SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-11102
OCEAN BIO-CHEM, INC.
(Exact name of Registrant as specified in its charter)
Florida 59-1564329
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4041 SW 47 Avenue, Fort Lauderdale, Florida 33314-4023
954-587-6280
(Address and telephone number, including area code of Registrant's
Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 12, 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 [x] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of
1934), or a non-accelerated filer
Large Accelerated Filer [ ] Accelerated Filer [ ] Non- Accelerated Filer [x]
Indicate by check mark whether the Registrant (1) Is a Shell Company (as
Defined In rule 12b-2 of the Exchange Act).
Yes [ ] No [x ]
Indicate the number of shares outstanding of each class of the Issuer's
common stock, as of the latest practicable date:
$.01 par value common stock, 10,000,000 shares authorized,
5,978,316 shares issued and outstanding at November 8, 2006
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
INDEX
Description Page
-------
Part I - Financial Information:
Item 1. - Financial Statements:
Consolidated balance sheets as of September 30, 2006
and December 31, 2005 3
Consolidated statements of operations for
the nine months ended September 30,
2006 and 2005 4
Consolidated statements of changes in
shareholders' equity for the nine months
ended September 30, 2006 and 2005 5
Consolidated statements of cash flows
For the nine months ended September 30,
2006 and 2005 6
Notes to consolidated financial statements 7-13
Item 2. - Management's Discussion and Analysis
of Financial Condition and Results of Operations 13-17
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 17
Item 4 - Controls and Procedures 17-18
Part II - Other Information:
Item 1. - Legal Proceedings 18
Item 1A.- Risk Factors 18
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. - Defaults upon Senior Securities 18
Item 4. - Submission of Matters to a Vote of Security Holders 18
Item 5. - Other information 18
Item 6. - Exhibits 18
Signatures 18
Certifications
2
PART I - Financial Information
Item l. Financial Statements:
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------- -----------
(UNAUDITED) (RESTATED)
Current assets:
Cash $ 91,101 $ 204,543
Trade accounts receivable net of allowance for doubtful
accounts of approximately $192,700 and $131,000 at
September 30, 2006 and December 31, 2005, respectively 5,568,412 2,027,162
Inventories 5,867,555 6,260,813
Prepaid expenses and other current assets 211,372 510,074
----------- -----------
Total current assets 11,738,440 9,002,592
----------- -----------
Property, plant and equipment, net 6,979,734 7,310,640
----------- -----------
Other assets:
Trademarks, trade names and patents, net
of accumulated amortization 330,439 330,439
Due from affiliated companies, net 869 29,022
Deposits and other assets 204,028 230,329
----------- -----------
Total other assets 535,336 589,790
----------- -----------
Total assets $19,253,510 $16,903,022
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade $ 974,332 $ 1,256,640
Note payable - bank 5,525,000 4,000,000
Current portion of Long-Term debt 585,575 580,852
Accrued expenses payable 491,979 451,977
----------- -----------
Total Current Liabilities 7,576,886 6,289,469
----------- -----------
Due to affiliated companies, net 42,700 -
----------- -----------
Long term debt, less current portion 5,832,628 5,950,958
----------- -----------
Shareholders' equity:
Common stock - $.01 par value, 10,000,000 shares authorized;
5,978,316 and 5,849,316 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively 59,783 58,493
Additional paid-in capital 5,870,197 5,397,845
Foreign currency translation adjustment ( 164,879) ( 179,653)
Retained earnings (deficit) 44,390 ( 605,895)
------------ ------------
5,809,491 4,670,790
Less cost of common stock in treasury, 7,519 shares
at September 30, 2006 and December 31, 2005 ( 8,195) ( 8,195)
------------ ------------
5,801,296 4,662,595
------------ ------------
Total liabilities and shareholders' equity $19,253,510 $16,903,022
============ ============
3
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2006 2005 2006 2005
---------- ---------- ----------- -----------
Gross sales $8,491,859 $6,574,073 $17,939,676 $15,200,391
Allowances 766,770 621,242 1,473,486 1,564,667
---------- ---------- ----------- -----------
Net sales 7,725,089 5,952,831 16,466,190 13,635,724
Cost of goods sold 5,543,693 4,940,843 11,758,247 10,946,024
---------- ---------- ----------- -----------
Gross profit 2,181,396 1,011,988 4,707,943 2,689,700
---------- ---------- ----------- ------------
Costs and expenses:
Advertising and promotion 428,254 353,620 900,611 1,025,022
Selling and administrative 889,005 950,143 2,629,776 2,916,683
Interest expense 204,772 132,989 539,874 344,462
---------- ---------- ----------- -----------
Total cost and expenses 1,522,031 1,436,752 4,070,261 4,286,167
---------- ---------- ----------- -----------
Operating income (loss) 759,365 ( 424,764) 637,682 ( 1,596,467)
Other income 11,316 6,510 12,603 16,270
---------- ---------- ----------- ------------
Income (Loss) before income taxes 670,681 ( 418,254) 650,285 ( 1,580,197)
Income taxes (benefit) - - - ( 274,500)
---------- ----------- ----------- ------------
Net Income (loss) 670,681 ( 418,254) 650,285 ( 1,305,697)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment 1,042 18,177 14,774 22,298
---------- ----------- ----------- ------------
Comprehensive income (loss) $ 771,723 ($ 400,077) $ 665,059 ($1,283,399)
========== =========== =========== ============
Earnings (loss) per common share - basic $ .11 ($ .07) $ .11 ($ .23)
====== ========= ======= =========
Earnings (loss) per common share - diluted $ .11 ($ .07) $ .10 ($ .23)
====== ========= ======= =========
The Company has adopted Statement of Financial Accounting Standards No. 130
that requires items of comprehensive income to be stated as part of the basic
financial statements. The only item of comprehensive income that the Registrant
has is its foreign currency translation adjustment.
4
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
Additional Foreign Retained
Common stock paid-in currency earnings Treasury
Shares Amount capital adjustment (deficit) stock Total
--------- -------- ---------- ---------- --------- -------- ----------
January 1, 2006,
as previously
reported 5,849,316 $ 58,493 $4,908,615 ($179,653) ($ 488,563) ($8,195) $4,290,697
Compensation cost
associated with the
modification of stock
options, net 178,332 ( 117,332) 61,000
Compensation cost
associated with
stock warrants 310,898 310,898
--------- -------- ---------- ---------- ----------- -------- -----------
January 1, 2006,
as restated 5,849,316 58,493 5,397,845 ( 179,653) ( 605,895) ( 8,195) 4,662,595
Net income 650,285 650,285
Debt forgiveness -
affiliate 295,752 295,752
Common stock
issuance 129,000 1,290 118,132 119,422
Stock based compensation 58,468 58,468
Foreign currency
translation adjustment 14,774 14,774
--------- -------- ---------- ---------- ----------- --------- -----------
September 30,
2006 5,978,316 $ 59,783 $5,870,197 ($164,879) $ 44,390 ($8,195) $5,801,296
========= ======== ========== ========== =========== ========= ===========
January 1,
2005 5,417,813 $ 54,178 $4,722,746 ($204,864) $1,324,630 ($8,195) $ 5,888,495
Net (loss) (1,305,697) ( 1,305,697)
Common stock
issuances 431,503 4,315 185,869 190,184
Foreign currency
translation
adjustment 22,298 22,298
--------- -------- ---------- ---------- ---------- -------- -----------
September 30,
2005 5,849,316 $ 58,493 $4,908,615 ($182,566) $ 18,933 ($8,195) $ 4,795,280
========= ======== ========== ========== ========== ======== ===========
5
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
2006 2005
----------- -----------
Cash flow provided (used) by operating activities:
Net income (loss) $ 650,285 ($1,305,698)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operations:
Depreciation and amortization 582,971 555,095
Stock based compensation expense 58,468 -
Amortization of imputed interest 46,636 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ( 3,541,251) 413,409
(Increase) decrease in inventories 393,257 ( 1,686,183)
Decrease (increase) in prepaid expenses and other current assets 298,704 ( 29,555)
Increase (decrease) in accounts payable, accrued
expenses and other ( 216,005) 2,257
------------ ------------
Net cash used by operating activities ( 1,726,935) ( 2,050,675)
------------ ------------
Cash flows from financing activities:
Net increases under line of credit 1,525,000 1,275,000
Reduction in due from affiliates, net 323,905 -
Increases in due to affiliates, net 42,700 225,632
Additions to long term debt, net 250,000 800,000
Payments on long term debt, net ( 410,243) ( 380,133)
Common stock transactions 119,422 190,184
------------ ------------
Net cash provided by financing activities 1,850,784 2,110,683
------------ ------------
Cash flow used by investing activities:
Purchases of property, plant, equipment, net
of funds held in escrow ( 252,065) ( 636,683)
------------ ------------
Net cash used by investing activities ( 252,065) ( 636,683)
------------ ------------
Increase (decrease) in cash prior to effect of
foreign currency translation adjustment ( 128,216) ( 576,675)
Effect of foreign currency translation adjustment on cash 14,774 22,298
------------ ------------
Net (decrease) in cash ( 113,442) ( 554,377)
Cash at beginning of period 204,543 988,106
------------ ------------
Cash at end of period $ 91,101 $ 433,729
============ ============
Supplemental Information:
Cash used for payment of interest during period $ 539,874 $ 344,462
============ ============
Cash used for payment of income taxes during period $ - $ 110,734
============ ============
Non-cash investing and financing activities:
Debt forgiven by affiliated entity $ 295,752 $ -
============ ============
6
OCEAN BIO-CHEM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
Interim Reporting
The accompanying unaudited consolidated financial statements include the
accounts of Ocean Bio-Chem, Inc. and its subsidiaries ("the Company"). All
significant inter-company transactions and balances have been eliminated. The
unaudited consolidated financial statements have been prepared in conformity
with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and,
therefore, do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America. However, all adjustments (consisting of normal recurring accruals)
that, in the opinion of management, are necessary for a fair presentation of the
financial statements, have been included. Operating results for the period ended
September 30, 2006 are not necessarily indicative of the results that may be
expected for the future fiscal quarter in 2006 or the full year ending
December 31, 2006 due to seasonal fluctuations in the Company's business,
changes in economic conditions and other factors. For further information,
please refer to the Consolidated Financial Statements and Notes thereto
contained in the Company's Annual Report on Form 10-KA for the year ended
December 31, 2005.
During August 2006, we filed an amendment to our Form 10-K for the period
ended December 31, 2005. The substantive changes reflected in such amendment
were (1) the recognition of compensation cost associated with stock options of
which certain terms were modified and (2) the reclassification between debt and
Additional Paid-Capital of certain of the proceeds from the Revolving
Subordinated Obligation to our president and CEO, Peter G. Dornau.
Certain financial statement items for the nine months and quarter ended
September 30, 2005 have been reclassified to conform to the 2006 presentation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amount of assets, liabilities, revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is recognized when persuasive evidence of an
arrangement exists, delivery to customer has occurred, the sales price is fixed
and determinable, and collectibility of the related receivable is probable.
Reported net sales are net of customer prompt pay discounts, contractual
allowances, authorized customer returns, consumer rebates and other allowable
deductions from our invoices. Cooperative advertising deductions, based on our
customers' promotion of our products is recognized as an advertising cost and
charged against operations as an operating expense.
Cost of goods sold/Selling, general and administrative expenses
Cost of Goods Sold include all of the direct and indirect costs of
manufacturing our products. Included therein specifically are warehousing costs
of both raw and finished materials, in-bound freight, out-bound freight (in
those instances that we absorb such costs), purchasing, receiving, and
inspection costs. Other costs of the distribution network are reflected in
Selling, General and Administrative expenses. Also included therein are
managerial and clerical wages and related expenses, office and administrative
occupancy costs, taxes, professional fees, insurance coverages and other related
expenses.
Inventories
Inventories are comprised of finished goods and raw materials and are
stated at the lower of cost or market. Cost is determined by the first-in,
first-out method. The composition of inventories at September 30, 2006 and
December 31, 2005 were as follows:
2006 2005
---------- ----------
Raw materials $3,415,180 $3,235,086
Finished goods 2,452,375 3,025,727
---------- ----------
$5,867,555 $6,260,813
========== ==========
7
Stock Based Compensation
At September 30, 2006, The Company had options outstanding under four
stock-based compensation plans, which are described below. On January 1, 2006,
The Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), "Shared Based Payment" ("SFAS No. 123R"), which requires the measurement
and recognition of compensation cost for all share-based payment awards made to
employees and directors based on estimated fair values. Prior to the adoption of
SFAS No. 123R, The Company accounted for its stock-based employee compensation
related to stock options under the intrinsic value recognition and measurement
principles of Accounting Principles Board Opinion No.25, "Accounting for Stock
Issued to Employees" ("APB 25") and the disclosure alternative prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure."
Accordingly, The Company presents pro- forma information for the periods prior
to the adoption of SFAS No 123R and no employee compensation cost was recognized
for the stock-based compensation plans other than the grant date intrinsic
value, if any, for the options granted prior to January 1, 2006.
The Company has elected to use the modified prospective transition method
for adopting SFAS No. 123R, which requires the recognition of stock-based
compensation cost on a prospective basis; therefore, prior period financial
statements have not been restated. Under this method, the provisions of SFAS No.
123R are applied to all awards granted after the adoption date and to awards not
yet vested with unrecognized expense at the adoption date based on the estimated
fair value at grant date as determined under the original provisions of SFAS No.
123. The impact of forfeitures that may occur prior to vesting is also estimated
and considered in the amount recognized. In addition, the realization of tax
benefits in excess of amounts recognized for financial reporting purposes will
be recognized as a financing activity rather than an operating activity as in
the past. Pursuant to the requirements of SFAS No. 123R, The Company will
continue to present the pro-forma information for periods prior to the adoption
date.
Stock Compensation Plans
Under various plans, The Company may grant incentive or non-qualified stock
options to employees and directors. The terms of stock options granted under the
plans are determined by the Compensation Committee of the Board of Directors at
the time of grant, including the exercise price, term and any restrictions on
the exercisability of such option. The exercise price of all options granted
under the plans equals the market price at the date of grant, except for options
granted to Mr. Dornau, our President and CEO, which are generally granted at a
premium of 10% above the market price of the underlying common stock, and no
option is exercisable after the expiration of five or ten years from the date of
grant, depending on the Plan under which it was awarded. The stock options
outstanding under our qualified or incentive plans were generally granted for
terms of five years and vest on a straight line basis over such period. The
stock options outstanding under our 2002 non qualified plan were generally
granted for terms of ten years and vested immediately. No employee compensation
expense was recognized in our financial statements upon either the grant or
exercise of these stock options prior to January 1, 2006.
As of September 30, 2006, the number of options outstanding and the number
of shares available for grant under each Stock Option Plan and non-plan options
is presented below:
Plan Options outstanding Options available for grant
1992 Plan 143,000 shares None - terminated 2002
1994 Plan 159,500 shares None - terminated 2004
2002 Qualified Plan 265,000 shares 135,000 shares
2002 Non-qualified Plan 155,000 shares 45,000 shares
Non-plan options 231,000 shares N/A
Information with respect to our stock option activity is as follows:
Weighted average
Shares exercise price
Outstanding at December 31, 2005 964,500 $1.12
Granted 40,000 $1.08
Exercised -
Forfeited 51,000 $1.25
------- -----
Outstanding at September 30, 2006 953,500 $1.13
======= =====
8
For the nine month period ended September 30, 2006, The Company recognized
$ 58,468 in stock-based compensation costs, which is reflected in operating
expenses. No tax benefits were attributed to the stock-based compensation
expense because a valuation allowance was maintained for substantially all net
deferred tax assets. The Company elected to adopt the alternative method of
calculating the historical pool of windfall tax benefits as permitted by FASB
Staff Position (FSP) No. SFAS 123R-c, "Transition Election Related to Accounting
for the Tax Effects of Share-Based Payment Awards." This is a simplified method
to determine the pool of windfall tax benefits that is used in determining the
tax effects of stock compensation in the results of operations and cash flow
reporting for awards that were outstanding as of the adoption of SFAS No. 123R.
As of September 30, 2006, The Company had approximately $105,800 of unrecognized
compensation costs related to non-vested stock option awards that is expected to
be recognized over a weighted average period of 2.4 years.
The following information applies to options outstanding and exercisable as
of September 30, 2006:
Options outstanding Options exercisable
Weighted Weighted Weighted
average average average
remaining exercise exercise
Shares life price Shares price
------- ---- ------ ------- ------
Non-Plan options 231,000 2.50 $ .758 231,000 $ .758
1992 Plan 143,000 .25 1.009 123,200 1.009
1994 Plan 159,500 3.08 1.050 31,900 1.050
2002 Plan - qualified 125,000 1.08 1.260 81,000 1.260
2002 Plan - qualified 140,000 2.50 1.520 56,000 1.620
2002 Plan - non-qualified 35,000 3.08 1.260 35,000 1.260
2002 Plan - non-qualified 40,000 7.75 1.030 40,000 1.030
2002 Plan - non-qualified 40,000 8.65 1.460 40,000 1.460
2002 Plan - non-qualified 40,000 9.55 1.080 40,000 1.050
------- ------- ------- ------
953,500 $1.110 678,100 $1.045
======= ====== ======= ======
The Company utilizes a Black-Scholes option-pricing model to determine the
fair value of stock options on the date of grant. This model derives the fair
value of stock options based on certain assumptions related to expected stock
price volatility, expected option life, risk-free interest rate and dividend
yield. The Company's expected volatility is based on the historical volatility
of The Company's stock price over the most recent period commensurate with the
expected term of the stock option award. The estimated expected option life is
based primarily on historical employee exercise patterns and considers whether
and the extent to which the options are in-the-money. The risk-free interest
rate assumption is based upon the U.S. Treasury yield curve appropriate for the
term of The Company's stock options awards and the selected dividend yield
assumption was determined in view of The Company's historical and estimated
dividend payout. The Company has no reason to believe that the expected
volatility of its stock price or its option exercise patterns will differ
significantly from historical volatility or option exercises.
No stock options have been granted during the three months ended September
30, 2006. The fair value of each option grant during the three month and nine
month periods ended September 30, 2006 and 2005, was estimated on the date of
grant using the following weighted-average assumptions:
For the three months ended For the nine months ended
------------------------------------- ------------------------------------------------
September 30, 2006 September 30,2005 September 30, 2006 September 30, 2005
------------------- ----------------- ------------------- ------------------
Expected dividend yield 00.0% 00.0% 00.0% 00.0%
Expected price volatility 33.5% 33.5% 33.5% 33.5%
Risk-free interest rate 4.5% 4.0% 4.5% 4.0%
Expected life of options in
years 5-10 5-10 5-10 5-10
9
The following table illustrates the effect on net loss and basic and
diluted loss per share if we had applied the fair value recognition provisions
of SFAS No. 123 to options granted under our stock option plans for the three
month and nine month period ended September 30, 2005:
For the three For the nine
months ended months ended
September 30, September 30,
2005 2005
-------------- -------------
Net loss, as reported ($418,254) ($1,305,697)
Add: Stock-based employee compensation expense included in net loss - -
Deduct: Total stock-based employee compensation expense determined under fair
value based method, net of income taxes 7,700 21,500
---------- ------------
Pro forma net loss $(425,954) ($1,327,197)
========== =============
Loss per share:
Basic and diluted as reported $ (0.08) $ (0.23)
Basic and diluted pro forma $ (0.08) $ (0.23)
On March 25, 1999, the Company granted two officers a five-year option for
115,000 shares each, as adjusted for the Company's stock dividend distributions
of 2000 and 2002, at an exercise price of $.758 representing the market price at
the time of grant. Such grants were awarded in consideration of a loan to the
Company in the amount of $400,000 from an affiliated company in which they are
each 50% co-shareholders. During 2004, the underlying loan was modified to
extend the maturity date and, accordingly, the options were extended for an
additional five years expiring March 25, 2009. The intrinsic value of these
options at the date of term modification aggregated $178,332. Such amount was
not originally recorded as a charge against operations in our issued financial
statements as contained in our Form 10-K as of December 31, 2005 and 2004 and
the years then ended. Accordingly, our Consolidated Statement of Operations was
restated for 2004 to reflect such costs along with the corresponding increase to
Additional paid-in capital on our Consolidated Balance Sheet and Consolidated
Statement of Shareholders' Equity. The amended filing was made during August
2006.
2. PROPERTY, PLANT & EQUIPMENT
The Company's property, plant and equipment consisted of the following at
September 30, 2006 and December 31, 2005:
Estimated
Useful
Life- Years 2006 2005
----------- ---------- ----------
Land N/A $ 278,325 $ 278,325
Building 30 4,390,894 4,390,894
Manufacturing and warehouse equipment 6-10 4,669,009 4,384,268
Manufacturing and warehouse equipment 11-20 1,659,870 1,659,870
Office equipment and furniture 3-5 678,537 652,940
Construction in process N/A 219,966 278,239
Leasehold improvement 10-15 145,505 145,505
---------- ----------
12,042,106 11,790,041
Less accumulated depreciation 5,062,372 4,479,401
---------- ----------
Total property, plant and equipment, net $6,979,734 $7,310,640
========== ==========
10
3. LONG-TERM DEBT
Long-term debt at September 30, 2006 consisted of the following:
The Company is obligated pursuant to capital leases financed through
Industrial Development Bonds. Such obligations were incurred during 1997 and
2002 in connection with building and equipment expansion at the Company's
Alabama manufacturing and distribution facility. Both bear interest at tax-free
rates that adjust weekly. At September 30, 2006, approximately $1,868,100 and
$2,990.000 were outstanding attributable to the 1997 and 2002 series,
respectively. During the nine months ended September 30, 2006 interest rates
ranged between 3.3% and 3.9%. Principal and accrued interest retiring the
underlying bonds are payable quarterly through March, 2012 and July, 2017 for
the 1997 and 2002 series, respectively. Repayment of the bonds is guaranteed by
a Letter of Credit issued by the Company's primary commercial bank. Security for
the Letter of Credit is a priority first mortgage on our Alabama, Kinpak,
facility as well as the manufacturing equipment utilized therein..
The Company, through its subsidiary, Kinpak Inc., was obligated pursuant to
various capital lease agreements covering equipment utilized in the Company's
Alabama plant. Such obligations, aggregating approximately $ 66,000 at September
30, 2006, have varying maturities through 2009 and carry interest rates ranging
from 7% to 12%.
During April 2005 we entered into a financing obligation with Regions Bank
whereby they advanced us $500,000 to finance equipment acquisitions at our
Kinpak facility. Such obligation is due in monthly installments of principal
aggregating approximately $8,300 plus interest at prevailing rates (the
outstanding balance and interest rate on this obligation at September 30, 2006
were approximately $358,300 and 7.83% per annum, respectively) through maturity
on April 15, 2010.
During the quarter ended December 31, 2005, we finalized a $1.5 million
revolving credit facility with our President and CEO, Peter G. Dornau. At
September 30, 2006 and December 31, 2005, the gross obligation aggregating
$1,400,000 and $1,150,000, respectively was outstanding pursuant to this
obligation which is due in October 2010 along with accrued interest at the rate
of prime plus 2%. In connection with his offering this financing arrangement to
the Company, we issued warrants to Mr. Dornau to purchase a maximum of 1 million
shares of our common stock. Such warrants are exercisable 500,000 shares at
$1.13 and 500,000 shares at $.863. The exercise prices were determined by the
closing bid of our stock plus ten (10) percent on each date of grant. In
addition, he has the right, at his sole discretion, to convert such debt into a
maximum of 1.5 million shares of our common stock at the rate of $1.00 per
share. The gross obligation was reduced by an allocation of imputed interest
associated with the warrants issued to Mr. Dornau. The initial amount of such
allocation was $310,898 which will be amortized and charged against operations
as additional interest expense over the sixty (60) month term of this financing.
During the nine months ended September 30, 2006, amortization of approximately
$46,600 was charged against operations. This obligation is subordinate to all
borrowings from Regions Bank.
The composition of these obligations at September 30, 2006 and December 31,
2005 were as follows:
Current Portion Long Term Portion
2006 2005 2006 2005
-------- -------- ---------- ----------
Industrial Development Bonds $460,000 $460,000 $4,398,108 $4,745,000
Notes payable 99,996 99,996 258,343 331,448
Capitalized equipment leases 25,579 20,856 40,439 35,408
Subordinated note payable-P. Dornau - - 1,400,000 1,150,000
-------- -------- ---------- ----------
585,575 580,852 6,096,890 6,261,856
Less imputed interest - Subordinated
note payable-P. Dornau - - ( 264,262) ( 310,898)
-------- -------- ----------- -----------
$585,575 $580,852 $5,832,628 $5,950,958
======== ======== ========== ===========
11
Required principal payment obligations attributable to the foregoing as of
December 31, 2005 are tabulated below:
Year ending December 31,
2006 $ 580,852
2007 579,279
2008 571,757
2009 564,360
2010 1,643,352
Thereafter 2,903,108
----------
Total $6,842,708
==========
4. RELATED PARTY TRANSACTIONS
At September 30, 2006 and December 31, 2005, the Company had amounts
receivable from and payable to affiliated companies, which are directly or
beneficially owned by the Company's president, aggregated a net receivable of
approximately $900 and $29,000, respectively. Such amounts result from sales to
the affiliates, allocations of expenses incurred by the Company on the
affiliates' behalf and funds advanced to or from the Company. Ina addition, at
September 30, 2006, the Company was indebted to such affiliates in the
approximate amount of 42,700.
Sales to our European affiliate aggregated approximately $81,200, $183,200,
$485,2009, and $724,000 during the three months ended September 30, 2006 and
2005, and the nine months ended September 30, 2006 and 2005, respectively.
During March 2006, our lessor affiliate offered to forgive the Company's
indebtedness to such entity in the approximate amount of $295,000. Accordingly,
during the first quarter of 2006, such amount was credited to Additional paid-in
capital and increased the net amount due from affiliates.
On May 1, 1998, the Company entered into a ten year lease for approximately
12,700 square feet of office and warehouse facilities in Fort Lauderdale,
Florida from an entity owned by certain officers of the Company. The lease
required a minimum rental of $94,800 for the first year and provides for a
maximum 2% increase on the anniversary of the lease throughout the term.
Additionally, the landlord is entitled to its pro-rata share of all taxes,
assessments, and any other expenses that arise from ownership. Rent charged to
operations aggregated approximately $75,300, $71,800, $25,100, and $25,100
during the nine months ended September 30, 2006 and 2005, and the three months
ended September 30, 2006 and 2005, respectively.
The Company has entered into a corporate guaranty of a mortgage note
obligation of such affiliate. The obligation aggregating approximately $314,100
and $336,900 at September 30, 2006 and December 31, 2005, respectively is
primarily secured by the real estate leased to the Company.
The following is a schedule of minimum future rentals on the non-cancelable
operating leases.
Year ending December 31,
2006 $ 104,507
2007 106,597
2008 108,729
2009 -
2010 -
Thereafter -
----------
Total $ 319,833
==========
12
5. EARNINGS (LOSS) PER SHARE
Nine months Three months
ended September 30, ended September 30,
2006 2005 2006 2005
--------- --------- --------- ---------
Weighted-average common
shares outstanding 5,935,316 5,651,260 5,978,316 5,651,260
Dilutive effect of stock plans,
other options & conversion rights 170,898 93,507 391,617 69,818
--------- --------- --------- ---------
Diluted weighted-average shares
outstanding 6,106,214 5,744,767 6,369,933 5,721,078
========= ========= ========= =========
6. INCOME TAXES
As of September 30, 2006, our potential Deferred Tax Asset aggregated
approximately $472,000. Estimated Income Taxes attributable to our earnings for
the nine months ended September 30, 2006 and deferred Income Taxes associated
with the timing differences between policies reflected in financial reporting
and for Income Tax purposes aggregated approximately $221,100 and $247,800,
respectively. Accordingly, the result of the foregoing is a net Deferred Tax
Asset of approximately $3,000. There is no assurance that the Company will ever
avail itself of all or a portion of such credits. We established a valuation
allowance of 100% against this deferred asset.
7. SUBSEQUENT EVENT
On November 10, 2006, our President and CEO, Peter G. Dornau indicated that
he is exercising his right to convert our indebtedness to him into common stock
pursuant to the terms of our Revolving Line of Credit. Had this decision been
reflected in the accompanying financial statements as of September 30, 2006 our
total long-term debt would be reduced and shareholders' equity been increased by
approximately $1,250,000, respectively. Net income and related earnings per
share for the nine months ended September 30, 2006 would not have been
materially impacted by this subsequent event.
Forward-looking Statements:
Certain statements contained herein, including without limitation
expectations as to future sales and operating results, constitute
forward-looking statements pursuant to the safe harbor provisions of the Private
Securities Litigations Reform Act of 1995. For this purpose, any statements
contained in this report that are not statements of historical fact may be
deemed forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "will", "expect", "anticipate", "intend",
"could" or the negative other variations thereof or comparable terminology are
intended to identify forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Factors which may affect the Company's results
include, but are not limited to, the highly competitive nature of the Company's
industry; reliance on certain key customers; consumer demand for marine
recreational vehicle and automotive products; advertising and promotional
efforts, and other factors. The Company will not undertake and specifically
declines any obligation to update or correct any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations
Overview:
We are a leading manufacturer and distributor of chemical formulations
serving the appearance and functional categories of the marine, automotive,
recreational vehicle and home care markets. We were founded in 1973 and have
conducted operations within the aforementioned categories since then. During
1984, we changed our corporate name to Ocean Bio-Chem, Inc. (the parent company)
from our former name, Star brite Corporation. Our operations were conducted as a
privately owned company through March, 1981 when we completed our initial public
offering of common stock.
13
Critical accounting policies and estimates:
Principles of consolidation - Our consolidated financial statements include
the accounts of the parent company and its wholly owned subsidiaries. All
significant inter-company accounts and transactions are eliminated in
consolidation.
Revenue recognition - Revenue from product sales is recognized when
persuasive evidence of an arrangement exists, delivery to customer has occurred,
the sales price is fixed and determinable, and collectibility of the related
receivable is probable.
Prepaid advertising and promotion - In any given year we introduce certain
new products to our customers. In connection therewith, we produce new
promotional items to be distributed over a period of time. We follow the policy
of amortizing these costs over a one-year basis.
Property, plant and equipment - Property, plant and equipment are stated at
cost. Depreciation is provided over the estimated useful lives of the related
assets using the straight-line method.
Stock based compensation - Prior to January 1, 2006 we followed the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, to
record compensation costs. Opinion No. 25 requires that compensation cost be
based on the difference, if any, between the quoted market price of the stock
and the price the employee must pay to acquire the stock depending on the terms
of the award. Effective January 1, 2006 we adopted the provisions of Statement
of Financial Accounting Standards No. 123R to record such compensation costs.
Prior thereto, such matters were disclosed on a pro-forma basis in the notes to
our consolidated financial statements.
Concentration of credit risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable. Over the past three years, our five largest customers
historically represented a range of approximately 45% to 55% of consolidated
gross revenues and 25% to 77% of consolidated accounts receivable, respectively.
We have experienced a longstanding relationship with each of these entities and
have always collected open receivable balances in a timely manner. However, the
loss of any of these customers could have an adverse impact on our operations.
Fair value of financial instruments - The carrying amount of cash
approximates its fair value. The fair value of long-term debt is based on
current rates at which we could borrow funds with similar remaining maturities,
and the carrying amount approximates fair value.
Income taxes - We file consolidated federal and state income tax returns.
We have adopted Statement of Financial Accounting Standards No. 109 in the
accompanying consolidated financial statements. The only temporary differences
included therein are attributable to differing methods of reflecting
depreciation for financial statement and income tax purposes.
Trademarks, trade names and patents - The Star brite trade name and
trademark were purchased in 1980 for $880,000. The cost of such intangible
assets was amortized on a straight-line basis over an estimated useful life of
40 years through December 31, 2001. Effective January 1, 2002 and reporting
periods thereafter and pursuant to Statement of Financial Accounting Standards
No. 142, we have determined that the carrying value of such intangible assets
relating to our Star brite brand does not require further amortization. In
addition, we own certain patents that we believe are valuable in limited product
lines, but not material to our success or competitiveness in general. There are
no capitalized costs attributable to our patents.
Translation of Canadian currency - The accounts of our Canadian subsidiary
are translated in accordance with Statement of Financial Accounting Standards
No. 52, which requires that foreign currency assets and liabilities be
translated using the exchange rates in effect at the balance sheet date. Results
of operations are translated using the average exchange rate prevailing
throughout the period. The effects of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
accumulated as the translation adjustment in shareholders' equity. Realized
gains and losses from foreign currency transactions, if any, are included in
Comprehensive earnings of the period.
Liquidity and Capital Resources:
The primary sources of our liquidity are our operations and short-term
borrowings from Regions Bank pursuant to a revolving line of credit aggregating
$6 million. Such line matures May 31, 2007, bears interest at the 30 Day LIBOR
plus 275 basis points (approximately 8.08% at September 30, 2006) and is secured
by our trade receivables, inventory and intangible assets. As of each year-end,
December 31, we are required to maintain a minimum working capital of $1.5
million and meet certain other financial covenants during the term of the
agreement. As of September 30, 2006, we were obligated under this arrangement in
the amount of $5,525,000.
14
In connection with the purchase and expansion of the Alabama facility, we
closed on Industrial Development Bonds during 1997 aggregating approximately $5
million. The proceeds were utilized for both the repayment of certain advances
used to purchase the Alabama facility and to expand such facility for our future
needs. During July 2002, we completed a second Industrial Development Bond
("IDB") financing aggregating $3.5 million through the City of Montgomery,
Alabama. Such transaction funded an approximate 70,000 square foot addition to
the manufacturing facility as well as the remaining machinery and equipment
additions required therein. This project was completed during 2003.
In order to market the IBD at favorable rates, we obtained a substitute
irrevocable letter of credit for the 1997 issue and a new irrevocable letter of
credit for the 2002 issue. Under such letters of credit agreements, maturing on
July 31, 2007, we are required to maintain a stipulated level of working
capital, a designated maximum debt to tangible ratio, and a required debt
service coverage ratio. Such letters of credit are secured by a first priority
mortgage on the underlying Alabama facility and equipment.
The bonds are marketed weekly at the prevailing rates for such tax-exempt
instruments. During the nine months ended September 30, 2006 such bonds carried
interest ranging between 3.3% and 3.9% annually. Interest and principal are
payable quarterly. We believe current operations are sufficient to meet these
obligations.
On April 12, 2005 we entered into a financing obligation with Regions Bank
whereby they advanced us $500,000 to finance equipment acquisitions at our
Kinpak facility. Such obligation is due in monthly installments of principal
aggregating approximately $8,300 plus interest at prevailing rates (the
outstanding balance and interest rate on this obligation at September 30, 2006
were approximately $358,300 and 7.83% per annum, respectively). The maturity on
this obligation is April 15, 2010.
During the quarter ended December 31, 2005, we finalized a $1.5 million
revolving credit facility with our president and CEO, Peter G. Dornau. At
September 30, 2006 and December 31, 2005, the gross obligation aggregating
$1,400,000 and $1,150,000, respectively was outstanding pursuant to this
obligation which is due in October 2010 along with accrued interest at the rate
of prime plus 2%. In connection with his offering this financing arrangement to
the Company, we issued warrants to Mr. Dornau to purchase a maximum of 1 million
shares of our common stock. Such warrants are exercisable 500,000 shares at
$1.13 and 500,000 shares at $.863. The exercise prices were determined by the
closing bid of our stock plus ten (10) percent on each date of grant. In
addition, he has the right, at his sole discretion, to convert such debt into a
maximum of 1.5 million shares of our common stock at the rate of $1.00 per
share. The gross obligation was reduced by an allocation of imputed interest
associated with the warrants issued to Mr. Dornau. The initial amount of such
allocation was $310,898 which will be amortized and charged against operations
as additional interest expense over the sixty (60) month term of this financing.
During the nine months ended September 30, 2006, amortization of approximately
$46,600 was charged against operations. This obligation is subordinate to all
borrowings from Regions Bank.
We are involved in making sales in the Canadian market and must deal with
the currency fluctuations of the Canadian currency. We do not engage in currency
hedging and deal with such currency risk as a pricing issue.
During the past few years, we have introduced various new products to our
customers. At times this has required us to carry greater amounts of overall
inventory and has resulted in lower inventory turnover rates. The effects of
such inventory turnover have not been material to our overall operations. We
believe that all required capital to maintain such increases can continue to be
provided by operations and current financing arrangements.
Many of the raw materials that we use in the manufacturing process are
commodities that are subject to fluctuating prices. We react to long-term
increases by passing along all or a portion of such increases to our customers.
As of September 30, 2006 and through the date hereof, we did not and do not
have any material commitments for capital expenditures, nor do we have any other
present commitment that is likely to result in our liquidity increasing or
decreasing in any material way. In addition, except for our need for additional
capital to finance inventory purchases, we know of no trend, additional demand,
event or uncertainty that will result in, or that is reasonably likely to result
in, our liquidity increasing or decreasing in any material way.
As disclosed in our Form 10-Q for the quarter ended March 31, 2005, our
largest customer, West Marine, publicly announced their adoption of a policy to
reduce their overall inventory levels. This resulted in an approximate
$4,294,000 decrease in sales to them for the year ended December 31, 2005
compared to 2004. Our products have historically sold well at their retail
stores and they have indicated to us that such was the case during 2005. Current
period sales to West Marine represented an increase of approximately $2.9
million for the nine months ended September 30, 2006 over the comparable period
in 2005.
15
Corporate management has enhanced its analysis, supervision and overall
involvement with our manufacturing facility. We have identified several areas
that require improvement and through increased on-site management presence,
major personnel changes, adoption of certain strategic enhancements to our
manufacturing process, and a renewed commitment from our team in Alabama to
strive for improved efficiency and cost savings, we believe that we will achieve
a material reduction in manufacturing cost thereby improving product margins and
operating results at Kinpak during 2006.
On March 25, 1999, the Company entered into a loan arrangement with an
entity owned 50% each by our President and Vice President - Advertising, Messrs.
Peter G. Dornau and Jeffrey J. Tieger, respectively whereby we borrowed $400,000
to be repaid in monthly installments of approximately $3,400 plus prevailing
interest at prime plus 1%. On March 9, 2006 we received notification from the
shareholders of said entity that they were forgiving this obligation and,
accordingly, the Company has no further obligation associated with this debt. At
that date the principal balance outstanding amounted to $295,752 and such amount
is reflected on the accompany consolidated statement of shareholders' equity as
an increase to Additional paid-in capital.
Results of Operations:
For The Three Months Ended September 30, 2006 compared to the Three Months
ended September 30, 2005:
Net sales increased approximately $1,772,000 or 30% for the quarter ended
September 30, 2006 compared to the same quarter of the preceding year. The
consolidated net sales aggregated approximately $7,725,000 and $5,952,800,
respectively. Management attributes this increase to both timing and increased
revenues associated with our Anti-freeze season as well as enhanced sales to
West Marine comparing the current period with the same period in 2005.
Cost of goods sold amounted to approximately $5,543,700 or 71.8% of net
sales compared to $4,940,800 or 83.0% of net sales for the quarters ended
September 30, 2006 and 2005, respectively. These results were favorably effected
by a sales price increase passed along to substantially all customers effective
January, 2006, modifications initiated in certain manufacturing processes
however, unfavorably impacted as the result of spreading our fixed element of
manufacturing overhead over the reduced sales levels experienced during the
current quarter.
Selling and administrative expenses decreased approximately $61,100 or 6.4%
when comparing the quarters ended September 30, 2006 and 2005. Certain expenses
which are components of this grouping increased and others decreased. However,
the significant changes were reduced personnel costs, principally at Kinpak, and
lower professional fees and other outside services, including consulting and
outsourced data processing fees.
Advertising and promotion increased approximately $74,600 or approximately
21.1% comparing the three months ended September 30, 2006 and 2005. This was the
result of advertising costs associated with our Starton product line and
contractual co-operative advertising programs related to the increased sales
experienced during the current period.
Interest expense increased by approximately $71,800 comparing the quarter
ended September 30, 2006 to the corresponding quarter in 2005. This principally
resulted from increasing interest rates, the accrual of interest on the
revolving line loaned to the Company by our president and CEO, Peter G. Dornau,
and the amortization of imputed interest associated with the foregoing
obligation.
Our net income for the quarter ended September 30, 2006 amounted to
approximately $670,700 compared to a loss of $418,300 for the comparable period
in 2005. As a result of available Income Tax carryovers, there was no provision
or benefit for income taxes in the current quarter.
For the Nine Months Ended September 30, 2006 Compared To The Nine Months
Ended September 30, 2005
Net sales increased 20.7% to approximately $16,466,200 for the nine months
ended September 30, 2006 compared to approximately $13,635,700 for the nine
months ended September 30, 2005. Management attributes such increase
significantly to our largest customer resuming their purchasing after apparently
reaching their inventory goals, new customer development, higher sales
associated with our Anti-freeze season, and sales price increases passed along
to customer to cover increasing costs.
Cost of goods sold decreased to 71.4 % of net sales for the nine months
ended September 30, 2006 compared to 80.3% of net sales for the nine months
ended September 30, 2005. This change resulted was attributed sales price
increases passed along to our customers, certain initiatives adopted in our
manufacturing processes, and the result of spreading our fixed element of
manufacturing overhead over the higher sales levels experienced during the six
month period.
Advertising and promotion expenses decreased approximately $124,400 or
12.1% for the 2006 period when compared to comparable expenses in the same time
period in the previous year. This resulted primarily from planned advertising
programs in media and co-op advertising programs for the current year.
16
Selling and administrative expenses decreased by approximately $286,900 or
9.9% for the nine months ended September 30, 2006 compared to the nine months
ended September 30, 2005. . Certain expenses which are components of this
grouping increased and others decreased. However, the significant changes were
reduced personnel costs, principally at Kinpak, and lower professional fees and
other outside services, including consulting and outsourced data processing
fees.
Interest expense for the 2006 period increased approximately $195,400 when
compared to the same nine month period of 2005. This principally resulted from
increasing interest rates, the accrual of interest on the revolving line loaned
to the Company by our president and CEO, Peter G. Dornau, and the amortization
of imputed interest associated with the foregoing obligation.
Our net income was approximately $650,300 for the nine months ended
September 30, 2006 compared to a net loss of approximately $1,305,700 for the
nine months ended September 30, 2005. As a result of available Income Tax
carryovers, there was no provision or benefit for income taxes in the current
nine month period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial and commodity, principally petroleum based raw materials, market
prices and interest rates. We are exposed to market risk in the areas of changes
in borrowing rates in the United States and changes in foreign currency exchange
rates. Historically, and as of September 30, 2006, we have not used derivative
instruments or engaged in hedging activities to minimize market risk.
Interest rate risk
As of September 30, 2006, we had floating interest rates on our industrial
development revenue bonds and our working capital line of credit facility. As of
September 30, 2006 the interest rate on our approximate $4,858,100 outstanding
balance of industrial revenue bonds was approximately 3.9% per annum and the
interest rate on our line of credit facility was based on the 30 day LIBOR rate
plus 275 basis points (the effective interest rate at September 30, 2006 was
8.08%). We do not expect any changes in interest rates to have a material impact
on our operations during the year ending December 31, 2006.
Foreign currency risk
We sell products in Canada, based on the Canadian dollar. Thereby, we have
exposure to changes in exchange rates. Changes in the Canadian dollar/U.S.
dollar exchange rates may positively or negatively affect our gross margins,
operating income and retained earnings. We do not believe that near-term changes
in the exchange rates, if any, will result in a material effect on our future
earnings, fair values or cash flows, and therefore, we have chosen not to enter
into foreign currency hedging transactions. We cannot assure you that this
approach will be successful, especially in the event of a significant and sudden
change in the value of the Canadian dollar.
Concentration and credit risk
We maintain cash balances at several financial institutions, which are
insured by the Federal Deposit Insurance Corporation up to $100,000. At times,
our cash balances may exceed federally insured limits. We have not experienced
any losses in such accounts and we believe the risk related to these deposits is
minimal.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We have carried out an
evaluation under the supervision of management, including the President and
Chief Executive Officer ("CEO") and the Chief Operating Officer and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, our CEO and
CFO have concluded that, as of September 30, 2006, our disclosure controls and
procedures were effective to ensure that information required to be disclosed by
us in the reports filed or submitted by us under the Securities Exchange Act of
1934, as amended, was recorded, processed, summarized and reported within the
time periods specified in the rules and regulations of the SEC, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports was accumulated and communicated to management,
including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosures. During the past quarter, there have not been any changes
in our internal control over financial reporting that have materially affected,
or are reasonably likely to materially affect our internal control over
financial reporting.
17
Limitations on the Effectiveness of Controls. Our management, including the
CEO and CFO, does not expect that our disclosure or internal controls will
prevent all errors or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected. Despite these limitations, our CEO
and CFO have concluded that our disclosure controls and procedures (1) are
designed to provide reasonable assurance of achieving their objectives and
(2) do provide reasonable assurance of achieving their objectives.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings:
We are not a party to any material litigation presently pending nor, to the
best knowledge of the Company, have any such proceedings been threatened.
Item 1A. - Risk Factors
Set forth any material changes from Risk Factors as previously reported in
the Registrant's Form 10-K in response to Item 1A. in Part 1 of Form 10-K.
There have been no material changes
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds: Not
applicable
Item 3. - Defaults Upon Senior Securities: Not applicable
Item 4 - Submission of Matters to Vote of Security Holders: Not applicable
Item 5. - Other Information: (a) Not applicable (b) We have no standing
Nominating Committee of the Board of Directors. All members of the Board
participate in the consideration of nominees to the Board.
Item 6. - Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the Undersigned
there unto duly authorized.
OCEAN BIO-CHEM, INC.
Date: November 10, 2006 /s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board of Directors
and Chief Executive Officer
/s/ Edward Anchel
Edward Anchel
Chief Financial Officer
18
Exhibit 31.1
CERTIFICATION
I, Peter G. Dornau certify that:
1. I have reviewed this Form 10-Q of Ocean Bio-Chem, Inc. as of and for the
period ended September 30, 2006;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: November 10, 2006 /s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Edward Anchel certify that:
1. I have reviewed this Form 10-Q of Ocean Bio-Chem, Inc. as of and for the
period ended September 30, 2006;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: November 10, 2006 /s/ Edward Anchel
Edward Anchel
Chief Financial Officer
Exhibit 32.1
CERTIFICATION
Pursuant to 18U.S.C.Section 1350, the undersigned officers of Ocean
Bio-Chem, Inc. (the "Company"), hereby certify that the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2006 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operation of the Company.
Dated: November 10, 2006
/s/ Peter G. Dornau
Peter G. Dornau
Chairman of the Board of
Directors and Chief
Executive Officer
/s/ Edward Anchel
Edward Anchel
Chief Financial Officer