OCEAN BIO-CHEM, INC. The following discussion should be read in conjunction with our consolidated financial statements which are contained in a separate section of this report, beginning on page F-1. 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 withinthe United States andCanada . 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 a line of products including disinfectants, sanitizers and deodorizers. We sell our products through national retailers and to national and regional distributors. In addition, we sell products to two companies affiliated withPeter G. Dornau , our Chairman, President and Chief Executive Officer; these companies distribute the products outside ofthe United States andCanada . Transactions with the affiliated companies were made in the ordinary course of business, and management believes that sales to the affiliated companies do not involve more than normal credit risk.
In February of 2022, the Company's wholly owned subsidiary,
7
Critical accounting estimates:
The preparation of consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and, if subject to different assumptions and conditions, could lead to materially different results.
Collectability of trade accounts receivable
In the ordinary course of business, we grant non-interest-bearing trade credit to our unaffiliated customers on terms that range from 30 to 360 days. In an effort to reduce our credit risk, we perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and aging of receivables, as well as our assessment of our customers' creditworthiness, as determined by our review of credit information relating to the customers. We generally do not require collateral on trade accounts receivable. We maintain an allowance for doubtful accounts based on expected collectability of the trade accounts receivable, after considering our historical collection experience, the length of time an account is outstanding, the financial position of the customer if known and information provided by credit rating services. In addition, we use historical and current information to estimate future credit losses to determine if the allowance is adequate. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine a smaller or larger reserve is appropriate, we would record a benefit or charge to selling and administrative expenses in the period in which such a determination was made. The adequacy of this allowance is reviewed each reporting period and adjusted as necessary. Our allowance for doubtful accounts was approximately$632,000 and$326,000 atDecember 31, 2021 and 2020, respectively, which was approximately 6.2% and 3.8% of gross accounts receivable atDecember 31, 2021 and 2020, respectively. If the financial condition of our customers were to deteriorate, resulting in increased uncertainty as to their ability to make payments, or if unexpected events or significant future changes in trends were to occur, we may be required to increase the allowance or incur a bad debt expense. In this regard, we incurred bad debt expense of approximately$311,000 and$197,000 in 2021 and 2020, respectively. Inventories
Our inventories primarily are composed of raw materials and finished goods and are stated at the lower of cost or net realizable value, using the first-in, first-out method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We maintain a reserve for slow moving and obsolete inventory to reflect the diminution in value resulting from product obsolescence, damage or other issues affecting marketability in an amount equal to the difference between the cost of the inventory and its estimated net realizable value. The adequacy of this reserve is reviewed each reporting period and adjusted as necessary. We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities. In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage.
Our slow moving and obsolete inventory reserve was approximately
Income taxes
We account for income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized to reflect the future
tax consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured and recorded using
currently enacted tax rates, which we expect will apply to taxable income in the
years in which the differences between the financial statement carrying amounts
of existing assets and liabilities and their tax bases are recovered or
settled. The differences are attributable to differing methods of financial
statement and income tax treatment with respect to depreciation and reserves for
trade accounts receivable and inventories. The likelihood of a material change
in our expected realization of deferred tax assets is dependent on, among other
factors, changes in tax law, future taxable income and settlements with tax
authorities.
In assessing the realizability of our deferred tax assets, we evaluate positive
and negative evidence and use judgments regarding past and future events,
including operating results and available tax planning strategies that could be
implemented to realize the deferred tax assets. We record a valuation allowance
when necessary to reduce our deferred tax assets to the net amount that we
believe is more likely than not to be realized. We consider available evidence,
both positive and negative, and use judgments regarding past and future events,
including operating results and available tax planning strategies, in assessing
the need for a valuation allowance.
Significant judgment is required in determining income tax provisions and in
evaluating tax positions. We establish additional provisions for income taxes
when, despite the belief that tax positions are fully supportable, there remain
certain positions that do not meet the minimum probability threshold, which is a
tax position that is more likely than not to be sustained upon examination by
the applicable taxing authority. In the normal course of business, we and our
subsidiaries are examined by various federal and state tax authorities. We
regularly assess the potential outcomes of these examinations and any future
examinations for the current or prior years in determining the adequacy of our
provision for income taxes. We adjust the income tax provision, the current tax
liability and deferred taxes in any period in which we become aware of facts
that necessitate such an adjustment. The ultimate outcomes of the examinations
of our income tax returns could result in increases or decreases to our recorded
tax liabilities, which would affect our financial results.
8
Intangible Assets
Intangible assets are acquired assets that lack physical substance and that meet specified criteria for recognition apart from goodwill. We own several trademarks and trade names, including Star brite® and Performacide®. We have determined that these intangible assets have indefinite lives and, therefore, are not amortized. In addition, we own other intangible assets including patents, royalty rights, other trademarks and trade names, customer lists, and product formulas that have finite lives. As these intangible assets have finite lives, their carrying value is amortized over their remaining useful lives. See Note 5 to the consolidated financial statements included in this report for additional information regarding our intangible assets. We evaluate our indefinite-lived intangible assets for impairment annually and at other times if events or changes in circumstances indicate that an impairment may have occurred. In evaluating our indefinite-lived intangible assets for impairment, we assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If, after completing the qualitative assessment, we determine it is more likely than not that the fair value of the indefinite-lived intangible asset is greater than its carrying amount, the asset is not impaired. If we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying value, we would then proceed to a quantitative impairment test, which consists of a comparison of the fair value of the intangible assets to their carrying amounts. In 2021, we performed a qualitative assessment on all of our indefinite lived assets and determined, based on the assessment, that their fair values were more likely than not higher than their carrying values. We assess the remaining useful life and recoverability of intangible assets having finite lives whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Such events or circumstances may include, for example, the occurrence of an adverse change with respect to a product line that utilizes the intangible assets. Significant judgments in this area involve determining whether such an event or circumstance has occurred. Any impairment loss, if indicated, equals the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. Results of Operations:
The following table provides a summary of our financial results for the years
ended
For The Years Ended December 31,
Percent Percentage of Net Sales
2021 2020 Change 2021 2020
Net sales $ 64,298,595 $ 55,561,169 15.7 % 100.0 % 100.0 %
Cost of goods sold 40,001,908 32,059,747 24.8 % 62.2 % 57.7 %
Gross profit 24,296,687 23,501,422 3.4 % 37.8 % 42.3 %
Advertising and promotion 4,025,385 2,980,356 35.1 % 6.3 % 5.4 %
Selling and administrative 9,412,437 8,357,504 12.6 % 14.6 % 15.0 %
Operating income 10,858,865 12,163,562 (10.7 )% 16.9 % 21.9 %
Interest (expense), net (148,580 ) (132,466 ) 12.2 % 0.2 % 0.2 %Gain on insurance settlement - 201,210
N/A N/A 0.4 % Provision for income taxes (2,306,317 ) (2,615,623 ) (11.8 )% 3.6 % 4.7 % Net income$ 8,403,968 $ 9,616,683 (12.6 )% 13.1 % 17.3 % Net salesincreased by approximately$8,737,000 , or 15.7%, during 2021 as compared to 2020. The increase in net sales was principally a result of increased sales of Star brite® branded marine products, private label marine products, and winterizing products, partially offset by a decrease in sales of chlorine dioxide-based products (Performacide® and private label). Cost of goods sold increased by approximately$7,942,000 or 24.8% in 2021, as compared to 2020. The increase in cost of goods sold was a result of higher sales volume, the mix of products sold described above, higher raw materials, freight imported to our warehouses and to our customers and other manufacturing costs. Gross profit increased by approximately$795,000 , or 3.4%, in 2021 as compared to 2020. The increase in gross profit was a result of increased sales volume, partially offset by the higher costs described above. As a percentage of net sales, gross profit decreased to 37.8% in 2021 from 42.3% in 2020, primarily because of a less profitable sales mix. Advertising and promotion expenses increased by approximately$1,045,000 , or 35.1%, during 2021 as compared to 2020. As a percentage of net sales, advertising and promotion expense increased to 6.3% in 2021 from 5.4% in 2020. The increase in advertising and promotion expenses was principally a result of increased internet and television advertising, and trade show expenses as a result of the easing of travel and social distancing restrictions implemented in 2020 due to the COVID-19 pandemic. Selling and administrative expenses increased by approximately$1,055,000 , or 12.6%, during 2021 as compared to 2020. The increase in selling and administrative expenses was primarily a result of increased sales commissions and higher employee compensation expenses, increased insurance expenses, product testing, and a non-cash adjustment to increase our trade receivables allowance account. As a percentage of net sales, selling and administrative expenses decreased to 14.6% in 2021 from 15.0% in 2020. 9
Interest (expense), net during 2021 increased by approximately
Gain on insurance settlement was approximately
Provision for income taxes decreased by approximately$309,000 or 11.8% in 2021, as compared to 2020. The decrease was principally a result of lower income before income taxes. As a percentage of income before income taxes our provision for income taxes increased to 21.5% in 2021 from 21.4% in 2020.
Liquidity and Capital Resources:
Our cash balance was approximately$12,685,000 atDecember 31, 2021 as compared to approximately$11,124,000 atDecember 31, 2020 . In addition, we had restricted cash of approximately$477,000 atDecember 31, 2020 . The restricted cash constituted amounts held in a custodial account that were used to fund additional capital expenditures in connection with the 2017Expansion Project which is now complete. The following table summarizes our cash flows for the years endedDecember 31, 2021 and 2020: Years Ended December 31, 2021 2020 Net cash provided by operating activities$ 5,505,697 $
6,207,205
Net cash used in investing activities (7,442,783 ) (1,350,099 ) Net cash provided by (used in) financing activities 3,020,856 (1,267,090 ) Effect of exchange rate fluctuations on cash 13
716
Net increase in cash and restricted cash$ 1,083,783 $ 3,590,732 Net cash provided by operating activities during 2021 decreased by approximately$702,000 or 11.3%, as compared to 2020. The decrease in cash provided by operating activities was principally a result of the approximately$1,213,000 decrease in the Company's net income, partially offset by a$541,000 increase in non-cash expenses. Changes in working capital accounted for approximately$30,000 more in cash used during 2021 as compared to 2020. Inventories, net were approximately$16,819,000 and$13,176,000 atDecember 31, 2021 and 2020, respectively, representing an increase of approximately$3,643,000 , or 27.7%, in 2021. We believe the higher levels of inventories were necessary to in order to reduce potential supply chain problems and price increases. Inventories, net were approximately$16,819,000 and$13,176,000 atDecember 31, 2021 and 2020, respectively, representing an increase of approximately$3,643,000 , or 27.7%, in 2021. We believe the higher levels of inventories were necessary to in order to reduce potential supply chain problems and material price increases.
Net cash used in investing activities during 2021 increased by approximately
Net cash provided by financing activities during 2021 was approximately$3,021,000 , as compared to net cash used in financing activities of approximately$1,267,000 for the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , the Company received proceeds of approximately$4,990,000 from a term loan related to the expansion at Kinpak (see Note 8). In the year endedDecember 31, 2021 , the Company paid dividends to common shareholders aggregating approximately$1,139,000 and made payments on long term debt of approximately$753,000 , as compared to dividends paid to common shareholders aggregating approximately$757,000 and payments on long term debt of approximately$510,000 in the year endedDecember 31, 2020 . See Notes 6 and 8 to the consolidated financial statements included in this report for information concerning our principal credit facilities, consisting of Kinpak's obligations relating to a term loan, the payment of which we have guaranteed, an industrial development bond financing, the payment of which we have guaranteed and a revolving line of credit. AtDecember 31, 2021 and 2020, we had outstanding balances of approximately$4,888,000 and$0 , respectively, under Kinpak's obligation relating to the term loan and of$3,334,000 and$3,719,000 , respectively, under Kinpak's obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility. The loan agreement pertaining to our revolving credit facility, as amended, has a stated term that expires onAugust 30, 2024 , although as was the case with earlier revolving lines of credit provided to us in recent years, amounts outstanding are payable on demand. Nevertheless, the loan agreement pertaining to our revolving line of credit contains various covenants, including financial covenants that are described in Note 6 to the consolidated financial statements included in this report. AtDecember 31, 2021 , we were in compliance with these financial covenants. The revolving credit facility is subject to several events of default, including a decline of the majority shareholder's ownership below 50% of our outstanding shares. 10
Our guarantee of Kinpak's obligations related to the industrial development bond financing are subject to various covenants, including financial covenants that are described in Note 8 to the consolidated financial statements included in this report. As ofDecember 31, 2021 , we were in compliance with these financial covenants. In connection with our 2018 acquisition of assets of Snappy Marine, we issued 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). AtDecember 31, 2021 , we had an outstanding balance of$316,667 under the promissory note (including$309,218 recorded as principal and$7,449 to be recorded as interest expense over the remaining term of the note). We also obtained financing through leases for office equipment, totaling approximately$79,000 and$100,000 atDecember 31, 2021 and 2020, respectively. Some of our assets and liabilities are denominated in Canadian dollars and are subject to currency exchange rate fluctuations. We do not engage in currency hedging and address currency risk as a pricing issue. In 2021, we recorded$1,988 in foreign currency translation adjustments, which resulted in a corresponding increase in shareholders' equity. In 2020, we recorded$167 in foreign currency translation adjustments, which resulted in a corresponding increase in shareholders' equity. Many of the raw materials that we use in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The nature of our business does not enable us to pass through the price increases to our national retailer customers and to our distributors as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.
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 funds provided through operations, our revolving line of credit, and other sources of financing will be sufficient to satisfy our cash requirements over at least the next twelve months. Although amounts outstanding under our revolving line of credit facility are payable on demand, based on our experience with respect to previous revolving line of credit facilities with the same bank that is providing our current revolving line of credit facility, we anticipate that we will be able to maintain borrowings, if any, under the current revolving line of credit facility until the end of its stated term.
© Edgar Online, source