Blue Star(BSFC) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Blue Star Foods Corp. reported a significant net loss increase, raising substantial doubt about its going concern ability Consolidated Balance Sheets Assets increased, but liabilities grew more substantially, leading to a decline in stockholders' equity Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $10,677,348 | $9,631,546 | | Inventory, net | $6,118,720 | $2,119,441 | | Total Assets | $16,855,489 | $15,945,409 | | Total Current Liabilities | $10,114,592 | $6,792,069 | | Total Liabilities | $11,529,544 | $7,038,441 | | Total Stockholders' Equity | $5,325,945 | $8,906,968 | Consolidated Statements of Operations Revenue declined in Q3, swinging to a gross loss, and nine-month net loss significantly widened Statement of Operations Summary (Unaudited) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue, Net | $2,429,195 | $3,726,704 | $10,712,363 | $8,341,984 | | Gross Profit (Loss) | ($1,544,461) | $670,243 | ($718,968) | $1,542,921 | | Impairment Loss | $748,997 | $0 | $748,997 | $0 | | Net Loss | ($3,738,089) | ($161,788) | ($6,229,168) | ($1,077,019) | | Net Loss Per Share | ($0.15) | ($0.01) | ($0.25) | ($0.05) | Consolidated Statements of Cash Flows Operating cash flow was negative at $4.1 million due to inventory, with financing providing $3.7 million Cash Flow Summary (Unaudited, Nine Months Ended Sep 30) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash (Used in) Operating Activities | ($4,095,243) | ($1,005,549) | | Net Cash (Used in) Investing Activities | ($549,337) | ($841,643) | | Net Cash Provided by Financing Activities | $3,732,734 | $1,666,141 | | Net (Decrease) in Cash | ($917,330) | ($133,720) | | Cash and Cash Equivalents - End of Period | $238,183 | $203,967 | Notes to Unaudited Consolidated Financial Statements Notes highlight going concern doubt, inventory write-down, goodwill impairment, and $5.75 million convertible debt - The company's financial statements were prepared with the assumption of it continuing as a going concern, but management notes that recurring net losses ($6.2M for the nine months) and an accumulated deficit ($22.4M) raise "substantial doubt" about this ability[66] - An inventory adjustment of $514,912 was recorded to reduce the carrying value of inventory to the lower of cost or net realizable value, which was charged to cost of goods sold[47] - The company recognized a goodwill impairment loss of $748,997 for the nine months ended September 30, 2022[59] - In January 2022, the company issued a $5.75 million secured, two-year, interest-free convertible promissory note to Lind Global Fund II LP, along with a warrant to purchase 1,000,000 shares[99] - The company was not in compliance with the cash flow covenants of its Loan Agreement with Lighthouse for July, August, and September 2022. Lighthouse has notified the company of the default but has not yet exercised its rights and remedies[74] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q3 revenue decline to lower prices, with net loss increase driven by higher costs, write-downs, and impairment, straining liquidity Q3 2022 vs Q3 2021 Performance | Metric | Q3 2022 | Q3 2021 | Change | Reason | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $2,429,195 | $3,726,704 | -34.8% | Lower selling price for crab meat. | | Gross Profit (Loss) | ($1,544,461) | $670,243 | - | Higher cost of goods and inventory write-down. | | Net Loss | ($3,738,089) | ($161,788) | +2210% | Decreased gross profit, lower sales prices, higher costs. | Nine Months 2022 vs Nine Months 2021 Performance | Metric | YTD 2022 | YTD 2021 | Change | Reason | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | $10,712,363 | $8,341,984 | +28.4% | Sales from new TOBC and soft-shell crab operations. | | Gross Profit (Loss) | ($718,968) | $1,542,921 | - | Higher market prices at time of purchase and inventory adjustment. | | Net Loss | ($6,229,168) | ($1,077,019) | +478% | Increased operating expenses from acquisitions and amortization of Lind debt discount. | - The company's liquidity is primarily supported by its inventory of $6.1 million and accounts receivable of $0.8 million. It had a working capital surplus of $562,756 as of September 30, 2022[181] - Cash used in operating activities increased significantly to $4.1 million for the nine months ended Sep 30, 2022, compared to $1.0 million in the prior year, mainly due to a $4.5 million increase in inventory[184] 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 item[210] Controls and Procedures Management concluded the company's disclosure controls and procedures were not effective due to material weaknesses and inadequate segregation of duties - Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2022[211] - Material weaknesses identified include: - Ineffective controls over the financial close and reporting process - Inadequate segregation of duties, lack of personnel resources, and insufficient technical accounting expertise[213] - Remediation plans include hiring personnel with technical accounting expertise to segregate duties and creating an internal control framework to address the financial close and reporting process[215] PART II – OTHER INFORMATION Legal Proceedings The company reports no material pending legal proceedings - There are no material pending legal proceedings to which the company is a party[218] Risk Factors 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 and is not required to provide risk factor disclosures in its Form 10-Q[219] Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered shares of common stock in Q3 2022 for consulting services and as partial payment for a convertible note - On August 25, 2022, and September 26, 2022, the company issued a total of 444,444 shares of common stock to Lind as partial payment of a convertible promissory note[223][224] - The company issued shares of common stock to the designee of Clear Think Capital for consulting services on July 1, August 1, and September 1, 2022[220][221][224] Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - None reported[225]