U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-11102
OCEAN BIO-CHEM, INC.
(Exact name of registrant as specified in its charter)
Florida 59-1564329
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4041 SW 47 Avenue, Ft. Lauderdale, Florida 33314-4023
(Address of principal executive offices)
954-587-6280
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated file. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No.|X|
As of August 6, 2008, there were 7,886,816 shares of Common Stock, $.01 par
value of the registrant outstanding
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX
Description Page
Part I Financial Information:
Item 1. - Financial Statements:
Condensed consolidated balance sheets as of
June 30, 2008 (unaudited) and December 31, 2007 3
Condensed consolidated statements of operations
for the three and six month periods ended
June 30, 2008 and 2007 (unaudited) 4
Condensed consolidated statements of cash flows
for the six months ended June 30, 2008 and
2007(unaudited) 5
Notes to (unaudited) condensed consolidated financial
statements 6-10
Item 2. - Management's Discussion and Analysis
of Financial Condition and Results of Operations 10-12
Item 3. - Quantitative and Qualitative Disclosures
about Market Risk 13
Item 4. - Controls and Procedures 13
Part II - Other Information:
Item 1. - Legal Proceedings 13
Item 1A. - Risk Factors 13
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3. - Defaults upon Senior Securities 13
Item 4. - Submission of Matters to a Vote by Security Holders 13
Item 5. - Other Matters 13
Item 6. - Exhibits 14
Signatures 14
Certifications 15-17
PART I - Financial Information
1. Financial Statements (unaudited)
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 DECEMBER 31, 2007
--------------- -----------------
ASSETS (UNAUDITED)
Current Assets:
Cash $ 598,098 $ 750,901
Trade accounts receivable net of allowance for doubtful
accounts of approximately $47,000 at June 30, 2008 and
December 31, 2007 respectively 1,883,880 1,974,654
Income taxes receivable 96,817 -
Inventories, net 7,591,081 5,993,657
Prepaid expenses and other current assets 152,709 285,126
------------ ------------
Total current assets 10,322,585 9,004,338
------------ ------------
Property, plant and equipment, net 6,019,604 6,235,812
------------ ------------
Other assets:
Trademarks, trade names and patents, net
of accumulated amortization 330,439 330,439
Due from affiliated companies, net 210,944 109,310
Deposits and other assets 151,601 253,718
------------ ------------
Total Other Assets 692,984 693,467
------------ ------------
Total Assets $ 17,035,173 $ 15,933,617
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 1,213,563 $ 1,010,263
Note payable - bank 2,900,000 1,750,000
Current portion of long term debt 589,034 589,906
Accrued expenses payable 773,432 511,758
------------ ------------
Total Current Liabilities 5,476,029 3,861,927
------------ ------------
Long term debt, less current portion 3,706,126 3,988,978
------------ ------------
Shareholders' Equity:
Common stock - $.01 par value, 10,000,000 shares authorized;
7,871,816 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively 78,718 78,718
Additional paid in capital 7,840,285 7,780,547
Foreign currency translation adjustment ( 272,839) ( 209,049)
Retained earnings 215,049 440,691
------------ ------------
7,861,213 8,090,907
Less cost of common stock in treasury, 7,519 shares ( 8,195) ( 8,195)
------------ ------------
Total Shareholders' Equity 7,853,018 8,082,712
------------ ------------
Total Liabilities and Shareholders' Equity $ 17,035,173 $ 15,933,617
============ ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2008 2007 2008 2007
------------ ------------ ------------ -------------
Gross Sales $ 5,205,221 $ 5,968,738 $ 9,185,740 $ 10,388,395
Allowances 214,255 534,735 449,814 931,984
------------ ------------ ------------ -------------
Net sales 4,990,966 5,434,003 8,735,926 9,456,411
Cost of goods sold 3,285,957 3,275,260 6,159,781 6,122,769
------------ ------------ ------------ -------------
Gross profit 1,705,009 2,158,743 2,576,145 3,333,642
------------ ------------ ------------ -------------
Expenses:
Advertising and promotion 467,724 467,380 670,070 674,032
Selling and administrative 1,149,478 1,190,910 2,076,725 2,225,052
Interest expense 95,246 105,860 159,933 203,098
------------ ------------ ------------ -------------
Total expenses 1,712,448 1,764,150 2,906,728 3,102,182
------------ ------------ ------------ -------------
Operating Income (Loss) (7,439) 394,593 ( 330,583) 231,460
Other Income (Expense) (822) - 11,086 -
------------ ------------ ------------ -------------
Income (Loss) before income taxes ( 8,261) 394,593 ( 319,497) 231,460
Income tax expense (benefit) 9,453 - ( 95,493) -
------------ ------------ ------------ -------------
Net Income (Loss) ( 17,714) 394,593 ( 224,004) 231,460
Other comprehensive Income (Loss), net of tax
Foreign currency translation adjustment ( 62,480) 34,912 ( 63,790) ( 33,845)
------------ ------------ ------------ -------------
Comprehensive Income (Loss) ($ 80,194) $ 429,505 ($ 287,794) $ 197,615
============ ============ ============ =============
Income (Loss) per common share - basic ($ 0.00) $ 0.06 ($ 0.03) $ 0.03
============ ============ ============ =============
Income (Loss) per common share - diluted ($ 0.00) $ 0.05 ($ 0.03) $ 0.02
============ ============ ============ =============
Weighted average shares - basic 7,871,816 7,689,316 7,871,816 7,655,316
============ ============ ============ =============
Weighted average shares - diluted 7,871,816 8,572,376 7,871,816 8,538,376
============ ============ ============ =============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
2008 2007
------------ ------------
Cash flows from operating activities:
Net Income (Loss) ($ 224,004) $ 231,460
Adjustments to reconcile Net income (Loss)
to net cash provided by (used in) operations:
Depreciation and amortization 394,598 388,498
Compensation cost associated with stock options and stock awards 59,738 166,694
Change in allowance for doubtful accounts 2,106 142,431
Changes in assets and liabilities:
Accounts receivable 88,668 ( 594,696)
Inventory ( 1,597,424) ( 865,075)
Prepaid expenses and other assets 137,716 (26,650)
Accounts payable and other accrued liabilities 399,147 644,898
------------- -------------
Net cash provided by (used in) operating activities ( 739,455) 87,560
------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment ( 178,391) ( 74,700)
------------- -------------
Net cash provided by (used in) investing activities ( 178,391) ( 74,700)
------------- -------------
Cash flows from financing activities:
Borrowings line of credit, net 1,150,000 851,998
Amounts due from affiliates ( 101,634) 231,200
Short term borrowings, net ( 872)
Principal payments - Long-term debt ( 282,852) ( 292,785)
------------- -------------
Net cash provided by (used in) financing activities 764,642 790,413
------------- -------------
Cash prior to effect of exchange rate on cash ( 153,204) 803,273
Effect of exchange rate on cash 401 ( 33,845)
------------- -------------
Net (decrease) increase in cash ( 152,803) 769,428
Cash at beginning of period 750,901 71,080
------------- -------------
Cash at end of period $ 598,098 $ 840,508
============= =============
Supplemental disclosure of cash transactions:
Cash paid for interest during period $ 159,933 $ 208,579
------------- -------------
Cash paid for income taxes during period $ - $ -
------------- -------------
The company had no cash equivalents at June 30, 2008 and 2007
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Interim Reporting
The accompanying unaudited consolidated financial statements include the
accounts of Ocean Bio-Chem, Inc. and its subsidiaries ("the Company"). All
significant inter-company transactions and balances have been eliminated. The
unaudited consolidated financial statements have been prepared in conformity
with Article 10 of Regulation S-X of the Securities and Exchange Commission and,
therefore, do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all adjustments (consisting of normal recurring accruals)
that, in the opinion of management, are necessary for a fair presentation of the
financial statements have been included. Operating results for the period ended
June 30, 2008 are not necessarily indicative of the results that may be expected
for the future fiscal quarters in 2008 or the full year ending December 31, 2008
due to seasonal fluctuations in the Company's business, changes in economic
conditions and other factors. For further information, please refer to the
Consolidated Financial Statements and Notes thereto contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2007.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amount of assets, liabilities, revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery to customer has occurred, the sales price is fixed
and determinable, and collectibility of the related receivable is probable.
Reported net sales are net of customer prompt pay discounts, contractual
allowances, authorized customer returns, consumer rebates and other allowable
deductions from our invoices. Cooperative advertising deductions, based on our
customers' promotion of our products is recognized as an advertising cost and
charged against operations as an operating expense. The Company follows the
policy of reporting sales taxes as a net amount - receipt and payments recorded
in a liability account.
Cost of goods sold/Selling, general and administrative expenses
Cost of goods sold includes all of the direct and indirect costs of
manufacturing our products. Included therein specifically are warehousing costs
of both raw and finished materials, in-bound freight, out-bound freight (in
those instances that we absorb such costs), purchasing, receiving, and
inspection costs. Other costs of the distribution network are reflected in
Selling, General and Administrative expenses. Also included therein are
managerial and clerical wages and related expenses, office and administrative
occupancy costs, taxes, professional fees, insurance coverage's and other
related expenses.
Inventories
Inventories are comprised of raw materials, work-in process and finished
goods and stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
2. SUMMARY OF SIGNIFICANT ACCOUNTING CHANGES:
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This statement clarifies the definition of fair value of assets and liabilities,
establishes a framework for measuring fair value of assets and liabilities and
expands the disclosures on fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. However, the FASB deferred
the effective date of SFAS No. 157 until the fiscal years beginning after
November 15, 2008 as it relates to the fair value measurement requirements for
nonfinancial assets and liabilities that are initially measured at fair value,
but not measured at fair value in subsequent periods. These nonfinancial assets
include trademarks and other intangible assets which are included within other
assets. In accordance with SFAS No. 157, the Company has adopted the provisions
of SFAS No. 157 with respect to financial assets and liabilities effective as of
January 1, 2008 and its adoption did not have a material impact on its results
of operations or financial condition. The adoption of this standard has not had
a material effect on the consolidated results of operations and financial
position of the Company for the reporting period.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115." SFAS No. 159 permits entities to choose to measure many
6
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected will be
recognized in earnings at each subsequent reporting date. SFAS No. 159 is
effective for us on January 1, 2008. The adoption of this standard has not had a
material effect on the consolidated results of operations and financial position
of the Company for the reporting period.
In December 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 110. This guidance allows companies, in certain
circumstances, to utilize a simplified method in determining the expected term
of stock option grants when calculating the compensation expense to be recorded
under Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment. The simplified method can be used after December 31, 2007 only if a
company's stock option exercise experience does not provide a reasonable basis
upon which to estimate the expected option term. Through 2007, we utilized the
simplified method to determine the expected option term, based upon the vesting
and original contractual terms of the option. During 2008, we continue to use
the simplified method in accordance with SAB No. 110.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations" ("FASB No. 141(R)"). FASB No. 141(R) retains the fundamental
requirements of the original pronouncement requiring that the purchase method be
used for all business combinations. FASB No. 141(R) defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination, establishes the acquisition date as the date that the acquirer
achieves control and requires the acquirer to recognize the assets acquired,
liabilities assumed and any non-controlling interest at their fair values as of
the acquisition date. FASB No. 141(R) also requires that acquisition-related
costs be recognized separately from the acquisition. FASB No. 141(R) is
effective for the Company for fiscal 2010. The Company is currently assessing
the impact of FASB No. 141(R) on its consolidated financial position and results
of operations.
In December 2007, the FASB issued Statement No. 160, "Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB No. 51 ("FASB
No. 160")." The objective of FASB No. 160 is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards for the Noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This Statement applies
to all entities that prepare consolidated financial statements, except
not-for-profit organizations. FASB No. 160 amends ARB 51 to establish accounting
and reporting standards for the Noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also amends certain of ARB 51's
consolidation procedures for consistency with the requirements of FASB No. 141
(R). This Statement is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008 (that is, January 1,
2009, for entities with calendar year-ends). Earlier adoption is prohibited. The
effective date of this Statement is the same as that of the related Statement
141(R). FASB No. 160 will be effective for the Company's fiscal 2010. This
Statement shall be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements shall be
applied retrospectively for all periods presented.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and
expands the disclosure requirement for FASB Statement No. 133, "Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). It requires enhanced
disclosure about (i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under SFAS No.
133 and its related interpretations, and (iii) how derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. SFAS No. 161 is effective for the Company as of
January 1, 2009.
In April 2008, the FASB issued FSP 142-3, "Determination of the Useful Life
of Intangible Assets", (FSP 142-3). FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets". FSP 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of FSP
142-3 on its consolidated financial position and results of operations.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP. The current GAAP hierarchy has been criticized because it
is directed to the auditor rather than the entity, it is complex, and it ranks
FASB Statements of Financial Accounting Concepts, which are subject to the same
level of due process as FASB Statements of Financial Accounting Standards, below
industry practices that are widely recognized as generally accepted but that are
not subject to due process. The Board believes the GAAP hierarchy should be
7
directed to entities because it is the entity (not its auditors) that is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. The adoption of FASB 162 is not expected
to have a material impact on the Company's consolidated financial position and
results of operations.
In May, 2008 the FASB issued FASB Staff Position (FSP) APB 14-1,
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." APB 14-1 requires the issuer to
separately account for the liability and equity components of convertible debt
instruments in a manner that reflects the issuer's nonconvertible debt borrowing
rate. The guidance will result in companies recognizing higher interest expense
in the statement of operations due to amortization of the discount that results
from separating the liability and equity components. APB 14-1 will be effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company is currently
evaluating the impact of adopting APB 14-1 on its consolidated financial
statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities". This FASB Staff Position (FSP) addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share (EPS) under the two-class method described in
paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. This FSP
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of EPS
pursuant to the two-class method. The provisions of FSP No. 03-6-1 shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period EPS
data presented shall be adjusted retrospectively (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of this FSP. Early application is not permitted. The provisions
of FSP No. 03-6-1 are effective for the Company retroactively in the first
quarter ended March 31, 2009. The Company is currently assessing the impact of
FSP No. EITF 03-6-1 on the calculation and presentation of earnings per share in
its consolidated financial statements.
4. INVENTORIES
The composition of inventories at June 30, 2008 and December 31, 2007 are
as follows:
2008 2007
----------- -----------
Raw materials $ 4,006,752 $ 3,247,359
Finished goods 3,699,956 2,821,861
Less inventory reserve ( 115,627) ( 75,563)
------------ ------------
Inventory - net $ 7,591,081 $ 5,993,657
============ ============
At June 30, 2008 and December 31, 2007, approximately $116,000 and $76,000
respectively is reflected in the accompanying consolidated financial statements
as a reserve for excess, obsolete, slow moving and shrinkage inventory
adjustments.
5. PROPERTY, PLANT & EQUIPMENT
The Company's property, plant and equipment consisted of the following at
June 30, 2008 and December 31, 2007:
Estimated
Useful
Life- Years 2008 2007
----------- ------------- ------------
Land N/A $ 278,325 $ 278,325
Building 30 4,389,154 4,389,154
Manufacturing and warehouse equipment 6-20 6,492,622 6,367,883
Office equipment and furniture 3-5 553,917 509,496
Leasehold improvement 10-15 122,644 122,644
Construction in process N/A 30,310 21,080
------------- ------------
11,866,972 11,688,582
Less accumulated depreciation ( 5,847,368) ( 5,452,770)
------------- ------------
Total property, plant and equipment, net $ 6,019,604 $ 6,235,812
============= ============
8
6. NOTE PAYABLE BANK
The primary sources of our liquidity are our operations and short-term
borrowings from Regions Bank pursuant to a revolving line of credit aggregating
$6 million. Such line matures May 31, 2011, bears interest at the 30 Day LIBOR
plus 250 basis points (approximately 5.0% at June 30, 2008) and is secured by
our trade receivables, inventory and intangible assets. As of each year-end,
December 31, we are required to maintain a minimum working capital of $1.5
million and meet certain other financial covenants during the term of the
agreement. As of June 30, 2008, we were obligated under this arrangement in the
amount of $2,900,000.
7. LONG-TERM DEBT
Long-term debt at June 30, 2008 consisted of the following:
The Company is obligated pursuant to capital leases financed through
Industrial Development Bonds. Such obligations were incurred during 1997 and
2002 in connection with building and equipment expansion at the Company's
Alabama manufacturing and distribution facility. Both bear interest at tax-free
rates that adjust weekly. At June 30, 2008, $1,275,000 and $2,780,000 were
outstanding attributable to the 1997 and 2002 series, respectively. During the
six months ended June 30, 2008 interest rates ranged between 1.5% and 3.7%.
Principal and accrued interest retiring the underlying bonds are payable
quarterly through March, 2012 and July, 2017 for the 1997 and 2002 series,
respectively. Repayment of the bonds is guaranteed by a Letter of Credit issued
by the Company's primary commercial bank. Security for the Letter of Credit is a
priority first mortgage on the Kinpak facility and manufacturing equipment.
The Company, through its subsidiary, Kinpak Inc., is obligated pursuant to
various capital lease agreements covering equipment utilized in the Company's
Alabama plant. Such obligations, aggregating approximately $32,529 at June 30,
2008, have varying maturities through 2012 and carry interest rates ranging from
7% to 12%.
During April 2005 we entered into a financing obligation with Regions Bank
whereby they advanced the Company $500,000 to finance equipment acquisitions at
our Kinpak facility. Such obligation is due in monthly installments of principal
aggregating approximately $8,300 plus interest at prevailing rates (the
outstanding balance and interest rate on this obligation at June 30, 2008 were
approximately $183,346 and 5% per annum, respectively) through maturity on April
15, 2010.
The composition of these obligations at June 30, 2008 and December 31, 2007
were as follows:
Current Portion Long Term Portion
--------------- -----------------
2008 2007 2008 2007
---- ---- ---- ----
Industrial Development Bonds $460,000 $460,000 $3,595,000 $3,825,000
Notes payable 99,996 99,996 83,350 133,348
Capitalized equipment leases 29,038 29,910 27,776 30,630
-------- -------- ---------- ----------
$589,034 $589,906 $3,706,126 $3,988,978
======== ======== ========== ==========
Required principal payment obligations attributable to the foregoing are
tabulated below:
Twelve month period ending June 30,:
2009 $ 589,034
2010 553,599
2011 469,795
2012 462,732
2013 440,000
Thereafter 1,780,000
----------
Total $4,295,160
==========
8. RELATED PARTY TRANSACTIONS
At June 30, 2008 and December 31, 2007, the Company had amounts receivable
from and payable to affiliated companies, which are directly or beneficially
owned by the Company's president, aggregating a net receivable of approximately
$210,944 and $109,310 respectively. Such amounts result from sales to the
affiliates, allocations of expenses incurred by the Company on the affiliates'
behalf and funds advanced to or from the Company.
Sales to such affiliates aggregated approximately $298,679 and $270,934
during the six months ended June 30, 2008 and 2007, and $103,279 and $74,256 for
the three months ended June 30, 2008 and 2007, respectively.
9
Commitments:
On May 1, 2008, the Company renewed for ten years the existing lease for
approximately 12,700 square feet of office and warehouse facilities in Fort
Lauderdale, Florida from an entity owned by a certain officer of the Company.
The lease required a minimum rental of $94,800 plus applicable taxes for the
first year and provides for a maximum 2% increase on the anniversary of the
lease throughout the term, which has been waived through December 31, 2008.
Additionally, the landlord is entitled to its pro-rata share of all taxes,
assessments, and any other expenses that arise from ownership. Rent charged to
operations aggregated approximately $53,500 during the six months ended June 30,
2008 and 2007, and $25,100 for the three months ended June 30, 2008 and 2007.
The Company had entered into a corporate guaranty of a mortgage note
obligation of such affiliate. The obligation aggregating approximately $274,000
at December 31, 2007. The property was refinanced in the 2nd quarter 2008,
without a corporate guaranty.
The following is a schedule of minimum future rentals on the non-cancelable
operating leases.
Twelve month period ending June 30,:
2009 $ 100,823
2010 102,839
2011 104,896
2012 106,994
2013 109,134
Thereafter 558,882
-----------
Total $ 1,083,568
===========
9. EARNINGS (LOSS) PER SHARE
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2008 2007 2008 2007
---- ---- ---- ----
Weighted-average common
shares outstanding 7,871,816 7,689,316 7,871,816 7,655,316
Dilutive effect of stock plans,
other options & conversion rights - 883,060 - 883,060
--------- --------- --------- ---------
Diluted weighted-average shares
outstanding 7,871,816 8,572,376 7,871,816 8,538,376
========= ========= ========= =========
10. SUBSEQUENT EVENT
Subsequent to June 30, 2008 the Company entered into negotiations with one
of its customers to alter the manner in which it is currently transacting
business. It is intended that the Company will be allowed to manage the
inventory levels at its customer's warehouses and will be paid as the the
products are sold by such customer. It is further expected that this new
arrangement will commence on or around October 1, 2008. However, at this time,
the negotiations are not finalized and the impact of this new agreement to
historical or prospective operations is not currently determinable.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Forward-looking Statements:
Certain statements contained herein, including without limitation
expectations as to future sales and operating results, constitute
forward-looking statements pursuant to the safe harbor provisions of the Private
Securities Litigations Reform Act of 1995. For this purpose, any statements
contained in this report that are not statements of historical fact may be
deemed forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "will", "expect", "anticipate", "intend",
"could" or the negative 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, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Factors that may affect the Company's results
include, but are not limited to, the highly competitive nature of the Company's
industry; reliance on certain key customers; consumer demand for marine
recreational vehicle and automotive products; advertising and promotional
efforts, and other factors. The Company will not undertake and specifically
declines any obligation to update or correct any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
10
Overview:
We are a leading manufacturer and distributor of chemical formulations
serving the appearance and functional categories of the marine, automotive,
recreational vehicle and home care markets. We were founded in 1973 and have
conducted operations within the aforementioned categories since then. During
1984, we changed our corporate name to Ocean Bio-Chem, Inc. (the parent company)
from our former name, Star Brite Corporation. Our operations were conducted as a
privately owned company through March, 1981 when we completed our initial public
offering of common stock.
Critical accounting policies and estimates:
See Note 1 "Summary of Accounting Policies" in the Notes to the Unaudited
Condensed Consolidated Financial Statements for a discussion of recent
accounting pronouncements and their effect, if any, on the Company.
Liquidity and Capital Resources:
The primary sources of our liquidity are our operations and short-term
borrowings from Regions Bank pursuant to a revolving line of credit aggregating
$6 million. Such line matures May 31, 2011, bears interest at the 30 Day LIBOR
plus 250 basis points (approximately 5.0% at June 30, 2008) and is secured by
our trade receivables, inventory and intangible assets. As of each year-end,
December 31, we are required to maintain a minimum working capital of $1.5
million and meet certain other financial covenants during the term of the
agreement. As of June 30, 2008, we were obligated under this arrangement in the
amount of $2,900,000.
In connection with the purchase and expansion of the Alabama facility, we
closed on Industrial Development Bonds during 1997 aggregating approximately $5
million. The proceeds were utilized for both the repayment of certain advances
used to purchase the Alabama facility and to expand such facility. During July
2002, we completed a second Industrial Development Bond financing aggregating
$3.5 million through the City of Montgomery, Alabama. Such transaction funded an
approximate 70,000 square foot addition to the manufacturing facility as well as
the remaining machinery and equipment additions required therein. This project
was substantially completed during 2003.
In order to market the Industrial Development Bonds at favorable rates, we
obtained a substitute irrevocable letter of credit for the 1997 issue and a new
irrevocable letter of credit for the 2002 issue. Under such letters of credit
agreements, maturing on July 31, 2008, we are required to maintain a stipulated
level of working capital, a designated maximum debt to tangible ratio, and a
required debt service coverage ratio. Such letters of credit are secured by a
first priority mortgage on the underlying Alabama facility and equipment.
The bonds are marketed weekly at the prevailing rates for such tax-exempt
instruments. During the six months ended June 30, 2008 and 2007 such bonds
carried interest ranging between 1.5% and 3.7%, and 3.3% and 3.7%, respectively.
Interest and principal are payable quarterly. We believe current operations are
sufficient to meet these obligations.
On April 12, 2005 we entered into a financing obligation with Regions Bank
whereby they advanced us $500,000 to finance equipment acquisitions at our
Kinpak facility. Such obligation is due in monthly installments of principal
aggregating approximately $8,300 plus interest at prevailing rates (the
outstanding balance and interest rate on this obligation at June 30, 2008 were
approximately $183,300. The maturity on this obligation is April 15, 2010.
We are involved in making sales in the Canadian market and must deal with
the currency fluctuations of the Canadian currency.
We do not engage in currency hedging and deal with such currency risk as a
pricing issue.
During the past few years, we have introduced various new products to our
customers. At times this has required us to carry greater amounts of overall
inventory and has resulted in lower inventory turnover rates. The effects of
such inventory turnover have not been material to our overall operations. We
believe that all required capital to maintain such increases can continue to be
provided by operations and current financing arrangements. As of June 30, 2008,
the inventory value was approximately $7,591,000, an increase of $1,597,000. The
inventory increase is a seasonal increase, in anticipation of colder weather in
the northern parts of the United States and the start of the Company's
winterizing programs including sale of antifreeze.
Many of the raw materials that we use in the manufacturing process are
commodities that are subject to fluctuating prices. We react to long-term
increases by passing along all or a portion of such increases to our customers.
As of June 30, 2008 and through the date hereof, we did not and do not have
any material commitments for capital expenditures, nor do we have any other
present commitment that is likely to result in our liquidity increasing or
decreasing in any material way. In addition, except for our need for additional
capital to finance inventory purchases, we know of no trend, additional demand,
event or uncertainty that will result in, or that is reasonably likely to result
in, our liquidity increasing or decreasing in any material way.
11
Results of Operations:
For The Three Months Ended June 30, 2008 compared to the Three Months ended
June 30, 2007
Net sales were approximately $ 4,991,000 for the three months ended June
30, 2008 compared to $5,434,000 for the comparative quarter 2007, a decrease of
$443,000 or 8.2%. Due to the unprecedented increase in petroleum prices, slowing
economy, and the tightening credit market for the purchase of new boats, the
recreational boating industry has been adversely affected. The manufacturing of
new boats has slowed, with plants closures, in addition to the curtailed use of
recreation boats due to high fuel prices. We believe we are well positioned when
the industry recovers.
Cost of goods sold as a percentage of net sales increased to 65.8% of sales
compared to 60.3% for the comparative 2007 quarter. This increase in the cost of
goods sold percentage of 5.6 % was a result of the unprecedented increase in oil
prices and the resulting increase in the Company's raw material costs that could
not be fully passed on to our customers. In addition due to higher oil prices,
transportation costs increased for both inbound raw materials as well as
outbound freight to our customers.
Advertising and promotion was approximately $467,000 for both comparative
quarters. Management has taken initiatives to reduce spending for advertising
and promotion for the balance of the year.
Selling and administrative expenses decreased approximately $62,600 to
$1,149,000 for 2008, from $1,190,900 for 2007. Management has taken steps to
reduce spending. Cost savings were realized in compensation expense as well as
computer consulting services.
Interest expense decreased to approximately $95,000 for the quarter ended
June 30, 2008 compared to the corresponding quarter in 2007. Reduced borrowings
and interest rates decreased interest expense 10% or approximately $10,600.
Our net loss for the quarter ended June 30, 2008 amounted to approximately
$18,000 compared to a net income of $395,000 for the comparable period in 2007.
The Company has a net tax expense for the quarter of approximately $9,000, as a
result of tax accruals.
For the Six Months Ended June 30, 2008 Compared To The Six Months Ended
June 30, 2007
Net sales were approximately $8,736,000 for the six month period ending
June 30, 2008 compared to approximately $9,456,000 for the 2007 comparative
period, a decrease of approximately $720,000 or 7.6%. The decrease in sales for
the six month period as discussed above in the current quarter MD&A narrative is
related to unprecedented higher oil prices and tightened credit for the purchase
of new boats, resulting in less of the Company's products being sold to boat
manufacturers and less products sold at retail due to reduced usage of
recreational boats from higher fuel prices.
Cost of goods sold as a percentage of sales increased to 70.5% of sales
compared to 64.7% for the comparative 2007 six month period. As discussed above
in the quarterly narrative the increase in cost of goods sold percentage of 5.6
% was a result of the unprecedented increase in oil prices and the resulting
increase in the Company's raw material costs that could not be fully passed on
to our customers. In addition due to higher oil prices, transportation costs
increased for both inbound raw materials as well as outbound freight to our
customers.
Advertising and promotion was approximately $670,000 compared to $674,000
for the comparative period of 2007. Management has taken advantage of reduced
advertising rates for unsold space and will continue to avail itself of this
avenue for advertising Starbrite products for the balance of the year.
Selling and administrative expenses decreased to approximately $2,076,000
for the six months ended June 30, 2008 compared to $2,225,000 for the six months
ended June 30, 2007, which corresponds to a decrease of $149,000 or 6.7%. The
significant component of this decrease was caused by a reduction of commission
expense in relation with reduced sales volume as well as reduced general and
administrative compensation expense.
Interest expense for 2008 decreased approximately $43,000 when compared to
the same six month period of 2007. This principally resulted from reduced
borrowings and interest rates for the comparative periods.
The loss was approximately $224,000 for the six months ended June 30, 2008
compared to a net income of approximately $231,460 for the six months ended June
30, 2007.
12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: The Company has carried
out an evaluation under the supervision of management, including the President
and Chief Executive Officer ("CEO") and the Vice President - Finance and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
its disclosure controls and procedures. Based on that evaluation, our CEO and
CFO have concluded that, as of June 30, 2008, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC,
and include controls and procedures designed to ensure that information required
to be disclosed by us in such reports is accumulated and communicated to
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosures.
Changes in Internal Control Over Financial Reporting.
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the most
recent fiscal quarter that has materially affected, or reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings:
We are not a party to any material litigation presently pending nor, to the
best knowledge of the Company, have any such proceedings been threatened.
Item 1A. - Risk Factors
Not Applicable
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds:
Not Applicable
Item 3. - Defaults Upon Senior Securities:
Not Applicable
Item 4 - Submission of Matters to Vote of Security Holders:
On June 20, 2008, at our annual meeting of shareholders, nine directors;
Peter G. Dornau, Edward Anchel, Jeffrey S. Barocas, Sonia B. Beard, Greg Dornau,
William Dudman, James M. Kolisch, Laz L. Schneider and John B. Turner were
elected, shareholders ratified and approved the 2008 Incentive Stock Option Plan
and the 2008 Non-Qualified Stock Option Plan and approved Berenfeld, Spritzer,
Shechter & Sheer, Certified Public Accountants & Consultants, as independent
auditors for the year ending December 31, 2008.
The tabulation of voting for the foregoing was as follows:
For Against Abstain
Election of Directors 6,354,240 - 4,106
Approve 2008 Incentive Stock Option Plan 5,347,737 86,518 3,632
Approve 2008 Non-Qualified Stock Option Plan 5,347,283 87,104 3,500
Ratify appointment of Berenfeld, Spritzer, Shechter & Sheer 6,355,873 2,190 283
as independent CPA through December 31, 2008
Item 5 - Other Matters - Not applicable
13
Item 6. - Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the Undersigned
there unto duly authorized.
OCEAN BIO-CHEM, INC.
Date: August 12, 2008 /s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board of Directors
and Chief Executive Officer
/s/ Jeffrey S. Barocas
Jeffrey S. Barocas
Chief Financial Officer
14
Exhibit 31.1
CERTIFICATION
I, Peter G. Dornau certify that:
1. I have reviewed this Form 10-Q of Ocean Bio-Chem, Inc. as of and for the
period ended June 30, 2008;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registran's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: August 12, 2008 /s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board and
Chief Executive Officer
15
Exhibit 31.2
CERTIFICATION
I, Jeffrey S. Barocas certify that:
1. I have reviewed this Form 10-Q of Ocean Bio-Chem, Inc. as of and for the
period ended June 30, 2008;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registran's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: August 12, 2008 /s/ Jeffrey S. Barocas
Jeffrey S. Barocas
Chief Financial Officer
16
Exhibit 32.1
CERTIFICATION
Pursuant to 18U.S.C.Section 1350, the undersigned officers of Ocean
Bio-Chem, Inc. (the "Company"), hereby certify that the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operation of the Company.
Dated: August 12, 2008 /s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board of
Directors and Chief Executive Officer
/s/ Jeffrey S. Barocas
Jeffrey s. Barocas
Chief Financial Officer
17