UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

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

For the transition period from _____ to _____

Commission File Number: 0-11102

OCEAN BIO-CHEM, INC.

(Exact name of registrant as specified in its charter)

Florida

59-1564329

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

4041 SW 47 Avenue, Fort Lauderdale, Florida		33314
(Address of principal executive offices)		(Zip Code)

954-587-6280

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, $0.01 par value		OBCI		The NASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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 ☒

At November 11, 2021, 9,485,799 shares of the registrant’s common stock were outstanding.

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I	Financial Information:

Item 1.	Financial Statements	1

	Condensed consolidated balance sheets at September 30, 2021 (unaudited) and December 31, 2020	1

	Condensed consolidated statements of operations (unaudited) for the three and nine months ended September 30, 2021 and 2020	2

	Condensed consolidated statements of comprehensive income (unaudited) for the three and nine months ended September 30, 2021 and 2020	3

	Condensed consolidated statements of shareholders’ equity (unaudited) for the three and nine months ended September 30, 2021 and 2020	4-5

	Condensed consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2021 and 2020	6

	Notes to condensed consolidated financial statements	7-17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

PART II	Other Information:

Item 1A.	Risk Factors	24

Item 6.	Exhibits	24

	Signatures	25

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2021			December 31, 2020
	(Unaudited)
ASSETS
Current Assets:
Cash	$	10,679,703		$	11,123,726
Trade accounts receivable less allowances of approximately $492,000 and $326,000, respectively		17,226,890			8,326,939
Receivables due from affiliated companies		624,748			1,496,104
Restricted cash		-			477,426
Inventories, net		16,788,800			13,175,756
Prepaid expenses and other current assets		1,970,210			1,259,786
Total Current Assets		47,290,351			35,859,737

Property, plant and equipment, net		14,180,888			10,101,962
Operating lease – right to use		204,434			268,920
Intangible assets, net		1,451,814			1,665,299
Total Assets	$	63,127,487		$	47,895,918

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt, net	$	737,995		$	500,694
Current portion of operating lease liability		88,783			86,377
Accounts payable – trade		5,082,599			1,966,010
Accrued expenses payable		1,820,964			1,142,825
Total Current Liabilities		7,730,341			3,695,906

Deferred tax liability		412,795			380,218
Operating lease liability, less current portion		115,651			182,543
Long-term debt, less current portion and debt issuance costs		7,983,559			3,730,180
Total Liabilities		16,242,346			7,988,847

COMMITMENTS AND CONTINGENCIES

Shareholders’ Equity:
Common stock - $.01 par value, 12,000,000 shares authorized; 9,485,799 and 9,481,799 shares issued and outstanding		94,858			94,818
Additional paid in capital		10,871,840			10,816,100
Accumulated other comprehensive loss		(294,997	)		(294,324	)
Retained earnings		36,213,440			29,290,477
Total Shareholders’ Equity		46,885,141			39,907,071

Total Liabilities and Shareholders’ Equity	$	63,127,487		$	47,895,918

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

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020

Net sales	$	21,483,054		$	19,161,372		$	50,303,263		$	42,682,497

Cost of goods sold		14,028,573			10,414,131			30,195,629			23,085,473

Gross profit		7,454,481			8,747,241			20,107,634			19,597,024

Operating Expenses:
Advertising and promotion		955,812			723,446			3,163,209			2,265,382
Selling and administrative		2,292,301			2,030,787			6,906,770			6,242,862
Total operating expenses		3,248,113			2,754,233			10,069,979			8,508,244

Operating income		4,206,368			5,993,008			10,037,655			11,088,780

Other (expense) income
Interest (expense), net		(35,776	)		(39,615	)		(113,786	)		(93,695	)
Gain on insurance settlement		-			-			-			126,210

Income before income taxes		4,170,592			5,953,393			9,923,869			11,121,295

Provision for income taxes		(899,731	)		(1,296,563	)		(2,147,424	)		(2,385,263	)

Net income	$	3,270,861		$	4,656,830		$	7,776,445		$	8,736,032

Earnings per common share – basic and diluted	$	0.34		$	0.49		$	0.82		$	0.92

Dividends declared per common share	$	0.03		$	0.02		$	0.09		$	0.06

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

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020

Net income	$	3,270,861		$	4,656,830		$	7,776,445		$	8,736,032
Foreign currency translation adjustment		(1,154	)		(281	)		(673	)		(1,663	)

Comprehensive income	$	3,269,707		$	4,656,549		$	7,775,772		$	8,734,369

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

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

					Additional		Accumulated Other
	Common Stock				Paid In		Comprehensive			Retained
	Shares		Amount		Capital		Loss			Earnings			Total

June 30, 2021		9,485,799	$	94,858	$	10,871,840	$	(293,843	)	$	33,227,153		$	43,900,008

Net income		-		-		-		-			3,270,861			3,270,861

Dividends, common stock		-		-		-		-			(284,574	)		(284,574	)

Foreign currency translation adjustment		-		-		-		(1,154	)		-			(1,154	)

September 30, 2021		9,485,799	$	94,858	$	10,871,840	$	(294,997	)	$	36,213,440		$	46,885,141

					Additional		Accumulated Other
	Common Stock				Paid In		Comprehensive			Retained
	Shares		Amount		Capital		Loss			Earnings			Total

June 30, 2020		9,462,105	$	94,621	$	10,545,898	$	(295,873	)	$	24,131,874		$	34,476,520

Net income		-		-		-		-			4,656,830			4,656,830

Dividends, common stock		-		-		-		-			(189,242	)		(189,242	)

Foreign currency translation adjustment		-		-		-		(281	)		-			(281	)

September 30, 2020		9,462,105	$	94,621	$	10,545,898	$	(296,154	)	$	28,599,462		$	38,943,827

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

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(UNAUDITED)

					Additional		Accumulated Other
	Common Stock				Paid In		Comprehensive			Retained
	Shares		Amount		Capital		Loss			Earnings			Total

December 31, 2020		9,481,799	$	94,818	$	10,816,100	$	(294,324	)	$	29,290,477		$	39,907,071

Net income		-		-		-		-			7,776,445			7,776,445

Dividends, common stock		-		-		-		-			(853,482	)		(853,482	)

Stock based compensation		4,000		40		55,740		-			-			55,780

Foreign currency translation adjustment		-		-		-		(673	)		-			(673	)

September 30, 2021		9,485,799	$	94,858	$	10,871,840	$	(294,997	)	$	36,213,440		$	46,885,141

					Additional		Accumulated Other
	Common Stock				Paid In		Comprehensive			Retained
	Shares		Amount		Capital		Loss			Earnings			Total

December 31, 2019		9,442,809	$	94,428	$	10,503,171	$	(294,491	)	$	20,431,156		$	30,734,264

Net income		-		-		-		-			8,736,032			8,736,032

Dividends, common stock		-		-		-		-			(567,726	)		(567,726	)

Options exercised		15,296		153		20,547		-			-			20,700

Stock based compensation		4,000		40		22,180		-			-			22,220

Foreign currency translation adjustment		-		-		-		(1,663	)		-			(1,663	)

September 30, 2020		9,462,105	$	94,621	$	10,545,898	$	(296,154	)	$	28,599,462		$	38,943,827

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

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
	2021			2020
Cash flows from operating activities:
Net income	$	7,776,445		$	8,736,032
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization		1,105,542			1,020,179
Deferred income taxes		32,577			88,377
Stock based compensation		55,780			22,220
Provision for bad debts		170,978			213,398
Provision for slow moving and obsolete inventory		24,450			47,146
Impairment of equipment		-			65,725
Other operating non-cash items		(690	)		(1,061	)
Cash used related to 2019 chemical incident		-			(200,665	)
Gain on insurance settlement		-			(126,210	)

Changes in assets and liabilities:

Trade accounts receivable		(9,070,929	)		(9,343,556	)
Receivables due from affiliated companies		871,356			(145,840	)
Inventories		(3,637,494	)		(2,812,905	)
Prepaid expenses and other current assets		(710,424	)		(43,784	)
Accounts payable – trade		3,116,589			2,709,747
Income taxes payable		-			267,402
Accrued expenses payable		678,139			881,019
Net cash provided by operating activities		412,319			1,377,224

Cash flows from investing activities:
Insurance proceeds received for damaged machinery and equipment		-			411,657
Purchases of property, plant and equipment		(4,956,102	)		(1,549,077	)
Net cash used in investing activities		(4,956,102	)		(1,137,420	)

Cash flows from financing activities:
Payments on long-term debt		(513,990	)		(381,616	)
Proceeds from term loan		4,989,789			-
Proceeds from CARES Act note		-			1,556,800
Repayment of CARES Act note		-			(1,556,800	)
Dividends paid to common shareholders		(853,482	)		(567,726	)
Proceeds from exercise of stock options		-			20,700
Net cash provided by (used in) financing activities		3,622,317			(928,642	)

Effect of exchange rate on cash		17			(602	)

Net decrease in cash and restricted cash		(921,449	)		(689,440	)

Cash and restricted cash at beginning of period		11,601,152			8,010,420
Cash and restricted cash at end of period	$	10,679,703		$	7,320,980

Supplemental disclosure of cash flow information:
Cash paid for interest during period excluding capitalized interest	$	95,858		$	107,147
Cash paid for income taxes during period	$	2,175,938		$	2,029,484
Cash paid under operating lease	$	71,100		$	71,100

Cash	$	10,679,703		$	6,581,944
Restricted cash		-			739,036
Total cash and restricted cash	$	10,679,703		$	7,320,980

Noncash lease activities:
Finance lease right to use assets exchanged for finance lease liabilities	$	-		$	96,039

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

OCEAN BIO-CHEM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF ACCOUNTING POLICIES

Interim reporting

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

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

The financial information furnished herein reflects all adjustments, consisting of normal recurring items that, in the opinion of management, are necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods. The results of operations for the three months and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021.

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, 2020.

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.

INVENTORIES

The Company’s inventories at September 30, 2021 and December 31, 2020 consisted of the following:

	September 30, 2021			December 31, 2020
Raw materials	$	7,659,240		$	5,393,961
Finished goods		9,444,391			8,072,176
Inventories, gross		17,103,631			13,466,137

Inventory reserves		(314,831	)		(290,381	)

Inventories, net	$	16,788,800		$	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 $1,047,000 and $629,000 at September 30, 2021 and December 31, 2020, respectively.

PROPERTY, PLANT & EQUIPMENT

The Company’s property, plant and equipment at September 30, 2021 and December 31, 2020 consisted of the following:

	Estimated Useful Life	September 30, 2021			December 31, 2020

Land		$	278,325		$	278,325
Building and improvements	30 years		9,696,070			9,563,406
Manufacturing and warehouse equipment	6-20 years		12,889,187			11,959,563
Office equipment and furniture	3-5 years		1,907,868			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			4,313,064			464,203
Property, plant and equipment, gross			29,795,458			24,856,828

Less accumulated depreciation			(15,614,570	)		(14,754,866	)

Property, plant and equipment, net		$	14,180,888		$	10,101,962

The Company’s wholly owned subsidiary, Kinpak Inc. (“Kinpak”), has started a 69,000 square foot expansion of its manufacturing, warehouse and distribution facilities in Montgomery, AL. The expansion is expected to be completed in early 2022. For more information see our Current Report on Form 8-K filed on February 3, 2021.

Depreciation expense totaled $302,866 (of which $277,931 is included in cost of goods sold and $24,935 is included in selling and administrative expenses) and $273,490 (of which $248,528 is included in cost of goods sold and $24,962 is included in selling and administrative expenses) for the three months ended September 30, 2021 and 2020, respectively, and $877,176 (of which $803,302 is included in cost of goods sold and $73,874 is included in selling and administrative expenses) and $791,981 (of which $717,907 is included in cost of goods sold and $74,074 is included in selling and administrative expenses) for the nine months ended September 30, 2021 and 2020, respectively.

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 $24,339 and $24,521 for the three months ended September 30, 2021 and 2020, respectively, and $73,017 and $73,564 for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and December 31, 2020, the Company had a right to use asset and a corresponding liability of $204,434 and $268,920, respectively, related to the operating lease. Set forth below is a schedule of future minimum rent payments under the operating lease.

Twelve-month period ending September 30,
2022	$	94,800
2023		94,800
2024		23,700
Total future minimum lease payments		213,300
Less imputed interest		(8,866	)
Total operating lease liability	$	204,434

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 nine months ended September 30, 2021 and 2020 are set forth below.

	Three Months Ended September 30, 2021		Three Months Ended September 30, 2020
Operating lease expense	$	24,339	$	24,521
Finance lease amortization		5,302		5,406
Finance lease interest		385		361
Total lease expense	$	30,026	$	30,288

	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
Operating lease expense	$	73,017	$	73,564
Finance lease amortization		15,833		16,938
Finance lease interest		1,230		679
Total lease expense	$	90,080	$	91,181

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 September 30, 2021 and December 31, 2020 are set forth below:

	September 30, 2021
Remaining lease term – operating lease		2.25 years
Weighted average remaining lease term – finance leases		3.9 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	%

INTANGIBLE ASSETS

The Company’s intangible assets at September 30, 2021 and December 31, 2020 consisted of the following:

September 30, 2021

Intangible Assets	Cost		Accumulated Amortization		Net
Patents	$	622,733	$	583,896	$	38,837
Trade names and trademarks		1,715,325		655,684		1,059,641
Customer list		584,468		357,882		226,586
Product formulas		292,234		178,941		113,293
Royalty rights		160,000		146,543		13,457
Total intangible assets	$	3,374,760	$	1,922,946	$	1,451,814

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 was $71,162 for each of the three months ended September 30, 2021 and 2020, and $213,485 and $213,486 for the nine months ended September 30, 2021 and 2020, respectively.

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 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 September 30, 2021 and December 31, 2020, the Company had no borrowings under the revolving line of credit provided by the current and former Business Loan Agreements.

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 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 in the amount of $1,799,201. The Bond provides that the interest rate will be subject to adjustment if it is determined by the United States Treasury Department, the Internal Revenue Service, or a similar government entity that the interest on the Bond is includable in the gross income of the Lender for federal income tax purposes.

Under the Lease, Kinpak is required to make rental payments for the account of the IDB to the Lender in such amounts and at such times as are necessary to enable the payment of all principal and interest due on the Bond and other charges, if any, payable in respect of the Bond. The Lease also provides that Kinpak may redeem the Bond, in whole or in part, by prepaying its rental payment obligations in an amount sufficient to effect the redemption. In addition, the Lease contains provisions relating to the Expansion Project, including limitations on utilization of Bond proceeds, deposit of unused proceeds into a custodial account (as described below) and investment of monies held in the custodial account.

Payment of amounts due and payable under the Bond and other related agreements are guaranteed by the Company and its other consolidated subsidiaries. In connection with 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 September 30, 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 over the life of the Bond.

Other Long-Term Obligations

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

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

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 September 30, 2021 and December 31, 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 $84,000 and $100,000 at September 30, 2021 and December 31, 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 three months ended September 30, 2021 and 2020, the Company paid $5,687 ($5,302 principal and $385 interest) and $5,767 ($5,406 principal and $361 interest), respectively, and during the nine months ended September 30, 2021 and 2020, the Company paid $17,063 ($15,833 principal and $1,230 interest) and $17,617 ($16,938 principal and $679 interest), respectively, under the lease agreements.

The following table provides information regarding the Company’s long-term debt at September 30, 2021 and December 31, 2020:

	Current Portion						Long Term Portion
	September 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020
Term loan	$	263,746		$	-		$	4,689,609		$	-
Obligations related to industrial development bond financing		272,492		$	263,881		$	3,173,834		$	3,454,904
Note payable related to Snappy Marine asset acquisition		192,277			188,187			164,495			309,218
Obligation related to Check Corporation asset acquisition		8,662			47,082			-			-
Office equipment finance leases		21,455			21,160			62,719			78,847
Total principal of long- term debt		758,632			520,310			8,090,657			3,842,969
Debt issuance costs		(20,637	)		(19,616	)		(107,098	)		(112,789	)
Total long- term debt	$	737,995		$	500,694		$	7,983,559		$	3,730,180

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

Twelve-month period ending September 30,
2022	$	758,632
2023		740,016
2024		591,431
2025		609,084
2026		610,985
Thereafter		5,539,141
Total	$	8,849,289

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 $588,000 and $334,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $1,644,000 and $1,366,000 for the nine months ended September 30, 2021 and 2020, respectively. Fees for administrative services aggregated approximately $161,000 and $166,000 for the three months ended September 30, 2021 and 2020, respectively, and approximately $618,000 and $646,000 for the nine months ended September 30, 2021 and 2020, respectively. Amounts billed to the affiliated companies to reimburse the Company for business related expenditures made on behalf of the affiliated companies aggregated approximately $30,000 and $28,000 during the three months ended September 30, 2021 and 2020, respectively, and approximately $93,000 and $79,000 during the nine months ended September 30, 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 $625,000 and $1,496,000 at September 30, 2021 and December 31, 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 $15,000 ($12,000 for research and development services and $3,000 for charter boat services that the Company used to provide sales incentives to customers) and $12,000 for research and development services for the three months ended September 30, 2021 and 2020, respectively, and $59,000 ($36,000 for research and development services, $17,000 for charter boat services that the Company used to provide sales incentives for customers and $6,000 for the production of television commercials ) and $47,000 ($36,000 for research and development services, $9,000 for charter boat services that the Company used to provide sales incentives for customers and $2,000 for the production of television commercials) for the nine months ended September 30, 2021 and 2020, 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.

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 September 30, 2021 and 2020, the Company paid an aggregate of approximately $816,000 and $471,000, respectively, and during the nine months ended September 30, 2021 and 2020, the Company paid an aggregate of approximately $1,645,000 and $984,000, respectively in insurance premiums on policies obtained through the insurance broker.

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 issuances upon the exercise of outstanding stock options. The following table sets forth the computation of basic and diluted earnings per common share, as well as a reconciliation of the weighted average number of common shares outstanding to the weighted average number of shares outstanding on a diluted basis.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Earnings per common share – Basic

Net income	$	3,270,861	$	4,656,830	$	7,776,445	$	8,736,032

Weighted average number of common shares outstanding		9,485,799		9,462,105		9,483,499		9,454,639

Earnings per common share – Basic	$	0.34	$	0.49	$	0.82	$	0.92

Earnings per common share – Diluted

Net income	$	3,270,861	$	4,656,830	$	7,776,445	$	8,736,032

Weighted average number of common shares outstanding		9,485,799		9,462,105		9,483,499		9,454,639

Dilutive effect of outstanding stock options		-		-		-		4,708

Weighted average number of common shares outstanding - Diluted		9,485,799		9,462,105		9,483,499		9,459,347

Earnings per common share – Diluted	$	0.34	$	0.49	$	0.82	$	0.92

The Company had no stock options outstanding during any of the three and nine month periods ended September 30, 2021 and 2020 that were antidilutive and therefore not included in the diluted earnings per common share calculation.

10.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

No stock compensation expense was incurred during each of the three months ended September 30, 2021 and 2020. Stock compensation expense during the nine months ended September 30, 2021 and 2020 was $55,780 and $22,220, respectively, 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 September 30, 2021, there were no outstanding stock options or unrecognized compensation expense related to stock options.

11.

CASH DIVIDENDS

The Company’s board of directors declared the following cash dividends during the nine months ended September 30, 2021 and 2020:

Nine months ended September 30, 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

Total

0.09

853,482

Nine months ended September 30, 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

Total

0.06

567,726

12.

CUSTOMER CONCENTRATION

During the three months ended September 30, 2021 and 2020, the Company had net sales to each of three customers that constituted in excess of 10% of its net sales. Net sales to these three customers respectively represented approximately 44.3% (22.0%, 12.3% and 10.0%) and 45.0% (17.8%, 13.8% and 13.4.%) of the Company’s net sales, respectively, for the three months ended September 30, 2021 and 2020.

During the nine months ended September 30, 2021, the Company had net sales to each of three customers that constituted in excess of 10% of its net sales. Net sales to these three customers represented approximately 45.1% (17.8%, 14.6% and 12.7%) of the Company’s net sales for the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company had net sales to each of two customers that constituted in excess of 10% of its net sales. Net sales to these two customers represented approximately 32.8% (17.4% and 15.4%) of the Company’s net sales for the nine months ended September 30, 2020.

At September 30, 2021, four customers constituted at least 10% of the Company’s gross trade accounts receivable. The gross trade accounts receivable balances for these customers represented approximately 63.9% (18.7%, 16.9%, 15.2% and 13.1%) of the Company’s gross trade accounts receivable at September 30, 2021. At December 31, 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 63.6% (28.8%, 21.1%, and 13.7%) of the Company’s gross trade accounts receivable at December 31, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements:

Certain statements contained in this Quarterly Report on Form 10-Q, including without limitation, our ability to provide required capital to support inventory levels, the effect of price increases in raw materials that are petroleum or chemical based or commodity chemicals on our margins, and the sufficiency of funds provided through operations and existing sources of financing to satisfy our cash requirements constitute forward-looking statements. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “believe,” “may,” “will,” “expect,” “anticipate,” “intend,” or “could,” including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. These statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking statements. Factors that may affect these results include, but are not limited to, the impact of the COVID-19 pandemic on our business and the economy in general, the highly competitive nature of our industry; reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; expenditures on, and the effectiveness of our advertising and promotional efforts; adverse weather conditions; unanticipated litigation developments; exposure to market risks relating to changes in interest rates, foreign currency exchange rates and prices for raw materials that are petroleum or chemical based, availability in general of raw materials and other factors addressed in the sections entitled “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2020.

Overview:

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

Critical accounting estimates:

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020 for information regarding our critical accounting estimates.

Results of Operations:

Three Months Ended September 30, 2021 Compared to the Three Months Ended September 30, 2020

The following table provides a summary of our financial results for the three months ended September 30, 2021 and 2020:

	For The Three Months Ended September 30,
							Percent			Percentage of Net Sales
	2021			2020			Change			2021			2020
Net sales	$	21,483,054		$	19,161,372			12.1	%		100.0	%		100.0	%
Cost of goods sold		14,028,573			10,414,131			34.7	%		65.3	%		54.3	%
Gross profit		7,454,481			8,747,241			(14.8	)%		34.7	%		45.7	%
Advertising and promotion		955,812			723,446			32.1	%		4.4	%		3.8	%
Selling and administrative		2,292,301			2,030,787			12.9	%		10.7	%		10.6	%
Operating income		4,206,368			5,993,008			(29.8	)%		19.6	%		31.3	%
Interest (expense), net		(35,776	)		(39,615	)		(9.7	)%		0.2	%		0.2	%
Provision for income taxes		(899,731	)		(1,296,563	)		(30.6	)%		4.2	%		6.8	%
Net income	$	3,270,861		$	4,656,830			(29.8	)%		15.2	%		24.3	%

Net sales for the three months ended September 30, 2021 increased by approximately $2,322,000, or 12.1%, as compared to the three months ended September 30, 2020. The increase was primarily attributable to increased sales of winterizing products partially offset by decreased sales of chlorine dioxide-based products (Performacide^® and private label).

Cost of goods sold increased by approximately $3,614,000, or 34.7%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase was principally a result of higher sales volume, the mix of sales, increased cost of raw materials, freight, and other manufacturing cost increases.

Gross profit decreased by approximately $1,293,000, or 14.8%, for the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. Gross profit decreased due to the mix of sales and the cost of goods sold described above. As a percentage of net sales, gross profit was approximately 34.7% and 45.7% for the three months ended September 30, 2021 and 2020, respectively.

Advertising and promotion expenses increased by approximately $232,000, or 32.1%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase in advertising and promotion expenses was principally a result of increased internet advertising and television advertising, trade show expenses and other marketing expenses partially offset by decreased cooperative advertising. As a percentage of net sales, advertising and promotion expenses increased to 4.4% for the three months ended September 30, 2021, from 3.8% for the three months ended September 30, 2020.

Selling and administrative expenses increased by approximately $262,000, or 12.9%, during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020. The increase in selling and administrative expenses was primarily a result of the higher variable expenses principally higher sales commissions to independent sales representatives and Company salesmen. In addition, the Company had higher employee compensation and benefits and product testing by independent testing laboratories. As a percentage of net sales, selling and administrative expenses increased to 10.7% for the three months ended September 30, 2021, from 10.6% for the three months ended September 30, 2020.

Interest (expense), net for the three months ended September 30, 2021 decreased by approximately $4,000 or 9.7%, as compared to the three months ended September 30, 2020.

Provision for income taxes for the three months ended September 30, 2021 was approximately $900,000, or 21.6% of our income before taxes. For the three months ended September 30, 2020 the provision was approximately $1,297,000, or 21.8% of our income before taxes.

Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020

The following table provides a summary of our financial results for the nine months ended September 30, 2021 and 2020:

	For The Nine Months Ended September 30,
							Percent			Percentage of Net Sales
	2021			2020			Change			2021			2020
Net sales	$	50,303,263		$	42,682,497			17.9	%		100.0	%		100.0	%
Cost of goods sold		30,195,629			23,085,473			30.8	%		60.0	%		54.1	%
Gross profit		20,107,634			19,597,024			2.6	%		40.0	%		45.9	%
Advertising and promotion		3,163,209			2,265,382			39.6	%		6.3	%		5.3	%
Selling and administrative		6,906,770			6,242,862			10.6	%		13.7	%		14.6	%
Operating income		10,037,655			11,088,780			(9.5	)%		20.0	%		26.0	%
Interest (expense), net		(113,786	)		(93,695	)		21.4	%		0.2	%		0.2	%
Gain on insurance settlement		-			126,210			(100.0	)%		0.0	%		0.3	%
Provision for income taxes		(2,147,424	)		(2,385,263	)		(10.0	)%		4.3	%		5.6	%
Net income	$	7,776,445		$	8,736,032			(11.0	)%		15.5	%		20.5	%

Net sales for the nine months ended September 30, 2021 increased by approximately $7,621,000, or 17.9%, as compared to the nine months ended September 30, 2020. The increase in net sales was principally a result of increased sales of Star brite^® branded marine products, private label marine products, and winterizing products, partially offset by a decrease in sales of chlorine dioxide-based products (Performacide^® and private label).

Cost of goods sold increased by approximately $7,110,000, or 30.8%, during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in cost of goods sold was a result of higher sales volume, the mix of products sold described above, higher raw materials, freight and other manufacturing costs.

Gross profit increased by approximately $511,000, or 2.6%, for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. Gross profit increased due to our higher sales volume. As a percentage of net sales, gross profit was approximately 40.0% and 45.9% for the nine months ended September 30, 2021 and 2020, respectively.

Advertising and promotion expenses increased by approximately $898,000, or 39.6%, during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in advertising and promotion expenses was principally a result of increased internet and television advertising, partially offset by decreased cooperative advertising with our customers. As a percentage of net sales, advertising and promotion expenses increased to 6.3% for the nine months ended September 30, 2021, from 5.3% for the nine months ended September 30, 2020.

Selling and administrative expenses increased by approximately $664,000, or 10.6%, during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020. The increase in selling and administrative expenses was primarily a result of our higher net sales which resulted in increased sales commissions and higher employee compensation expenses, increased insurance expenses, and product testing. As a percentage of net sales, selling and administrative expenses decreased to 13.7% for the nine months ended September 30, 2021, from 14.6% for the nine months ended September 30, 2020.

Interest (expense), net for the nine months ended September 30, 2021 increased by approximately $20,000 or 21.4%, as compared to the nine months ended September 30, 2020. During the nine months ended September 30, 2020, the Company had interest income from a money market mutual fund account which the Company did not have in the nine months ended September 30, 2021.

Gain on insurance settlement was approximately $126,000 during the nine months ended September 30, 2020. The Company received a check for approximately $412,000 from our insurance company to cover losses from a chemical incident at our Kinpak facility that took place in December 2019.

Provision for income taxes for the nine months ended September 30, 2021 was approximately $2,147,000, or 21.6% of our income before taxes. For the nine months ended September 30, 2020 the provision was approximately $2,385,000, or 21.4% of our income before taxes.

Liquidity and capital resources:

Our cash balance was approximately $10,680,000 at September 30, 2021 and approximately $11,124,000 at December 31, 2020. In addition, we had restricted cash of approximately $477,000 at December 31, 2020. The restricted cash constituted amounts held in a custodial account to be used from time to time to fund additional capital expenditures in connection with the 2017 Expansion Project. At September 30, 2021, these amounts have been fully expended. See Note 7 to the condensed consolidated financial statements included in this report for additional information.

The following table summarizes our cash flows for the nine months ended September 30, 2021 and 2020:

	Nine Months Ended September 30,
	2021			2020
Net cash provided by operating activities	$	412,319		$	1,377,224
Net cash used in investing activities		(4,956,102	)		(1,137,420	)
Net cash provided by (used in) financing activities		3,622,317			(928,642	)
Effect of exchange rate fluctuations on cash		17			(602	)
Net decrease in cash and restricted cash	$	(921,449	)	$	(689,440	)

Net cash provided by operating activities for the nine months ended September 30, 2021 decreased by approximately $965,000, or 70.1%, as compared to the nine months ended September 30, 2020. During the nine months ended September 30, 2021, net income decreased by approximately $960,000, noncash adjustments to net income increased by approximately $260,000, and changes in working capital used approximately $265,000 more in cash, as compared to the nine months ended September 30, 2020.

Net trade accounts receivable at September 30, 2021 aggregated approximately $17,227,000, an increase of approximately $8,900,000, or 106.9%, as compared to approximately $8,327,000 in net trade accounts receivable outstanding at December 31, 2020. The increase was principally a result of our net sales during the third quarter of 2021. Receivables due from affiliated companies aggregated approximately $625,000 at September 30, 2021, a decrease of approximately $871,000, or 58.2%, from receivables due from affiliated companies of approximately $1,496,000 at December 31, 2020. The decrease was a result of payments received during the nine months ended September 30, 2021.

Inventories, net were approximately $16,789,000 and $13,176,000 at September 30, 2021 and December 31, 2020, respectively, representing an increase of approximately $3,613,000, or 27.4%, during the nine months ended September 30, 2021. The increase in inventories is principally due to the combination of anticipated higher costs and availability of raw materials and the continuation of strong sales.

Net cash used in investing activities for the nine months ended September 30, 2021 increased by approximately $3,819,000, or 335.7%, as compared to the nine months ended September 30, 2020. The increase in cash used was principally to expand our manufacturing, warehouse and distribution facilities at Kinpak. Additionally, the Company received insurance proceeds (see Results of Operations) of approximately $412,000 during the nine months ended September 30, 2020.

Net cash provided by financing activities for the nine months ended September 30, 2021 was approximately $3,622,000 as compared to net cash used in financing of approximately $929,000 for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, the Company received proceeds of approximately $4,990,000 from a term loan related to the expansion at Kinpak (see Note 7). In the nine months ended September 30, 2021, the Company paid dividends to common shareholders aggregating approximately $853,000 and made payments on long term debt of approximately $514,000, as compared to dividends paid to common shareholders aggregating approximately $568,000 and payments on long term debt of approximately $382,000 in the nine months ended September 30, 2020. Additionally, the Company received proceeds from the exercise of stock options of approximately $21,000 during the nine months ended September 30, 2020.

See Notes 6 and 7 to the condensed consolidated financial statements included in this report for information concerning our principal credit facilities, consisting of Kinpak’s obligations relating to a term loan, the payment of which we have guaranteed, an industrial development bond financing, the payment of which we have guaranteed, and a revolving line of credit. At September 30, 2021 and December 31, 2020, we had outstanding balances of approximately $4,953,000 and $0, respectively under Kinpak’s obligation relating to the term loan, $3,446,000 and $3,719,000, respectively, under Kinpak’s obligations relating to the industrial development bond financing, and no borrowings under our revolving credit facility.

The loan agreement pertaining to our revolving credit facility, as amended, has a stated term that expires on August 31, 2021, although, as was the case with earlier revolving lines of credit provided to us in recent years, amounts outstanding are payable on demand. Nevertheless, the loan agreement pertaining to our revolving line of credit, as amended, contains various covenants, including financial covenants that are described in Note 6 to the condensed consolidated financial statements included in this report. At September 30, 2021, we were in compliance with these financial covenants. The revolving credit facility is subject to several events of default, including a decline of the majority shareholder’s ownership below 50% of our outstanding shares.

Our guarantee of Kinpak’s obligations related to the industrial development bond financing are subject to various covenants, including financial covenants that are described in Note 7 to the condensed consolidated financial statements included in this report. At September 30, 2021, we were in compliance with these financial covenants.

In connection with our acquisition of assets of Snappy Marine, we issued a promissory note in the amount of $1,000,000, including interest (of the $1,000,000 amount of the promissory note, $930,528 was recorded as principal, and the remaining $69,472, representing an imputed interest rate of 2.87% per annum, is being recorded as interest expense over the term of the note). At September 30, 2021, we had an outstanding balance of $366,667 under the promissory note (including $356,772 recorded as principal and $9,895 to be recorded as interest expense over the remaining term of the note).

In connection with our agreement to purchase assets of Check Corporation (dba Damp Check^TM), we agreed to pay Check Corporation $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. We recorded $97,012 as principal, and the remaining $2,988, representing an imputed interest rate of 3.15% per annum, will be recorded as interest expense over the 23 months). At September 30, 2021, we had an outstanding balance of $8,696 (including $8,662 recorded as principal and $34 to be recorded as interest expense over the remaining term of the agreement).

We also obtained financing through leases for office equipment, totaling approximately $84,000 and $100,000 at September 30, 2021 and December 31, 2020, respectively.

Some of our assets and liabilities are denominated in Canadian dollars and are subject to currency exchange rate fluctuations. We do not engage in currency hedging and address currency risk as a pricing issue. For the nine months ended September 30, 2021, we recorded $673 in foreign currency translation adjustments (decreasing shareholders’ equity by $673).

During the past few years, we have introduced a number of new products. At times, new product introductions have required us to increase our overall inventory and have resulted in lower inventory turnover rates. The effects of reduced inventory turnover have not been material to our overall operations. We believe that all required capital to maintain such increases will continue to be provided by operations and our current revolving line of credit or a renewal or replacement of the facility.

Many of the raw materials that we use in the manufacturing process are petroleum or chemical based and commodity chemicals that are subject to fluctuating prices. The nature of our business does not enable us to pass through the price increases to our national retailer customers and to our distributors as promptly as we experience increases in raw material costs. This may, at times, adversely affect our margins.

We believe that funds provided through operations and our revolving line of credit will be sufficient to satisfy our cash requirements over at least the next twelve months.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) at the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act are (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the disclosure.

Change in Internal Controls over Financial Reporting:

No change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1A. Risk Factors

The business, results of operations, financial condition, cash flow, and stock price of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (the “Q1 2021 Form 10-Q”) under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition, operating results and cash flow to vary materially from past, or from anticipated future, financial condition operating results and cash flow.

We may experience adverse effects from problems associated with supply chain and material costs.

The ongoing supply chain problems in the United States has led to increased costs of raw materials and disruptions in availability of raw materials. We may not be able to obtain the materials we need to manufacture our products on a timely basis or at all, and the higher costs cannot be passed on to customers in a timely manner, affecting profits. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results, cash flow, and stock price.

Item 6. Exhibits

Exhibit No.		Description

10.1		Credit Agreement dated July 20, 2021, between Kinpak and Regions (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).

10.2		Guaranty Agreement dated July 20, 2021, provided by the Company to Regions (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).

10.3		Business Loan Agreement effective July 30, 2021 between the Company and Regions (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).

10.4		Commercial Security Agreement dated July 30, 2021 between the Company and Regions (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act.
32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
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101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OCEAN BIO-CHEM, INC.

Dated: November 12, 2021	/s/ Peter G. Dornau
	Peter G. Dornau
	Chairman of the Board, President and
	Chief Executive Officer

Dated: November 12, 2021	/s/ Jeffrey S. Barocas
	Jeffrey S. Barocas
	Vice President and
	Chief Financial Officer

SEC Form 10-Q filed by Ocean Bio-Chem, Inc.