UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 20192020

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)

4041 SW 47 Avenue, Fort Lauderdale, Florida 33314

(Address of principal executive offices) (Zip Code)

954-587-6280

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act.

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act.

At May 14, 2019, 9,366,1192020, 9,458,105 shares of the registrant’s Common Stock were outstanding.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I1 - FINANCIAL INFORMATION

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interim reporting

The accompanying unaudited condensed consolidated financial statements include the accounts of Ocean Bio-Chem, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior period data have been reclassified to conform to the current period presentation.  Unless the context indicates otherwise, the term “Company” refers to Ocean Bio-Chem, Inc. and its subsidiaries.

The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

The financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three months ended March 31, 20192020 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.2020.

The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.

Use of estimates

The preparation of condensed consolidated 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 and assumptions.

Accounting Guidance Adopted by the Company

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “Leases (Topic 842).” 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 the previous guidance, and leases classified as operating leases) 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 previous guidance, operating leases were not recognized on the balance sheet. The Company adopted ASU 2016-02 on January 1, 2019 utilizing a modified retrospective method, under which the Company recorded an immaterial cumulative adjustment to retained earnings rather than retrospectively adjusting prior periods. As a result, the Company’s balance sheet presentation at March 31, 2019 is not comparable to the presentation at December 31, 2018.  The adoption of ASU 2016-02 resulted in the recognition of approximately $432,000 as an operating lease right to use asset and a corresponding operating lease liability, and the derecognition of office equipment with a net book value of approximately $27,000, which is now classified as a finance lease – right to use asset within property, plant and equipment.

As permitted under the new guidance, the Company has made 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); instead, the Company will recognize the lease payments for short term leases on a straight-line basis over the lease term. The Company did not have any short term leases at March 31, 2019.

Accounting Guidance Not Yet Adopted by the Company

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other,” which simplifies the quantitative test for goodwill impairment. Under current guidance, if a reporting unit’s carrying value exceeds its fair value, the entity must determine the implied value of goodwill. This determination is made by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole as if the reporting unit had just been acquired. Under the new guidance, a determination of the implied value of goodwill will no longer be required; a goodwill impairment will be equal to the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on the Company’s financial statements.

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, expected credit losses will be measured based not only on past events and current conditions, but also on reasonable and supportable forecasts. 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 ofThe Company adopted ASU 2016-13 on January 1, 2019.2020. The Company is currently evaluating the impact the adoption of this new standard willASU 2016-13 did not have a material impact on the Company’s financial statements.

The Company’s inventories at March 31, 20192020 and December 31, 20182019 consisted of the following:

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 $468,000$547,000 and $495,000$562,000 at March 31, 20192020 and December 31, 2018,2019, respectively.

The Company’s property, plant and equipment at March 31, 20192020 and December 31, 20182019 consisted of the following:

The Company isCompany’s wholly-owned subsidiary, KINPAK Inc. (“Kinpak”) has been engaged since 2017 in a project involving the expansion of theits 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”). AsKinpak has completed the construction of, March 31, 2019,and placed into service, an approximately 85,000 square foot addition to the remaining work onfacilities and an expansion of a tank farm to accommodate an additional 500,000 gallons of tank capacity. The final phase of the Expansion Project involvesentails the completion of a bottle filling line and theevaluation, purchase and installation of additional equipment. The Company is financing the Expansion Project through a $4,500,000 industrial development bond, which is described in Note 8. At March 31, 2019,2020, the Company’s expenditures onCompany had unused proceeds from the Expansion Project aggregatedindustrial development bond of approximately $6.1 million.$1,892,000 in a custodial account restricted for the use of funding additional capital improvements. The totalCompany intends to utilize the remaining proceeds to purchase machinery and equipment to expand production capacity of its disinfectant/sanitizing product group includingPerformacide^® and its Damp Check^TM mildew and humidity control products in addition to other production equipment.

Depreciation expense totaled $254,308 (of which $230,966 is included in cost of goods sold and $23,342 is included in selling and administrative expenses) and $252,408 (of which $224,161 is included in cost of goods sold and $28,247 is included in selling and administrative expenses) for the Expansion Project is estimated to be approximately $6.7 million. Construction in progress atthree months ended March 31, 2020 and 2019, and December 31, 2018 includes $74,215 and $46,996, respectively, relating to the expansion of Kinpak’s manufacturing, warehouse and distribution facilities.respectively.

The Company has one operating lease and two finance leases.

Under the operating lease, 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. Operating lease expense for each of the three months ended March 31, 2020 and 2019 was approximately $25,000, compared to rent expense of approximately $24,000 for the three months ended March 31, 2018.$25,000. At March 31, 2019,2020, the Company has a right to use asset and a corresponding liability of $412,672$331,658 related to the operating lease. Set forth below is a schedule of future minimum rent payments under the operating lease.

The Company’s two finance leases relate to office equipment. See Note 4 for right to use asset information regarding the carrying value of the Company’s finance leaseslease right to use assets and Note 8 for information regarding the finance lease payment schedule.

Expenses incurred with respect to the Company’s leases during the quarterthree months ended March 31, 2020 and 2019 are set forth below.

The remaining lease term with respect to the operating lease, weighted average remaining lease term with respect to the finance leases and discount rate with respect to the operating lease and finance leases at March 31, 20192020 are set forth below:

The Company’s intangible assets at March 31, 20192020 and December 31, 20182019 consisted of the following:

March 31, 2020

December 31, 2019

December 31, 2018 

Amortization expense related to intangible assets was $63,480$71,162 and $17,570$63,480 for the three months ended March 31, 2020 and 2019, and 2018.respectively.

7. 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 Business Loan Agreement, 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 March 31, 2019,2020, 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.

There has been no impact in the availability of funds to the Company, as a result of the COVID-19 pandemic.

At March 31, 20192020 and December 31, 2018,2019, the Company had no borrowings under the revolving line of credit provided by the Business Loan Agreement.

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 athe 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 March 31, 2019,2020, the Company was in compliance with these financial covenants.

Through March 31, 2019,2020, of the $4,500,000 proceeds of the Bond sale, there are unused proceeds of approximately $2,343,000 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$1,892,000 remaining amount isthat are held in a custodial account and may be drawn by Kinpak from time to time to fund additional expenditures related to the Expansion Project. BecauseDue to restrictions under, among other things, the Internal Revenue Code and the Lease contains limitations on Kinpak’s utilization of 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 intends to utilize the remaining proceeds to purchase machinery and equipment to expand our production capacity of our disinfectant product group includingPerformacide^® and our Damp Check^TM mildew and humidity control products.

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 over the life of the Bond.

Other Long Term Obligations

In connection with the Company’s agreement to purchase assets of Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018, 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.

In connection with the Company’s agreement to purchase assets of Check Corporation, the Company agreed to pay Check Corporation (dba Damp Check^TM) $100,000 in equal installments of approximately $4,348 over a 23-month period that commenced on January 15, 2020 with a final payment due and payable on November 15, 2021. The Company recorded $97,012 as principal, and the remaining $2,988, representing an imputed interest rate of 3.15% per annum, will be recorded as interest expense over the 23 months). 

At March 31, 20192020 and December 31, 2018,2019, the Company was obligated under lease agreements covering equipment utilized in the Company’s operations. The equipment leases, aggregating approximately $43,000$20,000 and $31,000$26,000 at March 31, 20192020 and December 31, 2018,2019, respectively, have maturities through 2024 and carry an interest rates ranging from 2% to 4% per annum. The equipment leases are classified as finance leases. During each of the three months ended March 31, 20192020 and 2018,2019, the Company paid approximately $5,200$5,925 ($5,752 principal and $173 interest) and $5,205 ($5,000 principal and $200$205 interest), respectively, under thesethe lease agreements.

The following table provides information regarding the Company’s long-term debt at March 31, 20192020 and December 31, 2018:2019:

Required principal payments under the Company’s long term obligations are set forth below:

Duringthe three months ended March 31, 2019 and 2018, theThe Company soldsells products to companies affiliated with Peter G. Dornau, who is the Company’s Chairman, President and Chief Executive Officer. The affiliated companies distribute the productsresell, outside of the United States and Canada.Canada, products they purchase from the Company. 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. DuringSales to the affiliated companies aggregated approximately $651,000 and $752,000 for the three months ended March 31, 20192020 and 2018, sales to the affiliated companies aggregated approximately $752,000 and $820,000,2019, respectively; fees for administrative services aggregated approximately $197,000 and $155,000 for the three months ended March 31, 2020 and $149,000,2019, 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 $30,000 and $32,000 for the three month ended March 31, 2020 and $29,000,2019, respectively.  The Company had accounts receivable from the affiliated companies in connection with the product sales, administrative services and business related expensesexpenditures aggregating approximately $1,517,000$1,196,000 and $1,046,000$962,000 at March 31, 20192020 and December 31, 2018,2019, 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 $21,000 ($12,000 for research and development services and $9,000 for charter boat services that the Company used to provide sales incentives for customers) and $27,000 ($10,500 for research and development services and $16,500 for charter boat services that the Company used to provide sales incentives for external sales representatives) and $15,000 ($10,500 for research and development services and $4,500 for charter boat services that the Company used to provide sales incentives for external sales representatives)customers) for the three months ended March 31, 20192020 and 2018,2019, 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 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 5 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 three months ended March 31, 20192020 and 2018,2019, the Company paid an aggregate of approximately $225,000$257,000 and $188,000,$225,000, respectively, in insurance premiums on policies obtained through the insurance broker.

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 issuances 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.

.

The Company had no stock options outstanding at March 31, 20192020 and 2018,2019, respectively that were antidilutive and therefore not included in the diluted earnings per common share calculation.

No stock compensation expense was incurred during the three months ended March 31, 20192020 and 2018,2019, and at March 31, 2019,2020, there was no unrecognized compensation expense related to stock options.

No stock awards were issued during the three months ended March 31, 20192020 and 2018.2019.

In 2010, the Company granted, under its 20182008 Non-Qualified Stock Option Plan, stock options to purchase 20,000 shares of its common stock at an exercise price per share of $2.07. At March 31, 2020, 10,000 of these shares remained unexercised. The stockremaining options expirewere exercised on April 25,24, 2020.

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. There were 9,366,119 shares of common stock outstanding on April 5, 2019; therefore, dividends aggregating $468,306 were paid on April 19, 2019.

OnNo dividends were declared during the three months ending 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, 2018.31, 2020.

During the three months ended March 31, 20192020, the Company had net sales to each of two customers that constituted in excess of 10% of its net sales. Net sales to these two customers represented approximately 24.4% (14.0% and 2018,10.4%, respectively) of the Company’s net sales for the three months ended March 31, 2020. During the three months ended March 31, 2019, the Company had net sales to one customer that constituted in excess of 10% of its net sales. Net sales to this customer accounted forrepresented approximately 25.6% and 22.0% of consolidatedthe Company’s net sales respectively, for the three months endingended March 31, 2019.

At March 31, 2020 and December 31, 2019, three customers constituted at least 10% of the Company’s gross trade accounts receivable. The gross trade accounts receivable balances for these customers represented approximately 55.3% (27.9%, 14.8%, and 2018. This customer also comprised approximately 35.0% and 25.2%12.6% , respectively) of the Company’s gross trade accounts receivable respectively, at March 31, 20192020, and 56.8% (28.0%, 15.3%, and 13.5%, respectively) of the Company’s gross trade accounts receivable at December 31, 2018.

2019.

On April 18, 2020, the Company entered into a promissory note with Regions Bank evidencing a loan under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), administered by the U.S. Small Business Administration (the “SBA Loan”).  The amount outstanding under the SBA Loan is $1,556,800.

The Company has determined to return the entire amount of the SBA Loan and is in the process of arranging for this with Regions Bank.  Upon the return of the full outstanding amount, which the Company expects to occur in the near future, the promissory note evidencing the SBA Loan will be terminated.

Forward-looking Statements:

Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, estimated costs of an expansion project with respect to facilities operated by our wholly-owned subsidiary, Kinpak Inc. (“Kinpak”), our ability to provide required capital to support inventory levels, the effect of price increases in raw materials that are petroleum or chemical based or commodity chemicals on our margins, and the sufficiency of funds provided through operations and existing sources of financing to satisfy our cash requirements constitute forward-looking statements. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “believe,” “may,” “will,” “expect,” “anticipate,” “intend,” or “could,” including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements are subject to 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 impact of the COVID-19 pandemic on our business and the economy in general, 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; adverse weather conditions; 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 addressed in Part I, Item 1A (“Risk Factors”) in our annual report on Form 10-K for the year ended December 31, 2018.2019, as well as in Part II Item 1A (“Risk Factors”) of subsequent filing of quarterly reports on Form 10-Q.

Overview:

We are engaged in the manufacture, marketing and distribution of a broad line of appearance, performance, and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite® and other trademarks within the United States and Canada. In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products.  We also manufacture, market and distribute chlorine dioxide-based deodorizing, disinfectant and sanitizing products. We sell our products through national retailers and to national and regional distributors. In addition, we sell products to two companies affiliated with Peter G. Dornau, our Chairman, President and Chief Executive Officer; these companies distribute the products outside of the United States and Canada.

We have

Kinpak has been engaged since 2017 in a project involving thea major expansion of Kinpak’sits manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (the “Expansion Project”). Kinpak has completed the construction of, and placed into service, an approximately 85,000 square foot addition to the facilities and an expansion of a tank farm to accommodate an additional 500,000 gallons of tank capacity. The remaining work onfinal phase of the Expansion Project involves completion of a bottle filling lineentails the evaluation, purchase and purchaseinstallation of additional equipment. We are conducting operationsThe Company is financing the Expansion Project through a $4,500,000 industrial development bond, which is described in the expanded facilities.Note 8. At March 31, 2019, we have spent an aggregate2020, the Company had unused proceeds from the industrial development bond of approximately $6.1 million,$1,892,000 in a custodial account restricted for the use of funding additional capital improvements. The Company intends to utilize the remaining proceeds to purchase machinery and the total costequipment to expand our production capacity of the project is estimated to be approximately $6.7 million.our disinfectant product group includingPerformacide^® and our Damp Check^TM mildew and humidity control products.

Critical accounting estimates:

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 20182019 for information regarding our critical accounting estimates.

Results of Operations:

Three Months Ended March 31, 20192020 Compared to the Three Months Ended March 31, 20182019

The following table provides a summary of our financial results for the three months ended March 31, 20192020 and 2018:2019:

Net sales for the three months ended March 31, 2019 increased2020 decreased by approximately $697,000,$1,262,000, or 8.3%13.9%, as compared to the three months ended March 31, 2018.2019. We believe that the net decrease in sales was caused by the economic shutdown in the United States of retail stores and wholesale marine distributors, in order to comply with the COVID-19 pandemic social distancing restrictions. The increase in netdecrease of sales is principally a result of increasedwas partially offset by strong sales of Star briteour Performacide^® branded marinedisinfectant/sanitizer products, to threewhich only started increasing in the latter portion of our largest customers.the first quarter of 2020.

Cost of goods soldincreaseddecreased by approximately $254,000,$983,000, or 4.7%17.4%, during the three months ended March 31, 2019,2020, as compared to the three months ended March 31, 2018.2019. The increasedecrease in cost of goods sold iswas primarily a result of higherlower sales volume.volume and lower expenses at our manufacturing subsidiary Kinpak.

Gross profit increaseddecreased by approximately $443,000$279,000 or 8.1% for the three months ended March 31, 2019,2020, as compared to the three months ended March 31, 2018.2019. Gross profit increaseddecreased due to our higherlower sales volume, and a more profitable sales mix.partially offset by an increase in our gross profit percentage because of lower expenses at our manufacturing subsidiary Kinpak. As a percentage of net sales, gross profit was approximately 37.7%40.2% and 35.5%37.7% for the three month periodsmonths ended March 31, 2020 and 2019, and 2018, respectively. The increase in gross profit as a percentage of net sales is principally due to our sales mix, which included a greater proportion of Star brite^® branded marine products and a lower amount of windshield washer products.

Advertising and promotion expenses increaseddecreased by approximately $15,000,$29,000, or 2.0%3.7%, during the three months ended March 31, 2019,2020, as compared to the three months ended March 31, 2018.2019.    The decrease in advertising and promotion expenses was primarily a result of decreased trade show expenses in the 2020 period as compared to the 2019 period, as a result of the travel and social distancing restrictions implemented in light of the pandemic social distancing policies. As a percentage of net sales, advertising and promotion expenses decreasedincreased to 9.4% for the three months ended March 31, 2020, from 8.4% for the three months ended March 31, 2019, from 9.0% for2019.  

Selling and administrative expenses increased by approximately $13,000, or 0.8%, during the three months ended March 31, 2018.  

Selling and administrative expensesincreased by approximately $146,000, or 9.4%, during the three months ending March 31, 2019,2020, as compared to the three months ended March 31, 2018. The increase in selling and administrative expenses is principally a result of higher employee compensation and benefits, higher sales commissions due to increased sales, and an increase in amortization expense related to intangible assets acquired from Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018, partially offset by a decrease in the Company’s allowance for bad debts.2019. As a percentage of net sales, selling and administrative expenses increased to 21.9% for the three months ended March 31, 2020, from 18.7% for the three months ended March 31, 2019, from 18.5% for2019. The Company did not furlough or layoff any employees as a result of the three months ended March 31, 2018. pandemic virus.

Interest (expense), netfor the three months ended March 31, 2019 was2020 decreased by approximately $30,000; for$14,000 or 46.8%, as compared to the three months ended March 31, 2018,2019. The decrease in interest (expense), net was principally a result of interest income from a money market mutual fund account established in the first quarter of 2020.

Gain on insurance settlementwas approximately $7,000. The increase is principally results from the Company’s interest incurred with respect to the Company’s obligations under the industrial development bond financing relating to the Expansion Project. Because construction was ongoing$126,000 during the three months ended March 31, 2018, interest was capitalized rather than charged2020. The Company received a check for approximately $412,000 from our insurance company to interest expense. In addition, interest expensecover losses from a chemical incident at our Kinpak facility that took place in December 2019. The Company is still evaluating the overall damage. For more information please refer to Recent Developments and Note 16 included in the Company’s Annual Report on Form 10-K for the three monthsyear ended MarchDecember 31, 2019 includes interest on a promissory note we provided on July 13, 2018 in connection with our acquisition of Snappy Marine assets. See Note 8 to the condensed consolidated financial statements included in this report for additional information.2019.

Provision for income taxesfor the three months ended March 31, 2020 was approximately $175,000, or 21.8% of our pretax income. For the three months ended March 31, 2019 the provision was approximately $209,000, or 22.6% of our pretax income, compared to approximately $156,000, or 23.0% of pretax income, for the three months ended March 31, 2018.income.  

Liquidity and capital resources:

Our cash balance was approximately $563,000$6,148,000 at March 31, 2019 compared to2020 and approximately $1,401,000$6,125,000 at December 31, 2018.2019. In addition, we had restricted cash of approximately $2,163,000 and $2,333,000$1,892,000 at March 31, 20192020 and $1,885,000 at December 31, 2018, respectively.2019. The restricted cash constitutes amounts held in a custodial account that are to be used from time to time to fund additional capital expenditures in connection with the Expansion Project. See Note 8 to the condensed consolidated financial statements included in this report for additional information.

The following table summarizes our cash flows for the three months ended March 31, 20192020 and 2018:2019:

Net cash provided by operating activities for the three months ended March 31, 2020 was approximately $288,000, and net cash used in operating activities was approximately $606,000 for the three months ended March 31, 2019. The improvement in our net cash provided by (used) in operating activities was primarily due to changes in our trade accounts receivable and accounts payable balances, partially offset by the change to our inventories balance. In the three months ended March 31, 2020 our trade accounts receivable (excluding allowances) decreased by approximately $712,000, as compared to an increase of approximately $1,002,000 during the three months ended March 31, 2019. Our accounts payable increased by approximately $949,000 during the three months ended March 31, 2020, as compared to an increase of approximately $115,000 for the three months ended March 31, 2019. . Our inventories (excluding reserves) increased by approximately $1,841,000 during the three months ended March 31, 2020, as compared to an increase of approximately $439,000 for the three months ended March 31, 2019. The increases in our net cash provided by (used) in operating activities for the three months ended March 31, 20192020 was approximately $606,000, as compared to net cash provided by operating activities of approximately $522,000 for the three months ended March 31, 2018. The higher amount of cash used during the three months ended March 31, 2019 is principally a result of increases in our trade accounts receivable and receivables due from affiliated companies, partially offset by cash used of approximately $201,000 for expenses related to the December 2019 chemical incident and a lower increase in inventories.$126,000 gain from an insurance settlement from the December 2019 chemical incident.

Net trade accounts receivable at March 31, 20192020 aggregated approximately $6,693,000, an increase$6,404,000, a decrease of approximately $1,034,000$728,000, or 18.3%10.2%, as compared to approximately $5,659,000$7,132,000 in net trade accounts receivable outstanding at December 31, 2018.2019.  The increasedecrease principally reflects collections received during the timingthree months ended March 31, 2020, as a result of payments in accordance with applicable payment terms.high sales during the latter part of 2019. Receivables due from affiliated companies aggregated approximately $1,517,000$1,196,000 at March 31, 2019,2020, an increase of approximately $471,000,$233,000, or 45.0%24.3%, from receivables due from affiliated companies of approximately $1,046,000$962,000 at December 31, 2018.2019. The increase primarily results from timingis principally a result of payments, and to a lesser extent, sales during the three months ended March 31, 2019; one of the affiliated companies paid $450,000 to the Company on April 1, 2019.

2020.

Inventories, net were approximately $12,525,000$11,360,000 and $12,086,000$9,555,000 at March 31, 20192020 and December 31, 2018,2019, respectively, representing an increase in inventories, net of approximately $439,000$1,805,000, or 3.6%18.9%, during the three months ended March 31, 2019.2020. The increase in inventories is seasonal and reflects anticipated sales volume during the second quarterCompany’s anticipation of 2019.the lifting of social distancing restrictions and opening of marinas and the resumption of recreational boating.

Net cash used in investing activities for the three months ended March 31, 20192020 decreased by approximately $268,000$174,000 or 46.8%57.4%, as compared to the three months ended March 31, 2018. The decrease reflects a lower amount2019. During the three months ended March 31, 2020, we received insurance proceeds (see Results of expenditures onOperations) of $411,657. Purchases of property, plant and equipment were approximately $237,000 higher during the Expansion Project,three months ended March 31, 2020, as most ofcompared to the work on the project is completed. See “Overview” above for additional information.three months ended March 31, 2019.

Net cash used in financing activities for the three months ended March 31, 20192020 increased by approximately $31,000 or 47.3%,$29,000, as compared to the three months ended March 31, 2018.2019. The increase in cash usedwas a result of higher debt payments made during the three months ended March 31, 2020, as well that during the three months ended March 31, 2019, as compared to the three months ended March 31, 2018 is the result of higher debt payments, partially offset bywe received proceeds from the exercise of stock options.options, while there were no such proceeds in the current period.

See Notes 7 and 8 to the condensed consolidated financial statements included in this report for information concerning our principal credit facilities, consisting of Kinpak’s obligations relating to an industrial development bond financing, the payment of which we have guaranteed, and a revolving line of credit. At March 31, 20192020 and December 31, 2018,2019, we had outstanding balances of approximately $4,161,000$3,911,000 and $4,222,000,$3,974,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility.