Blue Star(BSFC) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion for Blue Star Foods Corp Item 1. Financial Statements (Unaudited) This section presents Blue Star Foods Corp.'s unaudited consolidated financial statements for Q1 2020, prepared under GAAP and SEC rules - The financial statements are unaudited and prepared in accordance with GAAP and SEC rules, reflecting all necessary recurring adjustments[18] - Results for the presented periods are not necessarily indicative of the full year's expected results[18] Consolidated Balance Sheets This section provides a snapshot of the company's financial position at March 31, 2020, compared to December 31, 2019 Consolidated Balance Sheet Highlights (March 31, 2020 vs. December 31, 2019) | Metric | March 31, 2020 (Unaudited) ($) | December 31, 2019 ($) | | :-------------------------- | :------------------------- | :---------------- | | Total Assets | $12,232,820 | $15,746,064 | | Total Current Assets | $8,283,930 | $11,780,300 | | Cash | $22,959 | $153,904 | | Inventory, net | $4,784,499 | $7,984,492 | | Total Liabilities | $13,556,727 | $16,265,776 | | Total Current Liabilities | $11,894,056 | $14,566,386 | | Total Stockholders Deficit | $(1,323,907) | $(519,712) | Consolidated Statements of Operations and Comprehensive Loss This section details the company's financial performance and comprehensive loss for the three months ended March 31, 2020 and 2019 Consolidated Statements of Operations and Comprehensive Loss (Three Months Ended March 31) | Metric | 2020 ($) | 2019 ($) | | :---------------------------------------------- | :------------ | :------------ | | REVENUE, NET | $4,571,614 | $6,510,774 | | COST OF REVENUE | $4,148,398 | $5,600,914 | | GROSS PROFIT | $423,216 | $909,860 | | LOSS FROM OPERATIONS | $(576,992) | $(1,001,104) | | NET LOSS | $(853,647) | $(1,239,297) | | NET LOSS ATTRIBUTABLE TO BLUE STAR FOODS CORP. | $(850,407) | $(1,220,029) | | Loss per basic and diluted common share | $(0.05) | $(0.08) | | Basic weighted average common shares outstanding| 17,589,705 | 16,026,386 | Consolidated Statements of Changes in Stockholders Deficit This section outlines changes in the company's stockholders' deficit for the three months ended March 31, 2020 Changes in Stockholders Deficit (Three Months Ended March 31, 2020) | Metric | December 31, 2019 ($) | March 31, 2020 ($) | | :--------------------------------------- | :---------------- | :------------- | | Total Blue Star Foods Corp. Stockholder's Deficit | $(161,684) | $(977,245) | | NonControlling Interest | $(358,028) | $(346,662) | | Total Stockholder's Deficit | $(519,712) | $(1,323,907) | - The company issued 14,130 shares of common stock as an 8% dividend on Series A Preferred Stock, valued at $28,259, during the three months ended March 31, 2020[23] Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for Q1 2020 and 2019 Consolidated Statements of Cash Flows (Three Months Ended March 31) | Metric | 2020 ($) | 2019 ($) | | :---------------------------------------------- | :------------ | :------------ | | Net cash provided by (used) in operating activities | $1,857,853 | $(1,688,467) | | Net cash used in investing activities | $(13,230) | $(3,670) | | Net provided by (used in) financing activities | $(1,998,594) | $1,503,148 | | NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | $(139,365) | $(242,839) | | CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF PERIOD | $56,445 | $104,387 | Note 1. Company Overview This note provides an overview of Blue Star Foods Corp.'s business, including its operations and recent acquisition activities - Blue Star Foods Corp. is a sustainable seafood company based in Miami, Florida, primarily importing and distributing blue and red swimming crab meat from Indonesia, Philippines, and China under various brand names[27] - On November 26, 2019, the Company's subsidiary, John Keeler & Co., Inc., completed the acquisition of Coastal Pride Company, Inc., a seafood company importing pasteurized and fresh crabmeat from Mexico and Latin America[28][30] Pro Forma Financial Information (Three Months Ending March 31, 2019) - Assuming all acquisitions on Jan 1, 2019 | Metric | March 31, 2019 ($) | | :---------------------------------------------- | :------------- | | Revenue | $9,178,661 | | Net Loss | $(1,596,396) | | Basic and Diluted Loss per Share | $(0.10) | | Basic and Diluted Weighted Average Common Shares Outstanding | 16,026,386 | Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note details the basis of financial statement presentation and outlines the company's significant accounting policies - The unaudited interim consolidated financial statements are prepared under SEC rules and GAAP, reflecting normal recurring adjustments[34] - The Company advances payments to suppliers, including related party Bacolod, for future product shipments, with a balance due of approximately $1,301,900 as of March 31, 2020, representing about six months of purchases[35][36] - The Company adopted ASC 718 for employee stock-based compensation and ASU 2018-07 for non-employee stock-based compensation, aligning accounting for share-based payments[37][38][39] - Revenue is recognized when customers obtain control of promised goods or services, in accordance with Topic 606, with shipping and handling treated as fulfillment activities[42][43] - Effective January 1, 2019, the Company adopted ASC 842 for lease accounting, recognizing right-of-use assets and lease obligations on the balance sheet, with all leases categorized as operating leases as of March 31, 2020[44][45][46] Lease-Related Assets and Liabilities (March 31, 2020) | Category | Amount ($) | | :------------------------ | :--------------- | | Operating lease assets | $1,190,706 | | Current lease liabilities | $162,112 | | Noncurrent lease liabilities | $1,052,671 | Operating Lease Terms (March 31, 2020) | Metric | Value | | :-------------------------- | :----------- | | Weighted-average remaining lease term | 5.81 years | | Weighted-average discount rate | 5.4% | Note 3. Going Concern This note addresses the company's ability to continue as a going concern, citing financial challenges and mitigation strategies - The Company's ability to continue as a going concern is in substantial doubt due to a net loss of $853,647, an accumulated deficit of $9,831,132, and a working capital deficit of $3,610,126 for the three months ended March 31, 2020[54] - Continuation is dependent on increasing revenues, executing business plans to acquire complementary companies, raising capital, and maintaining adequate working capital[54] Note 4. Consolidation of Variable Interest Entities This note explains the consolidation of Strike the Gold Foods Ltd. as a Variable Interest Entity (VIE) - The Company consolidates Strike the Gold Foods Ltd. ('Strike'), a UK-based related party, as a Variable Interest Entity (VIE) since April 1, 2014, with Strike's equity classified as non-controlling interest[55] Strike the Gold Foods Ltd. (VIE) Financials | Metric | March 31, 2020 ($) | December 31, 2019 ($) | | :------------------------- | :------------- | :---------------- | | Assets | $113,732 | $128,166 | | Liabilities | $4,849 | $30,649 | | Non-controlling interest | $(479,490) | $(476,250) | Note 5. Debt This note details the company's various debt instruments, including revolving credit lines and promissory notes - The Company has a $14,000,000 revolving line of credit with ACF Finco I, LP, secured by all assets of John Keeler & Co., Inc., bearing an interest rate of 10.83% as of March 31, 2020[57][58][63] - As of March 31, 2020, the outstanding balance on the ACF line of credit was approximately $4,989,400, down from $6,918,000 at December 31, 2019[63] - The Company was in violation of its minimum EBITDA covenant and exceeded the advances to Bacolod covenant during the three months ended March 31, 2020[62] - Unsecured promissory notes to the Company's stockholder totaled approximately $2,910,000 as of March 31, 2020, bearing 6% annual interest and subordinated to the ACF working capital line of credit[64] - The Kenar Note, a $1,000,000 promissory note, had an outstanding principal of $872,500 as of March 31, 2020, with an 18% interest rate, and was amended in May 2020 to extend maturity and adjust terms[65] - The Lobo Note, initially $100,000 at 18% interest, was paid off on April 1, 2020, with a new six-month unsecured promissory note of $100,000 at 10% interest[66] - Several subordinated promissory notes were issued as part of the Coastal Pride acquisition, including a $500,000 note to Walter Lubkin Jr. and convertible notes totaling $210,000 to Walter Lubkin III, Tracy Greco, and John Lubkin, all bearing 4% interest[68][69][70][71] Note 6. Common Stock This note describes common stock issuances, including dividends to Series A Preferred stockholders - On January 23, 2020, 14,130 shares of common stock were issued to Series A Preferred stockholders as a common stock dividend, with an aggregate value of $28,259[73] Note 7. Options This note provides details on the company's stock option activity and outstanding options Option Activity (Three Months Ended March 31, 2020) | Metric | Number of Options | Weighted Average Exercise Price ($) | | :-------------------------- | :---------------- | :------------------------------ | | Outstanding - Dec 31, 2019 | 3,810,000 | $2.00 | | Exercisable - Dec 31, 2019 | 3,120,000 | $2.00 | | Vested | 3,280,000 | | | Outstanding - Mar 31, 2020 | 3,810,000 | $2.00 | | Exercisable - Mar 31, 2020 | 3,280,000 | $2.00 | - There was no option activity (granted, forfeited) for the three months ending March 31, 2020[75] Note 8. Warrants This note provides details on the company's warrant activity and outstanding warrants Warrant Activity (Three Months Ended March 31, 2020) | Metric | Number of Warrants | Weighted Average Exercise Price ($) | | :-------------------------- | :----------------- | :------------------------------ | | Outstanding - Dec 31, 2019 | 353,250 | $2.40 | | Exercisable - Dec 31, 2019 | 353,250 | $2.40 | | Outstanding - Mar 31, 2020 | 353,250 | $2.40 | | Exercisable - Mar 31, 2020 | 353,250 | $2.40 | - There was no warrant activity (granted, forfeited, expired) for the three months ending March 31, 2020[77] Note 9. Commitment and Contingencies This note outlines the company's lease commitments, guarantees, and settlement agreements - The Company leases its Miami office and warehouse from a related party (JK Real Estate) with a lease expiring in July 2021, and is a guarantor of the facility's mortgage, with a maximum exposure of approximately $1,259,300 as of March 31, 2020[78] - The Company also leases office space in Beaufort, South Carolina, for Coastal Pride Seafood, LLC, under two related-party leases with approximately 6 years remaining[79] Rental and Equipment Lease Expenses (Three Months Ended March 31) | Year | Amount ($) | | :--- | :---------- | | 2020 | $63,500 | | 2019 | $58,500 | - The Company has reached a settlement agreement with a former employee and has reserved the entire amount[80] Note 10. COVID-19 Pandemic This note discusses the anticipated adverse impact of the COVID-19 pandemic on the company's operations and sales - The COVID-19 pandemic is expected to have an adverse impact on the Company's operations, sales, and supply due to decreased demand and sourcing difficulties[81] - The Company has implemented measures to reduce expenses in response to potential demand reduction[81] Note 11. Subsequent Events This note details significant events occurring after the reporting period, including financing and debt amendments - On April 17, 2020, the Company secured a $344,762 loan under the CARES Act Payroll Protection Program, with a 1% interest rate and two-year maturity, potentially forgivable[83] - On May 7, 2020, an amendment to the ACF loan agreement acknowledged the PPP loan, reserved rights regarding an EBITDA covenant default, and increased the default interest rate by 3%[84] - On May 21, 2020, the Kenar Note was amended to extend its maturity to March 31, 2021, set the interest rate at 18%, and require one-third of any equity capital raise to reduce its principal[85] - On April 1, 2020, the Lobo Note was paid off with a new six-month, $100,000 unsecured promissory note bearing 10% interest[86] - On May 27, 2020, 14,130 shares of common stock, valued at $28,261, were issued to Series A Preferred stockholders as a dividend related to December 31, 2019[87] - On May 27, 2020, the Company issued 5,000 shares of common stock for $10,000 in a private offering to an accredited investor[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, liquidity, and capital resources for Q1 2020 - The discussion includes forward-looking statements subject to risks and uncertainties, including those related to COVID-19[90] - The Company, formerly AG Acquisition Group II, Inc., acquired John Keeler & Co., Inc. in November 2018 and Coastal Pride Company, Inc. in November 2019, transitioning into an international seafood company[92][93][94][96] Overview This section provides a brief history of the company and details its recent acquisition of Coastal Pride Company, Inc. - The Company was incorporated on October 17, 2017, as a blank check company and subsequently acquired John Keeler & Co., Inc. in November 2018, changing its name to Blue Star Foods Corp[92][93][94] - In November 2019, the Company acquired Coastal Pride Company, Inc., a seafood importer and seller of premium branded crabmeat, for cash, promissory notes, and common stock[96][97][98][99][100] - The acquisition consideration included $394,622 in cash, a $500,000 five-year 4% promissory note, $210,000 in three-year 4% convertible promissory notes, and 1,295,000 shares of common stock[98][99][100] COVID-19 Impact This section discusses the significant decrease in revenue and business interruption caused by the COVID-19 pandemic - The COVID-19 pandemic has led to a significant decrease in revenue and business interruption, prompting management to reduce expenses across payroll, marketing, sales, and warehousing[107][108] - The full impact of COVID-19 on operations, sales, and supply chain remains uncertain and could materially adversely affect the Company's financial condition[107][108] Results of Operations This section analyzes the company's financial performance, including revenue, gross profit, and net loss, for Q1 2020 versus Q1 2019 Key Financial Performance (Three Months Ended March 31) | Metric | 2020 ($) | 2019 ($) | Change (%) | | :-------------------------- | :------------ | :------------ | :--------- | | Net Revenue | $4,571,614 | $6,510,774 | -29.8% | | Cost of Goods Sold | $4,148,398 | $5,600,914 | -25.9% | | Gross Profit | $423,216 | $909,860 | -53.5% | | Commissions Expenses | $66,829 | $18,810 | +255.3% | | Salaries and Wages Expense | $409,181 | $1,116,748 | -63.4% | | Other Operating Expense | $524,198 | $775,406 | -32.4% | | Interest Expense | $276,655 | $238,193 | +16.1% | | Net Loss | $(853,647) | $(1,239,297) | -31.1% | - Net revenue decreased by 29.8% due to a decrease in poundage from phasing out private label business and a 20.8% decrease in average selling price per pound[111] - Gross profit margin decreased by $486,644, primarily due to a reduction in selling price not fully offset by a drop in inventory cost[113] - Salaries and wages expense decreased significantly by 63.4%, mainly due to a $630,182 reduction in non-cash stock-based compensation and a $77,385 strategic reduction in salaries[115] - Interest expense increased by 16.1% due to an increase in the average cost of borrowed funds from 12.0% to 15.7%, despite a decrease in average funds borrowed[117] - The net loss decreased by 31.1%, primarily attributable to the reduction in non-cash operating expenses related to stock compensation[118] Liquidity and Capital Resources This section assesses the company's cash position, working capital, and sources of liquidity, including the impact of COVID-19 - As of March 31, 2020, the Company had cash of $56,455 (including $33,486 restricted cash) and a working capital deficit of $3,610,126[120] - Primary liquidity sources include inventory ($4,784,499) and accounts receivable ($1,921,761)[120] - The COVID-19 pandemic may negatively impact the Company's ability to raise financing and access capital[122] - Cash provided by operating activities significantly increased to $1,857,853 for the three months ended March 31, 2020, from a cash usage of $1,688,467 in the prior year, driven by a $3,053,140 reduction in inventory[130] - Cash used in financing activities was $1,998,594, primarily due to a reduction of the revolving working capital line of credit and payment of loan costs[132] Off-Balance Sheet Arrangements This section confirms that the company currently has no off-balance sheet arrangements - The Company currently has no off-balance sheet arrangements[133] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Blue Star Foods Corp. is not required to provide market risk disclosures - The Company is a smaller reporting company and is exempt from providing market risk disclosures[134] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of March 31, 2020, with remediation plans underway - Disclosure controls and procedures were deemed ineffective as of March 31, 2020[135] - Material weaknesses identified include the lack of an audit committee with a financial expert and inadequate segregation of duties due to limited personnel and technical accounting expertise[137] - Management believes these weaknesses did not affect financial results but could lead to material misstatements if not remediated[138] - Remediation plans include establishing an audit committee with a financial expert, creating a position for segregated duties, hiring personnel with technical accounting expertise, and appointing a Chief Financial Officer[139] - No changes in internal control over financial reporting materially affected or are reasonably likely to materially affect internal control during the period[141] PART II - OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal, equity, and control matters Item 1. Legal Proceedings There are no pending legal proceedings involving the Company or its related parties that are adverse to the Company - No pending legal proceedings exist where the Company or its related parties are adverse to the Company or have a material adverse interest[143] Item 1A. Risk Factors As a smaller reporting company, Blue Star Foods Corp. is not required to provide risk factor information under this item - The Company is a smaller reporting company and is not required to provide risk factor information under this item[147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered common stock for professional fees and dividends, exempt under Section 4(2) of the Securities Act - On January 23, 2020, the Company issued 87,700 shares of common stock to Newbridge Securities Corporation for professional fees and 70,321 shares (40,000 + 30,321) to MEC Consulting, Inc. for professional and legal fees[149] - On March 31, 2020, 14,130 shares of common stock were issued to Series A convertible preferred stockholders as quarterly dividends[149] - These issuances were exempt from registration requirements under Section 4(2) of the Securities Act of 1933[150] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the period covered by this report - No defaults upon senior securities occurred[151] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[151] Item 5. Other Information No other information is reported under this item - No other information is reported[152] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report, including certifications from officers and XBRL documents - Exhibits include certifications (31.1, 31.2, 32.1, 32.2) from the Principal Executive Officer and Principal Financial Officer[152] - XBRL Instance Document and Taxonomy Extension Documents (Schema, Calculation, Definition, Label, Presentation) are filed[152] SIGNATURES This section contains the official signatures for the Quarterly Report, confirming its submission Signatures The report was signed on July 6, 2020, by John Keeler, serving as Executive Chairman, CEO, and CFO - The report was signed on July 6, 2020, by John Keeler, who holds the titles of Executive Chairman, Chief Executive Officer, and Chief Financial Officer[156]