Required principal payments under the Company’s long term obligations are set forth below:
During the three and six months ended June 30, 2013 and 2012, the Company sold products to companies affiliated with its Chairman, President and Chief Executive Officer. The affiliated companies distribute the products outside of the United States and Canada. The Company also provides administrative services to these companies. Sales to the affiliated companies aggregated approximately $469,000 and $384,000 during the three months ended June 30, 2013 and 2012, respectively, and $940,000 and $611,000 for the six months ended June 30, 2013 and 2012, respectively. Administrative fees aggregated approximately $134,000 and $86,000 during the three months ended June 30, 2013 and 2012, respectively, and $236,000 and $146,000 for the six months ended June 30, 2013 and 2012, respectively., The Company had accounts receivable from the affiliated companies in connection with the product sales and administrative services aggregating approximately $424,000 and $556,000 at June 30, 2013 and December 31, 2012, respectively. Transactions with the affiliated companies were made in the ordinary course of business. While the terms of sale to the affiliated companies differed from the terms applicable to other customers, the affiliated companies bear their own warehousing, distribution, advertising, selling and marketing costs, as well as their own freight charges (the company pays freight charges in connection with sales to its domestic customers on all but small orders). Moreover, the Company does not pay sales commissions with respect to products sold to the affiliated companies. As a result, the Company believes its profit margins with respect to sales to the affiliated companies are similar to the profit margins with respect to sales to its larger domestic customers. Management believes that the sales transactions did not involve more than normal credit risk or present other unfavorable features.
A subsidiary of the Company currently uses the services of an entity that is owned by the Chairman, President and Chief Executive Officer of the Company to conduct product research and development, marketing and advertising. The Company paid the entity approximately $10,500 for each of the three month periods ended June 30, 2013 and 2012 and $21,000 for each of the six month periods ended June 30, 2013 and 2012, under this arrangement.
The Company leases office and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. The Company believes that the rental payments are below market rates. See Note 9 for a description of the lease terms.
The Company leases from the Alabama State Port Authority a 1.5 acre docking facility on the Alabama River, located approximately eleven miles from the Company’s Alabama manufacturing facility. The lease expires on September 30, 2014, and requires the Company to pay rent and additional expenses totaling approximately $7,800 annually.
Basic earnings per share is calculated based on net income attributable to Ocean Bio-Chem, Inc. and the weighted average number of shares outstanding during the reported period. Diluted earnings per share reflect additional dilution from potential common stock issuable upon the exercise of outstanding stock options. The following table sets forth the computation of basic and diluted earnings per common share, as well as a reconciliation of the weighted average number of common shares outstanding to the weighted average number of shares outstanding on a diluted basis.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-looking Statements:
Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, our expectations regarding our full year 2013 cooperative advertising expense, our ability to provide required capital to support inventory levels, the effect of price increases in petroleum-based or chemical-based raw materials 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 forward-looking statements. Without limiting the generality of the foregoing, words such as "believe," "may," "will," "expect," "anticipate," "intend," or "could," including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those expressed or implied by such forward-looking statements. Factors that may affect these results include, but are not limited to, the highly competitive nature of our industry; reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; advertising and promotional efforts; exposure to market risks relating to changes in interest rates and foreign exchange rates; and other factors.
Overview:
We are principally engaged in manufacturing, marketing and distributing a broad line of appearance, performance and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite®, StarTron® and other trademarks within the United States of America and Canada. In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products. We sell our products through national retailers and to national and regional distributors who, in turn, sell our products to specialized retail outlets.
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, 2012 for information regarding our critical accounting estimates.
Results of Operations:
Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012
Net sales were approximately $8,178,000 for the three months ended June 30, 2013 compared to approximately $7,882,000 during the corresponding period in 2012, an increase of $296,000 or 3.8%. Our net sales increased primarily because our largest customer resumed its normal buying practices following completion of its inventory reduction program in our sector. The inventory reduction program was in effect during the corresponding period in 2012. In addition, sales of our StarTron® products to both the automotive retailers and power sport distributors increased as compared to the three months ended June 30, 2012. These sales increases were partially offset by a decline in sales of marine products, which we believe was due to reduced recreational boating usage resulting from unfavorable weather conditions in much of the United States during most of the second quarter of 2013.
Cost of goods sold and gross profit – Cost of goods sold increased by approximately $189,000 or 3.8% to approximately $5,206,000 during the three months ended June 30, 2013, from approximately $5,017,000 during the same period in 2012. The increase in cost of goods sold reflects the increase in net sales.
Gross profit increased by approximately $107,000 or 3.7% to approximately $2,972,000 for the three months ended June 30, 2013, from approximately $2,865,000 during the same period in 2012, as the result of the factor described above.
As a percentage of net sales, gross profit was approximately 36.3% for each of the three month periods ended June 30, 2013 and 2012.
Advertising and promotion expenses increased to approximately $820,000 for the three months ended June 30, 2013 from $641,000 during the corresponding period in 2012, an increase of approximately $179,000 or 27.9%. As a percentage of net sales, advertising and promotion expense was approximately 10.0% in the second quarter of 2013 compared to approximately 8.1% in the second quarter of 2012. The increase is primarily a result of increased cooperative advertising programs with our larger customers, which we believe largely reflects the timing of such programs. We do not anticipate that our full year 2013 cooperative advertising expense will be substantially higher than expenses incurred for the full year 2012. We also promoted several consumer rebate programs that contributed to higher advertising costs in the quarter. Other types of advertising programs, including TV and magazine advertising, were at approximately the same levels as in the second quarter of 2012.
Selling and administrative expenses increased by approximately $275,000 or 17.1%, from approximately $1,604,000 during the three months ended June 30, 2012 to approximately $1,879,000 during the same period in 2013. The increase was attributable to non cash stock based compensation and our selling activities, including sales commissions, consumer rebate programs, and travel and entertainment expenses. As a percentage of net sales, selling and administrative expenses increased to 23.0% during the second quarter of 2013 as compared to 20.3% in the second quarter of 2012.
Interest expense decreased by approximately $8,000 to approximately $18,000 during the three months ended June 30, 2013, compared to approximately $26,000 during the three months ended June 30, 2012. The decrease reflects the lower average borrowings, under our revolving line of credit during the second quarter of 2013 compared to the second quarter of 2012. In addition, we continue to reduce the outstanding principal on our term loan.
Operating income – As a result of the foregoing, operating income was approximately $274,000 in the second quarter of 2013 compared to approximately $620,000 in the corresponding 2012 period, a decrease of approximately $346,000 or 55.8%.
Income taxes - Our income tax expense in the second quarter of 2013 was approximately $92,000, or 36.0% of pretax income, compared to approximately $241,000, or 40.5% of pretax income, during the corresponding period in 2012. The lower second quarter 2013 income tax rate is consistent with our effective tax rate for the year ended December 31, 2012.
Net income and Net income attributable to Ocean Bio-Chem, Inc. - As a result of the factors described above, net income for the second quarter of 2013 decreased by approximately $191,000, or 53.9%, to $163,000 from approximately $354,000 in the second quarter of 2012. Net income attributable to Ocean Bio-Chem. Inc. decreased by approximately $190,000, or 52.4%, to approximately $173,000 in the second quarter 2013, from approximately $363,000 in 2012. Net income attributable to Ocean Bio-Chem, Inc. does not include losses of approximately $9,000 and $8,000 for the three month periods ended June 30, 2013 and 2012, respectively, which are attributable to the interest of the other participant in the OdorStar Technology LLC (“OdorStar”), joint venture. See Note 5 to the condensed consolidated financial statements included in this report.
Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012
Net sales were approximately $14,490,000 for the six months ended June 30, 2013 compared to approximately $13,886,000 during the corresponding period in 2012, an increase of $604,000 or 4.3%. The increase in sales principally results from our commencement of sales to a new national automotive chain store customer, increased sales of StarTron® products, the resumption by our largest customer of normal buying practices following completion of its inventory reduction program in our sector, which was in effect during the corresponding period in 2012, and increased sales to affiliated companies (see Note 8 to the condensed consolidated financial statements included in this report).
Cost of goods sold and gross profit – Cost of goods sold increased by approximately $397,000 or 4.5% to approximately $9,277,000 during the six months ended June 30, 2013, from approximately $8,880,000 during the same period in 2012. The increase in cost of goods sold reflects the increase in net sales.
Gross profit increased by approximately $206,000 or 4.1% to approximately $5,213,000 for the six months ended June 30, 2013, from approximately $5,007,000 for the same period in 2012, as the result of the factors described above.
As a percentage of net sales, gross profit was approximately 36.0% and 36.1% for the six months ended June 30, 2013 and 2012, respectively.
Advertising and promotion expenses increased to approximately $1,387,000 for the six months ended June 30, 2013 from $1,107,000 during the corresponding period in 2012, an increase of approximately $280,000 or 25.3%. As a percentage of net sales, advertising and promotion expense was approximately 9.6% during the six months ended June 30, 2013 compared to approximately 8.0% in the comparable period of 2012. During the six months ended June 30, 2013, we increased our magazine and customer cooperative advertising, increased general marketing expenditures, and attended more trade shows as compared to the corresponding period in 2012.
Selling and administrative expenses increased by approximately $369,000 or 13.9%, from approximately $2,659,000 during the six months ended June 30, 2012 to approximately $3,028,000 during the same period in 2013. The increase was attributable to non cash stock based compensation and the Company’s selling activities, including sales commissions, consumer rebates and travel and entertainment expenses. As a percentage of net sales, selling and administrative expenses increased to 20.9% during the six months ended June 30, 2013 as compared to 19.2% during the six months ended June 30, 2012.
Interest expense decreased by approximately $17,000 to approximately $36,000 during the six months ended June 30, 2013, compared to approximately $53,000 during the same period in 2012. The decrease reflects the lower average borrowings, under our revolving line of credit during the six months ended June 30, 2013 compared to the same period in 2012. In addition, we continue to reduce the outstanding principal on our term loan.
Operating income – As a result of the foregoing, operating income was approximately $798,000 for the six months ended June 30, 2013 compared to approximately $1,240,000 in the corresponding 2012 period, a decrease of approximately $442,000 or 35.6%.
Income taxes - Our income tax expense for the six months ended June 30, 2013 was approximately $271,000, or 35.5% of pretax income, compared to approximately $482,000, or 40.5% of pretax income, during the corresponding period in 2012. The lower 2013 income tax rate is consistent with our effective tax rate for the year ended December 31, 2012.
Net income and Net income attributable to Ocean Bio-Chem, Inc. - As a result of the factors described above, net income for the six months ended June 30, 2013 decreased by approximately $216,000, or 30.5%, to $492,000 from approximately $708,000 in the six months ended June 30, 2012. Net income attributable to Ocean Bio-Chem. Inc. decreased by approximately $205,000, or 28.3%, to approximately $522,000 for the six months ended June 30, 2013 from approximately $727,000 in 2012. Net income attributable to Ocean Bio-Chem, Inc. does not include losses of approximately $30,000 and $19,000 for the six months ended June 30, 2013 and 2012, respectively, which are attributable to the interest of the other participant in the OdorStar, joint venture. See Note 5 to the condensed consolidated financial statements included in this report.
Liquidity and capital resources:
Our cash balance was approximately $1,006,000 at June 30, 2013 compared to approximately $1,508,000 at December 31, 2012. At June 30, 2013 and December 31, 2012, we had no borrowings under our revolving line of credit.
Net cash provided by operating activities during the six months ended June 30, 2013 was approximately $32,000 compared to net cash provided by operating activities of approximately $1,348,000 for the six months ended June 30, 2012. The decrease is primarily due to $1,200,000 in year-over-year increases in working capital items, principally reflecting an increase in accounts receivable of approximately $940,000 and a $443,000 increase in inventory, compared to an increase of $396,000 in accounts receivable and a decrease in inventory of approximately $474,000 in the six months ended June 30, 2012.
Net cash used in investing activities was approximately $328,000 for the six months ended June 30, 2013 compared to approximately $229,000 for the six months ended June 30, 2012. In both periods cash was used for purchases of property, plant, and equipment. We continue to invest in our manufacturing facilities as we deem appropriate.
Net cash used in financing activities was approximately $202,000 for the six months ended June 30, 2013 compared to net cash used of approximately $573,000 during the six months ended June 30, 2012. During the six months ended June 30, 2013, we did not have any net borrowings or repayments under our revolving line of credit. During the six months ended June 30, 2012, we had net repayments of $450,000 under the revolving line of credit, partially offset by $78,000 in proceeds of stock option exercises during the six months ended June 30, 2012.
On July 6, 2011, we, together with our subsidiary, Kinpak Inc. (“Kinpak”), entered into a Credit Agreement with Regions Bank (and, pursuant to an Equipment Finance Addendum to the Credit Agreement, Regions Equipment Finance Corporation (“REFCO”)) under which (a) our revolving line of credit with Regions Bank was renewed, and (b)REFCO provided a new term loan in the amount of $2,430,000, the proceeds of which were used to pay the Kinpak’s remaining lease obligations in connection with the previously outstanding 2002 Series of Industrial Development Revenue Bonds issued by the City of Montgomery, Alabama (the “2002 Bonds”). The 2002 Bonds were used to fund the expansion of Kinpak’s facilities and acquisition of related equipment.
Under the term loan, we pay principal, together with interest at the fixed rate of 3.54% per annum, in 72 consecutive monthly payments of $37,511 over the six year period beginning on August 6, 2011, with the final payment due on July 6, 2017. In the event our debt service coverage ratio (net profit plus taxes, interest, depreciation, amortization and rent expense divided by debt service plus interest and lease/rent expense) falls to 2.0 to 1, interest on the term loan will increase by 1.01% per annum. At June 30, 2013, our debt service coverage ratio was approximately 6.0 to 1.
The Credit Agreement contains various covenants, including financial covenants requiring a minimum debt coverage ratio of 1.75 to 1.00, tested on a rolling four-quarter basis, and a maximum debt to capitalization ratio (funded debt divided by the sum of total net worth and funded debt) of 0.75 to 1, tested quarterly. At June 30, 2013, we were in compliance with these covenants.
Under the renewed revolving line of credit, we may borrow up to the lesser of (i) $6 million and (ii) a borrowing base equal to 80% of eligible accounts receivable plus 50% of eligible inventory. Interest on the revolving line of credit is payable at the 30 day LIBOR rate plus 1.74% per annum (unless our debt service coverage ratio falls to 2.0 to 1, in which case the additional percentage will be 2.75% per annum). In no event will the interest rate be less than 2.0% per annum. Outstanding amounts under the revolving line of credit are payable on demand. If no demand is made, we may repay and reborrow funds from time to time. Interest payments are made in monthly installments on outstanding average balances with all outstanding principal and interest payable on July 6, 2014. At June 30, 2013, there were no borrowings under our revolving line of credit.
Our obligations under the Credit Agreement are secured by our accounts receivable and inventory, as well as real property and equipment at Kinpak’s Montgomery, Alabama facility.
In addition to the revolving line of credit and term loan, we have obtained financing through capital leases for both manufacturing and office equipment, totaling approximately $27,900 and $37,600 at June 30, 2013 and December 31, 2012, respectively.
Our sales in the Canadian market are subject to currency fluctuations relating to the Canadian dollar. We do not engage in currency hedging and address currency risk as a pricing issue. In the six months ended June 30, 2013, we recorded approximately $7,000 in foreign currency translation adjustments (decreasing shareholders equity by $7,000).
During the past few years, we have introduced a number of new products. At times, new product introductions have required us to increase our overall inventory and have resulted in lower inventory turnover rates. The effects of reduced inventory turnover have not been material to our overall operations. We believe that all required capital to maintain such increases will continue to be provided by operations and our current financing arrangements.
Many of the raw materials that we use in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The nature of our business does not enable us to pass through the price increases to our national retailers and distributors, as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.
At June 30, 2013 and through the date of this report, 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.
We believe that funds provided through operations and our existing sources of financing will be sufficient to satisfy our cash requirements over at least the next twelve months.
| Quantitative and Qualitative Disclosures about Market Risk |
Not applicable
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures:
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") at the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act are (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the disclosure.
Change in Internal Controls over Financial Reporting:
No change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A. – Risk Factors
In addition to the information set forth in this report, you should carefully consider the factors discussed in Part I -Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect the Company’s business, financial condition or future results.
Item 6. – Exhibits
| Exhibit No. | | Description |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act. * |
| | | |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act. * |
| | | |
| 32.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350. * |
| | | |
| 32.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350. * |
| | | |
| 101 | | The following materials from Ocean Bio-Chem, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June, 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012; (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 and (v) Notes to Condensed Consolidated Financial Statements. . |
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned thereunto duly authorized.
| | OCEAN BIO-CHEM, INC. | |
| �� | | |
| Dated: August 14, 2013 | /s/ Peter G. Dornau | |
| | Peter G. Dornau | |
| | Chairman of the Board, President and | |
| | Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
| Dated: August 14, 2013 | /s/ Jeffrey S. Barocas | |
| | Jeffrey S. Barocas | |
| | Vice President and | |
| | Chief Financial Officer | |
| | (Principal Financial and Accounting Officer) | |
