by providing rental payments under a lease between the IDB and Kinpak (the “Lease”), under which
Kinpak leases its facilities from the IDB. Kinpak inherited the lease structure when it first acquired its facilities from its predecessor-in-interest
in 1996. The Lease provides that prior to the maturity date of the Bond, Kinpak may repurchase
the facilities for $1,000 if the Bond has been redeemed or fully paid.
The
Bond bears interest at the rate of 3.07% per annum, calculated on the basis of a 360-day year and the actual number of days elapsed
(subject to increase to 6.07% per annum upon the occurrence of an event of default), and is payable in 118 monthly installments
of $31,324 beginning on November 1, 2017 and ending on August 1, 2027, with a final principal and interest payment to be made
on September 1, 2027 in the amount of $1,799,201. The Bond provides that the interest rate will be subject to adjustment if it
is determined by the United States Treasury Department, the Internal Revenue Service, or a similar government entity that the
interest on the Bond is includable in the gross income of the Lender for federal income tax purposes.
Under
the Lease, Kinpak is required to make rental payments for the account of the IDB to the Lender in such amounts and at such times
as are necessary to enable the payment of all principal and interest due on the Bond and other charges, if any, payable in respect
of the Bond. The Lease also provides that Kinpak may redeem the Bond, in whole or in part, by prepaying its rental payment obligations
in an amount sufficient to effect the redemption. In addition, the Lease contains provisions relating to the Expansion Project,
including limitations on utilization of Bond proceeds, deposit of unused proceeds into a custodial account (as described below)
and investment of monies held in the custodial account.
Payment of amounts due and payable under
the Bond and other related agreements are guaranteed by the Company and its other consolidated subsidiaries. In connection with
a guarantee agreement under which the Company provided its guarantee, the Company is subject to certain covenants, including financial
covenants requiring that the Company maintain (i) a minimum fixed charge ratio (generally, the ratio of (A) EBITDA minus the sum
of Company’s distributions to its shareholders, taxes paid and unfunded capital expenditures to (B) current maturities of
Company long-term debt plus interest expense) of 1.2 to 1, tested quarterly, and (ii) a ratio of funded debt (as defined in the
guaranty agreement) divided by the sum of net worth and funded debt of 0.75 to 1, tested quarterly. For purposes of computing the
fixed charge coverage ratio, “EBITDA” generally is defined as net income before taxes and depreciation expense plus
amortization expense, plus interest expense, plus non-recurring and/or non-cash losses and expenses, minus non-recurring and/or
non-cash gains and income; “unfunded capital expenditures” generally is defined as capital expenditures made from Company
funds other than funds borrowed through term debt incurred to finance such capital expenditures. At December 31, 2018, the Company
was in compliance with these financial covenants.
Through
December 31, 2018, of the $4,500,000 proceeds of the Bond sale, approximately $2,161,000 has been applied to reimburse Kinpak
for Expansion Project expenditures and approximately $54,000 was paid directly to other parties for certain transaction costs.
The remaining amount is held in a custodial account and may be drawn by Kinpak from time to time to fund additional expenditures
related to the Expansion Project. Because the Lease contains limitations on the manner in which Kinpak may utilize funds held
in the custodial account, such funds are classified as restricted cash on the Company’s balance sheets.
The
Company incurred debt financing costs of $196,095 in connection with the financing. These costs are shown as a reduction of the
debt balance and are being amortized under the effective interest method.
Other
Long Term Obligations
In connection with the Company’s
agreement to purchase the assets of Snappy Marine (see Note 4 above), the Company provided to Snappy Marine a promissory note in
the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal,
and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over
the term of the note). The note is payable in equal installments of $16,667 over a 60 month period that commenced on August 1,
2018, with a final payment due and payable on July 1, 2023. If the note is prepaid in full, the entire outstanding balance of the
note (including all unpaid amounts allocated to interest over the remaining term of the note) must be paid.
At December 31, 2018 and 2017,
the Company was obligated under capital lease agreements covering equipment utilized in the Company’s operations. The
capital leases, aggregating approximately $31,000 and $50,000 at December 31, 2018 and 2017, 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, 2018 and 2017:
|
|
Current Portion
|
|
|
Long Term Portion
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Obligations related to industrial development bond financing
|
|
$
|
247,985
|
|
|
$
|
240,395
|
|
|
$
|
3,974,256
|
|
|
$
|
4,222,241
|
|
Note payable related to asset acquisition
|
|
|
177,701
|
|
|
|
---
|
|
|
|
680,274
|
|
|
|
---
|
|
Capitalized equipment leases
|
|
|
19,593
|
|
|
|
19,238
|
|
|
|
11,596
|
|
|
|
31,188
|
|
Total principal of long term debt
|
|
|
445,279
|
|
|
|
259,633
|
|
|
|
4,666,126
|
|
|
|
4,253,429
|
|
Debt issuance costs
|
|
|
(19,616
|
)
|
|
|
(19,616
|
)
|
|
|
(152,021
|
)
|
|
|
(171,636
|
)
|
Total long term debt
|
|
$
|
425,663
|
|
|
$
|
240,017
|
|
|
$
|
4,514,105
|
|
|
$
|
4,081,793
|
|
Required principal payments under the Company’s industrial
development bond financing and other long term obligations are set forth below:
Year
ending December 31,
|
|
|
|
2019
|
|
$
|
445,279
|
|
2020
|
|
|
449,936
|
|
2021
|
|
|
452,068
|
|
2022
|
|
|
465,873
|
|
2023
|
|
|
396,366
|
|
Thereafter
|
|
|
2,901,883
|
|
Total
|
|
$
|
5,111,405
|
|
Note 9
– Income Taxes:
The
components of the Company’s provision for income taxes for the years ended December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Federal – current
|
|
$
|
636,046
|
|
|
$
|
1,101,503
|
|
Federal – deferred
|
|
|
120,760
|
|
|
|
(60,364
|
)
|
State – current
|
|
|
28,530
|
|
|
|
31,930
|
|
State – deferred
|
|
|
5,694
|
|
|
|
892
|
|
Total provision for income taxes
|
|
$
|
791,030
|
|
|
$
|
1,073,961
|
|
The
reconciliation of the provision for income taxes at the statutory rate to the reported provision for income taxes is as follows:
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
Income Tax computed at statutory rate
|
|
$
|
753,119
|
|
|
|
21.0
|
%
|
|
$
|
1,250,348
|
|
|
|
34.0
|
%
|
State tax, net of federal benefit
|
|
|
22,468
|
|
|
|
0.6
|
%
|
|
|
21,074
|
|
|
|
0.6
|
%
|
Share based compensation
|
|
|
(1,233
|
)
|
|
|
(0.0
|
)%
|
|
|
(6,303
|
)
|
|
|
(0.2
|
)%
|
Domestic production activities deduction
|
|
|
----
|
|
|
|
----
|
|
|
|
(110,410
|
)
|
|
|
(3.0
|
)%
|
Effect of tax rate change on deferred taxes
|
|
|
----
|
|
|
|
----
|
|
|
|
(90,980
|
)
|
|
|
(2.5
|
)%
|
Permanent adjustments
|
|
|
14,040
|
|
|
|
0.4
|
%
|
|
|
24,202
|
|
|
|
0.7
|
%
|
Tax credits and other
|
|
|
2,636
|
|
|
|
0.1
|
%
|
|
|
(13,970
|
)
|
|
|
(0.4
|
)%
|
Provision for income taxes
|
|
$
|
791,030
|
|
|
|
22.1
|
%
|
|
$
|
1,073,961
|
|
|
|
29.2
|
%
|
The
Company’s deferred tax liability consisted of the following at December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
Inventory reserves
|
|
$
|
62,475
|
|
|
$
|
68,631
|
|
Trade accounts receivable allowances
|
|
|
37,645
|
|
|
|
9,017
|
|
Depreciation and amortization
|
|
|
(380,469
|
)
|
|
|
(231,543
|
)
|
Total net deferred tax liability
|
|
$
|
(280,349
|
)
|
|
$
|
(153,895
|
)
|
The Tax Cuts and Jobs Act was enacted on
December 22, 2017. The legislation significantly changes United States tax law by, among other things, reducing the Company’s
federal corporate income tax rate from 34% to 21%, effective January 1, 2018. As a result of the reduction in the federal corporate
income tax rate, the Company revalued its net deferred tax liabilities at December 31, 2017 and recognized a $90,980 tax benefit
in the Company’s consolidated statement of operations.
Note 10
– Related Party Transactions:
During 2018, as in previous years, the Company
sold products to companies affiliated with Peter G. Dornau, who is the Company’s 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 and pays certain business related expenditures for the affiliated companies, for which the Company
is reimbursed. Sales to the affiliated companies aggregated approximately $2,190,000 and $2,070,000 during the years ended December
31, 2018 and 2017, respectively; fees for administrative services aggregated approximately $760,000 and $764,000, respectively;
and amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the
affiliated companies aggregated approximately $151,000 and $120,000 during the years ended December 31, 2018 and 2017, respectively.
The Company had accounts receivable from the affiliated companies in connection with the product sales and administrative services
aggregating approximately $1,046,000 and $1,584,000 at December 31, 2018 and 2017, respectively.
An entity that is owned by the
Company’s Chairman, President and Chief Executive Officer provides several services to the Company. Under
this arrangement, the Company paid the entity an aggregate of $77,000 ($42,000 for research and development, $14,000 for
charter boat services that the Company used to provide sales incentives for external sales representatives and $21,000 for
the production of television commercials) and $106,250 ($42,000 for research and development and $64,250 for charter boat
services that the Company used to provide sales incentives for external sales representatives) for the years ended December
31, 2018 and 2017, respectively. Expenditures for the research and development services are included in the consolidated
statements of operations within selling and administrative expenses. Expenditures for the charter boat services and
television production services are included in the consolidated statements of operations within advertising and promotion
expenses.
The Company leases office and warehouse
facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. See
Note 11 for a description of the lease terms.
A
director of the Company is Regional Executive Vice President of an insurance broker through which the Company sources most of
its insurance needs. During the years ended December 31, 2018 and 2017, the Company paid an aggregate of approximately
$1,261,000 and $1,235,000, respectively, in insurance premiums on policies obtained through the insurance broker.
Note 11
– Commitments and Contingencies:
The Company leases its executive offices
and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by Peter G. Dornau, the Company’s Chairman,
President and Chief Executive Officer. The lease, as extended, expires on December 31, 2023. The lease requires an annual
minimum base rent of $94,800 and provides for a maximum annual 2% increase in subsequent years, although the entity has not raised
the minimum base rent since the Company entered into a previous lease agreement in 1998. Additionally, the leasing entity is entitled
to reimbursement of all taxes, assessments, and any other expenses that arise from ownership. Each of the parties to the lease
has agreed to review the terms of the lease every three years at the request of the other party. Rent expense under the lease was
approximately $97,000 for each of the years ended December 31, 2018 and 2017. The rent expense is included in the Company’s
consolidated statements of operations as a selling and administrative expense.
The
Company also leased a 15,000 square foot warehouse in Montgomery, Alabama near its Kinpak manufacturing facility for the purpose of
fabricating and assembling brushes used for cleaning boats, automobiles, and recreational vehicles. The Company paid monthly rent
of $4,375 under the lease, which commenced on August 1, 2016 and expired on July 31, 2018. The Company has relocated the brush
fabrication and assembly operations from the leased warehouse to Kinpak’s facilities, which have been expanded in connection
with the Expansion Project. See Note 8 above.
The following is a schedule of minimum
future rentals on the Company’s non-cancelable operating leases.
Year ending December 31,
|
2019
|
|
$
|
96,064
|
|
2020
|
|
|
97,985
|
|
2021
|
|
|
99,945
|
|
2022
|
|
|
101,944
|
|
2023
|
|
|
103,983
|
|
Total
|
|
$
|
499,921
|
|
Note
12
- 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, 2018 and 2017, the Company granted stock awards under the Plan aggregating 81,400 and
79,100 shares of common stock, respectively, to officers, key employees, directors and, in 2017, a consultant of an affiliated
company. Following the withholding of an aggregate of 6,299 and 5,500 shares of common stock, respectively, in connection with
a tax withholding feature of the Plan, 75,101 and 73,600 shares were delivered to the award recipients, during the years ended
December 31, 2018 and 2017, respectively. At December 31, 2018, 262,000 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 $330,823 and $324,145 for the years ended December 31, 2018 and 2017, respectively.
The Company withheld shares in 2018 and 2017 that had a value of $25,794 and $22,468, 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, 2018. 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, 2018 and 2017, and at December 31, 2018 and 2017, there was no unrecognized compensation cost related to share based compensation
arrangements
During 2018, a former director exercised
a stock option to purchase 10,000 shares of common stock. The Company withheld 1,490 shares in connection with the net exercise
of the stock option by the former director and delivered 8,510 shares to the former director.
During 2017, stock options to purchase
an aggregate of 40,000 shares of common stock were exercised. The Company received a total of $26,400, withheld 5,957 shares in
connection with the net exercise feature of the stock options and delivered an aggregate of 34,043 shares to the option holders
who exercised their options.
The following tables provide information
regarding outstanding options under the Company’s stock option plans at December 31, 2018 and 2017. All options
referenced in the table below were granted under the Company’s 2008 Non-Qualified Stock Option Plan.
At December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
Granted
|
|
Options Outstanding
|
|
|
Exercisable
Options
|
|
|
Exercise Price
|
|
|
Expiration
Date
|
|
Weighted Average
Remaining Life
|
|
1/11/09
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
0.69
|
|
|
1/10/19
|
|
|
0.0
|
|
4/26/10
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2.07
|
|
|
4/25/20
|
|
|
1.3
|
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
$
|
1.24
|
|
|
|
|
|
0.6
|
|
At
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
Granted
|
|
Options Outstanding
|
|
|
Exercisable
Options
|
|
|
Exercise Price
|
|
|
Expiration
Date
|
|
Weighted Average
Remaining Life
|
|
1/11/09
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
0.69
|
|
|
1/10/19
|
|
|
1.0
|
|
4/26/10
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2.07
|
|
|
4/25/20
|
|
|
2.4
|
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
$
|
1.15
|
|
|
|
|
|
1.5
|
|
The
following table provides information relating to stock option transactions during the years ended December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Options outstanding beginning of the year
|
|
|
60,000
|
|
|
$
|
1.15
|
|
|
|
100,000
|
|
|
$
|
1.22
|
|
Options exercised
|
|
|
(10,000
|
)
|
|
|
0.69
|
|
|
|
(40,000
|
)
|
|
|
1.32
|
|
Total
|
|
|
50,000
|
|
|
$
|
1.24
|
|
|
|
60,000
|
|
|
$
|
1.15
|
|
Note
13
– 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, 2018 and 2017. Net sales to each of these two customers respectively represented approximately 21.7% and 11.4% of
consolidated net sales, respectively, for the year ended December 31, 2018 and approximately 22.5% and 11.9% of consolidated net sales, respectively, for the
year ended December 31, 2017.
At December 31, 2018 and 2017, trade accounts
receivables due from the Company’s two largest customers respectively constituted 41.0% (25.2% and 15.8%) and 25.5% (14.0%
and 11.5%) of the Company’s outstanding trade accounts receivable. In 2018, the Company changed payment terms for its largest
customer from 30 days to 90 days.
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,
|
|
|
|
2018
|
|
|
2017
|
|
Earnings per common share –Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,795,249
|
|
|
$
|
2,603,534
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
9,279,872
|
|
|
|
9,190,429
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – Basic
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,795,249
|
|
|
$
|
2,603,534
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
9,279,872
|
|
|
|
9,190,429
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of employee stock-based awards
|
|
|
39,231
|
|
|
|
63,373
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
9,319,103
|
|
|
|
9,253,802
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - Diluted
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
The
Company had no stock options outstanding at December 31, 2018 and 2017, respectively that were anti-dilutive and therefore
not included in the diluted earnings per common share calculation.
Note
15
– Cash Dividends:
On
March 19, 2018, the Company’s Board of Directors declared a special cash dividend of $0.06 per common share payable
on April 16, 2018 to all shareholders of record on April 2, 2018. There were 9,254,580 shares of common stock outstanding
on April 2, 2018; therefore, dividends aggregating $555,275 were paid on April 16, 2018.
On
April 13, 2017, the Company’s Board of Directors declared a special cash dividend of $0.06 per common share payable
on May 11, 2017 to all shareholders of record on April 27, 2017. There were 9,154,243 shares of
common stock outstanding on April 27, 2017; therefore, dividends aggregating $549,255 were paid on May 11, 2017.
Note
16
– Recent Accounting Pronouncements:
Accounting
Guidance Adopted by the Company
In May 2014, the FASB issued ASU 2014-09,
“
Revenue from Contracts with Customers
(Topic 606).” ASU 2014-09, 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 Company adopted the new guidance effective January 1, 2018, using the
full retrospective method, under which the Company applies the new guidance to each comparative period presented. Under the new
guidance, the Company’s performance obligation to its customers under agreements currently in force is satisfied when the
goods are shipped or picked up by the customer and title of the goods is transferred (generally upon such shipment or pick up);
with regard to a customer for which the Company’s inventory is held at the customer’s warehouses, the Company’s
performance obligation is deemed satisfied when the Company is notified of sales by the customer. While the timing of the Company’s revenue recognition did not change as a result of the new guidance,
certain allowances provided by the Company to customers, primarily for cooperative advertising and freight, are now considered
a reduction of net sales instead of an expense (see Note 1 for more information).
In November 2016, the FASB issued ASU 2016-18,
which requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents,
and amounts generally described as restricted cash and restricted cash equivalents. The new guidance also requires disclosure
of such amounts in the statements of cash flows or in the financial statement footnotes if restricted cash and restricted cash
equivalents are presented in separate line items in the balance sheet. The Company adopted this guidance effective January 1,
2018. In accordance with the new guidance, the Company includes additional disclosures regarding its cash and restricted cash
amounts in its consolidated statements of cash flows for each comparative period presented. The changes to the Company’s
2017 statement of cash flows are as follows:
|
|
Originally
Reported
|
|
|
ASU 2016-18
Adjustment
|
|
|
As Revised
|
|
Net cash provided by operating activities
|
|
$
|
2,928,277
|
|
|
$
|
-
|
|
|
$
|
2,928,277
|
|
Net cash used in investing activities
|
|
|
(8,023,092
|
)
|
|
|
2,747,360
|
|
|
|
(5,275,732
|
)
|
Net cash provided by financing activities
|
|
|
3,442,826
|
|
|
|
-
|
|
|
|
3,442,826
|
|
Effect of exchange rate fluctuations on cash
|
|
|
28
|
|
|
|
-
|
|
|
|
28
|
|
Net (decrease) increase in cash
|
|
$
|
(1,651,961
|
)
|
|
$
|
2,747,360
|
|
|
$
|
1,095,399
|
|
Accounting
Guidance Not Yet Adopted by the Company
In
February 2016, the FASB issued ASU 2016-02 (Topic 842) “
Leases
.” Under this new guidance, lessees (including
lessees under leases classified as finance leases, which are to be classified based on criteria similar to that applicable to
capital leases under current guidance, and leases classified as operating leases) will recognize a right-to-use asset and a lease
liability on the balance sheet, initially measured as the present value of lease payments under the lease. Under current guidance,
operating leases are not recognized on the balance sheet. However, the new guidance permits companies to make an accounting policy
election not to apply the recognition provisions of the new guidance to short term leases (leases with a lease term of 12 months
or less that do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise). If
this election is made, lease payments under short term leases will be recognized on a straight-line basis over the lease term.
The Company will adopt the new guidance effective January
1, 2019 using a modified retrospective method, under which it will record an immaterial cumulative adjustment to retained earnings
rather than retrospectively adjusting prior periods. This application of the modified retrospective method will result in a balance
sheet presentation that will not be comparable to the prior period in the first year of adoption. Based on the Company’s
portfolio of leases at December 31, 2018, approximately $430,000 of lease assets and liabilities will be recognized on its balance
sheet upon adoption, almost all of which relate to the lease for to the Company’s executive offices and manufacturing facilities
located in Ft. Lauderdale, Florida. The Company does not expect the new standard to have a material impact on its results of operations
or cash flows.
In
June 2016, the FASB issued ASU 2016-13, “
Financial Instruments – Credit Losses
,” which replaces the “incurred
loss” model under current GAAP with a forward-looking “expected loss” model, principally in connection with
financial assets subject to credit losses. Under current GAAP, an entity reflects credit losses on financial assets measured on
an amortized cost basis only when it is probable that losses have been incurred, generally considering only past events and current
conditions in making these determinations. The guidance under ASU 2016-13 prospectively replaces this approach with a forward-looking
methodology that reflects the expected credit losses over the lives of financial assets, beginning when such assets are first
acquired. Under the expected loss model, credit losses will be measured based not only on past events and current conditions,
but also on reasonable and supportable forecasts that affect the collectability of financial assets. The guidance also expands
disclosure requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. Early adoption is permitted as of January 1, 2019. The Company is currently evaluating the impact the
adoption of this new standard will have on the Company’s financial statement
s.
Note -17
– Subsequent Event:
On March 22, 2019, the Company’s Board
of Directors declared a special cash dividend of $0.05 per common share payable on April 19, 2019 to all shareholders of
record on April 5, 2019. At the time of the filing of this report there were 9,366,119 shares of common stock outstanding; therefore,
dividends aggregating $468,306 will be paid on April 19, 2019.
F-20