Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 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, a smaller reporting company or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
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 ☒
The aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant as of June 30, 2021 was $35,691,560, based upon the closing price of the registrant’s
common stock on such date as reported by the NASDAQ Capital Market. For purposes of making this computation only, all executive officers,
directors and beneficial owners of more than five percent of the registrant’s common stock are deemed to be affiliates.
At March 30, 2022, 9,509,799 shares of the registrant’s
common stock were outstanding.
Portions of the registrant’s definitive
proxy statement, which will be filed not later than May 2, 2022 (the first business day after the 120th day following
the end of the registrant’s fiscal year), are incorporated by reference in Part III of this report.
Certain statements contained in this Annual Report
on Form 10-K, including without limitation, estimated costs of expansion of facilities operated by our wholly-owned subsidiary, KINPAK
Inc. (“Kinpak”), our ability to locate substitute third party manufacturing facilities without a substantial adverse effect
on our manufacturing and distribution, 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,
the sufficiency of funds provided through operations and existing sources of financing to satisfy our cash requirements and our expectation
that we will be able to maintain borrowings, if any, under our current revolving line of credit facility until the end of its stated term
constitute forward-looking statements. For this purpose, any statements contained in this report that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “believe,”
“may,” “will,” “expect,” “anticipate,” “intend,” or “could,” including
the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements
involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed
or implied by such forward-looking statements. Factors that may affect these results include, but are not limited to, the
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; unanticipated litigation developments; exposure to market risks relating to
changes in interest rates, foreign currency exchange rates and prices for raw materials that are petroleum or chemical based; and other
factors discussed below under Item 1A, “Risk Factors.”
PART I
Item 1. Business
General:
We are principally engaged in the manufacture,
marketing, and distribution of a broad line of appearance, performance and maintenance products for the marine, automotive, power sports,
recreational vehicle, home care and outdoor power equipment markets, under the Star brite® and Star Tron® brand names.
We sell these products within the United States of America and Canada. In addition, we produce private label formulations
of many of our products for various customers and provide custom blending and packaging services for these and other products. We
also manufacture, market and distribute chlorine dioxide-based deodorizing disinfectant, and sanitizing products under the Star brite®
and Performacide® brand names, utilizing a patented delivery system for use with products containing chlorine dioxide. Unless the
context indicates otherwise, we sometimes refer to Ocean Bio-Chem, Inc. and its consolidated subsidiaries as “the Company,”
“we” or “our.”
Ocean Bio-Chem, Inc. was incorporated in 1973
under the laws of the state of Florida. In 1981, we purchased, from Peter G. Dornau and Arthur Spector, the co-founders
of the Company, rights to the Star brite® trademark and related products for the United States and Canada. Mr. Dornau,
our Chairman, President and Chief Executive Officer, has retained rights to these assets with respect to all other geographic areas. Accordingly,
products we manufacture that are sold outside of the United States and Canada are purchased from us and distributed by two companies
owned by Mr. Dornau. Net sales to the two companies in 2021 and 2020 totaled approximately $2,373,000 and $2,212,000, representing
3.7% and 4.0% of our net sales, respectively. See Note 10 to the consolidated financial statements included in this report for
additional information.
Because our operations involve, in all material
respects, substantially similar manufacturing and distribution processes, our operations constitute one reportable segment for financial
reporting purposes.
Recent Developments:
In February of 2022, the Company’s wholly owned subsidiary,
KINPAK Inc. (“Kinpak”) completed an expansion of its manufacturing and distribution facilities by an additional 69,000
square feet on its 23-acre site. This expansion brings the total facility square footage to exceed 370,000 square feet of dedicated
space for production, warehousing, and distribution. This was the second major expansion of their facilities in less than five
years.
Products:
The products that we manufacture and market include the following:
Marine: Our marine line consists of
polishes, cleaners, protectants and waxes under the Star brite® brand name, enzyme fuel treatment under the Star Tron®
brand name, and private label products sold by some of our customers. The marine line also includes motor oils, boat washes, vinyl
cleaners, protectants, teak cleaners, teak oils, bilge cleaners, hull cleaners, silicone sealants, polyurethane sealants, polysulfide
sealants, gasket materials, lubricants, antifouling additives and anti-freeze coolants. In addition, we manufacture a line of brushes,
brush handles, tie-downs and other related marine accessories.
Automotive: We manufacture a line
of automotive products under the Star brite® and Star Tron® brand names. The automotive line includes
fuel treatments for both gas and diesel engines, motor oils, greases and related items. Our Star Tron® enzyme
fuel treatment is designed to eliminate and prevent engine problems associated with fuel containing 10% ethanol (E-10 fuel) including,
among other things, fuel degradation, debris in fuel (gum and varnish formation) and ethanol’s propensity to attract water (which
can adversely affect octane). Star Tron® fuel treatment also increases fuel economy by cleaning the fuel delivery
system and facilitating more complete and uniform combustion. In addition, we produce anti-freeze and windshield washes under the
Star brite® brand and under private labels for customers. We also produce automotive polishes, cleaners and other
appearance items.
Recreational Vehicle/Power Sports: We
market Star Tron® fuel treatment and other specialty products to the recreational vehicle market,
including snow mobiles, all-terrain vehicles and motorcycles. For power sports enthusiasts, Star Tron® provides
a viable solution to a number of problems associated with E-10 fuel. Other specialty recreational vehicle/power sports products include
cleaners, polishes, detergents, fabric cleaners and protectants, silicone sealants, waterproofers, gasket materials, degreasers, vinyl
cleaners and protectants, toilet treatment fluids and anti-freeze/coolant.
Outdoor Power Equipment/ Lawn & Garden:
We market Star Tron® as a solution to help rectify a number of operating engine problems associated with E-10 fuel
in commercial lawn equipment and other home and garden power equipment.
Disinfectant Group: Our disinfectant group
includes chlorine dioxide-based deodorizers, disinfectants and sanitizers, which we sell under the Star brite® and
Performacide® brand names, and which our customers sell using private label brands. Star brite® products
include NosGUARD mildew odor control bags and boat odor sanitizers. Performacide® products include disinfectants for hard,
non-porous surfaces, air care products for deodorizing and products to eliminate mold and mildew. These products are sold in both a gas
and liquid form. The U.S. Environmental Protection Agency has accepted labeling for Performacide® used in hard surface
applications that claims, among other things, effectiveness as a virucide against a variety of viruses, including HIV-1, Influenza-A,
Herpes Simplex-2, Poliovirus-1, norovirus and rotavirus; as a disinfectant against a number of different types of bacteria; and as a sanitizer
against certain types of bacteria that cause food borne illnesses. We are directing distribution efforts with respect to our disinfectant
group principally towards the marine, automotive, home restoration, pet care and agriculture markets, and to institutions such as schools.
Contract Filling and Blow Molded Bottles: We
blend and package a variety of chemical formulations to our customers’ specifications. In addition, we manufacture for sale
to various customers assorted styles of both PVC and HDPE blow molded bottles.
Manufacturing: We produce most
of our products at Kinpak’s manufacturing facilities in Montgomery, Alabama. In addition, we contract with various third- party
manufacturers to manufacture some of our products, which are manufactured to our specifications using our provided formulas. Each
third- party manufacturer enters into a confidentiality agreement with us.
We purchase raw materials from a variety of suppliers;
all raw materials used in manufacturing are readily available from alternative sources. We design our own packaging and supply our
outside manufacturers with the appropriate design or packaging. We believe that our internal manufacturing capacity and our arrangements
with our current outside manufacturers are adequate for our present needs.
In the event that arrangements with any third-party
manufacturer are discontinued, we believe that we will be able to locate substitute manufacturing facilities without a substantial adverse
effect on our manufacturing and distribution.
Marketing and Significant Customers:
Our branded and private label products are sold through national retailers such as Wal-Mart, Tractor Supply, West Marine and Bass Pro
Shops. Additionally, we market our products via online retailers such as Amazon. We also sell to national and regional distributors
that resell our products to specialized retail outlets. In the case of Performacide® disinfectant/sanitizing products,
we sell to both retailers as well as distributors that resell our products, in some cases under private labels, to end users principally
in the marine, automotive, home restoration, law enforcement and agriculture markets.
Net sales to each of three customers exceeded
10% of our consolidated net sales, and in the aggregate constituted approximately 43.7% and 41.5% of our consolidated net sales, for the
years ended December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, outstanding accounts receivable balances from our
three largest unaffiliated customers aggregated approximately 60.1% and 63.6% of our consolidated accounts receivable, respectively.
We market our products through both internal salesmen
and external sales representatives who work on an independent contractor commission basis. Our personnel also participate in sales
presentations and trade shows. In addition, we market our brands and products through advertising campaigns in national magazines,
on television, on the internet, in newspapers and through product catalogs. Our products are distributed primarily from Kinpak’s
manufacturing and distribution facility in Montgomery, Alabama. Since 2008, we have participated in a vendor managed inventory program
with one major customer. See Note 2 to the consolidated financial statements included in this report for additional information.
Backlog, seasonality, and selling terms:
We had no significant backlog of orders at December 31, 2021. We generally do not give customers the right to return products. The
majority of our products are non-seasonal and are sold throughout the year. Normal trade terms offered to customers range from 30
to 360 days. However, at times we offer extended payment terms or discount arrangements as purchasing incentives to customers. Historically,
these initiatives have not materially affected our overall profit margins.
Competition:
Competition with respect to our principal product
lines is described below. The principal elements of competition affecting all of our product lines are brand recognition, price,
service and the ability to deliver products on a timely basis.
Marine: We have several national and
regional competitors in the marine marketplace. We do not believe that any competitor or small group of competitors hold a dominant
market share. We believe that we can increase or maintain our market share through expenditures directed to our present advertising
and distribution channels.
Automotive: There are a large number
of companies, both national and regional, that compete with us. Many are more established and have greater financial resources than
we do. While our market share is small, the total market size is substantial. We seek to maintain and possibly increase our
market share through our present advertising and distribution channels.
Recreational Vehicle/Power Sports: We
compete with national and regional competitors. We do not believe that any competitor or small group of competitors hold a dominant
market share. We believe that we can increase or maintain our market share by utilizing advertising and distribution channels similar
to those we use in the marine market.
Outdoor Power Equipment/Lawn & Garden: We
compete with several established national and regional competitors. We do not believe that any competitor or small group of competitors
hold a dominant market share. We have attempted to make inroads in this market by emphasizing Star Tron®’s
unique formulation and by increasing our advertising and attendance at trade shows.
Disinfectant Group: There are a large number of companies that
compete with us, many of which are much larger, and have much greater financial resources than we do. We emphasize the effectiveness of
chlorine dioxide, coupled with the convenience in application of our products.
Trademarks: We have obtained
registered trademarks for Star brite®, Star Tron®, Performacide® and other trade
names used on our products. We view our trademarks as significant assets because they provide product recognition. We believe
that our trademarks provide protection in the geographic markets we serve, but we cannot assure that our intellectual property rights
can be successfully asserted in the future or will not be invalidated, circumvented or challenged.
Patents: We own several
patents, the most significant of which relate to a delivery system for use with products containing chlorine dioxide (the
“ClO2 Patents”). In 2021, we were issued a new patent for our ClO2 delivery system that
expires on July 8, 2039. See “Risk Factors - If we do not effectively utilize or successfully assert intellectual property
rights, our competitiveness could be materially adversely affected,” in Item 1A of this report for additional
information.
Governmental Regulation: We believe
that the high cost of acquiring federal and state licenses in order to sell chlorine dioxide products provide a high barrier to entry
for competitors.
New Product Development: We
continue to develop specialized products for the marine, automotive, recreational vehicle/power sports and outdoor power equipment/lawn
and garden markets. Expenditures for new product development have not been significant and are charged to operations in the year
incurred.
Personnel: At December 31,
2021, we had 195 full-time employees and five part-time employees. The following table provides information regarding personnel working
for the Company and its subsidiaries at December 31, 2021:
Location | |
Description | |
Number of Employees | |
Fort Lauderdale, Florida | |
Administrative, sales, and marketing | |
| 44 | 1 |
Fort Lauderdale, Florida | |
Manufacturing and distribution | |
| 6 | |
Montgomery, Alabama | |
Manufacturing and distribution | |
| 150 | 2 |
| |
| |
| 200 | |
1 Includes two part-time employees.
2 Includes three part-time employees.
Item 1A. Risk Factors
If we do not compete effectively, our business will suffer.
We confront aggressive competition in the sale
of our products. In each of the markets in which we sell our products, we compete with a number of national and regional competitors. Competition
in the automotive market is particularly intense, with many national and regional companies marketing competitive products. Many
of our competitors in the automotive market are more established and have greater financial resources than we do. Moreover, we confront
intense competition with respect to our Performacide® disinfectant, sanitizing and deodorizing products from a large number
of competitors, many of which are well established and have substantially greater financial resources than we do. Our inability to successfully
compete in our principal markets would have a material adverse effect on our financial condition, results of operations and cash flows.
Our business is, to a significant extent, dependent
on a small number of major customers, and the loss of any of these customers could adversely affect our financial condition, results of
operations and cash flows.
Net sales to each of three unaffiliated customers
exceeded 10% of our consolidated net sales, and in the aggregate constituted approximately 43.7% and 41.5% of our consolidated net sales,
for the years ended December 31, 2021 and 2020, respectively. The loss of any of these customers would have a material adverse effect
on our financial condition, results of operations and cash flows.
Our Chairman, President and Chief Executive
Officer is a majority shareholder who controls us, and his interests may conflict with or differ from the Company’s interests.
Peter G. Dornau, our Chairman, President
and Chief Executive Officer, together with a family entity he controls, owns approximately 50.6% of our common stock. As a result,
Mr. Dornau has the power to elect all of our directors and effectively has the ability to prevent any transaction that requires the
approval of our Board of Directors and our shareholders. Products that we manufacture and that are sold outside of the United States
and Canada are purchased from us and distributed by two companies owned by Mr. Dornau, which we refer to as the “affiliated
companies.” The affiliated companies also collectively own the rights to the Star brite® and Star Tron®
trademarks and related products outside of the United States and Canada. Sales to the affiliated companies aggregated approximately $2,373,000
and $2,212,000 during the years ended December 31, 2021 and 2020, respectively. In addition, we provided administrative services
and advances for business related expenditures to the affiliated companies. During the years ended December 31, 2021 and 2020, fees for
administrative services aggregated approximately $841,000 and $871,000, respectively, and amounts billed to the affiliated companies to
reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $123,000 and
$199,000, respectively. Receivables due from the affiliated companies in connection with product sales, administrative services,
and advances for business related expenditures totaled approximately $1,212,000 and $1,496,000 at December 31, 2021 and 2020, respectively.
The accounts receivable turnover ratio for the year ended December 31, 2021 with respect to sales to the affiliated companies was approximately
2.6 and with respect to administrative services and advances for business related expenditures was approximately 2.2. Management believes
that the sales and provision of administrative services to the affiliated companies do not involve more than normal credit risk.
We have entered into other transactions with entities
owned by Mr. Dornau. See Notes 4 and 10 to the consolidated financial statements included in this report for additional information.
Economic conditions can adversely affect our
business.
We are subject to risks arising from adverse
changes in general domestic and global economic conditions, including inflation, labor costs and availability, supply chain
problems, recession or economic slowdown and disruption of credit markets, which may impair the ability of our customers to satisfy
obligations due to us. In 2020, the world began experiencing an economic slowdown due to restrictions imposed related to the COVID-19
pandemic. We believe that in 2021 the COVID-19 pandemic did not adversely affect our
business. However, the pandemic is ongoing and potential economic problems caused by the pandemic and other factors could have a
material adverse effect on our business, results of operations, financial condition, cash flows, and stock price.
If we do not effectively utilize or successfully
assert intellectual property rights, our competitiveness could be materially adversely affected.
We rely on trademarks and trade names in connection
with our products, the most significant of which are Star brite® and Star Tron®. In addition, we own patents
we have viewed as providing some degree of competitive support for our Performacide® products. We rely on trademark, trade
secret, patent and copyright laws to protect our intellectual property rights. We cannot assure that these intellectual property
rights will be effectively utilized or, if necessary, successfully asserted. There is a risk that we will not be able to obtain
and perfect our own intellectual property rights, or, where appropriate, license from others intellectual property rights necessary to
support new product introductions. Our intellectual property rights, and any additional rights we may obtain in the future,
may be invalidated, circumvented or challenged, and the legal costs necessary to protect our intellectual property rights could be significant.
Our failure to perfect or successfully assert intellectual property rights could harm our competitive position and could have a material
adverse effect on our financial condition, results of operations and cash flows.
Our business involves the use of chemicals.
At our Kinpak facility we blend various chemicals that can cause explosions
or harmful gas to be released. Mishandling of chemicals can potentially result in people being hurt or killed, property damaged, and business
interruption.
Environmental matters may cause potential liability risks.
We must comply with various environmental laws
and regulations in connection with our operations, including those relating to the handling and disposal of hazardous wastes and the remediation
of contamination associated with the use and disposal of hazardous substances. A release of such substances due to accident
or intentional act could result in substantial liability to governmental authorities or to third parties. In addition, we are
subject to reporting requirements with respect to certain materials we use in our manufacturing operations. It is possible
that we could become subject to environmental liabilities in the future that could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Our business, results of operations, financial condition, cash flows,
and stock price could in the future be materially adversely affected by the ongoing COVID-19 pandemic.
The COVID-19 pandemic has caused substantial damage
to the national and global economies and remains a significant threat. The extent to which COVID-19 might impact our business, results
of operations, financial condition, cash flow, and stock price is highly uncertain and will depend on future developments. Such developments
may include the geographic spread and duration of the virus, the severity of the disease and the actions that may be taken by various
governmental authorities and other third parties in response to the outbreak.
Our global manufacturing facilities remain open,
though a range of external factors related to the pandemic that are not within our control, including the potential impact of the pandemic
on our workforce, could affect our ability to keep our manufacturing facilities fully operational. Additionally, global or national supply
chains may be affected if the pandemic persists for an extended period. Any decline or lower than expected demand in our served markets
could diminish demand for our products and services, which would adversely affect our financial condition, results of operations, cash
flow, and stock price. Moreover, the COVID-19 pandemic may adversely affect the financial condition of our customers and suppliers in
the future or their ability to purchase Company products, may delay customers’ purchasing decisions, result in a shift away from
discretionary products, and may result in longer payment terms or inability to collect customer payments. These issues may also materially
affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition and ability to
consummate future acquisitions.
If significant portions of our workforce are unable
to work effectively, including because of illness, quarantines or absenteeism; government actions; facility closures; work slowdowns or
stoppages; limited supplies or resources; or other circumstances related to COVID-19, our operations could be impacted. We may be unable
to perform fully on our customer obligations and we may incur liabilities and suffer losses as a result.
The duration and intensity of the impact of the
COVID-19 pandemic and any resulting disruption to our operations is uncertain but could have a material impact on our operations, cash
flows, and financial condition.
Our variable rate indebtedness exposes us to risks related to interest
rate fluctuation and matures in August 2024.
We have a revolving line of credit with a variable
interest rate. Interest on the revolving line of credit is payable at the one-month LIBOR rate plus 1.35% per annum, computed on
a 365/360 basis. At December 31, 2021, we did not have any borrowings outstanding under the revolving line of credit. However, if
we borrow amounts under the revolving line of credit in the future, and if interest rates were to increase significantly, our financial
condition, results of operations and cash flows could be materially adversely affected.
Weather conditions can adversely affect our
sales.
Our sales can be adversely affected by prolonged
cold winters which curtail boating activity and by natural disasters such as hurricanes, floods and tornados.
Trading in our common stock has been limited, and our stock price
could potentially be subject to substantial fluctuations.
Our common stock is listed on the NASDAQ Capital
Market, but trading in our stock has been limited. Our stock price could be affected substantially by a relatively modest volume
of transactions.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our executive offices and one of our manufacturing
facilities are located in Fort Lauderdale, Florida and are leased from an entity controlled by our Chairman, President and Chief Executive
Officer. The lease covers approximately 12,700 square feet of office, manufacturing, and warehouse space. The lease expires
in December 2023. See Note 4 to the consolidated financial statements included in this report for additional information.
Kinpak leases its Alabama manufacturing facilities
from The Industrial Development Board of the City of Montgomery, Alabama (the “IDB”). Kinpak entered into the lease in its
current form in connection with an industrial development bond financing related to the Expansion Project; Kinpak’s lease payments
are used to fund repayment of the IDB’s obligations under the bond it issued in connection with the industrial development bond
financing. See Note 8 to the consolidated financial statements included in this report for additional information. Kinpak inherited the
lease structure when it first acquired its facilities from its predecessor-in-interest in 1996. The lease provides that prior to the maturity
date of the bond, Kinpak may repurchase the facilities for $1,000 if the bond has been redeemed or fully paid. As a result of this Expansion
Project, the facilities were expanded to contain approximately 272,000 square feet of office, plant and warehouse space on 23 acres of
land. An additional expansion was completed in February of 2022, bringing the total square feet of the manufacturing facilities to exceed
370,000.
Item 3. Legal Proceedings
Not applicable
Item 4. Mine Safety Disclosures
Not applicable.
The accompanying notes are an integral part of these consolidated financial
statements.
The accompanying notes are an integral part of these consolidated financial
statements.
The accompanying notes are an integral part of these consolidated financial
statements.
The accompanying notes are an integral part of these consolidated financial
statements.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2021 AND 2020
Note 1 – Organization and Summary
of Significant Accounting Policies
Organization – The Company was incorporated
in November 1973 under the laws of the state of Florida and manufacturers, markets and distributes products, principally under the Star brite®
and Star Tron® brand names, for the marine, automotive, power sports, recreational vehicle and outdoor power equipment
markets in the United States and Canada. In addition, the Company produces private label formulations of many of its products for various
customers and provides custom blending and packaging services for these and other products. The Company also manufactures disinfectants,
sanitizers and deodorizers under the Performacide® and Star brite® brand names.
Basis of presentation and consolidation
– The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Revenue recognition – The
Company recognizes revenue based on Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers” (Topic 606). Under ASU 2014-09, revenue from a performance obligation satisfied at a point in time is
recognized at the point in time that the Company determines that the customer obtains control over the promised good or service. The
amount of revenue recognized reflects the consideration to which the Company expects to be entitled to in exchange for the promised
goods or services. Under ASU 2014-09, the Company’s performance obligation to its customers under agreements currently in
force is satisfied when the goods are shipped or picked up by the customer and title of the goods is transferred (generally upon
such shipment or pick up); with regard to a customer for which the Company’s inventory is held at the customer’s
warehouses, the Company’s performance obligation is deemed satisfied when the Company is notified of sales by the customer.
Sales allowances provided by the Company to customers are recorded as a reduction of net sales.
Leases - The Company accounts for leases
based on ASU 2016-02, “Leases” (Topic 842). Based on this standard, the Company determines if an agreement is a lease
at inception. Operating leases are included in operating lease – right to use, current portion of operating lease liability, and
operating lease liability, less current portion in the Company’s consolidated balance sheets. Finance leases are included in property,
plant, and equipment, net, current portion of long-term debt, net and long-term debt, less current portion and debt issuance costs in
the Company’s consolidated balance sheets.
As permitted under ASU 2016-02, the Company has
made an accounting policy election not to apply the recognition provisions of ASU 2016-02 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 December 31, 2021 and 2020.
Collectability of accounts receivable
– Trade accounts receivable at December 31, 2021 and 2020 are net of allowances for doubtful accounts aggregating
approximately $632,000 and $326,000, respectively. Such amounts are based on expected collectability of the trade accounts
receivable, after considering the Company’s historical collection experience, the length of time an account is outstanding,
the financial position of the customer, if known, and information provided by credit rating services. 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. During the years ended
December 31, 2021 and 2020, the Company recorded bad debt expense of approximately $311,000 and $197,000, respectively.
Inventories – Inventories are primarily
composed of raw materials and finished goods and are stated at the lower of cost, using the first-in, first-out method, or net realizable
value. 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.
Shipping and handling costs – All
shipping and handling costs incurred by the Company are included in cost of goods sold in the consolidated statements of operations. Shipping
and handling costs totaled approximately $2,287,000 and $1,456,000 for the years ended December 31, 2021 and 2020, respectively.
Advertising and promotion expense –
Advertising and promotion expense consists of advertising costs and marketing expenses, including catalog costs and expenses relating
to participation at trade shows. Advertising costs are expensed in the period in which the advertising occurs and totaled approximately
$4,025,000 and $2,980,000 in 2021 and 2020, respectively.
Property, plant and equipment – Property, plant and equipment is stated at cost, net of depreciation. Depreciation
is provided over the estimated useful lives of the related assets using the straight-line method. Depreciation expense totaled $1,184,445
(of which $1,086,183 is included in cost of goods sold and $98,262 is included in selling and administrative expenses) and $1,069,073
(of which $970,221 is included in cost of goods sold and $98,852 is included in selling and administrative expenses) for the years ended
December 31, 2021 and 2020, respectively.
Research and development costs –
Research and development costs are expensed as incurred and recorded in selling and administrative expenses in the consolidated statements
of operations. The Company incurred approximately $55,000 and $54,000 of research and development costs for the years ended December 31,
2021 and 2020, respectively.
Stock based compensation – The Company
records stock-based compensation in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 718, “Accounting for Stock Compensation,” which establishes accounting
standards for transactions in which an entity exchanges its equity instruments for goods or services. In accordance with guidance provided
under ASC Topic 718, the Company recognizes an expense for the fair value of its stock awards at the time of grant and the fair value
of its outstanding stock options as they vest, whether held by employees or others. At December 31, 2021, the Company had no outstanding
stock options.
Use of estimates – The preparation
of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of cash – During the
years ended and at December 31, 2021 and 2020, the Company had a concentration of cash in one bank in excess of prevailing insurance offered
through the Federal Deposit Insurance Corporation at such institution. Management does not consider the excess deposits to be a significant
risk.
Fair value of financial instruments –
ASC Topic 820, “Fair Value Measurements and Disclosures” defines “fair value” as the price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date.
ASC Topic 820 also sets forth a valuation hierarchy
of the inputs (assumptions that market participants would use in pricing an asset or liability) used to measure fair value. The hierarchy
prioritizes the three levels of inputs as follows:
|
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets. |
|
|
|
Level 2: Inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data through correlation or other means. |
|
|
|
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed data in connection with fair value measurements. |
The carrying amounts of the Company’s short-term
financial instruments, including cash, accounts receivable, accounts payable, certain accrued expenses and revolving line of credit, approximate
their fair value due to the relatively short period to maturity for these instruments. The fair value of long-term debt is based
on current rates at which the Company could borrow funds with similar remaining maturities; the carrying amount of the long-term debt
approximates fair value.
Impairment of long-lived assets –
Potential impairments of long-lived assets are reviewed when events or changes in circumstances indicate a potential impairment may exist. In
accordance with ASC Subtopic 360-10, “Property, Plant and Equipment – Overall,” impairment is determined when
estimated future undiscounted cash flows associated with an asset are less than the asset’s carrying value.
Income taxes – The Company records
income taxes under the asset and liability method. Under this method, the Company recognizes deferred income tax assets and liabilities
for the expected future consequences attributable to temporary differences between the financial reporting and tax bases of assets and
liabilities. These differences are measured using tax rates that are expected to apply to taxable income in the years in which those temporary
differences are recovered or settled. The Company recognizes in the consolidated statements of operations the effect on deferred income
taxes of a change in tax rates in the period in which the change is enacted.
The Company records a valuation allowance when
necessary to reduce its deferred tax assets to the net amount that the Company believes is more likely than not to be realized. The Company
considers available evidence, both positive and negative, and use judgments regarding past and future events, including operating results
and available tax planning strategies, in assessing the need for a valuation allowance.
The Company recognizes tax benefits from uncertain
tax positions only if the Company believes that it is more likely than not that the tax positions will be sustained on examination by
the taxing authorities based on the technical merits of the positions; otherwise, the Company establishes reserves for uncertain tax positions. The
Company adjusts reserves with respect to uncertain tax positions to address developments related to these positions, such as the closing
of a tax audit, the expiration of a statute of limitations or the refinement of an estimate. The provision for income taxes includes
any reserves with respect to uncertain tax positions that are considered appropriate, as well as the related net interest and penalties.
The Company has no uncertain tax positions as of December 31, 2021.
Intangible assets – The Company’s intangible assets
consist of trademarks, trade names, customer lists, product formulas, patents and royalty rights. At December 31, 2021, The Company had
intangible assets with a net book value of approximately $1,381,000, of which approximately $799,000 have finite lives and approximately
$582,000 have indefinite lives. The Company amortizes intangible assets with finite lives over the shorter of their estimated useful or
legal life. The useful life is reevaluated for each reporting period. The Company evaluates intangible assets with finite and indefinite
lives for impairment at least annually or when events or changes in circumstances indicate that an impairment may exist. The Company determined
that none of its intangible assets were impaired in 2021 or 2020.
Foreign currency translation – Assets
and liabilities of the Company’s Canadian subsidiary are translated from Canadian dollars to United States dollars at exchange rates
in effect at the balance sheet date. Income and expenses are translated at average exchange rates during the year. The translation
adjustments for the reporting period are included in the Company’s consolidated statements of comprehensive income, and the cumulative
effect of these adjustments are reported in the Company’s consolidated balance sheets as accumulated other comprehensive loss within
Shareholders’ Equity.
Earnings per share – Basic earnings
per share are computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share are computed assuming the exercise of dilutive stock options under the treasury stock method. See
Note 13.
Note 2 – Inventories
The composition of the Company’s inventories at December 31,
2021 and 2020 are as follows:
| |
2021 | | |
2020 | |
Raw materials | |
$ | 7,465,011 | | |
$ | 5,393,961 | |
Finished goods | |
| 9,669,073 | | |
| 8,072,176 | |
Inventories, gross | |
| 17,134,084 | | |
| 13,466,137 | |
| |
| | | |
| | |
Inventory reserves | |
| (314,831 | ) | |
| (290,381 | ) |
| |
| | | |
| | |
Inventories, net | |
$ | 16,819,253 | | |
$ | 13,175,756 | |
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 $1,051,000 and $629,000 at December 31, 2021 and 2020, respectively.
Note 3 – Property, Plant and Equipment
The Company’s property, plant and equipment at December 31, 2021
and 2020 consisted of the following:
| |
Estimated | |
| | |
| |
| |
Useful Life | |
2021 | | |
2020 | |
| |
| |
| | |
| |
Land | |
| |
$ | 278,325 | | |
$ | 278,325 | |
Building and Improvements | |
30 years | |
| 9,710,244 | | |
| 9,563,406 | |
Manufacturing and warehouse equipment | |
6-20 years | |
| 12,858,638 | | |
| 11,959,563 | |
Office equipment and furniture | |
3-5 years | |
| 1,805,002 | | |
| 1,880,387 | |
Leasehold improvements | |
10-15 years | |
| 587,183 | | |
| 587,183 | |
Finance leases – right to use | |
5 years | |
| 113,741 | | |
| 113,741 | |
Vehicles | |
3 years | |
| 10,020 | | |
| 10,020 | |
Construction in process (1) | |
| |
| 6,633,112 | | |
| 464,203 | |
Property, plant and equipment, gross | |
| |
| 31,996,265 | | |
| 24,856,828 | |
| |
| |
| | | |
| | |
Less accumulated depreciation | |
| |
| (15,636,047 | ) | |
| (14,754,866 | ) |
| |
| |
| | | |
| | |
Property, plant and equipment, net | |
| |
$ | 16,360,218 | | |
$ | 10,101,962 | |
| (1) | The Company’s wholly owned subsidiary, KINPAK Inc. (“Kinpak”)
is near completion of an expansion of its manufacturing and distribution facilities by an additional 69,000 square feet. on its 23-acre site.
This planned expansion will bring the total facility square footage to exceed 370,000 square feet. of dedicated space for production, warehousing,
and distribution. This is the second major expansion of their facilities in less than five years. The Company expects the expansion to
be completed during the first half of 2022, although it may be delayed due to supply chain issues. |
Note 4 – Leases
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 was approximately $97,000 and $98,000
for the years ended December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had a right to use asset and
a corresponding liability of $182,543 and $268,920, respectively related to the operating lease. Set forth below is a schedule of future
minimum rent payments under the operating lease.
Years ending December 31, |
2022 | |
$ | 94,800 | |
2023 | |
| 94,800 | |
Total future minimum lease payments | |
| 189,600 | |
Less imputed interest | |
| (7,057 | ) |
Total operating lease liability | |
$ | 182,543 | |
The Company’s two finance leases relate
to office equipment. See Note 3 for information regarding the Company’s finance lease right to use assets and Note 8 for information
regarding the finance lease payment schedule.
Costs incurred with respect to the Company’s
leases during 2021 and 2020 are set forth below.
| |
2021 | | |
2020 | |
Operating lease expense | |
$ | 97,356 | | |
$ | 98,086 | |
Finance lease amortization | |
| 21,161 | | |
| 22,167 | |
Finance lease interest | |
| 1,589 | | |
| 1,137 | |
Total lease expense | |
$ | 120,106 | | |
$ | 121,390 | |
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 December 31, 2021 and 2020 are set forth below:
| |
December 31, 2021 | |
Remaining lease term – operating lease | |
| 2.0 years | |
Weighted average remaining lease term – finance leases | |
| 3.7 years | |
Discount rate – operating lease | |
| 3.7 | % |
Weighted average discount rate – finance leases | |
| 1.8 | % |
| |
December 31, 2020 | |
Remaining lease term – operating lease | |
| 3.0 years | |
Weighted average remaining lease term – finance leases | |
| 4.6 years | |
Discount rate – operating lease | |
| 3.7 | % |
Weighted average discount rate – finance leases | |
| 1.8 | % |
Note 5 – Intangible Assets
The Company’s intangible assets at December 31, 2021 and 2020
consisted of the following:
December 31, 2021
Intangible Assets | |
Cost | | |
Accumulated Amortization | | |
Net | |
Patents | |
$ | 622,733 | | |
$ | 596,980 | | |
$ | 25,753 | |
Trade names and trademarks | |
| 1,715,325 | | |
| 665,440 | | |
| 1,049,885 | |
Customer list | |
| 584,468 | | |
| 387,105 | | |
| 197,363 | |
Product formulas | |
| 292,234 | | |
| 193,554 | | |
| 98,680 | |
Royalty rights | |
| 160,000 | | |
| 151,029 | | |
| 8,971 | |
Total intangible assets | |
$ | 3,374,760 | | |
$ | 1,994,108 | | |
$ | 1,380,652 | |
December 31, 2020
Intangible Assets | |
Cost | | |
Accumulated Amortization | | |
Net | |
Patents | |
$ | 622,733 | | |
$ | 544,644 | | |
$ | 78,089 | |
Trade names and trademarks | |
| 1,715,325 | | |
| 626,413 | | |
| 1,088,912 | |
Customer list | |
| 584,468 | | |
| 270,212 | | |
| 314,256 | |
Product formulas | |
| 292,234 | | |
| 135,107 | | |
| 157,127 | |
Royalty rights | |
| 160,000 | | |
| 133,085 | | |
| 26,915 | |
Total intangible assets | |
$ | 3,374,760 | | |
$ | 1,709,461 | | |
$ | 1,665,299 | |
Amortization expense related to intangible assets
aggregated $284,647 and $284,648 for the years ended December 31, 2021 and 2020, respectively.
Note 6 – Revolving Line of Credit
On August
6, 2021, the Company and Regions Bank (“the “Lender”) entered into a Business Loan Agreement (the “Business Loan
Agreement”), effective as of July 30, 2021, under which the Company was provided a revolving line of credit in the amount of $6,000,000. The Business Loan Agreement supersedes the Company’s previous $6,000,000 revolving line of credit
from the Lender, entered into on August 31, 2018, that was scheduled to expire on August 31, 2021. The revolving line of credit under
the Business Loan Agreement is evidenced by a promissory note and is secured principally by the Company’s inventory and accounts
receivable.
The Business
Loan Agreement bears interest at a variable annual rate of LIBOR plus 1.35%, computed on a 365/360 basis. All outstanding principal
plus all accrued unpaid interest is due upon Lender’s demand or when the Business Loan Agreement expires on August 30, 2024.
At December 31, 2021 and 2020, the Company had
no borrowings under its then-existing revolving line of credit provided by the Business Loan Agreements.
Note 7 – Accrued Expenses Payable
Accrued expenses payable at December 31,
2021 and 2020 consisted of the following:
| |
2021 | | |
2020 | |
| |
| | |
| |
Accrued customer promotions | |
$ | 34,110 | | |
$ | 342,481 | |
Accrued payroll, commissions, and benefits | |
| 498,975 | | |
| 440,302 | |
Other | |
| 367,897 | | |
| 360,042 | |
| |
| | | |
| | |
Total accrued expenses payable | |
$ | 900,982 | | |
$ | 1,142,825 | |
Note 8 – Long Term Debt
Term
Loan
On July
30, 2021, Kinpak and Regions Bank (the “Lender”) entered into a Credit Agreement (the “Credit Agreement”),
effective as of July 20, 2021, under which the Company was extended a term loan (the “Term Loan”) in the original principal
amount of $5,000,000. The Company is using the proceeds of the Term Loan for a 69,000 square foot expansion
of Kinpak’s manufacturing, warehouse and distribution facilities in Montgomery, Alabama. The Term Loan is evidenced by a promissory
note (the “Note”) and is secured by a second priority mortgage of the assets pledged in Kinpak’s industrial development
bond financing obtained on September 26, 2017 (see below for further information).
The Company
has unconditionally guaranteed the payment to the Lender promptly when due, by acceleration or otherwise, of all obligations of Kinpak
to the Lender.
The Term
Loan bears interest at an annual rate of 3.25% and is due in 119 monthly installments of $35,249 each, plus interest then accrued,
beginning on August 20, 2021. The final installment shall be due and payable on July 20, 2031 in an amount equal to all principal and
interest then remaining unpaid. Assuming that all amounts due prior to that date are paid in a timely manner, the final installment would
be $1,977,047.
The Credit
Agreement provides that prepayments on the Term Loan are subject to a prepayment penalty of 5% during the first year the Term Loan
is outstanding, with such penalty declining 1% each year thereafter until there is no prepayment penalty after five years. However,
the Lender has agreed to waive the prepayment provisions.
The Credit
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 period current maturities of Company long term debt plus
interest expense incurred over the most recently completed four fiscal quarters) of at least 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. The Credit Agreement also requires that the majority shareholder’s
ownership does not drop below 50% of the outstanding shares of Kinpak.
The Credit
Agreement contains cross-default and cross-collateral provisions relating to any other indebtedness with the Lender, including without
limitation the Company’s obligations under its $6,000,000 revolving line of credit from the Lender.
The Credit
Agreement also contains negative covenants restricting the Company’s ability to, among other things, create or assume indebtedness
for borrowed money exceeding $250,000 other than trade payables incurred in the normal course of business, create liens other than
permitted liens (as defined in the Credit Agreement), acquire an interest in another entity or incur any obligation as surety or guarantor
other than in the ordinary course of business.
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. The amount of the final payment was originally
scheduled to be $1,799,201, however at December 31, 2021 the final payment is scheduled to be $1,654,391 because the Company has made
additional debt payments. 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. At December 31, 2021, there
are no unused proceeds in the custodial account.
Payment of amounts due and payable under the Bond
and other related agreements are guaranteed by the Company and its other consolidated subsidiaries. In connection with a guarantee agreement
under which the Company provided its guarantee, the Company is subject to certain covenants, including financial covenants requiring that
the Company maintain (i) a minimum fixed charge ratio (generally, the ratio of (A) EBITDA minus the sum of Company’s distributions
to its shareholders, taxes paid and unfunded capital expenditures to (B) current maturities of Company long-term debt plus interest expense)
of 1.2 to 1, tested quarterly, and (ii) a ratio of funded debt (as defined in the guaranty agreement) divided by the sum of net worth
and funded debt of 0.75 to 1, tested quarterly. For purposes of computing the fixed charge coverage ratio, “EBITDA” generally
is defined as net income before taxes and depreciation expense plus amortization expense, plus interest expense, plus non-recurring and/or
non-cash losses and expenses, minus non-recurring and/or non-cash gains and income; “unfunded capital expenditures” generally
is defined as capital expenditures made from Company funds other than funds borrowed through term debt incurred to finance such capital
expenditures. At December 31, 2021, the Company was in compliance with these financial covenants.
The Company incurred debt financing costs of $196,095
in connection with the financing. These costs are shown as a reduction of the debt balance and are being amortized under the effective
interest method.
Other Long- Term Obligations
In connection with the Company’s agreement
to purchase assets of Snappy Marine, 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®)
$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, was recorded as interest expense over the 23 months. This obligation was paid in full on November 15,
2021.
On June
22, 2020, the Company entered into a lease agreement with Canon Solutions America, Inc. to lease office equipment. The lease obligates
the Company to pay $100,009 in 63 equal monthly payments of $1,587. The lease is classified as a finance lease. The Company recorded a
lease liability which is included in long term debt and a corresponding right to use asset that is included in property, plant and equipment
of $96,039 based on a discount rate of 1.53%.
At December 31, 2021 and 2020, the Company was
obligated under lease agreements covering office equipment utilized in the Company’s operations (inclusive of the lease referenced
in the preceding paragraph). The office equipment leases, aggregating approximately $79,000 and $100,000 at December 31, 2021 and 2020,
respectively, have maturities through 2025 and carry interest rates ranging from approximately 1.53% to 3.86% per annum. The office equipment
leases are classified as finance leases. During the years ended December 31, 2021 and 2020, the Company paid $22,750 ($21,161 principal
and $1,589 interest) and $23,304 ($22,167 principal and $1,137 interest), respectively, under the lease agreements.
The following table provides information regarding
the Company’s long-term debt at December 31, 2021 and 2020:
| |
Current Portion | | |
Long Term Portion | |
| |
December 31, 2021 | | |
December 31, 2020 | | |
December 31, 2021 | | |
December 31, 2020 | |
Term loan | |
$ | 265,918 | | |
$ | - | | |
$ | 4,622,204 | | |
$ | - | |
Obligations related to industrial development bond financing | |
| 276,036 | | |
| 263,881 | | |
| 3,057,773 | | |
| 3,454,904 | |
Note payable related to Snappy Marine asset acquisition | |
| 193,660 | | |
| 188,187 | | |
| 115,558 | | |
| 309,218 | |
Obligation related to Check Corporation asset acquisition | |
| - | | |
| 47,082 | | |
| - | | |
| - | |
Office equipment finance leases | |
| 21,554 | | |
| 21,160 | | |
| 57,292 | | |
| 78,847 | |
Total principal of long- term debt | |
| 757,168 | | |
| 520,310 | | |
| 7,852,827 | | |
| 3,842,969 | |
Debt issuance costs | |
| (20,637 | ) | |
| (19,616 | ) | |
| (101,938 | ) | |
| (112,789 | ) |
Total long- term debt | |
$ | 736,531 | | |
$ | 500,694 | | |
$ | 7,750,889 | | |
$ | 3,730,180 | |
Required principal payments under the Company’s
industrial development bond financing and other long- term obligations are set forth below:
Year ending December 31, | |
| |
2022 | |
$ | 757,168 | |
2023 | |
| 697,082 | |
2024 | |
| 596,685 | |
2025 | |
| 612,269 | |
2026 | |
| 615,892 | |
Thereafter | |
| 5,330,899 | |
Total | |
$ | 8,609,995 | |
Note 9 – Income Taxes
The components of the Company’s provision for income taxes for
the years ended December 31, 2021 and 2020 are as follows:
| |
2021 | | |
2020 | |
Federal – current | |
$ | 2,272,796 | | |
$ | 2,475,632 | |
Federal – deferred | |
| (31,032 | ) | |
| 65,745 | |
State – current | |
| 66,016 | | |
| 71,147 | |
State – deferred | |
| (1,463 | ) | |
| 3,099 | |
Total provision for income taxes | |
$ | 2,306,317 | | |
$ | 2,615,623 | |
The reconciliation of the provision for income
taxes at the statutory rate to the reported provision for income taxes is as follows:
| |
2021 | | |
% | | |
2020 | | |
% | |
Income Tax computed at statutory rate | |
$ | 2,249,160 | | |
| 21.0 | % | |
$ | 2,568,784 | | |
| 21.0 | % |
State tax, net of federal benefit | |
| 48,480 | | |
| 0.4 | % | |
| 67,569 | | |
| 0.5 | % |
Share based compensation | |
| - | | |
| 0.0 | % | |
| (2,302 | ) | |
| (0.0 | )% |
Permanent adjustments | |
| 7,845 | | |
| 0.1 | % | |
| 9,679 | | |
| 0.1 | % |
Tax credits and other | |
| 832 | | |
| 0.0 | % | |
| (28,107 | ) | |
| (0.2 | )% |
Provision for income taxes | |
$ | 2,306,317 | | |
| 21.5 | % | |
$ | 2,615,623 | | |
| 21.4 | % |
The Company’s deferred tax liability consisted
of the following at December 31, 2021 and 2020:
| |
2021 | | |
2020 | |
Deferred tax liability | |
| | |
| |
Inventory | |
$ | 120,208 | | |
$ | 63,855 | |
Trade accounts receivable allowances | |
| 139,059 | | |
| 71,678 | |
Depreciation and amortization | |
| (606,990 | ) | |
| (515,751 | ) |
Total net deferred tax liability | |
$ | (347,723 | ) | |
$ | (380,218 | ) |
Note 10 – Related Party Transactions
The Company sells products to companies affiliated
with Peter G. Dornau, who is the Company’s Chairman, President and Chief Executive Officer. The affiliated companies resell, outside
of the United States and 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. Sales to the affiliated
companies aggregated approximately $2,373,000 and $2,212,000 for the years ended December 31, 2021 and 2020, respectively; fees for administrative
services aggregated approximately $841,000 and $871,000, respectively, for such years; and amounts billed to the affiliated companies to reimburse the
Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $123,000 and $199,000 during
the years ended December 31, 2021 and 2020, respectively. The Company had accounts receivable from the affiliated companies in connection
with the product sales, administrative services and business-related expenditures aggregating approximately $1,212,000 and $1,496,000
at December 31, 2021 and 2020, 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 approximately $85,000 ($48,000 for research and development, $32,000 for charter boat services that the
Company used to provide sales incentives for customers and $5,000 for the production of television commercials) and $77,000 ($48,000 for
research and development, $9,000 for charter boat services that the Company used to provide sales incentives for customers, and $20,000
for the production of television commercials) for the years ended December 31, 2021 and 2020, respectively. Expenditures for the research
and development services are included in the consolidated statements of operations within selling and administrative expenses. Expenditures
for the charter boat services and television production services are included in the consolidated statements of operations within advertising
and promotion expenses.
The Company leases office and warehouse facilities
in Fort Lauderdale, Florida from an entity controlled by its Chairman, President and Chief Executive Officer. See Note 4
for a description of the lease terms.
A director of the Company is Regional Executive
Vice President of an insurance broker through which the Company sources most of its insurance needs. During the years ended December
31, 2021 and 2020, the Company paid an aggregate of approximately $1,933,000 and $1,365,000, respectively, in insurance premiums on policies
obtained through the insurance broker.
Note 11 – Stock Options and Awards
On May 29, 2015, the Company’s shareholders
approved the Ocean Bio-Chem, Inc. 2015 Equity Compensation Plan (the “Plan”). The Plan provides for grants of several types
of awards at the discretion of the Equity Grant Committee of the Company’s Board of Directors, including stock options, stock units,
stock awards, stock appreciation rights and other stock-based awards. The Plan authorizes the issuance of 630,000 shares of Company common
stock, subject to anti-dilution adjustments upon the occurrence of certain events affecting the common stock. During 2021 and 2020, the
Company granted stock awards under the Plan aggregating 36,600 and 25,150 shares of common stock, respectively, to officers, key employees,
and directors. Following the withholding of an aggregate of 3,500 and 1,456 shares of common stock, respectively, in connection with a
tax withholding feature of the Plan, 26,700 and 23,694 shares were issued to the award recipients, during 2021 and 2020, respectively. The
shares were fully expensed in the period in which they were awarded. Except for 6,400 shares awarded in 2021 that vested on January 1,
2022, the shares vested immediately upon issuance. Compensation expense related to the stock awards was $407,860 and $312,610 in 2021
and 2020, respectively. The value of the shares the Company withheld for taxes related to the stock awards was $37,800 and $19,991 in
2021 and 2020, respectively. At December 31, 2021, 117,250 shares remained available for future issuance under the Plan. As a result
of the adoption of the Plan, no further stock awards will be made under the Company’s equity compensation plans previously approved
by its shareholders (the “Prior Plans”).
Prior to the May 29, 2015 effective date of the
Plan, stock options were granted under the Prior Plans. The Company had no outstanding options under the Prior Plans at December 31, 2021
and 2020. The last tranche of non-qualified options was exercised before their expiration date of April 25, 2020. There was
no compensation expense attributable to stock options recognized during 2021 and 2020, and at December 31, 2021 and 2020, there was no
unrecognized compensation cost related to share based compensation arrangements
During 2020, stock options to purchase an aggregate
of 20,000 shares of common stock were exercised. The Company received a total of $20,700, withheld 4,704 shares in connection with the
net exercise feature of the stock options and issued an aggregate of 15,296 shares to the option holders who exercised their options.
Note 12 – Customer Concentration
During the years ended December 31, 2021 and 2020,
the Company had net sales to each of three major customers that constituted in excess of 10% of its net sales. Net sales to these three
customers respectively represented approximately 43.7% (16.8%, 13.7%, and 13.2%) and 41.5% (16.0%, 15.0%, and 10.5%) of the Company’s
net sales, respectively, for the years ended December 31, 2021 and 2020.
At December 31, 2021 and 2020, 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 60.1% (22.2%, 19.0%, and 18.9%) and 63.6% (28.8%, 21.1%, and 13.7%) of the Company’s gross trade
accounts receivable, respectively, at December 31, 2021, and 2020.
Note 13 – Earnings Per Share
Basic earnings per share are calculated by dividing
net income by the weighted average number of shares outstanding during the reporting period. Diluted earnings per share reflect additional
dilution from potential common stock issuable upon the exercise of outstanding stock options. The following table sets forth the
computation of basic and diluted earnings per common share, as well as a reconciliation of the weighted average number of common shares
outstanding to the weighted average number of shares outstanding on a diluted basis.
| |
Years Ended December 31, | |
| |
2021 | | |
2020 | |
Earnings per common share –Basic | |
| | |
| |
| |
| | |
| |
Net income | |
$ | 8,403,968 | | |
$ | 9,616,683 | |
| |
| | | |
| | |
Weighted average number of common shares outstanding | |
| 9,487,016 | | |
| 9,460,659 | |
| |
| | | |
| | |
Earnings per common share – Basic | |
$ | 0.89 | | |
$ | 1.02 | |
| |
| | | |
| | |
Earnings per common share – Diluted | |
| | | |
| | |
| |
| | | |
| | |
Net income | |
$ | 8,403,968 | | |
$ | 9,616,683 | |
| |
| | | |
| | |
Weighted average number of common shares outstanding | |
| 9,487,016 | | |
| 9,460,659 | |
| |
| | | |
| | |
Dilutive effect of employee stock-based awards | |
| - | | |
| 3,687 | |
Weighted average number of common shares outstanding – Diluted | |
| 9,487,016 | | |
| 9,464,346 | |
| |
| | | |
| | |
Earnings per common share – Diluted | |
$ | 0.89 | | |
$ | 1.02 | |
The Company had no stock options outstanding at
December 31, 2021 and 2020, respectively that were anti-dilutive and therefore not included in the diluted earnings per common share calculation.
Note 14 – Cash Dividends
The Company’s board of directors declared the following cash
dividends during the years ended December 31, 2021 and 2020:
Year ended December 31, 2021
Declaration Date | |
Type | |
Record Date | |
Payment Date | |
Dividends Per Share | | |
Amount | |
February 25, 2021 | |
Quarterly | |
March 11, 2021 | |
March 25, 2021 | |
$ | 0.03 | | |
$ | 284,454 | |
May 21, 2021 | |
Quarterly | |
June 4, 2021 | |
June 18, 2021 | |
| 0.03 | | |
| 284,454 | |
August 26, 2021 | |
Quarterly | |
September 9, 2021 | |
September 23, 2021 | |
| 0.03 | | |
| 284,574 | |
November 22, 2021 | |
Quarterly | |
December 6, 2021 | |
December 21, 2021 | |
| 0.03 | | |
| 285,255 | |
Total | |
| |
| |
| |
$ | 0.12 | | |
$ | 1,138,737 | |
Year ended December 31, 2020
Declaration Date | |
Type | |
Record Date | |
Payment Date | |
Dividends Per Share | | |
Amount | |
May 26, 2020 | |
Special | |
June 9, 2020 | |
June 23, 2020 | |
$ | 0.02 | | |
$ | 189,242 | |
May 26, 2020 | |
Quarterly | |
June 9, 2020 | |
June 23, 2020 | |
| 0.02 | | |
| 189,242 | |
August 26, 2020 | |
Quarterly | |
September 9, 2020 | |
September 23, 2020 | |
| 0.02 | | |
| 189,242 | |
November 23, 2020 | |
Quarterly | |
December 3, 2020 | |
December 17, 2020 | |
| 0.02 | | |
| 189,636 | |
Total | |
| |
| |
| |
$ | 0.08 | | |
$ | 757,362 | |
Note -15 – Recent Accounting Pronouncements
Accounting Guidance Adopted by the Company
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. The Company
adopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated
financial statements.
F-22
FL
The Company’s wholly owned subsidiary, KINPAK Inc. (“Kinpak”) is near completion of an expansion of its manufacturing and distribution facilities by an additional 69,000 square feet. on its 23-acre site. This planned expansion will bring the total facility square footage to exceed 370,000 square feet. of dedicated space for production, warehousing, and distribution. This is the second major expansion of their facilities in less than five years. The Company expects the expansion to be completed during the first half of 2022, although it may be delayed due to supply chain issues.
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