UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 20162017

or

☐   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 000-11102

OCEAN BIO-CHEM, INC.

(Exact name of registrant as specified in its charter)

4041 SW 47 AVENUE

FORT LAUDERDALE, FLORIDA  33314

(Address of principal executive offices)

954-587-6280

(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ☐   No ☒ 

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

Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒    No  ☐ 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐ 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ☐   No  ☒ 

The aggregate market value of the Common Stock held by non-affiliates of the registrant at June 30, 20162017 was $7,071,550,$12,234,396, based upon the closing price of the registrant’s common stock on the NASDAQ Capital Market.  For purposes of making this computation only, all executive officers, directors and beneficial owners of more than five percent of the registrant'sregistrant’s Common Stock are deemed to be affiliates. 

At March 31, 2017, 9,146,93729, 2018, 9,254,580 shares of the registrant’s Common Stock were outstanding. 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant'sregistrant’s definitive proxy statement, which will be filed not later than April 30, 2017,2018, are incorporated by reference in Part III of this report.

OCEAN BIO-CHEM, INC.

TABLE OF CONTENTS

Forward-looking Statements:

Certain statements contained in this Annual Report on Form 10-K, including without limitation, the anticipated time of completion of the expansion of our manufacturing and warehouse facilities,facilities; our ability to locate substitute manufacturing facilities in the event arrangements with any third party manufacturer are discontinued,discontinued; our ability to renew or replace our revolving credit facility,facility; anticipated decreases in sellingrelocation of our fabrication and administrative expenses,assembly operations relating to brushes used for cleaning boats, automobiles and recreational vehicles; our ability to provide required capital to support inventory levels,levels; the effect of price increases in raw materials that are petroleum or chemical based or commodity chemicals on our margins,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 forward-looking statements.  Without limiting the generality of the foregoing, words such as "believe," "may," "will," "expect," "anticipate," "intend,"“believe,” “may,” “will,” “expect,” “anticipate,” “intend,” or "could,"“could,” including the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements.  These statements involve known and unknown risks, uncertainties and other factors which 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, unanticipated delays in completion of the expansion of our manufacturing and warehouse facilities; the highly competitive nature of our industry; reliance on certain key customers; changes in consumer demand for marine, recreational vehicle and automotive products; advertising and promotional efforts; exposure to market risks relating to changes in interest rates, foreign exchange rates, prices for raw materials that are petroleum or chemical based and other factors.factors discussed below under Item 1A, “Risk Factors.”

PART I

Item 1.  Business

General:

We are principally engaged in the manufacture, marketing and distribution of a broad line of appearance, performance and maintenance products for the marine, automotive, power sports, recreational vehicle and outdoor power equipment markets, under the Star brite® and Star Tron® brand names. We sell these products within the United States of America and Canada.  In addition, we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products.  We also manufacture, market and distribute disinfectant, sanitizing and deodorizing products under the Performacide® and Star brite® brand names, utilizing a patented delivery system for use with products containing chlorine dioxide. Unless the context indicates otherwise, we sometimes refer to Ocean Bio-Chem, Inc. and its consolidated subsidiaries as “the Company," "we"” “we” or "our.“our.”

Ocean Bio-Chem, Inc. was incorporated in 1973 under the laws of the state of Florida.  In 1981, we purchased, from Peter G. Dornau and Arthur Spector, the co-founders of the Company, rights to the Star brite® trademark and related products for the United States and Canada.  Mr. Dornau, our Chairman, President and Chief Executive Officer, has retained rights to these assets with respect to all other geographic areas.  Accordingly, products we manufacture that are sold outside of the United States and Canada are purchased from us and distributed by two companies owned by Mr. Dornau.  Net sales to the two companies in 20162017 and 20152016 totaled approximately $2,070,000 and $1,850,000 or 5.3% and $2,075,000 or 5.1% and 6.1% of our net sales, respectively.  See Note 9 to the consolidated financial statements included in this report for additional information.

Because our operations involve, in all material respects, substantially similar manufacturing and distribution processes, our operations constitute one reportable segment for financial reporting purposes.

Recent Developments:

We are proceeding withnearing completion of a project to expandinvolving expansion of the manufacturing, warehouse and distribution facilities of our subsidiary, Kinpak,KINPAK Inc. ("Kinpak"(“Kinpak”) in Montgomery, Alabama. As currently contemplated, the project will entailAlabama (the “Expansion Project”). The Expansion Project principally entails an approximately 85,000 square feet addition to the facilities and an expansion of Kinpak’s outdoor blended tank farm to accommodate an additional 500,000 gallons in tank capacity, thereby doubling the tank farm’s current capacity. The first phase ofaddition to the project, involvingfacilities and expansion of the tank farm was initiated earlier in 2017. We are using internal funds for this phase, although we currently are in negotiations to finance the costscompleted. The remaining parts of the entire project. Nevertheless,Expansion Project involve additional upgrades to warehouse facilities and installation of new manufacturing equipment. At December 31, 2017, expenditures in connection with the Expansion Project aggregated approximately $5.1 million, and we cannot assure that such financing will be obtained. We currently estimate that the projecttotal cost of the Expansion Project will be approximately $4.7$6.0 million. The Expansion Project is expected to be completed and placed into service during 2018. Most of the Expansion Project is being financed with the proceeds of an industrial development bond financing, described in Note 6 to the consolidated financial statements included in this report.

Products:

The products that we manufacture and market include the following:

Marine:  Our marine line consists of polishes, cleaners, protectants and waxes under the Star brite^® brand name, enzyme fuel treatment under the Star Tron^® brand name, and private label products sold by some of our customers.  The marine line also includes motor oils, boat washes, vinyl cleaners, protectants, teak cleaners, teak oils, bilge cleaners, hull cleaners, silicone sealants, polyurethane sealants, polysulfide sealants, gasket materials, lubricants, antifouling additives and anti-freeze coolants.  In addition, we manufacture a line of brushes, poles, tie-downs and other related marine accessories.

Automotive:  We manufacture a line of automotive products under the Star brite® and Star Tron® brand names  The automotive line includes fuel treatments for both gas and diesel engines, motor oils, greases and related items.  Our Star Tron® enzyme fuel treatment is designed to eliminate and prevent engine problems associated with fuel containing 10% ethanol (E-10 fuel) including, among other things, fuel degradation, debris in fuel (gum and varnish formation) and ethanol’s propensity to attract water (which can adversely affect octane). ItStar Tron® fuel treatment also increases fuel economy by cleaning the fuel delivery system and facilitating more complete and uniform combustion.  In addition, we produce anti-freeze and windshield washes under the Star brite® brand and under private labels for customers.  We also produce automotive polishes, cleaners and other appearance items.

Recreational Vehicle/Power Sports:  We market Star Tron® fuel treatment and other specialty products to the recreational vehicle market, including snow mobiles, all-terrain vehicles and motorcycles.  For power sports enthusiasts, Star Tron® provides a viable solution to a number of problems associated with E-10 fuel, which is fuel containing 10% ethanol.fuel.  Other specialty recreational vehicle/power sports products include cleaners, polishes, detergents, fabric cleaners and protectors,protectants, silicone sealants, waterproofers, gasket materials, degreasers, vinyl cleaners and protectors,protectants, toilet treatment fluids and anti-freeze/coolant.

Outdoor Power Equipment/ Lawn & Garden: We market Star Tron® as a solution to help rectify a number of operating engine problems associated with E-10 fuel in commercial lawn equipment and other home and garden power equipment.

Disinfectants, Sanitizers and Deodorizers: Our line of disinfectant, sanitizing and deodorizing products are marketed under the Performacide^®and Star brite^® brand names. Performacide^® products include disinfectants for hard, non-porous surfaces, air care products for deodorizing and products to eliminate mold and mildew. The U.S. Environmental Protection Agency has accepted labeling for Performacide® used in hard surface applications that claims, among other things, effectiveness as a virucide against a variety of viruses, including HIV-1, Influenza-A, Herpes Simplex-2, Poliovirus-1 norovirus and rotavirus; as a disinfectant against a number of different types of bacteria; and as a sanitizer against certain types of bacteria that cause food borne illnesses. We are directing distribution efforts principally towards the marine, automotive, and home restoration, law enforcement and agriculture markets, and to institutions such as schools and to travel and leisure facilities such as hotels and cruise ships.schools.

Contract Filling and Blow Molded Bottles:  We blend and package a variety of chemical formulations to our customers’ specifications.  In addition, we manufacture for sale to various customers assorted styles of both PVC and HDPE blow molded bottles.

Manufacturing:  We produce the majority of our products at Kinpak’s manufacturing facilities in Montgomery, Alabama.  In addition, we contract with various third party manufacturers to manufacture some of our products, which are manufactured to our specifications using our provided formulas.  Each third party manufacturer enters into a confidentiality agreement with us.

We purchase raw materials from a variety of suppliers; all raw materials used in manufacturing are readily available from alternative sources.  We design our own packaging and supply our outside manufacturers with the appropriate design or packaging.  We believe that our internal manufacturing capacity and our arrangements with our current outside manufacturers are adequate for our present needs.

In the event that arrangements with any third party manufacturer are discontinued, we believe that we will be able to locate substitute manufacturing facilities without a substantial adverse effect on our manufacturing and distribution.

Marketing and Significant Customers: Our branded and private label products are sold through national retailers such as Wal-Mart, Tractor Supply, West Marine and Bass Pro Shops.  Additionally, we market our products via online retailers.  We also sell to national and regional distributors that resell our products to specialized retail outlets.  In the case of Performacide^® disinfectant/sanitizing products, we sell to distributors that resell our products, in some cases under private labels, to end users principally in the marine, automotive, home restoration, automotive, law enforcement and agriculture markets.

Net sales to each of two customers exceeded 10% of our consolidated net sales, and in the aggregate constituted approximately 34.0% and 33.0% and 38.2% of our consolidated net sales for the years ended December 31, 20162017 and 2015,2016, respectively.  Net sales to our five largest unaffiliated customers for the years ended December 31, 20162017 and 20152016 amounted to approximately 48.8%52.2% and 49.0%48.8% of our consolidated net sales, respectively, and at December 31, 20162017 and 2015,2016, outstanding accounts receivable balances from our five largest unaffiliated customers aggregated approximately 36.0%50.9% and 39.4%36.0% of our consolidated accounts receivable, respectively.

We market our products through both internal salesmen and external sales representatives who work on an independent contractor commission basis.  Our personnel also participate in sales presentations and trade shows.  In addition, we market our brands and products through advertising campaigns in national magazines, on television, on the internet, in newspapers and through product catalogs.  Our products are distributed primarily from Kinpak’s manufacturing and distribution facility in Montgomery, Alabama.  Since 2008, we have participated in a vendor managed inventory program with one major customer. See Note 2 to the consolidated financial statements included in this report for additional information.

Backlog, seasonality, and selling terms: We had no significant backlog of orders at December 31, 2016.2017.  We generally do not give customers the right to return products.  The majority of our products is non-seasonal and is sold throughout the year.  Normal trade terms offered to credit customers range from 30 to 180 days depending on the nature of the customer.days.  However, at times we offer extended payment terms or discount arrangements as purchasing incentives to customers.  TheseHistorically, these initiatives dohave not materially affect customaryaffected our overall profit margins.

Competition:

Competition with respect to our principal product lines is described below.  The principal elements of competition affecting all of our product lines are brand recognition, price, service and the ability to deliver products on a timely basis.

Marine:  We have several national and regional competitors in the marine marketplace.  We do not believe that any competitor or small group of competitors hold a dominant market share.  We believe that we can increase or maintain our market share through expenditures directed to our present advertising and distribution channels.

Automotive:  There are a large number of companies, both national and regional, that compete with us.  Many are more established and have greater financial resources than we do.  While our market share is small, the total market size is substantial.  We believe that we have established a reasonable market share through our present advertising and distribution channels, considering the large size of this market.

Recreational Vehicle/Power Sports:  We compete with national and regional competitors.  We do not believe that any competitor or small group of competitors hold a dominant market share.  We believe that we can increase or maintain our market share by utilizing similar advertising and distribution channels similar to those we use in the marine market.

Outdoor Power Equipment/Lawn & Garden:  We compete with several established national and regional competitors.  We do not believe that any competitor or small group of competitors hold a dominant market share.  We have attempted to make inroads in this market by emphasizing Star Tron®Tron^®’s unique formulation and by increasing our advertising and attendance at trade shows.

Disinfectants, Sanitizers and Deodorants: There are a large number of companies that compete with us, many of which are much larger, and have much greater financial resources than we do. We emphasize the effectiveness of chlorine dioxide, coupled with the convenience in application of our Performacide^®products.

Trademarks:  We have obtained registered trademarks for Star brite®, Star Tron®, Performacide^®and other trade names used on our products.  We view our trademarks as significant assets because they provide product recognition.  We believe that our intellectual property is protected,trademarks provide protection in the geographic markets we serve, but we cannot assure that our intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. 

Patents:  We own several patents, the most significant of which relate to a delivery system for use with products containing chlorine dioxide (the “ClO₂Patents”).  The ClO₂ patents expire in 2022.  We have encountered difficulty in protecting the ClO₂patents through litigation.  See “Risk Factors - If we do not utilize or successfully assert intellectual property rights, our competitiveness could be materially adversely affected,” in Item 1A of this report for additional information.  A 2014 adverse judgment in patent litigation that was upheld on appeal in 2015 has limited the scope of protection provided by the patent.  To date, we do not believe the judgment has materially impaired our ability to effectively market and distribute our Performacide^®products.  However, we are unable to predict the long-term competitive effect of the judgment on these products. 

New Product Development:  We continue to develop specialized products for the marine, automotive, recreational vehicle/power sports and outdoor power equipment/lawn and garden markets.  Expenditures for new product development have not been significant and are charged to operations in the year incurred.

Personnel:  At December 31, 2016,2017, we had 128140 full-time employees.employees and two part-time employees who constituted one full-time equivalent.  The following table provides information regarding personnel working for the Company and its subsidiaries at December 31, 2016:2017:

* Includes two part-time employees, who constitute one full-time equivalent.

Item 1A.  Risk Factors

If we do not compete effectively, our business will suffer.

We confront aggressive competition in the sale of our products.  In each of the markets in which we sell our products, we compete with a number of national and regional competitors.  Competition in the automotive market is particularly intense, with many national and regional companies marketing competitive products.  Many of our competitors in the automotive market are more established and have greater financial resources than we do.  Moreover, we confront intense competition with respect to our Performacide^® disinfectant, sanitizing and deodorizing products from a large number of competitors, many of which are well established and have substantially greater financial resources than we do. Our inability to successfully compete in our principal markets would have a material adverse effect on our financial condition, results of operations and cash flows.

Our business is, to a significant extent, dependent on a small number of major customers, and the loss of any of these customers could adversely affect our financial condition, results of operations and cash flows.

Net sales to our five largest unaffiliated customers accounted for 52.2% of our consolidated net sales in 2017; the two largest unaffiliated customers accounted for 34.0% of our consolidated net sales in 2017. The loss of any of these customers would have a material adverse effect on our financial condition, results of operations and cash flows.

Our Chairman, President and Chief Executive Officer is a majority shareholder who controls us, and his interests may conflict with or differ from the Company’s interests.

Peter G. Dornau, our Chairman, President and Chief Executive Officer, together with a family entity he controls, owns approximately 51.4% of our Common Stock.  As a result, Mr. Dornau has the power to elect all of our directors and effectively has the ability to prevent any transaction that requires the approval of our Board of Directors and our shareholders.   Products that we manufacture and that are sold outside of the United States and Canada are purchased from us and distributed by two companies owned by Mr. Dornau, which we refer to as the “affiliated companies.”  The affiliated companies also collectively own the rights to the Star brite® and Star Tron® trademarks and related products outside of the United States and Canada. Sales to the affiliated companies aggregated approximately $2,070,000 and $1,850,000 during the years ended December 31, 2017 and 2016, respectively.  In addition, we provided administrative services to the affiliated companies for fees aggregating approximately $884,000 and $735,000 (including $120,000 and $115,000 to reimburse the Company for business related expenditures that we made on behalf of the affiliated companies) during the years ended December 31, 2017 and 2016, respectively.  Receivables due from the affiliated companies in connection with product sales and administrative services totaled approximately $1,584,000 and $1,190,000 at December 31, 2017 and 2016, respectively. The accounts receivable turnover ratio for the year ended December 31, 2017 with respect to sales to the affiliated companies was approximately 3.3 and with respect to administrative services was approximately 1.1. Management believes that the sales and provision of administrative services to the affiliated companies do not involve more than normal credit risk.

We have entered into other transactions with entities owned by Mr. Dornau.  See Notes 9 and 10 to the consolidated financial statements included in this report for additional information.

Economic conditions can adversely affect our business.

We are subject to risks arising from adverse changes in general domestic and global economic conditions, including recession or economic slowdown and disruption of credit markets, which may impair the ability of our customers to satisfy obligations due to us.  In addition, we believe that adverse economic conditions in recent years adversely constrained discretionary spending, which we believe has, at times, adversely affected our product lines, particularly those directed to the marine and recreational vehicle markets.  AWhile published reports indicate that economic conditions recently have improved both domestically and globally, a future decline in economic conditions could have a material adverse effect on our financial condition, results of operations and cash flows.

If we do not effectively utilize or successfully assert intellectual property rights, our competitivenesscompetiveness could be materially adversely affected.

We rely on trademarks and trade names in connection with our products, the most significant of which are Star brite® and Star Tron®.  In addition, we own patents we have viewed as providing some degree of competitive support for our Performacide^® products. We rely on trademark, trade secret, patent and copyright laws to protect our intellectual property rights.  We cannot assure that these intellectual property rights will be effectively utilized or, if necessary, successfully asserted.  There is a risk that we will not be able to obtain and perfect our own intellectual property rights, or, where appropriate, license from others intellectual property rights necessary to support new product introductions.  Our intellectual property rights, and any additional rights we may obtain in the future, may be invalidated, circumvented or challenged in the future, and the legal costs necessary to protect our intellectual property rights could be significant.  In this regard, in 2013, we filed a patent infringement lawsuit in the United States District Court for the Southern District of Florida with respect to a U.S. patent relating to a delivery system for use with products containing chlorine dioxide, but the District Court granted the defendants'defendants’ motion for summary judgment, which the Federal Circuit Court of Appeals affirmed in January 2015. As a result, in March 2015, we stipulated to the dismissal with prejudice of our patent infringement claims in another lawsuit related to the same patent, and, in response, the court dismissed our claims. We are unable to predict the long-term competitive effect of the adverse outcome in the patent litigation on our Performacide^®products. Our failure to perfect or successfully assert intellectual property rights could harm our competitive position and could have a material adverse effect on our financial condition, results of operations and cash flows.

Environmental matters may cause potential liability risks.

We must comply with various environmental laws and regulations in connection with our operations, including those relating to the handling and disposal of hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances.  A release of such substances due to accident or intentional act could result in substantial liability to governmental authorities or to third parties.  In addition, we are subject to reporting requirements with respect to certain materials we use in our manufacturing operations.  In January 2011, Kinpak, which owns our manufacturing facility in Montgomery, Alabama, became subject to a consent agreement and final order with the United States Environmental Protection Agency relating to its alleged failure to complete and submit certain required forms with respect to toxic and hazardous chemicals used at its facilities.  Under the consent agreement and final order, Kinpak paid a civil penalty of $110,000.  It is possible that we could become subject to additional environmental liabilities in the future that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our variable rate indebtedness exposes us to risks related to interest rate fluctuation and matures in August 2017.2018.

We have a revolving line of credit with a variable interest rate.  Interest on the revolving line of credit is payable at the 30 dayone month LIBOR rate plus 1.50% per annum, computed on a 365/360 basis. During the year endedAt December 31, 2016, we did not utilize the revolving line of credit, and at December 31, 2016,2017, we did not have any borrowings outstanding under the revolving line of credit.   However, if we borrow amounts under the revolving line of credit in the future, and if interest rates were to increase significantly, our financial condition, results of operations and cash flows could be materially adversely affected. Moreover, we believe, but cannot assure, that we could obtain a renewal of the revolving line of credit or a suitable replacement facility when the current facility terminates in August 2017.2018. Our failure to renew or obtain a replacement for our current facility may impair our financial flexibility and have a material adverse effect on our business.

Our Chairman, President and Chief Executive Officer is a majority shareholder who controls us, and his interest may conflict with or differ from the Company's interests.

Peter G. Dornau, our Chairman, President and Chief Executive Officer, together with a family entity he controls, owns approximately 51.9% of our Common Stock.  As a result, Mr. Dornau has the power to elect all of our directors and effectively has the ability to prevent any transaction that requires the approval of our Board of Directors and our shareholders.   Products that we manufacture and that are sold outside of the United States and Canada are purchased from us and distributed by two companies owned by Mr. Dornau, which we refer to as the “affiliated companies.”  Sales to the affiliated companies aggregated approximately $1,850,000 and $2,075,000 during the years ended December 31, 2016 and 2015, respectively.  An affiliated company owns the rights to the Star brite® and Star Tron® trademarks and related products outside of the United States and Canada.

In addition, we provided administrative services to the affiliated companies for fees aggregating approximately $621,000 and $527,000 during the years ended December 31, 2016 and 2015, respectively.  While the terms of the sales to the affiliated companies differed from the terms of sale to other customers, the affiliated companies bear their own warehousing, distribution, advertising, selling and marketing costs, as well as their own freight charges (we pay freight charges in connection with sales to our domestic customers on all but small orders).  Moreover, we do not pay sales commissions with respect to products sold to the affiliated companies.  As a result, we believe our profit margins with respect to sales of our products to the affiliated companies are similar to the profit margins we realize with respect to sales of the same products to our larger domestic customers.  Management believes that the sales to the affiliated companies do not involve more than normal credit risk or present other unfavorable features.  We have entered into other transactions with entities owned by Mr. Dornau.  See Notes 9 and 10 to the consolidated financial statements included in this report for additional information

Trading in our Common Stock has been limited, and our stock price could potentially be subject to substantial fluctuations.

Our common stock is listed on the NASDAQ Capital Market, but trading in our stock has been limited.  Our stock price could be affected substantially by a relatively modest volume of transactions.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our executive offices and one of our manufacturing facilities are located in Fort Lauderdale, Florida and are leased from an entity controlled by our Chairman, President and Chief Executive Officer.  The lease covers approximately 12,700 square feet of office, manufacturing, and warehouse space.  The lease expires in December 2023. See Note 10 to the consolidated financial statements included in this report for additional information.

We own Kinpak’sKinpak leases its Alabama manufacturing facility, whichfacilities from The Industrial Development Board of the City of Montgomery, Alabama (the “IDB”). Kinpak entered into the lease in its current form in connection with an industrial development bond financing related to the Expansion Project; Kinpak’s lease payments are used to fund repayment of the IDB’s obligations under the bond it issued in connection with the industrial development bond financing. See Note 6 to the consolidated financial statements included in this report for additional information. Under the lease, 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 facilities currently contains(without giving effect to the Expansion Project) contain approximately 187,000 square feet of office, plant and warehouse space on 20 acres of land. The facility also includes a 500,000 gallon outdoor blending tank farm.  As discussed above in Item 1, Recent Developments, we are nearing completion of the Expansion Project.

In addition, we lease a 15,000 square foot warehouse in Montgomery, Alabama, near the Kinpak manufacturing facility. We use the warehouse to fabricate and assemble brushes used for cleaning boats, automobiles and recreational vehicles. The lease expires in July 2018.  

We are proceedingplan to relocate the fabrication and assembly operations with an expansion project relatingrespect to Kinpak’sthe brushes to the expanded Kinpak manufacturing and warehouse facilities. See “Business – Recent Developments” in Item 1facilities prior to expiration of this report for additional information.the lease.

Item 3. Legal Proceedings

Not applicable

Item 4.  Mine Safety Disclosures

Not applicable.

PART II

Item 5.    Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Capital Market under the symbol OBCI.  A summary of the high and low sales prices during each quarter of 20162017 and 20152016 is presented below.

On December 31, 2016,2017, there were 116112 holders of record and approximately 1,200 beneficial ownersrecord. Because many of our common stock.shares are held by brokers and institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.

On April 13, 2017, the Board of Directors of Ocean Bio-Chem, Inc. declared a special dividend of $0.06 per share payable on May 11, 2017 to shareholders of record on April 27, 2017.  

On March 25, 2016, the Board of Directors of Ocean Bio-Chem, Inc. declared a special dividend of $0.06 per share payable on April 26, 2016 to shareholders of record on April 12, 2016. The Company did not pay any dividends in 2015.

Payment of dividends in the future will be subject to the discretion of the Board of Directors in light of numerous factors, including the Company'sCompany’s business performance and operating plans, capital commitments, liquidity and other factors.

Item 6.   Selected Financial Data

Not applicable.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements contained in Item 8 of this report.

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 a line of products including disinfectants, sanitizers and deodorizers. We sell our products through national retailers and to national and regional distributors. In addition, we sell products to two companies affiliated with Peter G. Dornau, our Chairman, President and Chief Executive Officer; these companies distribute the products outside of the United States and Canada.

Transactions with the affiliated companies were made in the ordinary course of business. While the terms of thebusiness, and management believes that sales to the affiliated companies differed from the terms of sale to other customers, the affiliated companies bear their own warehousing, distribution, advertising, selling and marketing costs, as well as their own freight charges (the Company pays freight charges in connection with sales to its domestic customers on all but small orders).  Moreover, the Company does not pay sales commissions with respect to products sold to the affiliated companies.  As a result, the Company believes its profit margins with respect to sales of its products to the affiliated companies are similar to the profit margins it realizes with respect to sales of the same products to its larger domestic customers. Management believes that the sales to the affiliated companies diddo not involve more than normal credit risk or present other unfavorable features.risk.

We have commenced anare nearing completion of the Expansion Project, which involves the expansion of Kinpak’s manufacturing and warehouse facilities in Montgomery, Alabama. See “Business - Recent Developments” in Item 1 of this report.report for additional information.

The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, changes United States tax law significantly. The most important change affecting Ocean Bio-Chem, Inc. is the reduction in the United States corporate income tax rate from 35% to 21%, effective January 1, 2018. Among other things, the reduction in the corporate tax rate resulted in a substantial decrease in our deferred tax liabilities, which is discussed in more detail below under “Results of Operations – Provision for income taxes.”

Our operating results for 2016 and 2015 were adversely affected by professional fees and expenses related to litigation against a competitor in which we and the competitor each claimed that the other was engaged in false advertising and related violations of law (the “Advertising Litigation”). Following a trial in which it was determined that neither party was liable to the other, the Advertising Litigation was concluded. Our professional fees and expenses related to the Advertising Litigation were approximately $1,146,000 in 2016. As the Advertising Litigation was concluded in 2016, and $1,174,000 in 2015.we had no expenses related to the Advertising Litigation during 2017.

Critical accounting estimates:

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and assumptions.

We have identified the following as critical accounting estimates, which are defined as those that are reflective of significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and, if subject to different assumptions and conditions, could lead to materially different results.

Revenue recognition and collectabilityCollectability of trade accounts receivable

Revenue from product sales is recognized when persuasive evidence of a contract exists, the sales price is fixed and determinable, the title of goods pass to the customer, and collectability of the related receivable is probable.  With respect to a customer for whom the Company manages the inventory at the customer's location, revenue is recognized when the products are sold to a third party.  In the ordinary course of business, we grant non-interest bearing trade credit to our unaffiliated customers on normal credit terms.terms that range from 30 to 180 days.  In an effort to reduce our credit risk, we perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and aging of receivables, as well as our customers’ creditworthiness, as determined by our review of their current credit information.  We monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience, specific customer collection issues and reviews of agings of trade receivables based on contractual terms.  We generally do not require collateral on trade accounts receivable.  We maintain an allowance for doubtful accounts based on our historical collection experience and expected collectability of the trade accounts receivable, after considering our historical collection experience, the period the trade accounts receivable arelength of time an account is outstanding, the financial position of the customer if known and information provided by credit rating services.   The adequacy of this allowance is reviewed each reporting period and adjusted as necessary.  Our allowance for doubtful accounts was approximately $75,000$79,000 and $78,000$75,000 at December 31, 20162017 and 2015,2016, respectively, which was approximately 1.6% and 1.5% of gross accounts receivable at December 31, 2017 and 2016, and 2015.respectively.  If the financial condition of our customers were to deteriorate, resulting in increased uncertainty as to their ability to make payments, or if unexpected events or significant future changes in trends were to occur, we may be required to increase the allowance.allowance or incur a bad debt expense. In this regard, we incurred a bad debt expense of approximately $199,000 in 2017, most of which resulted from a customer’s bankruptcy.

Inventories

InventoriesOur inventories primarily are composed of raw materials and finished goods and are stated at the lower of cost or market,net realizable value, using the first-in, first-out method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We maintain a reserve for slow moving and obsolete inventory to reflect the diminution in value resulting from product obsolescence, damage or other issues affecting marketability in an amount equal to the difference between the cost of the inventory and its estimated marketnet realizable value.  The adequacy of this reserve is reviewed each reporting period and adjusted as necessary.  We regularly compare inventory quantities on hand against historical usage or forecasts related to specific items in order to evaluate obsolescence and excessive quantities.  In assessing historical usage, we also qualitatively assess business trends to evaluate the reasonableness of using historical information as an estimate of future usage.  

Our slow moving and obsolete inventory reserve was $268,159$274,295 and $279,882$268,159 at December 31, 20162017 and 2015,2016, respectively.

Income taxes

IncomeWe account for income taxes are accounted for under the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized to reflect the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured and recorded using currently enacted tax rates, which we expect will apply to taxable income in the years in which the differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases are recovered or settled.  The differences are attributable to differing methods of financial statement and income tax treatment with respect to depreciation and reserves for trade accounts receivable and inventories. The likelihood of a material change in our expected realization of deferred tax assets is dependent on, among other factors, changes in tax law, future taxable income and settlements with tax authorities.  In this regard, the enactment of the Tax Cuts and Jobs Act resulted in a meaningful reduction in our net deferred tax liability as of December 31, 2017, reflecting the Tax Cuts and Jobs Act’s reduction of the United States corporate income tax rate. While management believes that its judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may require future adjustments to our tax assets and liabilities, which could be material.

In assessing the realizability of our deferred tax assets, we evaluate positive and negative evidence and use judgments regarding past and future events, including operating results and available tax planning strategies that could be implemented to realize the deferred tax assets.  Based on this assessment,We record a valuation allowance when necessary to reduce our deferred tax assets to the net amount that we determine when itbelieve is more likely than not that all or some portion of our deferredto be realized. We consider available evidence, both positive and negative, and use judgments regarding past and future events, including operating results and available tax assets may not be realized,planning strategies, in which case we would applyassessing the need for a valuation allowance, in an amount equal to future tax benefits that may not be realized, to offset our deferred tax assets.  We currently do not apply a valuation allowance to our deferred tax assets.  However, if facts and circumstances change in the future, a valuation allowance may be required.allowance.

Significant judgment is required in determining income tax provisions and in evaluating tax positions.  We establish additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority.  In the normal course of business, we and our subsidiaries are examined by various federal and state tax authorities.  We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes.  We adjust the income tax provision, the current tax liability and deferred taxes in any period in which we become aware of facts that necessitate such an adjustment.  The ultimate outcomes of the examinations of our income tax returns could result in increases or decreases to our recorded tax liabilities, which would affect our financial results.

Intangible Assets

Intangible assets are acquired assets that lack physical substance and that meet specified criteria for recognition apart from goodwill. Our intangible assets include trademarks, tradenames, patents and royalty rights. We own several trademarks and trade names, including Star brite®, and Performacide®. We have determined that these intangible assets have indefinite lives and, therefore, are not amortized. In addition, we own several patents, the most significant of which are the ClO₂ Patents, which relate to a device for producing chlorine dioxide that is incorporated in our deodorizer, sanitizer and disinfectant products. We amortize our patents over their remaining life on a straight line basis; amortization expense related to these the ClO₂patents was approximately $51,000$52,000 ($51,000 for ClO₂patents and $1,000 for other patents) for each of the years ended December 31, 20162017 and 2015.2016. In 2013, we acquired royalty rights relating to sales of products encompassing the ClO₂ Patents’ technology (we purchased these rights from an unaffiliated entity that previously owned the ClO₂ Patents and retained the royalty rights after selling the patents). We are amortizing the royalty rights over their remaining life on a straight line basis; amortization expense relating to the royalty rights was approximately $18,000 for each of the years ended December 31, 20162017 and 2015.2016. See Note 7 to the consolidated financial statements included in this report for additional information.

We evaluate our indefinite-lived intangible assets (trademarks and trade names) for impairment annually and at other times if events or changes in circumstances indicate that an impairment may have occurred. In evaluating our indefinite-lived intangible assets for impairment, we assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If, after completing the qualitative assessment, we determine it is more likely than not that the fair value of the indefinite-lived intangible asset is greater than its carrying amount, the asset is not impaired. If we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying value, we would then proceed to a quantitative impairment test, which consists of a comparison of the fair value of the intangible assets to their carrying amounts. In 2016,2017, we performed a qualitative assessment on all of our indefinite lived assets and determined, based on the assessment, that their fair values were more likely than not higher than their carrying values.

We assess the remaining useful life and recoverability of intangible assets having finite lives (patents and royalty rights) whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Such events or circumstances may include, for example, the occurrence of an adverse change with respect to a product line that utilizes the intangible assets. Significant judgments in this area involve determining whether such an event or circumstance has occurred. Any impairment loss, if indicated, equals the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Results of Operations:

The following table provides a summary of our financial results for the years ended December 31, 20162017 and 2015:2016:

Net sales for the year ended December 31, 20162017 increased by approximately $2,218,000$2,728,000 or 6.5%7.5%, as compared to the year ended December 31, 2015.2016. The net sales increase principally is a result of increasedattributable to sales of Star brite® brandedour marine products to both retailers and wholesale distributorstwo of our products. In particular, we believe that the increased sales reflect the benefit of the inclusion of our products in more of our large national “brick and mortar” retail chain customers’ locations, as well as the provision of increased shelf space for our products by theselargest customers. In addition, ourwe experienced sales growth generally with respect to a wide range of customers, including mass merchandisers, large home improvement and marine/sports retail chains, and online retailers also increased as a result of higher consumer demand.

retailers.

Cost of goods sold indecreasedcreased by approximately $316,000$2,105,000 or 1.4%9.4% in 2016,2017, as compared to 2015.2016. The decreaseincrease in cost of goods sold despite the increase in net sales reflects the more favorable product mix resulting fromis principally a result of increased sales of Star brite® branded marine products.volume, higher raw material costs on our winterizing products and higher manufacturing costs.

Gross profit increased by approximately $2,534,000$623,000 or 22.3%4.5% during 2016,2017, as compared to 2015.2016. As a percentage of net sales, gross profit increaseddecreased to 37.2% in 2017 from 38.3% in 2016 from 33.4% in 2015.2016. The increasesincrease in gross profit andin 2017 is primarily attributable to increased sales volume. The decrease in gross profit as a percentage of net sales during 2017 is principally a result of the more favorable product mix discussed above.lower profit margins on sales of our winterizing products due to both lower sales prices and higher raw material costs.   

Advertising and promotion expenseincreased by approximately $106,000$407,000 or 3.5%13.0% during 2016,2017, as compared to 2015.2016.  As a percentage of net sales, advertising and promotion expense decreasedincreased to 9.1% in 2017 compared to 8.6% in 2016 compared to 8.9% in 2015.2016.  The gross increase in advertising and promotion expense is primarily a result of a $176,000 increaseincreases in customer cooperative advertising partially offset by a $66,000 decrease inallowances provided to select customers and other marketing expenses.

Selling and administrative expenses increaseddecreased by approximately $81,000$363,000 or 1.1%4.7%, during 2016,2017, as compared to 2015, reflecting an increase2016. The decrease reflects the conclusion of the Advertising Litigation in noncash stock based compensation expense of approximately $131,000. This increase was partially offset by a decrease of approximately $28,000 in2016. In 2016, legal fees and expenses related to the Advertising Litigation; such fees and expensesLitigation were approximately $1,146,000$1,146,000. This decrease was partially offset by increased employee compensation expenses (including salaries, commissions and $1,174,000 during 2016stock awards); bad debt expense of approximately $199,000, of which approximately $188,000 resulted from a customer’s bankruptcy; and 2015, respectively.  The Company expects sellingincreased costs of computer programming and administrative expenses to decline substantially in 2017 as a result of the conclusion of the Advertising Litigation during 2016.other information technology services. As a percentage of net sales, selling and administrative expenses decreased to 21.218.7 % in 20162017 from 22.3%21.2% in 2015.2016.

Interest income, net for the year ended December 31, 2017 was approximately $2,000; for the year ended December 31, 2016, interest expense, net decreased was approximately $18,000. Interest income in 2017 was generated principally by approximately $16,000 or 47.0%an escrow account in 2016, as comparedwhich a portion of the funds relating to 2015.an industrial development bond financing were deposited pending our utilization of such funds in connection with the Expansion Project. The decrease reflectsinterest income was offset principally by interest under an earlier term loan that matured on July 6, 2017; we paid all remaining principal and interest on the declining principal outstanding undermaturity date. The term loan also was the source of our term loan.primary interest obligation in 2016.

Provision for income taxes – Our provisionincreased by approximately $91,000 for income taxes for 2016 was approximately $983,000,the year ended December 31, 2017, or 31.9%29.2% of our pretax income, compared to approximately $243,000$983,000 in 2015the year ended December 31, 2016, or 34.5%31.9% of our pretax income. Our lowerThe increase in our provision for income taxes, which principally was due to the increase in our operating income, was offset in part by the benefit reflecting the reduction of our U.S. corporate income tax rate from 34% to 21% under the Tax Cuts and Jobs Act. We revalued our net deferred tax liabilities to give effect to the reduction in 2016 is attributable primarily tothe corporate income tax rate, which resulted in an increased benefit with respect to a domestic production activities deduction.approximately $91,000 tax benefit. For additional information, see Note 8 to the consolidated financial statements included in this report.

Liquidity and Capital Resources:

Our cash balance was approximately $2,418,000 at December 31, 2017 compared to approximately $4,070,000 at December 31, 2016 compared to approximately $2,468,000 at December 31, 2015.2016.  

The following table summarizes our cash flows for the years ended December 31, 20162017 and 2015:2016: