UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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BLUE STAR FOODS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
| PAGE | ||
| PART I - FINANCIAL INFORMATION | 4 | |
| Item 1. | Financial Statements (Unaudited) | 4 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 |
| Item 4. | Controls and Procedures | 25 |
| PART II - OTHER INFORMATION | 26 | |
| Item 1. | Legal Proceedings | 26 |
| Item 1A. | Risk Factors | 26 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
| Item 3. | Defaults Upon Senior Securities | 27 |
| Item 4. | Mine Safety Disclosures | 27 |
| Item 5. | Other Information | 27 |
| Item 6. | Exhibits | 27 |
| SIGNATURES | 28 | |
| 2 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements include, among others, those statements including the words “believes”, “anticipates”, “expects”, “intends”, “estimates”, “plans” and words of similar import. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Forward-looking statements are based on our current expectations and assumptions regarding our business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions and the following:
| ● | Our ability to raise capital when needed and on acceptable terms and conditions; | |
| ● | Our ability to make acquisitions and integrate acquired businesses into our company; | |
| ● | Our ability to attract and retain management with experience in the business of importing, packaging and selling of seafood; | |
| ● | Our ability to negotiate, finalize and maintain economically feasible agreements with suppliers and customers; | |
| ● | The availability of crab meat and other premium seafood products we sell; | |
| ● | The intensity of competition; | |
| ● | Changes in the political and regulatory environment and in business and fiscal conditions in the United States and overseas; and | |
| ● | The effect of COVID-19 on our operations and the capital markets. |
A description of these and other risks and uncertainties that could affect our business appears in the section captioned “Risk Factors” in our Registration Statement on Form S-1 which we filed with the Securities and Exchange Commission (“SEC”) on October 25, 2021. The risks and uncertainties described under “Risk Factors” are not exhaustive.
Given these uncertainties, readers of this Quarterly Report on Form 10-Q (“Quarterly Report”) are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
All references in this Quarterly Report to the “Company”, “Blue Star Foods”, “we”, “us”, or “our”, are to Blue Star Foods Corp., a Delaware corporation, and its consolidated subsidiaries, John Keeler & Co., Inc., d/b/a Blue Star Foods, a Florida corporation, and its wholly-owned subsidiary, Coastal Pride Seaford, LLC, a Florida limited liability company (“Coastal Pride”) and Taste of BC Aquafarms, Inc., a corporation formed under the laws of the Province of British Columbia, Canada (“TOBC”).
| 3 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC, and should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report, as updated in subsequent filings we have made with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
Blue Star Foods Corp.
CONSOLIDATED BALANCE SHEETS
| SEPTEMBER 30, 2021 | DECEMBER 31, 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | - | |||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Advances to related party | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| RELATED PARTY LONG-TERM RECEIVABLE | ||||||||
| FIXED ASSETS, net | ||||||||
| RIGHT OF USE ASSET | ||||||||
| INTANGIBLE ASSETS, net | ||||||||
| Trademarks | ||||||||
| Customer relationships | ||||||||
| Non-compete agreements | ||||||||
| Total Intangible Assets | ||||||||
| GOODWILL | ||||||||
| OTHER ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accruals | $ | $ | ||||||
| Working capital line of credit | ||||||||
| Current maturities of long-term debt | - | - | ||||||
| Current maturities of lease liabilities | ||||||||
| Current maturities of related party long-term notes | ||||||||
| Related party notes payable | ||||||||
| Related party notes payable - subordinated | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITY | ||||||||
| Long-term lease liability | ||||||||
| Long-term debt | - | |||||||
| Related party long-term notes | ||||||||
| Other long-term liabilities | - | - | ||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Series A | - | - | ||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding as of September 30, 2021, and shares issued and outstanding as of December 31, 2020 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive gain | - | |||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 4 |
Blue Star Foods Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 and 2020
| Three months ended | Nine months ended | |||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUE, NET | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| COMMISSIONS | ||||||||||||||||
| SALARIES AND WAGES | ||||||||||||||||
| DEPRECIATION AND AMORTIZATION | ||||||||||||||||
| OTHER OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME | ||||||||||||||||
| FORBEARANCE FEE EXPENSE (NON-CASH) | - | - | - | ( | ) | |||||||||||
| INTEREST EXPENSE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ||||||||||
| LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTEREST | - | - | - | |||||||||||||
| NET LOSS ATTRIBUTABLE TO BLUE STAR FOODS CORP. | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| DIVIDEND ON PREFERRED STOCK | - | |||||||||||||||
| NET LOSS ATTRIBUTABLE TO BLUE STAR FOODS CORP. COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
| CHANGE IN FOREIGN CURRENCY TRANSLATION ADJUSTMENT | - | - | ||||||||||||||
| TRANSLATION ADJUSTMENT ATTRIBUTABLE TO NON-CONTROLLING INTEREST | - | - | - | |||||||||||||
| COMPREHENSIVE INCOME | $ | $ | $ | $ | ||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO BLUE STAR FOODS CORP. | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Loss per basic and diluted common share: | ||||||||||||||||
| Basic net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Fully diluted net loss per common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Fully diluted weighted average common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 5 |
Blue Star Foods Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
| Series A Preferred Stock $.0001 par value | Common Stock $.0001 par value | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Blue Star Foods Corp. Stockholders’ | Non- Controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | - | $ | ( | ) | |||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Series
A preferred | - | - | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||
| Common stock issued for service | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||
| March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Common stock issued to settle related party interest | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for cash | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issued to be held in escrow | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for Taste of BC acquisition | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Preferred stock conversion to Common stock | ( | ) | - | ( | ) | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||
| Comprehensive Income | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Common stock issued for cash | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||
| Comprehensive Income | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Series A Preferred Stock $.0001 par value | Common Stock $.0001 par value | Additional Paid-in | Accumulated | Accumulated Other Comprehensive | Total Blue Star Foods Corp. Stockholders’ | Non- Controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Income | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | - | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Series A preferred | - | - | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Comprehensive Income | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Common stock issued for cash | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Common stock issued to a related party lender | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Series A preferred | - | - | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net Income (Loss) | - | - | - | - | - | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Comprehensive Income | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Common stock issued for service | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Series A preferred | - | - | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||
| Deconsolidation of Strike the Gold Foods, Ltd. | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 6 |
Blue Star Foods Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided in operating activities: | ||||||||
| Stock based compensation | ||||||||
| Common stock issued for service | ||||||||
| Common stock issued for forbearance fee | - | |||||||
| PPP loan forgiveness | ( | ) | ( | ) | ||||
| Depreciation of fixed assets | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of loan costs | ||||||||
| Lease expense | ||||||||
| Bad debt expense | ||||||||
| Allowance for inventory obsolescence | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivables | ||||||||
| Inventories | ( | ) | ||||||
| Advances to affiliated supplier | - | ( | ) | |||||
| Other current assets | ( | ) | ( | ) | ||||
| Right of use liability | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accruals | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Net Cash (Used in) Provided by Operating Activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Deconsolidation of variable interest entity | - | ( | ) | |||||
| Net cash paid for acquisition | ( | ) | - | |||||
| Purchases of fixed assets | ( | ) | ( | ) | ||||
| Net Cash Used in Investing Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from common stock offering | ||||||||
| Proceeds from working capital line of credit | ||||||||
| Proceeds from HSBC loan | - | |||||||
| Proceeds from PPP loan | ||||||||
| Repayments of working capital line of credit | ( | ) | ( | ) | ||||
| Repayments of related party notes payable | ( | ) | - | |||||
| Principal payments of long-term debt | ( | ) | - | |||||
| Payments of loan costs | - | ( | ) | |||||
| Net Cash Provided by (Used in) Financing Activities | ( | ) | ||||||
| Effect of Exchange Rate Changes on Cash | ||||||||
| NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ( | ) | ||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - BEGINNING OF PERIOD | ||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY | ||||||||
| Series A preferred | ||||||||
| Operating lease assets recognized in exchange for operating lease liabilities | - | |||||||
| Preferred shares conversion to common stock | - | |||||||
| Common stock issued for interest payment | - | |||||||
| Shares issued for acquisition | - | |||||||
| Related party notes recognized from business acquisition | - | |||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 7 |
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Company Overview
Blue Star Foods Corp., a Delaware corporation (“we”, “our”, the “Company”), is an international sustainable marine protein company based in Miami, Florida that imports, packages and sells refrigerated pasteurized crab meat, and other premium seafood products. The Company’s main operating business, John Keeler & Co., Inc. (“Keeler & Co.”) was incorporated in the State of Florida in May 1995. The Company’s current source of revenue is importing blue and red swimming crab meat primarily from Indonesia, Philippines and China and distributing it in the United States and Canada under several brand names such as Blue Star, Oceanica, Pacifika, Crab & Go, First Choice, Good Stuff and Coastal Pride Fresh, and steelhead salmon produced under the brand name Little Cedar Farms for distribution in Canada.
On November 26, 2019, Keeler & Co., a wholly-owned direct subsidiary of the Company, entered into an Agreement and Plan of Merger and Reorganization (the “Coastal Merger Agreement”) with Coastal Pride Company, Inc., a South Carolina corporation, Coastal Pride Seafood, LLC, a Florida limited liability company and newly-formed, wholly-owned subsidiary of the Purchaser (the “Acquisition Subsidiary” and, upon the effective date of the Merger, the “Surviving Company” or “Coastal Pride”), and The Walter F. Lubkin, Jr. Irrevocable Trust dated January 8, 2003 (the “Trust”), Walter F. Lubkin III (“Lubkin III”), Tracy Lubkin Greco (“Greco”) and John C. Lubkin (“Lubkin”), constituting all of the shareholders of Coastal Pride Company, Inc. immediately prior to the Coastal Merger (collectively, the “Sellers”). Pursuant to the terms of the Coastal Merger Agreement, Coastal Pride Company, Inc. merged with and into the Acquisition Subsidiary, with the Acquisition Subsidiary being the surviving company (the “Coastal Merger”).
Coastal Pride is a seafood company, based in Beaufort, South Carolina, that imports pasteurized and fresh crabmeat sourced primarily from Mexico and Latin America and sells premium branded label crabmeat throughout North America.
On
April 27, 2021, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with TOBC, and Steve Atkinson
and Janet Atkinson (the “Sellers”), the owners of all of the capital stock of TOBC (the “TOBC Shares”), pursuant
to which the Company acquired all of the TOBC Shares from the Sellers for an aggregate purchase price of CAD$
On
June 24, 2021, the Purchase Agreement was amended (the “Amendment”), to increase the Purchase Price up to an aggregate of
CAD$
On June 24, 2021, the Company consummated the acquisition of TOBC. As a result of the acquisition, TOBC became a wholly owned subsidiary of the Company.
TOBC is a land-based recirculating aquaculture systems salmon farming operation, based in Nanaimo, British Columbia, Canada, which sells its steelhead salmon to distributors in Canada.
| 8 |
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The following unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete annual financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The consolidated balance sheet as of December 31, 2020 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 15, 2021 for a broader discussion of our business and the risks inherent in such business.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Advances to Suppliers and Related Party
In the normal course of business, the Company may advance payments to its suppliers, inclusive of Bacolod Blue Star Export Corp. (“Bacolod”), a related party based in the Philippines. These advances are in the form of prepayments for products that will ship within a short window of time. In the event that it becomes necessary for the Company to return products or adjust for quality issues, the Company is issued a credit by the vendor in the normal course of business and these credits are also reflected against future shipments.
As
of September 30, 2021, and December 31, 2020, the balance due from the related party for future shipments was approximately $
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, as such, we record revenue when our customer obtains control of the promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company’s source of revenue is from importing blue and red swimming crab meat primarily from Indonesia, the Philippines and China and distributing it in the United States and Canada under several brand names such as Blue Star, Oceanica, Pacifika, Crab & Go, First Choice, Good Stuff and Coastal Pride Fresh, and steelhead salmon produced under the brand name Little Cedar Farms for distribution in Canada. The Company sells primarily to food service distributors. The Company also sells its products to wholesalers, retail establishments and seafood distributors.
To determine revenue recognition for the arrangements that the Company determines are within the scope of Topic 606, the Company performs the following five steps: (1) identify the contract(s) with a customer by receipt of purchase orders and confirmations sent by the Company which includes a required line of credit approval process, (2) identify the performance obligations in the contract which includes shipment of goods to the customer FOB shipping point or destination, (3) determine the transaction price which initiates with the purchase order received from the customer and confirmation sent by the Company and will include discounts and allowances by customer if any, (4) allocate the transaction price to the performance obligations in the contract which is the shipment of the goods to the customer and transaction price determined in step 3 above and (5) recognize revenue when (or as) the entity satisfies a performance obligation which is when the Company transfers control of the goods to the customers by shipment or delivery of the products.
The Company elected an accounting policy to treat shipping and handling activities as fulfillment activities. Consideration payable to a customer is recorded as a reduction of the arrangement’s transaction price, thereby reducing the amount of revenue recognized, unless the payment is for distinct goods or services received from the customer.
| 9 |
Lease Accounting
We account for our leases under ASC 842, Leases, which requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard.
We categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow us to substantially utilize or pay for the entire asset over its estimated life. Assets acquired under finance leases are recorded in property and equipment, net. All other leases are categorized as operating leases. We did not have any finance leases as of September 30, 2021. Our leases generally have terms that range from three years for equipment and five to twenty years for property. We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component and account for them as a lease.
Lease liabilities are recognized at the present value of the fixed lease payments using a discount rate based on similarly secured borrowings available to us. Lease assets are recognized based on the initial present value of the fixed lease payments, reduced by landlord incentives, plus any direct costs from executing the lease. Lease assets are tested for impairment in the same manner as long-lived assets used in operations. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected useful life or the lease term.
When we have the option to extend the lease term, terminate the lease before the contractual expiration date, or purchase the leased asset, and it is reasonably certain that we will exercise the option, we consider these options in determining the classification and measurement of the lease. Costs associated with operating lease assets are recognized on a straight-line basis within operating expenses over the term of the lease.
The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheet as of September 30, 2021.
September 30, 2021 | ||||
| Assets | ||||
| Operating lease assets | $ | |||
| Liabilities | ||||
| Current | ||||
| Operating lease liabilities | $ | |||
| Noncurrent | ||||
| Operating lease liabilities | $ | |||
Supplemental cash flow information related to leases were as follows:
Nine Months Ended September 30, 2021 | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | |||
| ROU assets recognized in exchange for lease obligations: | ||||
| Operating leases | $ | |||
The table below presents the remaining lease term and discount rates for operating leases.
| September 30, 2021 | ||||
| Weighted-average remaining lease term | ||||
| Operating leases | ||||
| Weighted-average discount rate | ||||
| Operating leases | % | |||
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Maturities of lease liabilities as of September 30, 2021, were as follows:
| Operating Leases | ||||
| 2021 (three months remaining) | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: amount of lease payments representing interest | ( | ) | ||
| Present value of future minimum lease payments | $ | |||
| Less: current obligations under leases | $ | ( | ) | |
| Non-current obligations | $ | |||
Intangible Assets and Goodwill
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company reviews its indefinite lived intangibles and goodwill for impairment annually or whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable. In accordance with its policies, the Company performed an assessment of indefinite lived intangibles and goodwill and determined there was no impairment for the nine months ended September 30, 2021 and 2020.
Foreign Currency Exchange Rates Risk
We manage our exposure to fluctuations in foreign currency exchange rates through our normal operating activities. Our primary focus is to monitor our exposure to, and manage, the economic foreign currency exchange risks faced by our operations and realized when we exchange one currency for another. Our operations primarily utilize the U.S. dollar and Canadian dollar as their functional currencies. Movements in foreign currency exchange rates affect our financial statements.
Note 3. Going Concern
The
accompanying consolidated financial statements and notes have been prepared assuming the Company will continue as a going concern. For
the nine months ended September 30, 2021, the Company incurred a net loss of $
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Note 4. Debt
Working Capital Line of Credit
Keeler
& Co entered into a $
The
line of credit accrued interest at a rate equal to the greater of 3 Month LIBOR rate plus
The ACF line of credit agreement was subject to the following terms:
| ● | ||
| ● | The line was collateralized by substantially all the assets and property of Keeler & Co. and was personally guaranteed by the stockholder of the Company. | |
| ● | Keeler & Co. was restricted to specified distribution payments, use of funds, and was required to comply with certain other covenants including certain financial ratios. | |
| ● | All cash received by Keeler & Co. was applied against the outstanding loan balance. | |
| ● | A subjective acceleration clause allowed ACF to call the note upon a material adverse change. |
On
November 26, 2019, Keeler & Co. entered into the seventh amendment to the loan and security agreement with ACF. This amendment memorialized
the acquisition of Coastal Pride and made Coastal Pride a co-borrower to the facility. Additionally, the seventh amendment waived and
reset the covenant default that occurred during 2019, extended the term of the facility to
On May 7, 2020, Keeler & Co. and Coastal Pride entered into an eighth amendment to the loan and security agreement with ACF which acknowledged the execution of a Payroll Protection Program loan, provided a reservation of rights related to a default of the minimum EBITDA covenant.
The Company analyzed the line of credit modification under ASC 470-50-40-21 and determined that the modification did not trigger any additional accounting due to the revolving line of credit remaining unchanged.
As
of December 31, 2020, the line of credit had an outstanding balance of approximately $
On
March 31, 2021, Keeler & Co. and Coastal Pride entered into a loan and security agreement (“Loan Agreement”) with Lighthouse
Financial Corp., a North Carolina corporation (“Lighthouse”) pursuant to the terms of the Loan Agreement, Lighthouse made
available to Keeler & Co. and Coastal Pride (together, the “Borrowers”) a $
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The
line of credit is secured by a first priority security interest on all the assets of each Borrower. Pursuant to the terms of a guaranty
agreement, the Company guaranteed the obligations of the Borrowers under the note and John Keeler, Executive Chairman and Chief Executive
Officer of the Company, provided a personal guaranty of up to $
The
Borrowers utilized $
First West Credit Union CEBA Loan
On
June 24, 2021, the Company assumed a commercial term loan with First West Credit Union Canada Emergency Business Account (“CEBA”)
in the principal amount of CAD$
John Keeler Promissory Notes – Subordinated
The
Company had unsecured promissory notes outstanding to John Keeler of approximately $
Kenar Note
On
March 26, 2019, the Company issued a four-month unsecured promissory note in the principal amount of $
The
amendment to the Kenar Note was analyzed under ASC 470-50 and was determined that it will be accounted for as an extinguishment of the
old debt and the new debt recorded at fair value with the new effective interest rate of
On April 28, 2021, the Kenar Note was amended to extend the maturity date to May 31, 2021.
On
July 6, 2021, the Company entered into a note payoff indemnity agreement with Kenar pursuant to which the Company paid Kenar $
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Lobo Note
On
April 2, 2019, the Company issued a four-month unsecured promissory note in the principal amount of $
Walter Lubkin Jr. Note – Subordinated
On
November 26, 2019, the Company issued a five-year unsecured promissory note in the principal amount of $
Walter Lubkin III Convertible Note – Subordinated
On
November 26, 2019, the Company issued a thirty-nine-month unsecured promissory note in the principal amount of $
Tracy Greco Convertible Note – Subordinated
On
November 26, 2019, the Company issued a thirty-nine-month unsecured promissory note in the principal amount of $
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John Lubkin Convertible Note – Subordinated
On
November 26, 2019, the Company issued a thirty-nine-month unsecured promissory note in the principal amount of $
Steven Atkinson and Janet Atkinson Promissory Notes – Subordinated
On
June 24, 2021, the Company issued a promissory note in the principal amount of CAD$
On
June 24, 2021, the Company issued a promissory note in the principal amount of CAD$
Payroll Protection Program Loan
On
March 2, 2021, the Company received proceeds of $
Note 5. Business Combination
Acquisition of Taste of BC Aquafarms
On
June 24, 2021, the Company consummated the acquisition of TOBC and TOBC became a wholly owned subsidiary of the Company. The acquisition
was accounted for as a business combination under the provisions of ASC 805. The aggregate purchase price of CAD$
The
transaction costs incurred in connection with the acquisition of TOBC amounted to $
Fair Value of Consideration Transferred and Recording of Assets Acquired
The following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed. The business combination accounting is not yet complete and the amounts assigned to assets acquired and liabilities assumed are provisional. Therefore, this may result in future adjustments to the provisional amounts as information is obtained about facts and circumstances that existed at the acquisition date.
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| Consideration Paid: | ||||
| Cash | $ | |||
| Common stock, shares of common stock of the Company | ||||
| Promissory notes to Sellers | ||||
| Contingent consideration - Common stock, shares of common stock of the Company in escrow | ||||
| Fair value of total consideration | $ | |||
| Purchase Price Allocation: | ||||
| Tangible assets acquired | $ | |||
| Trademarks | ||||
| Customer relationships | ||||
| Non-compete agreements | ||||
| Liabilities assumed | ( | ) | ||
| Fair market value of net assets acquired | $ | |||
In determining the fair value of the common stock issued, the Company considered the value of the stock as estimated by the Company at the time of closing which was determined to be $, based on the Company’s private placement offering price.
Liabilities
assumed included three mortgage loans of approximately CAD$
Unaudited Pro Forma Information
The following unaudited pro forma information assumes the business acquisition occurred on January 1, 2020. For all of the business acquisitions, depreciation and amortization have been included in the calculation of the below pro forma information based upon the actual acquisition costs.
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||
| Revenue | $ | $ | ||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||
The information included in the pro forma amounts is derived from historical information obtained from the Sellers of the business.
Note 6. Common Stock
On
July 1, 2020, the Company entered into an investment banking engagement agreement, as amended on October 30, 2020, with Newbridge Securities
Corporation. In consideration for advisory services, the Company agreed to issue Newbridge a total of shares of common stock with
a fair value of $
On
February 8, 2021, the Company issued shares of common stock with a fair value of $
On
March 30, 2021, the Company issued shares of common stock with a fair value of $
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On
March 31, 2021, the Company issued shares of common stock with a fair value of $
On
March 31, 2021, the Company issued shares of common stock to Series A preferred stockholders as a common stock dividend with an
aggregate fair value of $
On
April 15, 2021, the Company issued an aggregate of shares of common stock to Walter Lubkin Jr., Walter Lubkin III, Tracy Greco
and John Lubkin (collectively, the “Coastal Sellers”) in lieu of $
On
April 19, 2021, the Company issued shares of common stock with a fair value of $
On
April 29, 2021, the Company issued shares of common stock to Kenar Overseas Corp. in lieu of $
On
April 30, 2021, the Company issued shares of common stock with a fair value of $
On
May 31, 2021, the Company issued shares of common stock with a fair value of $
On
June 17, 2021, the Company sold pursuant to subscription agreements an aggregate of shares of common stock at $ per share
to
On
June 23, 2021, the Company sold pursuant to subscription agreements an aggregate shares of common stock at $ per share to
On June 24, 2021, the Company issued shares to the sellers of TOBC as partial consideration for the sale of TOBC to the Company.
On
June 30, 2021, the Company issued shares of common stock with a fair value of $
On
June 30, 2021, the Company issued shares of common stock with a fair value of $
On
June 30, 2021, the Company issued an aggregate of shares of common stock to Series A preferred stockholders upon conversion of
an aggregate
On
June 30, 2021, the Company sold pursuant to subscription agreements an aggregate of shares of common stock at $per share
to
On
July 8, 2021, the Company sold pursuant to subscription agreements an aggregate of shares of common stock at a purchase price
of $ per share and issued warrants to purchase an aggregate of shares at an exercise price of $ per share in a private
offering to sixteen accredited investors for gross proceeds of $
On
July 14, 2021, the Company sold pursuant to subscription agreements an aggregate of shares of common stock at a purchase price
of $ per share and issued warrants to purchase an aggregate of shares at an exercise price of $ per share in a private
offering to four accredited investors for gross proceeds of $
On
August 3, 2021, the Company issued shares of common stock with a fair value of $
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On
September 30, 2021, the Company issued shares of common stock with a fair value of $
On
September 30, 2021, the Company issued shares of common stock with a fair value of $
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2020 | $ | |||||||||||||||
| Exercisable – December 31, 2020 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Forfeited | ( | ) | $ | |||||||||||||
| Vested | ||||||||||||||||
| Outstanding – September 30, 2021 | $ | |||||||||||||||
| Exercisable – September 30, 2021 | $ | $ | ||||||||||||||
During the nine months ended September 30, 2021, the Company granted (i) four-year options to purchase an aggregate of 500,000 shares of common stock at an exercise price of $to its directors which vest in equal monthly installments during the first year from the date of grant; (ii) a five-year option to purchase shares of common stock at an exercise price of $to an employee of TOBC which vests in equal monthly installments for from the date of grant, and (iii) a three-year option to purchase shares of common stock at an exercise price of $to an employee which vests in equal monthly installments during the term of the option.
Under the Black-Scholes
option pricing model, the fair value of the options granted during the nine months ended September 30, 2021 is estimated at $
The Company recognized $ of compensation expense for vested stock options issued to directors, contractors and employees during 2019 and 2021 for the nine months ended September 30, 2021.
Note 8. Warrants
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2020 | $ | |||||||||||||||
| Exercisable – December 31, 2020 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Forfeited or Expired | $ | |||||||||||||||
| Outstanding – September 30, 2021 | $ | |||||||||||||||
| Exercisable – September 30, 2021 | $ | $ | ||||||||||||||
As
of September 30, 2021, the Company issued warrants to purchase an aggregate of
Note 9. Commitment and Contingencies
Office lease
The
Company leased its Miami office and warehouse facility from JK Real Estate, a related party through common family beneficial ownership.
The lease which had a
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Coastal
Pride leases approximately
TOBC’s
facilities are on land leased to TOBC for approximately $
Rental
and equipment lease expenses amounted to approximately $
Legal
The Company has reached a settlement agreement with a former employee. Although the agreement is not finalized, the Company has reserved for the entire amount of the settlement.
Note 10. COVID-19 Pandemic
The current COVID-19 pandemic has adversely affected our business operations, including disruptions and restrictions on our ability to travel or to distribute our seafood products, as well as temporary closures of our facilities. Any such disruption or delay may impact our sales and operating results. In addition, COVID-19 has resulted in a widespread health crisis that adversely affected the economies and financial markets of many other countries. As a result of COVID-19, the Company has experienced a significant decrease in revenue for the year ended December 31, 2020 and continues to have losses in the nine months ended September 30, 2021 although such losses have decreased in comparison to the nine months ended September 30, 2020.
As a result of the business interruption experienced to date, management has taken steps to reduce expenses across all areas of its operations, including payroll, marketing, sales and warehousing expenses. The extent to which we are affected by COVID-19 will largely depend on future developments and restrictions which may disrupt interactions with customers, suppliers, staff and advisors which cannot be accurately predicted, including the duration and scope of the pandemic, governmental and business responses to the pandemic and the impact on the global economy, our customers’ demand for our products, and our ability to provide our products. We continue to monitor the effects of the pandemic on our business.
Note 11. Subsequent Events
Lobo Note
On
October 1, 2021, the Company paid off the July 1, 2021 Lobo note with the issuance of a one-month unsecured promissory note in the principal
amount of $
Warrants Exercised
Between October 7, 2021 and November 8, 2021,
the Company issued a total of shares of common stock upon the exercise of warrants for total proceeds of $
On November 10, 2021, the Company issued shares of common stock to the designee of a law firm for services provided to the Company.
Lubkin and Greco Notes – Subordinated
On October 8, 2021,
principal amounts and interest totaling $
NASDAQ Listing
The Company’s common stock was approved to list on the NASDAQ Capital Market under the symbol “BSFC” and began trading on November 3, 2021.
Public Offering
In
connection with the NASDAQ uplisting, the Company consummated an underwritten public offering of shares of common stock at a
public offering price of $ per share for total gross proceeds of $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. The management’s discussion and analysis contain forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our Registration Statement on Form S-1 filed with the SEC on October 25, 2021, as updated in subsequent filings we have made with the SEC that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Basis of Presentation
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
Overview
We are an international seafood company that imports, packages and sells refrigerated pasteurized crab meat, and other premium seafood products. Our current source of revenue is from importing blue and red swimming crab meat primarily from Indonesia, the Philippines and China and distributing it in the United States and Canada under several brand names such as Blue Star, Oceanica, Pacifika, Crab & Go, First Choice, Good Stuff and Coastal Pride Fresh. The crab meat which we import is processed in 13 plants throughout Southeast Asia. Our suppliers are primarily via co-packing relationships, including two affiliated suppliers. We sell primarily to food service distributors. We also sell our products to wholesalers, retail establishments and seafood distributors.
Recent Developments
NASDAQ Listing
The Company’s common stock was approved to list on the NASDAQ Capital Market under the symbol “BSFC” and began trading on November 3, 2021.
Public Offering
In connection with the NASDAQ uplisting, the Company consummated an underwritten public offering of 800,000 shares of common stock at a public offering price of $5.00 per share for total gross proceeds of $4 million, before deducting underwriting discounts, commissions and other expenses, which closed on November 5, 2021. In addition, the Company granted the underwriter a 45-day option to purchase up to an additional 120,000 shares of common stock at the public offering price, less underwriting discounts and commissions.
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COVID-19
The current COVID-19 pandemic has adversely affected our business operations, including disruptions and restrictions on our ability to travel or to distribute our seafood products, as well as temporary closures of our facilities. Any such disruption or delay may impact our sales and operating results. In addition, COVID-19 has resulted in a widespread health crisis that adversely affected the economies and financial markets of many other countries. As a result of COVID-19, the Company has experienced a significant decrease in revenue for the year ended December 31, 2020 and continues to have losses in the nine months ended September 30, 2021 although such losses have significantly decreased in comparison to the nine months ended September 30, 2020.
As a result of the business interruption experienced to date, management has taken steps to reduce expenses across all areas of its operations, including payroll, marketing, sales and warehousing expenses. The extent to which we are affected by COVID-19 will largely depend on future developments and restrictions which may disrupt interactions with customers, suppliers, staff and advisors which cannot be accurately predicted, including the duration and scope of the pandemic, governmental and business responses to the pandemic and the impact on the global economy, our customers’ demand for our products, and our ability to provide our products. We continue to monitor the effects of the pandemic on our business.
Results of Operations
The information set forth below should be read in conjunction with the financial statements and accompanying notes elsewhere in this Report.
Three months ended September 30, 2021 and 2020
Net Revenue. Revenue for the three months ended September 30, 2021 decreased 6.4% to $3,726,704 as compared to $3,980,151 for the three months ended September 30, 2020 as a result of a decrease in poundage sold due to the impact of the COVID-19 pandemic.
Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2021 decreased to $3,056,461 as compared to $3,433,789 for the three months ended September 30, 2020. The decrease is attributable to the revenue decline.
Gross Profit. Gross profit for the three months ended September 30, 2021 increased to $670,243 as compared to $546,362 in the three months ended September 30, 2020. This increase is attributable to higher market prices and lower cost of goods sold in comparison with the three months ended September 30, 2020.
Commissions Expense. Commissions expense increased to $23,932 for the three months ended September 30, 2021 from $13,620 for the three months ended September 30, 2020. This increase is due to higher commissionable revenues for the three months ended September 30, 2021.
Salaries and Wages Expense. Salaries and wages expense increased to $419,445 for the three months ended September 30, 2021 as compared to $282,279 for the three months ended September 30, 2020. This increase is mainly attributable to the acquisition of TOBC.
Depreciation and Amortization. Depreciation and amortization expense increased to $143,199 for the three months ended September 30, 2021 as compared to $109,738 for the three months ended September 30, 2020. The increase is attributable to higher depreciation due to the TOBC acquisition offset by a decrease of amortization on ROU assets.
Other Operating Expense. Other operating expense increased to $575,824 for the three months ended September 30, 2021 from $307,543 for the three months ended September 30, 2020. This increase is mainly attributable to legal and professional fees and stock compensation expense associated with the TOBC acquisition and a NASDAQ uplisting application.
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Other Income. Other income increased for the three months ended September 30, 2021 to $385,855 from $355,857 for the three months ended September 30, 2020. This increase is mainly attributable to the payroll protection program loan forgiveness obtained from US Century Bank.
Interest Expense. Interest expense decreased to $55,486 for the three months ended September 30, 2021 from $188,501 for the three months ended September 30, 2020. The decrease is attributable to a decrease in average loans and line of credit outstanding to $3,911,439 for the three months ended September 30, 2021 from $7,743,165 for the three months ended September 30, 2020.
Net Loss. Net loss was $161,788 for the three months ended September 30, 2021 as compared to a net income of $538 for the three months ended September 30, 2020. The increase in net loss is primarily attributable to increases in salaries and wages and other expenses.
Nine months ended September 30, 2021 and 2020
Net Revenue. Revenue for the nine months ended September 30, 2021 decreased 26.9% to $8,341,984 as compared to $11,416,868 for the nine months ended September 30, 2020 as a result of a decrease in poundage sold due to the impact of the COVID-19 pandemic.
Cost of Goods Sold. Cost of goods sold for the nine months ended September 30, 2021 decreased to $6,799,063 as compared to $10,464,728 for the nine months ended September 30, 2020. The decrease is attributable to the revenue decline.
Gross Profit. Gross profit for the nine months ended September 30, 2021 increased to $1,542,921 as compared to $952,140 for the nine months ended September 30, 2020. This increase is attributable to higher market prices and lower cost of goods sold in comparison to the nine months ended September 30, 2020.
Commissions Expense. Commissions expense decreased to $42,332 for the nine months ended September 30, 2021 from $105,983 for the nine months ended September 30, 2020. This decrease is due to lower commissionable revenues for the nine months ended September 30, 2021.
Salaries and Wages Expense. Salaries and wages expense increased to $1,028,900 for the nine months ended September 30, 2021 as compared to $932,532 for the nine months ended September 30, 2020. This increase is mainly attributable to the acquisition of TOBC.
Depreciation and Amortization. Depreciation and amortization expense decreased to $243,189 for the nine months ended September 30, 2021 as compared to $348,358 for the nine months ended September 30, 2020. The decrease is attributable to decrease in amortization of ROU assets and intangibles offset by an increase in depreciation and amortization due to the TOBC acquisition.
Other Operating Expense. Other operating expense increased to $1,531,807 for the nine months ended September 30, 2021 from $1,060,978 for the nine months ended September 30, 2020. This increase is mainly attributable to legal and professional fees and stock compensation expense associated with the TOBC acquisition and a NASDAQ uplisting application.
Other Income. Other income decreased for the nine months ended September 30, 2021 to $491,045 from $511,770 for the nine months ended September 30, 2020. This decrease is mainly attributable to lower collections made by Coastal Pride for debt existing prior to the acquisition of Coastal Pride by the Company.
Forbearance Fee Expense (Non-Cash). Forbearance fee expense (non-cash) decreased to $0 for the nine months ended September 30, 2021 from $2,655,292 for the nine months ended September 30, 2020. This decrease is the result of a one-time, non-cash expense related to the issuance of common stock for a forbearance fee in connection with the Kenar Note in 2020.
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Interest Expense. Interest expense decreased to $264,757 for the nine months ended September 30, 2021 from $704,809 for the nine months ended September 30, 2020. The decrease is attributable to a decrease in average loans and line of credit outstanding to $4,239,804 for the nine months ended September 30, 2021 from $9,326,049 for the nine months ended September 30, 2020.
Net Loss. Net loss was $1,077,019 for the nine months ended September 30, 2021 as compared to $4,344,042 for the nine months ended September 30, 2020. The decrease in net loss is primarily attributable to reductions of depreciation and amortization, interest and other expenses.
Liquidity and Capital Resources
The Company had cash of $203,967 as of September 30, 2021. At September 30, 2021, the Company had a working capital deficit of $825,877, including $1,150,000 in stockholder loans that are subordinated to its working capital line of credit, and the Company’s primary sources of liquidity consisted of inventory of $1,910,535 and accounts receivable of $754,778.
The Company has historically financed its operations through the cash flow generated from operations, capital investment, notes payable and a working capital line of credit.
The COVID-19 pandemic has caused significant disruptions to the global financial markets. The full impact of the COVID-19 outbreak continues to evolve, is highly uncertain and subject to change. The Company is not able to estimate the possible continuing effects of the COVID-19 outbreak on its operations or financial condition for the next 12 months.
Cash (Utilized in) Provided by Operating Activities. Cash utilized in operating activities during the nine months ended September 30, 2021 was $1,005,549 as compared to cash provided by operating activities of $3,944,053 for the nine months ended September 30, 2020. The decrease is attributable to the decrease in the changes in inventory of $5,526,376, receivables of $256,866, other current assets of $652,628 and other assets of $56,034 netted against the increase in changes in right of use liability of $96,252 and payables of $1,143,025 for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020.
Cash Utilized in Investing Activities. Cash utilized in investing activities for the nine months ended September 30, 2021 was $841,643 as compared to cash utilized in investing activities of $54,351 for the nine months ended September 30, 2020. The increase was attributable to the acquisition of TOBC for the nine months ended September 30, 2021.
Cash Provided by (Utilized in) Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2021 was $1,666,141 as compared to cash utilized in financing activities of $4,040,924 for the nine months ended September 30, 2020. Reduction of the Company’s revolving working capital line of credit of $285,474 and repayments of related party notes of $1,022,212 and principal payments of long-term debt of $398,117 were partially offset by the proceeds from the PPP loan of $371,944 for the nine months ended September 30, 2021, compared to loan payment and loan costs paid on the working capital line of credit of $4,439,474 for the nine months ended September 30, 2020. As of September 30, 2021, the Company had $3,000,000 of proceeds from a common stock private offering.
Working Capital Line of Credit
Keeler & Co. entered into a $14,000,000 revolving line of credit with ACF on August 31, 2016, the proceeds of which were used to pay off the prior line of credit, pay new loan costs of approximately $309,000 and provide additional working capital to Keeler & Co. This facility was amended on November 18, 2016, June 19, 2017, October 16, 2017, September 19, 2018, November 8, 2018, July 29, 2019, November 26, 2019 and May 7, 2020 and was secured by all of the assets of Keeler & Co. and Coastal Pride. The interest rate under the line of credit was equal to the greater of (i) the 3-month LIBOR rate plus 9.25%, (ii) the prime rate plus 6.0%, and (iii) a fixed rate of 6.5%. As of December 31, 2020, the interest rate was 12.48%.
On March 31, 2021, Keeler & Co. and Coastal Pride entered into a loan and security agreement (“Loan Agreement”) with Lighthouse Financial Corp., a North Carolina corporation (“Lighthouse”) pursuant to the terms of the Loan Agreement, Lighthouse made available to Keeler & Co. and Coastal Pride (together, the “Borrowers”) a $5,000,000 revolving line of credit for a term of thirty-six months, renewable annually for one-year periods thereafter. Amounts due under the line of credit are represented by a revolving credit note issued to Lighthouse by the Borrowers.
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The advance rate of the revolving line of credit is 85% with respect to eligible accounts receivable and the lower of 60% of the Borrowers’ eligible inventory, or 80% of the net orderly liquidation value, subject to an inventory sublimit of $2,500,000. The inventory portion of the loan will never exceed 50% of the outstanding balance. Interest on the line of credit is the prime rate (with a floor of 3.25%), plus 3.75%. The Borrowers will pay Lighthouse a facility fee of $50,000 in three instalments of $16,667 in March, April and May 2021 and will pay an additional facility fee of $25,000 on each anniversary of March 31, 2021.
The line of credit is secured by a first priority security interest on all the assets of each Borrower. Pursuant to the terms of a guaranty agreement, the Company guaranteed the obligations of the Borrowers under the note and John Keeler, Executive Chairman and Chief Executive Officer of the Company, provided a personal guaranty of up to $1,000,000 to Lighthouse.
The Borrowers utilized $784,450 of the Lighthouse revolving line of credit to repay all the outstanding indebtedness owed to the ACF as of March 31, 2021. As a result, all obligations owed to ACF were satisfied and the loan agreement with ACF was terminated. The outstanding balance owed to Lighthouse as of September 30, 2021 amounted to $1,520,433.
John Keeler Promissory Notes – Subordinated
From January 2006 through May 2017, Keeler & Co issued 6% demand promissory notes in the aggregate principal amount of $2,910,000 to John Keeler, our Chief Executive Officer and Executive Chairman. As of September 30, 2021 and December 31, 2020, approximately $1,150,000 of principal remains outstanding and approximately $58,600 and $174,000 of interest was paid under the notes, respectively. These notes are subordinated to the Lighthouse note. After satisfaction of the terms of the subordination, the Company may prepay the notes at any time first against interest due thereunder. If an event of default occurs under the notes, interest will accrue at 18% per annum and if not paid within 10 days of payment becoming due, the holder of the note is entitled to a late fee of 5% of the amount of payment not timely made. The Company made principal payments during the nine months ended September 30, 2021 of $149,712.
Kenar Note
On March 26, 2019, the Company issued a four-month promissory note in the principal amount of $1,000,000 (the “Kenar Note”) to Kenar Overseas Corp., a company registered in Panama (“Kenar”). The note bears interest at the rate of 18% per annum during the initial four months which rate will increase to 24% during any extension thereof. The note may be prepaid in whole or in part without penalty. John Keeler, the Company’s Chief Executive Officer and Executive Chairman pledged 5,000,000 shares of common stock to secure the Company’s obligations under the note. The Kenar Note matured on July 26, 2019 and was extended on a month-to-month basis and on November 19, 2019, the Kenar Note was extended to March 31, 2020 on the same terms and conditions.
On May 21, 2020, the Kenar Note was amended to (i) extend the maturity date to March 31, 2021, (ii) provide that the Company use one-third of any capital raise from the sale of its equity to reduce the outstanding principal under the Kenar Note, (iii) set the interest rate at 18% per annum, payable monthly commencing October 1, 2020, and (iv) reduce the number of pledged shares by Mr. Keeler to 4,000,000. As consideration therefor, the Company issued 1,021,266 shares of Common Stock to Kenar on May 27, 2020. The outstanding principal amount of the note at March 31, 2021 and December 31, 2020 was $872,500. On April 28, 2021, the Kenar Note was further amended to extend the maturity date to May 31, 2021.
On July 6, 2021, the Company entered into a note payoff indemnity agreement with Kenar pursuant to which the Company paid Kenar $918,539 of principal and accrued interest in full satisfaction of the amounts due to Kenar under the Second Loan Amendment, dated April 26, 2021, between the Company and Kenar, and the Kenar Note was extinguished, and the shares pledged by Mr. Keeler were released.
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Lobo Note
On April 2, 2019, the Company issued a four-month unsecured promissory note in the principal amount of $100,000 (the “Lobo Note”) to Lobo Holdings, LLLP, a stockholder of the Company (“Lobo”). The Lobo Note bears interest at the rate of 18% per annum. The Lobo Note may be prepaid in whole or in part without penalty. John Keeler, the Company’s Executive Chairman and Chief Executive Officer, pledged 1,000,000 shares of common stock of the Company to secure the Company’s obligations under the Lobo Note. The Lobo Note matured on August 2, 2019 and was extended through December 2, 2019 on the same terms and conditions. On November 15, 2019, the Company paid off the Lobo Note with the issuance to Lobo of an unsecured promissory note in the principal amount of $100,000 which accrued interest at the rate of 15% per annum and matured on March 31, 2020. On April 1, 2020, the Company paid off the November 15, 2019 Lobo Note with the issuance to Lobo of a six-month unsecured promissory note in the principal amount of $100,000, which accrued interest at the rate of 10% per annum and matured on October 1, 2020. On October 1, 2020, the Company paid off the April 1, 2020 note with the issuance of a three-month unsecured promissory note in the principal amount of $100,000, which bears interest at the rate of 10% per annum and matured on December 31, 2020. On January 1, 2021, the Company paid off the October 1, 2020 note with the issuance of a six-month unsecured promissory note in the principal amount of $100,000, which bears interest at the rate of 10% per annum and matures on June 30, 2021. On July 1, 2021, the Company paid off the January 1, 2021 note with the issuance of a three-month unsecured promissory note in the principal amount of $100,000 which accrued interest at the rate of 10% per annum and matured on September 30, 2021. On October 1, 2021, the Company paid off the July 1, 2021 Lobo note with the issuance of a one-month unsecured promissory note in the principal amount of $100,000, which accrued interest at the rate of 10% per annum and matured on November 1, 2021. On November 1, 2021, the Company paid Lobo $100,877 of principal and accrued interest in full satisfaction of the amounts due to Lobo under the one-month unsecured promissory note dated October 1, 2021, between the Company and Lobo, and the Lobo Note was extinguished.
Payroll Protection Program Loan
On March 2, 2021, the Company received proceeds of $371,944 and issued an unsecured promissory note to US Century in the principal amount of $371,944 in connection with a PPP Loan. The note accrues interest at 1.0% per annum, matures five years from the date of issuance and is fully guaranteed by the SBA and may be forgiven provided certain criteria are met. In September 2021, the Company applied for the loan forgiveness by SBA through US Century Bank for the full amount which was granted in October 2021.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of September 30, 2021, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, based on the material weaknesses discussed below, our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our disclosure controls are not effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
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The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were:
● The Company’s lack of an audit committee with a financial expert and thus the Company lacks the board oversight role within the financial reporting process; and
● inadequate segregation of duties consistent with control objectives, including lack of personnel resources and technical accounting expertise within the accounting function of the Company.
Management believes that the material weaknesses that were identified did not have an effect on our financial results. However, management believes that these weaknesses, if not properly remediated, could result in a material misstatement in our financial statements in future periods.
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we plan to further initiate, the following measures, subject to the availability of required resources:
● We plan to create a position to segregate duties consistent with control objectives and hire personnel resources with technical accounting expertise within the accounting function;
● As of May 5, 2021, we hired a chief financial officer who is also the principal financial officer for SEC filing purposes; and
● On July 19, 2021, we established an audit committee and determined that Jeffrey Guzy is an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication as defined under the applicable Nasdaq rules and regulations.
Going forward, we intend to evaluate our processes and procedures and, where practicable and resources permit, implement changes in order to have more effective internal controls over financial reporting.
Changes in Internal Control over Financial Reporting
During the period covered by this Quarterly Report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be party to legal proceedings that arise in the ordinary course of business. There are currently no pending legal proceedings, individually or in the aggregate, that we believe will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Except as set forth below, there were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.
On August 3, 2021, the Company issued 5,000 shares of common stock with a fair value of $30,000 to an investor relations firm for services provided to the Company under an investor relations consulting agreement.
On August 3, 2021, the Company issued a stock option to purchase an aggregate of 7,013 shares of common stock at an exercise price of $6.00 per share to Silvia Alana, its chief financial officer.
On September 30, 2021, the Company issued 10,465 shares of common stock to the designee of a law firm for services provided to the Company.
On September 30, 2021, the Company issued 4,724 shares of common stock to the designee of a law firm for services provided to the Company.
The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe are exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BLUE STAR FOODS CORP. | ||
| Dated: November 22, 2021 | By: | /s/ John Keeler |
| Name: | John Keeler | |
| Title: | Executive Chairman and Chief Executive Officer (Principal Executive Officer) | |
| Dated: November 22, 2021 | By: | /s/ Silvia Alana |
| Name: | Silvia Alana | |
| Title: | Chief Financial Officer | |
| (Principal Financial and Accounting Officer) | ||
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