OBCI Ocean Bio Chem Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interim reporting

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

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

The financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.

The information included in this Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Use of estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

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 $712,000 and $1,051,000 at June 30, 2022 and December 31, 2021, respectively.

Depreciation expense totaled $384,976 (of which $359,949 is included in cost of goods sold and $25,027 is included in selling and administrative expenses) and $292,781 (of which $268,231 is included in cost of goods sold and $24,550 is included in selling and administrative expenses) for the three months ended June 30, 2022 and 2021, respectively, and $713,869 (of which $663,941 is included in cost of goods sold and $49,928 is included in selling and administrative expenses) and $574,310 (of which $525,371 is included in cost of goods sold and $48,939 is included in selling and administrative expenses) for the six months ended June 30, 2022 and 2021, respectively.

The Company has one operating lease and two finance leases.

Under the operating lease, the Company leases its executive offices and warehouse facilities in Fort Lauderdale, Florida from an entity controlled by Peter G. Dornau, the Company’s Chairman, President and Chief Executive Officer. The lease, as extended, expires on December 31, 2023. The lease requires an annual minimum base rent of $94,800 and provides for a maximum annual 2% increase in subsequent years, although the entity has not raised the minimum base rent since the Company entered into a previous lease agreement in 1998. Additionally, the leasing entity is entitled to reimbursement of all taxes, assessments, and any other expenses that arise from ownership. Each of the parties to the lease has agreed to review the terms of the lease every three years at the request of the other party. Operating lease expense was $24,554 and $24,339 for the three months ended June 30, 2022 and 2021, respectively, and $49,107 and $48,678 for the six months ended June 30, 2022 and 2021, respectively.  At June 30, 2022 and December 31, 2021, the Company had a right to use asset and a corresponding liability of $138,153 and $182,543, respectively, related to the operating lease. Set forth below is a schedule of future minimum rent payments under the operating lease.

The Company’s two finance leases relate to office equipment. See Note 3 for information regarding the carrying value of the Company’s finance lease right to use assets and Note 7 for information regarding the finance lease payment schedule.

Expenses incurred with respect to the Company’s leases during the three and six months ended June 30, 2022 and 2021 are set forth below.

The remaining lease term with respect to the operating lease, weighted average remaining lease term with respect to the finance leases and discount rate with respect to the operating lease and finance leases at June 30, 2022 and December 31, 2021 are set forth below:

The Company’s intangible assets at June 30, 2022 and December 31, 2021 consisted of the following:

June 30, 2022

Amortization expense related to intangible assets was $70,939 and $71,162 for the three months ended June 30, 2022 and 2021, respectively, and $141,908 and $142,323 for the six months ended June 30, 2022 and 2021, respectively.

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 Six Million Dollars ($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.

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

At June 30, 2022 and December 31, 2021, the Company had borrowings of $3,459,500 and $0, respectively, under the revolving line of credit provided by the current and former Business Loan Agreements.

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 Five Million Dollars ($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 have been used in full as of June 30, 2021, principally to pay or reimburse costs relating to the expansion of Kinpak’s manufacturing, warehouse and distribution facilities in Montgomery, Alabama, as well as the purchase and installation of associated machinery and equipment (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 June 30, 2022 the final payment is scheduled to be $1,547,739 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.

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 the 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 1.20 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 June 30, 2022, 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 over the life of the Bond.

Other Long-Term Obligations

In connection with the Company’s agreement to purchase assets of Snappy Marine, Inc. (“Snappy Marine”) on July 13, 2018, the Company provided to Snappy Marine a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). The note is payable in equal installments of $16,667 over a 60- month period that commenced on August 1, 2018, with a final payment due and payable on July 1, 2023. If the note is prepaid in full, the entire outstanding balance of the note (including all unpaid amounts allocated to interest over the remaining term of the note) must be paid.

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 June 30, 2022 and December 31, 2021, 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 $68,000 and $79,000 at June 30, 2022 and December 31, 2021, 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 three months ended June 30, 2022 and 2021, the Company paid $5,687 ($5,377 principal and $310 interest) and $5,689 ($5,277 principal and $412 interest), respectively, and during the six months ended June 30, 2022 and 2021, the Company paid $11,374 ($10,727 principal and $647 interest) and $11,376 ($10,531 principal and $845 interest), respectively, under the lease agreements.

The following table provides information regarding the Company’s long-term debt at June 30, 2022 and December 31, 2021:

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

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 $452,000 and $543,000 for the three months ended June 30, 2022 and 2021, respectively, and approximately $944,000 and $1,056,000 for the six months ended June 30, 2022 and 2021, respectively. Fees for administrative services aggregated approximately $343,000 and $289,000 for the three months ended June 30, 2022 and 2021, respectively, and approximately $531,000 and $457,000 for the six months ended June 30, 2022 and 2021, respectively. Amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $29,000 and $27,000 during the three months ended June 30, 2022 and 2021, respectively, and approximately $57,000 and $63,000 during the six months ended June 30, 2022 and 2021, respectively.  The Company had accounts receivable from the affiliated companies in connection with the product sales, administrative services and business- related expenditures aggregating approximately $1,494,000 and $1,212,000 at June 30, 2022 and December 31, 2021, 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 $14,000 ($12,000 for research and development services and $2,000 for charter boat services that the Company used to provide sales incentives to customers) and $21,000 ($12,000 for research and development services, $7,000 for charter boat services that the Company used to provide sales incentives to customers and $2,000 for the production of television commercials ) for the three months ended June 30, 2022 and 2021, respectively, and $49,000 ($24,000 for research and development services, $8,000 for charter boat services that the Company used to provide sales incentives for customers and $17,000 for the production of television commercials ) and $44,000 ($24,000 for research and development services, $14,000 for charter boat services that the Company used to provide sales incentives for customers and $6,000 for the production of television commercials) for the six months ended June 30, 2022 and 2021, respectively. Expenditures for the research and development services are included in the condensed consolidated statements of operations within selling and administrative expenses. Expenditures for the charter boat services are included in the condensed 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.

See Note 13, Merger Agreement, for a discussion of certain transaction relating to the above-described entities.

A director of the Company is Regional Executive Vice President of an insurance broker through which the Company sources most of its insurance needs.  During the three months ended June 30, 2022 and 2021, the Company paid an aggregate of approximately $355,000 and $432,000, respectively, and during the six months ended June 30, 2022 and 2021, the Company paid an aggregate of approximately $638,000 and $829,000, respectively in insurance premiums on policies obtained through the insurance broker.

The Company did not have any potentially dilutive securities during the three and six months ended June 30, 2022 and 2021. Therefore, the Company’s earnings per share are calculated by dividing net income by the weighted average number of shares outstanding during the reporting period.

No stock compensation expense was incurred during the three and six months ended June 30, 2022. Stock compensation expense during the three and six months ended June 30, 2021 was $55,780, all of which relates to the shares of Company common stock issued to the Company’s non-employee directors as part of their compensation for service on the Board of Directors. At June 30, 2022, there were no outstanding stock options or unrecognized compensation expense related to stock options. 

Six months ended June 30, 2021 

During the three months ended June 30, 2022, the Company had net sales to each of two customers that constituted at least of 10% of its net sales. Net sales to these two customers represented approximately 43.0% (24.8% and 18.2%) of the Company’s net sales for the three months ended June 30, 2022.

During the three months ended June 30, 2021, the Company had net sales to each of three customers that constituted at least of 10% of its net sales. Net sales to these three customers represented approximately 47.1% (18.6%, 18.5% and 10.0%) of the Company’s net sales for the three months ended June 30, 2021.

During the six months ended June 30, 2022 and 2021, the Company had net sales to each of two customers that constituted at least of 10% of its net sales. Net sales to these two customers respectively represented approximately 41.0% (20.8% and 20.2%) and 39.8% (23.5% and 16.3%) of the Company’s net sales, respectively, for the six months ended June 30, 2022 and 2021.

At June 30, 2022 and December 31, 2021, 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 64.1% (31.1%, 21.6%, and 11.4%) and 60.1% (22.2%, 19.0%, and 18.9%) of the Company’s gross trade accounts receivable at June 30, 2022 and December 31, 2021, respectively.

On June 22, 2022, the Company announced that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated as of June 21, 2022, with OneWater Marine Inc., a Delaware corporation (“Parent”), and OBCMS, Inc., a Florida corporation, and a wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company (the “Merger”) with the Company continuing as the surviving corporation (the “Surviving Corporation”) and wholly owned subsidiary of Parent following the effectiveness of the Merger.

At the effective time of the Merger (the “Effective Time”):

Entry into the Merger Agreement has been unanimously approved by the board of directors of the Company, based in part on the recommendation of a special committee of the board of directors composed entirely of directors who are not parties to the Merger directly or indirectly, other than as a result of being a shareholder of the Company, and who have no direct or indirect material financial interest or other material interest in the Merger.

Following execution of the Merger Agreement on June 21, 2022, holders of a majority of the issued and outstanding shares of Company common stock (the “Consenting Shareholders”) duly executed and delivered to the Company a written consent (the “Written Consent”), approving and adopting the Merger Agreement and the transactions contemplated thereby, including the Merger. No further approval of the Company’s shareholders is required to adopt the Merger Agreement or will be sought. As a result of receipt of the Written Consent, the Company is prohibited from engaging in any further discussions or solicitations regarding an alternative potential acquisition of the Company.

The consummation of the Merger is subject to customary closing conditions, including (i) receiving the approval of holders of a majority of the voting power of the outstanding Company common stock, which approval was effected after execution of the Merger Agreement through the Written Consent, (ii) the absence of legal restraints preventing the consummation of the Merger, (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iv) the payoff of certain indebtedness of the Company and (v) the closing or satisfaction or waiver of the closing conditions of transactions in which (A) Peter G. Dornau, the Chairman of the Board, President and Chief Executive Officer of the Company, and Mr. Dornau’s wife, will, pursuant to an equity purchase agreement entered into in connection with the Merger Agreement, sell to an affiliate of Parent and Merger Sub all of the issued and outstanding shares of common stock of Star Brite Europe, Inc. for an aggregate purchase price of $7,000,000, subject to certain adjustments and (B) an entity of which Mr. Dornau is the sole managing member will, pursuant to a real estate sales contract entered into in connection with the Merger Agreement, sell to an affiliate of Parent and Merger Sub certain real property, consisting of the Company’s executive offices and warehouse facilities in Fort Lauderdale, Florida, for a purchase price of $3,600,000, subject to certain adjustments.

The Merger Agreement includes customary representations, warranties and covenants of the Company, Parent and Merger Sub. Among other things, the Company has agreed to use commercially reasonable efforts to conduct its business in the ordinary course of business consistent with past practice and use commercially reasonable efforts to preserve intact its businesses until the Merger is consummated. The Company and Parent have also agreed to use their respective reasonable best efforts to obtain any approvals from governmental authorities for the Merger, including all required antitrust approvals, on the terms and subject to the conditions set forth in the Merger Agreement.

The Merger Agreement contains certain provisions giving each of Parent and the Company rights to terminate the Merger Agreement under certain circumstances, including the right for either Parent or the Company to terminate the Merger Agreement if the Merger has not been consummated on or before September 30, 2022. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $3,375,000. The Merger Agreement further provides that Parent will be required to pay the Company a reverse termination fee of $5,000,000 under certain circumstances if Parent is does not confirm in writing to the Company that it has available cash in an amount which, together with the Debt Financing (as defined below), is required to pay the Merger Consideration.

A copy of the Merger Agreement can be found as an exhibit to the Company’s Current Report on Form 8-K filed on June 22, 2022.

During the three and six months ended June 30, 2022, the Company incurred approximately $950,000 of expenses related to the proposed Merger. Such expenses are included in selling and administrative expenses in the accompanying unaudited condensed consolidated statement of operations.

The closing of the Merger is expected to occur during the quarter ending September 30, 2022.