UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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the quarterly period ended:
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BLUE STAR FOODS CORP.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
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 | 23 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 |
| Item 4. | Controls and Procedures | 29 |
| PART II - OTHER INFORMATION | 30 | |
| Item 1. | Legal Proceedings | 30 |
| Item 1A. | Risk Factors | 30 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 |
| Item 3. | Defaults Upon Senior Securities | 30 |
| Item 4. | Mine Safety Disclosures | 30 |
| Item 5. | Other Information | 30 |
| Item 6. | Exhibits | 30 |
| SIGNATURES | 31 | |
| 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), 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 Annual Report on Form 10-K for the year ended December 31, 2022 which we filed with the Securities and Exchange Commission (“SEC”) on April 17, 2023 and in our Registration Statement on Form S-1/A filed with the SEC on August 30, 2023. 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”, “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 (“Keeler & Co.”), and its wholly-owned subsidiary, Coastal Pride Seafood, 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”).
All references to shares of common stock of the Company in this Quarterly Report have been adjusted to reflect the Company’s 1:20 reverse stock split effective as of June 21, 2023 (the “Reverse Stock Split”).
| 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 on Form 10-K for the year ended December 31, 2022. 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
(UNAUDITED)
SEPTEMBER 30, 2023 | DECEMBER 31, 2022 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowances and credit losses of $ | ||||||||
| Inventory, net | ||||||||
| Advances to related party | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| RELATED PARTY LONG-TERM RECEIVABLE | ||||||||
| FIXED ASSETS, net | ||||||||
| RIGHT OF USE ASSET | ||||||||
| ADVANCES TO RELATED PARTY | ||||||||
| OTHER ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accruals | $ | $ | ||||||
| Working capital line of credit | ||||||||
| Deferred income | ||||||||
| Current maturities of long-term debt, net of discounts | ||||||||
| Current maturities of lease liabilities | ||||||||
| Current maturities of related party long-term notes | ||||||||
| Loan payable | ||||||||
| Related party notes payable - subordinated | ||||||||
| Derivative liability | ||||||||
| Warrants liability | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Lease liability, net of current portion | ||||||||
| Debt, net of current portion and discounts | ||||||||
| Related party notes, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series A | ||||||||
| Common stock, $ par value, shares authorized; shares issued and outstanding as of September 30, 2023, and shares issued and outstanding as of December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, shares as of September 30, 2023 and shares as of December 31, 2022 | ( | ) | ||||||
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | ( | ) | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
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)
(UNAUDITED)
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUE, NET | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| GROSS PROFIT (LOSS) | ( | ) | ( | ) | ( | ) | ||||||||||
| COMMISSIONS | ||||||||||||||||
| SALARIES AND WAGES | ||||||||||||||||
| DEPRECIATION AND AMORTIZATION | ||||||||||||||||
| IMPAIRMENT LOSS | ||||||||||||||||
| OTHER OPERATING EXPENSES | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME | ( | ) | ||||||||||||||
| INTEREST INCOME | ||||||||||||||||
| LOSS ON SETTLEMENT OF DEBT | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| CHANGE IN FAIR VALUE OF DERIVATIVE AND WARRANT LIABILITIES | ||||||||||||||||
| INTEREST EXPENSE | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||
| CHANGE IN FOREIGN CURRENCY TRANSLATION ADJUSTMENT | ( | ) | ( | ) | ||||||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share: | ||||||||||||||||
| Net loss per common share - basis and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 5 |
Blue Star Foods Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
| Series A Preferred Stock $.0001 par value | Common Stock $.0001 par value | Additional Paid-in | Accumulated | Treasury | Accumulated Other Comprehensive | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Income (Loss) | (Deficit) | ||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for note payment | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||||||||||
| Repurchase of common stock | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for note payment | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for cash | - | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for note payment | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for cash and exercise of warrants | - | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | ||||||||||||||||||||||||||||||||||
| September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||
| Series A Preferred Stock $.0001 par value | Common Stock $.0001 par value | Additional Paid-in | Accumulated | Treasury | Accumulated Other Comprehensive | Total Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Income (Loss) | Equity | ||||||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Warrants issued on convertible debt note | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for asset acquisition | ||||||||||||||||||||||||||||||||||||
| Common stock issued from exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Comprehensive Income | - | - | ||||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Comprehensive Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Stock based compensation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Common stock issued for service | - | |||||||||||||||||||||||||||||||||||
| Common stock issued for note payment | - | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Comprehensive Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 6 |
Blue Star Foods Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended September 30 | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
| Stock based compensation | ||||||||
| Common stock issued for service | ||||||||
| Depreciation of fixed assets | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of debt discounts | ||||||||
| Amortization of loan costs | ||||||||
| Impairment of goodwill | ||||||||
| Loss on settlement of debt | ||||||||
| Lease expense | ||||||||
| Write down of inventory | ||||||||
| Bad debt expense | ||||||||
| Credit loss expense | ||||||||
| Gain on revaluation of fair value of derivative and warrant liabilities | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivables | ||||||||
| Inventories | ( | ) | ||||||
| Advances to related parties | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Right of use liability | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Accounts payable and accruals | ( | ) | ||||||
| Deferred income | ( | ) | ||||||
| Other current liabilities | ( | ) | ||||||
| Net Cash (Used in) Operating Activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| 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 sale of prefunded warrants | ||||||||
| Proceeds from common stock warrants exercised | ||||||||
| Proceeds from working capital line of credit | ||||||||
| Proceeds from short-term loan | ||||||||
| Proceeds from convertible debt | ||||||||
| Repayments of working capital line of credit | ( | ) | ( | ) | ||||
| Repayments of short-term loan | ( | ) | ||||||
| Principal payments of Convertible Debt | ( | ) | ||||||
| Repayments of related party notes payable | ( | ) | ( | ) | ||||
| Principal payments of convertible debt | ( | ) | ||||||
| Purchase of treasury stock | ( | ) | ||||||
| Payment of loan costs | ( | ) | ||||||
| Net Cash Provided by Financing Activities | ||||||||
| Effect of Exchange Rate Changes on Cash | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | ( | ) | ||||||
| CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD | ||||||||
| CASH AND CASH EQUIVALENTS – END OF PERIOD | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES | ||||||||
| Operating lease assets recognized in exchange for operating lease liabilities | ||||||||
| Warrants issued for convertible debt | ||||||||
| Common stock issued for asset acquisition | ||||||||
| Common stock issued for partial settlement of note payable | ||||||||
| Derivative liability recognized on issuance of convertible note | ||||||||
| Warrant liability recognized on issuance of convertible note | ||||||||
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 has two other subsidiaries, Coastal Pride and TOBC who maintain the Company’s fresh crab meat and steelhead salmon businesses, respectively. The Company’s current source of revenue is from 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 and rainbow trout produced under the brand name Little Cedar Farms for distribution in Canada.
On
February 3, 2022, Coastal Pride entered into an asset purchase agreement with Gault Seafood, LLC, a South Carolina limited liability
company (“Gault Seafood”), and Robert J. Gault II, President of Gault Seafood (“Gault”) pursuant to which Coastal
Pride acquired all of the Seller’s right, title and interest in and to assets relating to Gault Seafood’s soft-shell crab
operations, including intellectual property, equipment, vehicles and other assets used in connection with the soft-shell crab business.
Coastal Pride did not assume any liabilities in connection with the acquisition. The purchase price for the assets consisted of a cash
payment in the amount of $
On
June 9, 2023, the Company amended its Certificate of Incorporation to affect a
Note 2. 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, 2022 has been derived from the Company’s annual financial statements that were audited by our 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, 2022 filed with the SEC on April 17, 2023 for a broader discussion of our business and the risks inherent in such business.
Advances to Suppliers and Related Party
In the normal course of business, the Company may advance payments to its suppliers, including 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, 2023, and December 31, 2022, the balance due from the related party for future shipments was approximately $
| 8 |
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 Mexico, 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 and rainbow trout fingerlings produced by TOBC 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.
Accounts Receivable
Accounts receivable consist of unsecured obligations due from customers under normal trade terms, usually net 30 days. The Company grants credit to its customers based on the Company’s evaluation of a particular customer’s credit worthiness.
Allowances for credit losses are maintained for potential credit losses based on the age of the accounts receivable and the results of the Company’s periodic credit evaluations of its customers’ financial condition. Receivables are written off as uncollectible and deducted from the allowance for doubtful accounts after collection efforts have been deemed to be unsuccessful. Subsequent recoveries are netted against the allowance for credit losses. The Company generally does not charge interest on receivables.
Receivables
are net of estimated allowances for credit losses and sales return, allowances and discounts. They are stated at estimated net realizable
value. Allowances for credit losses, sales returns, discounts and refunds of $
Inventories
Substantially all of the Company’s inventory consists of packaged crab meat located at a public cold storage facility and merchandise in transit from suppliers. The Company also has eggs and fish in process inventory from TOBC. The cost of inventory is primarily determined using the specific identification method for crab meat. Fish in process inventory is measured based on the estimated biomass of fish on hand. The Company has established a standard procedure to estimate the biomass of fish on hand using counting and sampling techniques. Inventory is valued at the lower of cost or net realizable value, cost being determined using the first-in, first-out method for crab meat and using various estimates and assumptions in regard to the calculation of the biomass, including expected yield, market value of the biomass, and estimated costs of completion.
| 9 |
Merchandise is purchased cost and freight shipping point and becomes the Company’s asset and liability upon leaving the suppliers’ warehouse.
The
Company periodically reviews the value of items in inventory and records an allowance to reduce the carrying value of inventory to the
lower of cost or net realizable value based on its assessment of market conditions, inventory turnover and current stock levels. For
the nine months ended September 30, 2023, the Company recorded
The Company’s inventory as of September 30, 2023 and December 31, 2022 consists of:
September 30, 2023 | December 31, 2022 | |||||||
| Inventory purchased for resale | $ | $ | ||||||
| Feeds and eggs processed | ||||||||
| In-transit inventory | ||||||||
| Inventory, net | $ | $ | ||||||
Lease Accounting
The Company accounts for its leases under ASC 842, Leases, which requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. The Company 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.
The Company categorizes leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those leases that would allow the Company 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. The Company did not have any finance leases as of September 30, 2023. The Company’s leases generally have terms that range from three years for equipment and six to seven years for real property. The Company elected the accounting policy to include both the lease and non-lease components of its agreements as a single component and accounts 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.
| 10 |
The table below presents the lease-related assets and liabilities recorded on the balance sheet as of September 30, 2023.
September 30, 2023 | ||||
| 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, 2023 | ||||
| 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, 2023 | ||||
| Weighted-average remaining lease term | ||||
| Operating leases | ||||
| Weighted-average discount rate | ||||
| Operating leases | % | |||
Maturities of lease liabilities as of September 30, 2023 were as follows:
Operating Leases | ||||
| 2023 (three months remaining) | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 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 | $ | |||
Goodwill and Other Intangible Assets
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.
| 11 |
The
Company reviews its 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 goodwill and
recognized an impairment loss on goodwill of $
Long-lived Assets
Management reviews long-lived assets, including finite-lived intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the asset’s useful life on an undiscounted basis. If the evaluation indicates that the carrying value of the asset may not be recoverable, the potential impairment is measured using fair value. Fair value estimates are completed using a discounted cash flow analysis. Impairment losses for assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
In
accordance with its policies, the Company performed an assessment of its long-lived assets and recognized an impairment loss on customer
relationships, trademarks, non-compete agreements of $
Foreign Currency Exchange Rates Risk
The Company manages its exposure to fluctuations in foreign currency exchange rates through its normal operating activities. Its primary focus is to monitor exposure to, and manage, the economic foreign currency exchange risks faced by, its operations and realized when the Company exchanges one currency for another. The Company’s operations primarily utilize the U.S. dollar and Canadian dollar as its functional currencies. Movements in foreign currency exchange rates affect its financial statements.
Fair Value Measurements and Financial Instruments
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured using inputs in one of the following three categories:
Level 1 measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation of these items does not entail a significant amount of judgment.
Level 2 measurements are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable for the assets or liabilities.
Level 3 measurements are based on unobservable data that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
Our financial instruments include cash, accounts receivable, accounts payable, accrued expenses, debt obligations, derivative liabilities and warrant liabilities. We believe the carrying values of our cash, accounts receivable, accounts payable, and accrued expenses financial instruments approximate their fair values because they are short term in nature or payable on demand. The derivative liability is the embedded conversion feature on the 2023 Lind convertible note. All derivatives and warrant liabilities are recorded at fair value. The change in fair value for derivatives and warrants liabilities is recognized in earnings. The Company’s derivative and warrant liabilities are measured at fair value on a recurring basis as of September 30, 2023.
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| September 30, 2023 | ||||||||||||||||
| Fair Value Measurement using Fair Value Hierarchy | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liability on convertible debt | $ | $ | $ | $ | ||||||||||||
| Warrant liability | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The table below presents the change in the fair value of the derivative liability convertible debt and warrant liability during the nine months ended September 30, 2023:
| Derivative liability balance, January 1, 2023 | ||||
| Issuance of derivative liability during the period | ||||
| Change in derivative liability during the period | ||||
| Derivative liability balance, June 30, 2023 | $ | |||
| Issuance of derivative liability during the period | ||||
| Change in derivative liability during the period | ||||
| Derivative liability balance, September 30, 2023 | $ | |||
| Warrant liability balance, January 1, 2023 | ||||
| Issuance of warrant liability during the period | ||||
| Change in warrant liability during the period | ( | ) | ||
| Warrant liability balance, June 30, 2023 | $ | |||
| Issuance of warrant liability during the period | ||||
| Settlement of warrant liability | ( | ) | ||
| Change in warrant liability during the period | ( | ) | ||
| Warrant liability balance, September 30, 2023 | $ |
Recent Accounting Pronouncements
ASU 2016-13 Financial Instruments – Credit Losses (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a forward-looking, expected loss model to estimate credit losses. It also requires entities to consider additional disclosures related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. ASU 2016-13 was further amended in November 2018 by ASU 2018-19, Codification Improvements to Topic 236, Financial Instrument-Credit Losses. For public business entities that are Securities and Exchange Commission filers excluding smaller reporting companies, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. On October 16, 2019, FASB voted to delay implementation of ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” For all other entities, the amendments are now effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. On November 15, 2019, FASB issued an Accounting Standard Update No. 2019-10 to amend the implementation date to fiscal year beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company adopted this ASU on January 1, 2023 related to its trade receivables and determined no material impact of the adoption of the ASU on the Company’s consolidated financial statements.
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Reverse Stock Split
On
March 29, 2023, the Company’s board of directors approved, and on May 10, 2023, at a special meeting of the stockholders, holders
of approximately
On June 1, 2023, the Board determined to effectuate the Reverse Stock Split and on June 9, 2023, the Company amended its Certificate of Incorporation to effect the Reverse Stock Split, effective as of June 21, 2023.
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, 2023, the Company incurred a net loss of $
Note 4. Other Current Assets
Other
current assets totaled $
Note 5. Fixed Assets, Net
Fixed assets comprised the following:
September 30, 2023 | December 31, 2022 | |||||||
| Computer equipment | $ | $ | ||||||
| RAS system | ||||||||
| Automobiles | ||||||||
| Leasehold improvements | ||||||||
| Building Improvements | ||||||||
| Total | ||||||||
| Less: Accumulated depreciation and impairment | ( | ) | ( | ) | ||||
| Fixed assets, net | $ | $ | ||||||
For
the nine months ended September 30, 2023 and 2022, depreciation expense totaled approximately $
Note 6. Debt
Working Capital Line of Credit
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 $
| 14 |
The
line of credit was 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
Company was in compliance with all financial covenants under the Loan Agreement, except for the requirement to maintain a greater than
$
During
the nine months ended September 30, 2023, cash proceeds from the working capital line of credit totaled $
On
June 16, 2023, the Company terminated the Loan Agreement and paid a total of approximately $
John Keeler Promissory Notes
The
Company had unsecured promissory notes outstanding to John Keeler of approximately $
Walter Lubkin Jr. Note
On
November 26, 2019, the Company issued a five-year unsecured promissory note in the principal amount of $
For
the year ended December 31, 2022, $
On
August 4, 2023, $
| 15 |
As
of September 30, 2023, $
Interest
expense for the note totaled approximately $
As
of September 30, 2023 and December 31, 2022, the outstanding principal balance on the note totaled $
Lind Global Fund II LP notes
2022 Note
On
January 24, 2022, the Company entered into a securities purchase agreement with Lind Global Fund II LP, a Delaware limited partnership
(“Lind”), pursuant to which the Company issued Lind a secured, two-year, interest free convertible promissory note in the
principal amount of $
In connection with the issuance of the 2022 Lind Note, the Company granted Lind a first priority security interest and lien on all of its assets, including a pledge of its shares in Keeler & Co., pursuant to a security agreement and a stock pledge agreement with Lind, dated January 24, 2022 (the “2022 Security Agreement). Each subsidiary of the Company also granted a second priority security interest in all of its respective assets.
The 2022 Lind Note is mandatorily payable prior to maturity if the Company issues any preferred stock (with certain exceptions described in the note) or, if the Company or its subsidiaries issues any indebtedness. The Company also agreed not to issue or sell any securities with a conversion, exercise or other price based on a discount to the trading prices of the Company’s stock or to grant the right to receive additional securities based on future transactions of the Company on terms more favorable than those granted to Lind, with certain exceptions.
If
the Company fails to maintain the listing and trading of its common stock, the note will become due and payable and Lind may convert
all or a portion of the outstanding principal at the lower of the then current conversion price and
If
the Company engages in capital raising transactions, Lind has the right to purchase up to
The
2022 Lind Note is convertible into common stock at $
| 16 |
Upon
an event of default as described in the 2022 Lind Note, the 2022 Lind Note will become immediately due and payable at a default interest
rate of
During
the nine months ended September 30, 2023, the Company made aggregate principal payments on the 2022 Lind Note of $
2023 Note
On
May 30, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Lind pursuant to which
the Company issued to Lind a secured, two-year, interest free convertible promissory note in the principal amount of $
In connection with the issuance of the 2022 Lind Note, the Company and Lind amended the 2022 Security Agreement to include the new 2023 Lind Note, pursuant to an amended and restated security agreement, dated May 30, 2023, between the Company and Lind.
The Company agreed to file a registration statement with the Securities and Exchange Commission covering the resale of the shares of common stock issuable pursuant to the 2023 Lind Note and Lind Warrant. If the registration statement is not declared effective within 90 days the 2023 Lind Note will be in default. Lind was also granted piggyback registration rights.
If
the Company engages in capital raising transactions, Lind has the right to purchase up to
The
2023 Lind Note is convertible into common stock of the Company after the earlier of 90 days from issuance or the date the registration
statement is effective, provided that no such conversion may be made that would result in beneficial ownership by Lind and its affiliates
of more than % of the Company’s outstanding shares of common stock. The conversion price of the 2023 Lind Note is equal to
the lesser of: (i) $
| 17 |
The 2023 Lind Note contains certain negative covenants, including restricting the Company from certain distributions, stock repurchases, borrowing, sale of assets, loans and exchange offers.
Upon
the occurrence of an event of default as described in the 2023 Lind Note, the 2023 Lind Note will become immediately due and payable
at a default interest rate of
The
Warrant entitles the Investor to purchase up to
On
July 27, 2023, the Company, entered into a First Amendment to the Purchase Agreement (the “Purchase Agreement Amendment”)
with Lind, which provided for the issuance of further senior convertible promissory notes up to an aggregate principal amount of up to
$
Pursuant
to the Purchase Agreement Amendment, the Company issued to Lind a two-year, interest free convertible promissory note in the principal
amount of $
As
of September 30, 2023, the outstanding balance on the notes was $
Agile Lending, LLC loan
On
June 14, 2023, the Company, and Keeler & Co. (each a “Borrower”) entered into a subordinated business loan and security
agreement with Agile Lending, LLC as lead lender (“Agile”) and Agile Capital Funding, LLC as collateral agent, which provides
for a term loan to the Company in the amount of $
Note 7. Stockholders’ Equity
On
January 24, 2022, the Company issued shares of common stock to an investor upon the exercise of warrants for total proceeds of
$
On
February 3, 2022, the Company issued shares of common stock with a fair value of $
On
March 31, 2022, the Company issued shares of common stock to Intelligent Investments I LLC, with a fair value of $
On
March 31, 2022, the Company issued shares of common stock with a fair value of $
On
April 4, 2022, the Company issued shares of common stock with a fair value of $
| 18 |
On
April 5, 2022, the Company issued an aggregate of shares of common stock with a fair value of $
On
May 1, 2022, the Company issued shares of common stock with a fair value of $
On
June 1, 2022, the Company issued shares of common stock with a fair value of $
On
June 3, 2022, the Company issued shares of common stock with a fair value of $
On
June 30, 2022, the Company issued shares of common stock to Intelligent Investments I LLC, with a fair value of $
On
July 1, 2022, the Company issued shares of common stock with a fair value of $
On
August 1, 2022, the Company issued shares of common stock with a fair value of $
On
August 25, 2022, the Company issued shares of common stock to Lind, with a fair value of $
On
September 1, 2022, the Company issued shares of common stock with a fair value of $
On
September 26, 2022, the Company issued shares of common stock to Lind, with a fair value of $
During the nine months ended September 30, 2023, the Company issued an aggregate of shares of common stock to the designee of ClearThink for consulting services provided to the Company.
In
January 2023, the Company sold an aggregate of shares of common stock for net proceeds of $
On
February 14, 2023, the Company issued shares of common stock and
On
August 22, 2023, the Company issued shares of common stock with a fair value of $
On
September 11, 2023, the Company sold an aggregate of shares of common stock for net proceeds of $
During
the nine months ended September 30, 2023, between May 2023, June 2023 and August 2023, the Company issued an aggregate of shares
of common stock for cash proceeds of $
| 19 |
During
the nine months ended September 30, 2023, the Company issued an aggregate of shares of common stock to Lind 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, 2022 | $ | |||||||||||||||
| Exercisable – December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Forfeited | $ | |||||||||||||||
| Vested | ||||||||||||||||
| Outstanding – September 30, 2023 | $ | |||||||||||||||
| Exercisable – September 30, 2023 | $ | $ | ||||||||||||||
For the nine months ended September 30, 2023, the Company recognized $ of compensation expense for vested stock options issued to directors, contractors and employees during 2019 to 2023.
Note 9. Warrants
The following table represents warrant activity for the nine months ended September 30, 2023:
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life in Years | Aggregate Intrinsic Value | |||||||||||||
| Outstanding – December 31, 2022 | $ | |||||||||||||||
| Exercisable – December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Forfeited or Expired | $ | |||||||||||||||
| Outstanding – September 30, 2023 | $ | |||||||||||||||
| Exercisable – September 30, 2023 | $ | $ | ||||||||||||||
On
January 24, 2022, in connection with the issuance of the $
| 20 |
On
May 30, 2023, in connection with the issuance of the $
On
July 27, 2023, in connection with the issuance of the $
On
September 11, 2023, in connection with the underwritten public offering pursuant to a securities
purchase agreement, the Company issued pre-funded warrants with the public offering price of $immediately exercisable to purchase up to
On
September 11, 2023, in connection with the underwritten public offering, the Company
issued -year
Series A-1 warrants to purchase up to
On
September 11, 2023, in connection with the underwritten public offering, the Company
issued -month
Series A-2 warrants to purchase up to
During
the nine months ended September 30, 2023, the Company issued
| 21 |
Note 10. Commitment and Contingencies
Office lease
On
January 1, 2022, the Company entered into a verbal month-to-month lease agreement for its executive offices with an unrelated third party
and paid $
Coastal
Pride leases approximately
On
February 3, 2022, in connection with the acquisition of certain assets of Gault, Coastal Pride entered into a -year lease agreement
for
The
offices and facility of TOBC are located in Nanaimo, British Columbia, Canada and are on land which was leased to TOBC for approximately
$
Rental
and equipment lease expenses amounted to approximately $
Note 11. Subsequent Events
On October 1, 2023 and November 1, 2023, the Company issued and shares of common stock, respectively, to the designee of Clear Think Capital for consulting services provided to the Company.
On
October 1, 2023, the leases for
As of November 3, 2023, the Company issued shares of common stock upon the exercise of pre-funded warrants in connection with an underwritten offering pursuant to a securities purchase agreement.
| 22 |
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 the financial statements and the related notes thereto contained in this Quarterly Report. 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 Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on April 17, 2023, 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, and steelhead salmon and rainbow trout fingerlings produced under the brand name Little Cedar Farms for distribution in Canada. The crab meat which we import is processed in six out of the ten plants available 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 Events
Public Offering
On September 11, 2023, the Company sold in an underwritten public offering pursuant to a securities purchase agreement, an aggregate of 690,000 shares of its common stock, Series A-1 warrants to purchase up to 10,741,139 shares of common stock, Series A-2 warrants to purchase up to 10,741,139 shares of common stock (collectively, the “Common Warrants”) and pre-funded warrants to purchase up to 10,051,139 shares of common stock (the “Pre-Funded Warrants”). Each share of common stock and Pre-Funded Warrants were sold together with a Series A-1 common stock purchase warrant to purchase one share of common stock and a Series A-2 common stock purchase warrant to purchase one share of common stock. The public offering price for each share of common stock and accompanying Common Warrants was $0.4655. Each Common Warrant has an exercise price of $0.4655 per share, and will be exercisable beginning on the effective date of stockholder approval of the issuance of the shares upon exercise of the Common Warrants (“Warrant Stockholder Approval”). The Series A-1 warrants will expire on the five-year anniversary of the effective date of Warrant Stockholder Approval. The Series A-2 warrants will expire on the eighteen-month anniversary of the effective date of Warrant Stockholder Approval. The public offering price was $0.4555 per Pre-funded Warrant and accompanying Common Warrants. The Pre-funded Warrants are immediately exercisable and have an exercise price of $0.01 per share.
H.C. Wainwright & Co., LLC, acted as placement agent for the offering and received a fee of 7% of the gross proceeds and reimbursement of $35,000 in non-accountable expenses and $100,000 of legal fees and out-of-pocket expenses.
NASDAQ Compliance
On September 26, 2023, the Company received notice from NASDAQ that based upon the closing bid price of its common stock for the last 30 consecutive business days, the Company was not in compliance with the requirement to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Requirement”). The Company has 180 days, or until March 24, 2024, to regain compliance with NASDAQ Listing Rule 5550(a)(2). If at any time before March 24, 2024, the closing bid price of the Company’s common stock closes at or above $1.00 per share for a minimum of ten consecutive business days, NASDAQ will provide written notification that the Company has achieved compliance with the Minimum Bid Requirement, and the matter would be resolved. If the Company does not regain compliance with the Minimum Bid Requirement during the initial 180 calendar day period, the Company may be eligible for an additional 180 calendar day compliance period if it meets all other applicable listing standards.
The Company will continue to actively monitor the closing bid price of its Common Stock and will seek to regain compliance with all applicable NASDAQ requirements within the allotted compliance periods. If the Company does not regain compliance within the allotted compliance periods, including any extensions that may be granted by NASDAQ, the Company’s Common Stock may be subject to delisting.
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Minimum Stockholder’s Equity
The Company was notified on May 23, 2023 by NASDAQ that it no longer complied with the minimum $2,500,000 stockholders’ equity required for continued listing on NASDAQ. At a hearing with NASDAQ on June 29, 2023, the Company’s request for continued listing on The NASDAQ Capital Market was granted, subject to filing a registration statement with the SEC for a $5 million public offering by July 28, 2023 and demonstrating compliance with the minimum stockholders’ equity requirement by August 18, 2025, which date was extended to September 15, 2023.On September 11, 2023, the Company closed its $5 million public offering. On October 16, 2023, NASDAQ notified the Company that it had regained compliance with the minimum $2,500,000 stockholders’ equity requirement. However, the Company will be subject to a mandatory panel monitor until October 16, 2024. If, within that one-year monitoring period, NASDAQ finds the Company out of compliance, the Company will have an opportunity to request a new hearing on the matter.
Results of Operations
The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, the financial statements and accompanying notes elsewhere in this Quarterly Report.
Three months ended September 30, 2023 and 2022
Net Revenue. Revenue for the three months ended September 30, 2023 decreased 35.7% to $1,561,679 as compared to $2,429,195 for the three months ended September 30, 2022 as a result of a decrease in poundage sold during the three months ended September 30, 2023.
Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2023 decreased to $1,586,478 as compared to $3,973,656 for the three months ended September 30, 2022. This decrease is attributable to the decrease in poundage sold in the cost of goods.
Gross Profit (Loss). Gross (loss) for the three months ended September 30, 2023 decreased to ($24,799) as compared to gross (loss) of ($1,544,461) in the three months September 30, 2022. This decrease is attributable to the cost of sales no longer being higher than sales and a minor operational issue affecting the biomass at TOBC.
Commissions Expense. Commissions expense decreased to $423 for the three months ended September 30, 2023 from $2,674 for the three months ended September 30, 2022. This decrease was due to lower commissionable revenues for the three months ended September 30, 2023.
Salaries and Wages Expense. Salaries and wages expense decreased to $301,393 for the three months ended September 30, 2023 as compared to $352,178 for the three months ended September 30, 2022. This decrease is mainly attributable to a strategic reduction in salaries for the three months ended September 30, 2023.
Depreciation and Amortization. Depreciation and amortization expense decreased to $2,754 for the three months ended September 30, 2023 as compared to $151,568 for the three months ended September 30, 2022. This decrease is attributable to lower depreciation due to the impairment of fixed assets and intangible assets in the year ended December 31, 2022.
Impairment Loss. Impairment loss decreased to $0 for the three months ended September 30, 2023 as compared to $748,997 for the three months ended September 30, 2022. This decrease is attributable to the impairment recognized on TOBC for the year ended December 31, 2022.
Other Operating Expense. Other operating expense decreased to $410,913 for the three months ended September 30, 2023 from $566,977 for the three months ended September 30, 2022. This decrease is mainly attributable to legal and professional fees related to our business operations.
| 24 |
Other Income (Expense). Other (expense) increased for the three months ended September 30, 2023 to ($1,902) from $22,229 for the three months ended September 30, 2022. This increase in expense is mainly attributable to the decrease in fair value of the common stock recorded in connection with common stock issued to ClearThink.
Interest Income. Interest income increased to $16 for the three months ended September 30, 2023 from $0 for the three months ended September 30, 2022. The increase is attributable to the interest earned on an interest-bearing brokerage account.
Loss on Settlement of Debt. Loss on settlement of debt increased to $144,169 for the three months ended September 30, 2023 from $57,085 for the three months ended September 30, 2022. The increase is attributable to the fair value of common stock issued higher than the principal amount paid.
Change in Fair Value of Derivative and Warrant Liabilities. Change in fair value of derivative and warrant liabilities increased to $1,240,214 for the three months ended September 30, 2023 from $0 for the three months ended September 30, 2022. The increase is a result of the decrease of the price of the Company’s common stock at September 30, 2023, as compared with the stock price at the date of issuance of the common stock under warrants.
Interest Expense. Interest expense increased to $799,690 for the three months ended September 30, 2023 from $336,378 for the three months ended September 30, 2022. The increase is attributable to the amortization of the Lind convertible debt discounts.
Net Loss. Net loss was $445,813 for the three months ended September 30, 2023 as compared to $3,738,089 for the three months ended September 30, 2022. The decrease in net loss is primarily attributable to the decrease of salaries and wages, operating expenses and gross loss and gain from revaluation of the derivative and warranty liability.
Nine months ended September 30, 2023 and 2022
Net Revenue. Revenue for the nine months ended September 30, 2023 decreased 52.2% to $5,115,680 as compared to $10,712,363 for the nine months ended September 30, 2022 as a result of decrease in poundage sold during the nine months ended September 30, 2023.
Cost of Goods Sold. Cost of goods sold for the nine months ended September 30, 2023 decreased to $4,775,102 as compared to $11,431,331 for the nine months ended September 30, 2022. This decrease is attributable to the decrease in poundage sold in the cost of goods.
Gross Profit (Loss). Gross profit for the nine months ended September 30, 2023 increased to $340,578 as compared to gross (loss) of $718,968 in the nine months ended September 30, 2022. This increase is attributable to decrease in the cost of inventory.
Commissions Expense. Commissions expense decreased to $2,169 for the nine months ended September 30, 2023 from $24,051 for the nine months ended September 30, 2022. This decrease was due to lower commissionable revenues for the nine months ended September 30, 2023.
Salaries and Wages Expense. Salaries and wages expense decreased to $1,298,358 for the nine months ended September 30, 2023 as compared to $1,498,703 for the nine months ended September 30, 2022. This decrease is mainly attributable to strategic reduction in salaries for the nine months ended September 30, 2023.
Depreciation and Amortization. Depreciation and amortization expense decreased to $33,091 for the nine months ended September 30, 2023 as compared to $426,364 for the nine months ended September 30, 2022. This decrease is attributable to lower depreciation due to the impairment of fixed assets and intangible assets in the year ended December 31, 2022.
Impairment Loss. Impairment loss decreased to $0 for the nine months ended September 30, 2023 as compared to $748,997 for the nine months ended September 30, 2022. This decrease is attributable to the impairment recognized on TOBC for the year ended December 31, 2022.
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Other Operating Expense. Other operating expense decreased to $1,773,702 for the nine months ended September 30, 2023 from $1,930,753 for the nine months ended September 30, 2022. This decrease is mainly attributable to legal and professional related to our business operations.
Other Income. Other income decreased for the nine months ended September 30, 2023 to $25,292 from $68,899 for the nine months ended September 30, 2022. This decrease is mainly attributable to the decrease in fair value of the common stock recorded in connection with common stock issued to ClearThink.
Interest Income. Interest income increased to $40 for the nine months ended September 30, 2023 from $0 for the nine months ended September 30, 2022. The increase is attributable to the interest earned on an interest-bearing brokerage account.
Loss on Settlement of Debt. Loss on settlement of debt increased to $977,188 for the nine months ended September 30, 2023 from $57,085 for the nine months ended September 30, 2022. The increase is attributable to the fair value of common stock issued was higher than the principal amount paid.
Change in Fair Value of Derivative and Warrant Liabilities. Change in fair value and derivative and warrant liabilities increase to $1,339,791 for the nine months ended September 30, 2023 from $0 for the nine months ended September 30, 2022. This increase is a result of the decrease in the stock price of the Company’s common stock at September 30, 2023, as compared with the stock price at date of issuance of such common stock.
Interest Expense. Interest expense increased to $1,470,143 for the nine months ended September 30, 2023 from $893,146 for the nine months ended September 30, 2022. The increase is attributable to the amortization of the Lind convertible debt discounts.
Net Loss. Net loss was $3,848,950 for the nine months ended September 30, 2023 as compared to $6,229,168 for the nine months ended September 30, 2022. The decrease in net loss is primarily attributable to the decrease of salaries and wages, operating expenses and gross loss and gain from revaluation of the derivative and warranty liability.
Liquidity and Capital Resources
The Company had cash of $488,833 as of September 30, 2023. At September 30, 2023, the Company had a working capital deficit of $1,254,840, including $768,839 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 $1,990,663 and accounts receivable of $152,954
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.
Cash (Used in) Operating Activities. Cash used in operating activities during the nine months ended September 30, 2023 was $3,112,126 as compared to cash used in operating activities of $4,095,243 for the nine months ended September 30, 2022. The decrease is primarily attributable to decrease in inventory of $7,331,680 and decrease in payables of $3,738,242, offset by the increase in other current assets of $3,076,240 for the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022.
Cash (Used in) Investing Activities. Cash used in investing activities for the nine months ended September 30, 2023 was $132,551 as compared to cash used in investing activities of $549,337 for the nine months ended September 30, 2022. The decrease was mainly attributable to a decrease in the purchase of fixed assets for the nine months ended September 30, 2023 compared to the acquisition of the soft-shell crab operations during the nine months ended September 30, 2022.
Cash Provided by Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2023 was $3,667,373 as compared to cash provided by financing activities of $3,732,734 for the nine months ended September 30, 2022. The decrease is mainly attributable to the pay-off of the working capital line of credit and the 2022 Lind Note during the nine months ended September 30, 2023.
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Working Capital Line of Credit
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 were represented by a revolving credit note issued to Lighthouse by the Borrowers.
The advance rate of the revolving line of credit was 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. Interest on the line of credit was the prime rate (with a floor of 3.25%), plus 3.75%. The Borrowers paid Lighthouse a facility fee of $50,000 in three instalments of $16,667 in March, April and May 2021 and paid an additional facility fee of $25,000 on each anniversary of March 31, 2021. On January 14, 2022, the maximum inventory advance under the line of credit was adjusted from 50% to 70% until June 30, 2022, 65% to July 31, 2022, 60% to August 31, 2022 and 55% to September 30, 2022 at a monthly fee of 0.25% on the portion of the loan in excess of the 50% advance in order to increase imports to meet customer demand. On July 29, 2022, the Loan Agreement was further amended to set the annual interest rate on the outstanding principal amount at 4.75% above the prime rate and to reduce the monthly required cash flow requirements beginning July 31, 2022. The amendment also updated the maximum inventory advance under the line of credit to 60% from August 1, 2022 through December 31, 2022 and 50% thereafter.
The line of credit was 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.
On June 16, 2023, the Company terminated the Loan Agreement and paid a total of approximately $108,400 to Lighthouse which included, as of June 16, 2023, an outstanding principal balance of approximately $93,400, accrued interest of approximately $9,900, and other fees incurred in connection with the line of credit of approximately $4,991. Upon the repayment of the total outstanding indebtedness owing to Lighthouse, the Loan Agreement and all other related financing agreements and documents entered into in connection with the Loan Agreement were deemed terminated.
During the nine months ended September 30, 2023, cash proceeds from the working capital line of credit totaled $2,405,034 and cash payments to the working capital line of credit totaled $4,182,971.
John Keeler Promissory Notes
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, 2023, approximately $768,800 of principal remains outstanding and approximately $39,900 of interest was paid under the notes during the nine months ended September 30, 2023. 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 ten 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 of $124,161 during the nine months ended September 30, 2023.
Lind Global Fund II LP notes
On January 24, 2022, the Company entered into a securities purchase agreement with Lind pursuant to which the Company issued Lind a secured, two-year, interest free convertible promissory note in the principal amount of $5,750,000 and a five-year warrant to purchase 1,000,000 shares of common stock at an exercise price of $4.50 per share, subject to customary adjustments (50,000 shares of common stock at an exercise price of $90 per share after taking into account the Company’s Reverse Stock Split). The warrant provides for cashless exercise and for full ratchet anti-dilution if the Company issues securities at less than $4.50 per share. In connection with the issuance of the note and the warrant, the Company paid a $150,000 commitment fee to Lind and approximately $87,000 of debt issuance costs.
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The outstanding principal under the note was payable commencing July 24, 2022, in 18 consecutive monthly installments of $333,333, at the Company’s option, in cash or shares of common stock at a price (the “Repayment Share Price”) based on 90% of the five lowest volume weighted average prices (“VWAP”) during the 20-days prior to the payment date with a floor price of $1.50 per share (the “Floor Price”), floor price of $30 per share after taking into account the Company’s Reverse Stock Split, or a combination of cash and stock provided that if at any time the Repayment Share Price is deemed to be the Floor Price, then in addition to shares, the Company will pay Lind an additional amount in cash as determined pursuant to a formula contained in the note.
In connection with the issuance of the note, the Company granted Lind a first priority security interest and lien on all of its assets, including a pledge on its shares in John Keeler & Co. Inc., its wholly-owned subsidiary, pursuant to a security agreement and a stock pledge agreement with Lind, dated January 24, 2022. Each subsidiary of the Company also granted a second priority security interest in all of its respective assets.
The note was mandatorily payable prior to maturity if the Company issued any preferred stock (with certain exceptions described in the note) or, if the Company or its subsidiaries issued any indebtedness. The Company also agreed not to issue or sell any securities with a conversion, exercise or other price based on a discount to the trading prices of the Company’s stock or to grant the right to receive additional securities based on future transactions of the Company on terms more favorable than those granted to Lind, with certain exceptions.
If the Company failed to maintain the listing and trading of its common stock, the note would become due and payable and Lind may convert all or a portion of the outstanding principal at the lower of the then current conversion price and 80% of the average of the 3-day VWAP during the 20 days prior to delivery of the conversion notice.
If the Company engages in capital raising transactions, Lind has the right to purchase up to 10% of the new securities.
The note was convertible into common stock at $5.00 per share ($100 per share after taking into account the Company’s Reverse Stock Split), subject to certain adjustments, at any time after the earlier of six months from issuance or the date the registration statement is effective; provided that no such conversion may be made that would result in beneficial ownership by Lind and its affiliates of more than 4.99% of the Company’s outstanding shares of common stock. If shares were issued by the Company at less than the conversion price, the conversion price will be reduced to such price.
On September 15, 2023, the Company paid $2,573,142 to Lind and the note was extinguished.
On May 30, 2023, the Company entered into a securities purchase agreement with Lind pursuant to which the Company issued to Lind a secured, two-year, interest free convertible promissory note in the principal amount of $1,200,000 (the “Lind Note”) and a warrant (the “Lind Warrant”) to purchase 435,035 shares of common stock of the Company commencing six months after issuance and exercisable for five years at an exercise price of $2.45 per share, for the aggregate funding amount of $1,000,000. The Lind Warrant includes cashless exercise and full ratchet anti-dilution provisions. In connection with the issuance of the Lind Note and the Lind Warrant, the Company paid Lind a $50,000 commitment fee. The proceeds from the sale of the Note and Warrant are for general working capital purposes.
On July 27, 2023, the Company, entered into a First Amendment to the securities purchase agreement (the “Purchase Agreement Amendment”) with Lind, pursuant to which the Company amended the securities purchase agreement, entered into with Lind as of May 30, 2023 in order to permit the issuance of further senior convertible promissory notes in the aggregate principal amount of up to $1,800,000 and warrants in such aggregate amount as the Company and Lind shall mutually agree.
Pursuant to the Purchase Agreement Amendment, the Company issued to Lind a two-year, interest free convertible promissory note in the principal amount of $300,000 and a warrant to purchase 175,234 shares of common stock of the Company, for the aggregate amount of $250,000. In connection with the issuance of the note and the warrant, the Company paid a $12,500 commitment fee. The proceeds from the sale of the note and warrant are for general working capital purposes.
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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, 2023, 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.
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:
● inadequate control over the monitoring of inventory maintained in the Company’s third-party warehouse;
● ineffective controls over the Company’s financial close and 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; and
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● We plan to create an internal control framework that will address financial close and reporting process, among other procedures.
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
There are no material pending legal proceedings to which we are a party or in which any director, officer or affiliate of ours, any owner of record or beneficially of more than 5% of any class of our voting securities, or security holder is a party adverse to us or has a material interest adverse to us.
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.
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 October 1, 2023 and November 1, 2023, the Company issued 42,308 and 87,302 shares of common stock, respectively, to the designee of Clear Think Capital for consulting 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 20, 2023 | By: | /s/ John Keeler |
| Name: | John Keeler | |
| Title: | Executive Chairman and Chief Executive Officer (Principal Executive Officer) | |
| Dated: November 20, 2023 | By: | /s/ Silvia Alana |
| Name: | Silvia Alana | |
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | |
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