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Blue Star(BSFC) - 2019 Q4 - Annual Report
Blue StarBlue Star(US:BSFC)2020-05-29 19:20

Part I Business Blue Star Foods Corp. is an international seafood company specializing in the import, packaging, and sale of refrigerated pasteurized crab meat and other premium products, emphasizing sustainable sourcing and strategic growth - The company operates as an international seafood entity that imports, packages, and sells refrigerated pasteurized crab meat and other premium seafood products under brands like Blue Star, Oceanica, and Coastal Pride Fresh46 - The company's growth strategy involves both organic expansion through new species and value-added products, and strategic acquisitions to create a vertically integrated seafood company495071 - A key differentiator is the company's focus on sustainability and traceability, utilizing a proprietary GPS-based system and a QR code-enabled application to track products from harvest to the end customer515354 - The company holds patents in the US and other countries for its eco-friendly flexible foil pouches, offering a sustainable alternative to traditional metal can packaging61 - Significant supplier concentration exists, with three suppliers accounting for approximately 63% of total purchases in 2019, and one affiliated supplier, Bacolod Blue Star Export Corp., accounted for 27% of purchases82 - The company faces customer concentration risk, with three customers representing approximately 47% of revenue in fiscal year 201990 Risk Factors The company faces significant risks including dependence on crab meat supply, reliance on key suppliers and customers, the need for capital due to a 'going concern' notice, operational challenges, financial constraints from debt and COVID-19, and illiquid 'penny stock' status with concentrated ownership - The company's independent auditor has issued a "going concern" opinion, citing a net loss of $5.0 million, an accumulated deficit of $9.0 million, and a working capital deficit of $2.8 million for the year ended December 31, 2019, with continued operations dependent on raising capital and increasing revenues138 - The business is highly dependent on a few key suppliers and customers; in 2019, two suppliers accounted for 42% of purchases, and three customers accounted for 46% of revenue, making the loss of any critical133134 - The company's debt agreement with ACF Finco I LP contains restrictive covenants limiting its ability to sell assets, incur more debt, or pay dividends, with $6.9 million in outstanding debt to ACF as of December 31, 2019152153155 - The COVID-19 pandemic poses a significant risk, potentially disrupting operations, distribution, and the ability to raise capital due to widespread economic downturn and financial market volatility238142143 - The company's common stock is considered a "penny stock," potentially making it less attractive to investors and harder to trade due to stringent broker-dealer regulations215217 - Executive officers, directors, and principal stockholders own approximately 85.4% of the common stock, granting them significant influence over corporate matters and potentially entrenching management224 Unresolved Staff Comments As a smaller reporting company, Blue Star Foods Corp. is not required to provide information for this item - The company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this Item240 Properties The company leases its primary 16,800 sq. ft. office and warehouse in Miami from a related party, with the lease expiring in June 2021, and also guarantees its mortgage, while a subsidiary leases office space in South Carolina - The company leases its main 16,800 sq. ft. office/warehouse in Miami for $16,916 per month from Keeler Real Estate Holding, Inc., a related party, with the lease expiring in June 2021241 - The company guarantees the mortgage on the Miami facility, which had a balance of approximately $1.28 million as of December 31, 2019241 - Subsidiary Coastal Pride leases 1,106 sq. ft. of office space in Beaufort, South Carolina, with a lease expiring in 2024241 Legal Proceedings The company reports that there are no pending legal proceedings to which it, or any of its directors, officers, affiliates, or major security holders, is a party - There are no pending legal proceedings involving the company or its directors, officers, or affiliates242 Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable243 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on OTC pink sheets with limited activity, has 17.56 million shares outstanding, and has never paid dividends, with future earnings retained for growth and restricted by debt covenants, while an equity incentive plan authorizes stock-based compensation - The company's common stock has been quoted on the OTC pink sheets under "BSFC" since February 18, 2020, with a limited trading market246 - As of May 27, 2020, there were 17,557,575 shares of common stock outstanding held by 46 stockholders of record248 - The company has never paid cash dividends and does not plan to in the foreseeable future, with its loan agreement also prohibiting them249 Equity Compensation Plan Information | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,825,000(1) | 2.00 | 3,675,000 | | Equity compensation plans not approved by security holders | 0 | 0 | 0 | Selected Financial Data As a smaller reporting company, Blue Star Foods Corp. is not required to provide information for this item - The company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this Item255 Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales decreased by 25.9% to $23.8 million in 2019, resulting in a $5.0 million net loss due to lower revenue and higher non-cash compensation, straining liquidity with a $2.8 million working capital deficit and a 'going concern' notice, further impacted by COVID-19 Key Financial Performance Metrics | Metric | 2019 ($) | 2018 ($) | Change | Reason | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 23,829,463 | 32,165,933 | -25.9% | Exit from private label business and 8% decrease in commodity value | | Gross Profit | 3,219,463 | 4,938,269 | -34.8% | Decreased revenues and tightening profit margins | | Net Loss | (5,021,703) | (2,277,116) | +120.5% | Lower revenue, margin contraction, and increased non-cash stock-based compensation | - Salaries and wages expense increased to $3.9 million in 2019 from $2.6 million in 2018, primarily due to a rise in non-cash stock-based compensation from $0.8 million to $2.3 million270 - The company had a working capital deficit of $2.79 million as of December 31, 2019, an increase from the $1.15 million deficit in 2018, primarily due to decreased inventory and accounts receivable, and an increase in related party notes payable278 - The company's revolving line of credit with ACF had an outstanding balance of approximately $6.9 million as of December 31, 2019, down from $8.2 million in 2018, and the company failed to meet certain financial covenants during 2019281417 - The COVID-19 pandemic has caused a significant decrease in revenue in the year-to-date period of 2020 compared to 2019, prompting management to reduce expenses261262 Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Blue Star Foods Corp. is not required to provide information for this item - The company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item315 Financial Statements and Supplementary Data This section presents the independent auditor's report, including a 'Going Concern' opinion, and consolidated financial statements showing total assets of $15.7 million, total liabilities of $16.3 million, and a net loss of $5.0 million for 2019, with notes detailing accounting policies, debt, and subsequent events like a PPP loan - The independent auditor's report includes a "Going Concern" paragraph, noting that the company's recurring losses and net capital deficiency raise substantial doubt about its ability to continue as a going concern318 Consolidated Balance Sheets | (In thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Total Current Assets | $11,780 | $13,154 | | Total Assets | $15,746 | $13,481 | | Liabilities & Equity | | | | Total Current Liabilities | $14,566 | $14,301 | | Total Liabilities | $16,266 | $14,301 | | Total Stockholder's Deficit | ($520) | ($820) | Consolidated Statements of Operations | (In thousands) | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Revenue, Net | $23,829 | $32,166 | | Gross Profit | $3,219 | $4,938 | | Loss from Operations | ($3,953) | ($1,268) | | Net Loss | ($5,022) | ($2,277) | | Net Loss per Share (Basic & Diluted) | ($0.31) | ($0.15) | - Subsequent to year-end, on April 17, 2020, the company received a loan of $344,762 under the Paycheck Protection Program (PPP)477 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None reported483 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2019, due to material weaknesses like the lack of an audit committee with a financial expert and inadequate segregation of duties, with remediation plans including establishing an audit committee and hiring accounting expertise - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019484 - Material weaknesses identified include the lack of an audit committee with a financial expert and inadequate segregation of duties and technical accounting expertise within the accounting function490 - Remediation plans include establishing an audit committee, hiring personnel with technical accounting expertise, and hiring a chief financial officer492 Other Information The company reported no other information for this item - None497 Part III Directors, Executive Officers and Corporate Governance The company's board comprises two directors, John Keeler and Nubar Herian, with the full board handling nominating, audit, and compensation functions due to the absence of dedicated committees, presenting potential conflicts of interest, and a formal code of ethics has not yet been adopted - The board of directors consists of two members: John Keeler (Executive Chairman) and Nubar Herian (Director)498500 - The company does not have separate nominating, audit, or compensation committees; these responsibilities are managed by the entire board509 - The company intends to adopt a code of ethics but has not yet done so508 Executive Compensation Executive compensation for 2019 included total compensation of $152,861 for John Keeler, $178,320 for Carlos Faria, and $252,824 for Christopher Constable, who held options for 3.12 million shares, while the 2018 Equity Incentive Plan authorizes up to 7.5 million shares for awards Summary Compensation Table | Name and Principal Position | Fiscal Year | Salary ($) | Total ($) | | :--- | :--- | :--- | :--- | | John Keeler (CEO & Exec. Chairman) | 2019 | 104,595 | 152,861 | | | 2018 | 104,959 | 131,424 | | Carlos Faria (Former President & CEO) | 2019 | 176,154 | 178,320 | | | 2018 | 150,000 | 154,398 | | Christopher Constable (Former CFO) | 2019 | 248,111 | 252,824 | | | 2018 | 253,475 | 257,873 | - As of December 31, 2019, former CFO Christopher Constable held exercisable options for 3,120,000 shares at an exercise price of $2.00, expiring on November 8, 2028523573 - The company adopted the 2018 Equity Incentive Plan, reserving 7,500,000 shares of common stock for issuance as stock-based compensation awards525526 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of May 27, 2019, the company's ownership is highly concentrated, with John Keeler beneficially owning 85.4% of common stock, Christopher H. Constable 15.1% through options, and Nubar Herian 2.6%, resulting in all current directors and executive officers collectively owning 89.7%, granting them significant control Beneficial Ownership Table | Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Beneficial Ownership | | :--- | :--- | :--- | | John Keeler | 15,000,000 | 85.4% | | Christopher H. Constable (Former CFO) | 3,120,000 | 15.1% | | Nubar Herian | 471,467 | 2.6% | | All current directors and executive officers as a group | 18,591,467 | 89.7% | - Ownership percentages are based on 17,557,575 shares of common stock outstanding as of May 29, 2020557 Certain Relationships and Related Transactions, and Director Independence The company has engaged in material related-party transactions, including $2.9 million in notes to CEO John Keeler, significant inventory purchases from his 95%-owned entity Bacolod, and a lease for its main facility from a Keeler family-owned entity, with Mr. Keeler also guaranteeing company debt, and the board having one non-independent director - The company has approximately $2.91 million in outstanding 6% demand promissory notes issued to CEO John Keeler564 - The company purchased approximately $5.6 million and $11.0 million of inventory in 2019 and 2018, respectively, from Bacolod, an exporter 95% owned by CEO John Keeler565566 - The company leases its primary office/warehouse from Keeler Real Estate, a corporation owned by trusts for CEO John Keeler's children, for $16,916 per month, and also guarantees the mortgage on this facility568 - Director Nubar Herian purchased 600 Units in the company's offering for $600,000 on November 8, 2018574 - John Keeler is not an independent director, and the independence of the other director, Nubar Herian, has not been assessed579 Principal Accountant Fees and Services The company disclosed fees paid to its principal accountants, MaloneBailey, LLP, totaling $94,175 in 2019 ($91,000 for audit fees) and $88,700 in 2018, with all services pre-approved by the board of directors acting as the audit committee Principal Accountant Fees | Fee Category | Year Ended Dec 31, 2019 ($) | Year Ended Dec 31, 2018 ($) | | :--- | :--- | :--- | | Audit fees | 91,000 | 81,000 | | All other fees | 3,175 | 7,700 | | Total fees | 94,175 | 88,700 | - The board of directors pre-approves all audit and permissible non-audit services, as the company has not yet established a formal audit committee586588 Part IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Annual Report, including merger agreements, corporate governance documents, financing agreements, related-party promissory notes, the 2018 Equity Incentive Plan, and officer certifications - Lists all exhibits filed with the Form 10-K, including merger agreements, corporate governance documents, financing agreements, and executive certifications590591592