Forward-Looking Statements
The following management's discussion and analysis should be read in conjunction
with our historical financial statements and the related notes thereto. The
management's discussion and analysis contain forward-looking statements, such as
statements of our plans, objectives, expectations and intentions. Any statements
that are not statements of historical fact are forward-looking statements. When
used, the words "believe," "plan," "intend," "anticipate," "target," "estimate,"
"expect" and the like, and/or future tense or conditional constructions ("will,"
"may," "could," "should," etc.), or similar expressions, identify certain of
these forward-looking statements. These forward-looking statements are subject
to risks and uncertainties, including those under "Risk Factors" in our Annual
Report filed with the SEC on April 15, 2021, as updated in subsequent filings we
have made with the SEC that could cause actual results or events to differ
materially from those expressed or implied by the forward-looking statements.
Our actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of several factors.
We do not undertake any obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this Quarterly
Report.
Basis of Presentation
The following discussion highlights our results of operations and the principal
factors that have affected our financial condition as well as our liquidity and
capital resources for the periods described, and provides information that
management believes is relevant for an assessment and understanding of the
statements of financial condition and results of operations presented herein.
The following discussion and analysis are based on our unaudited financial
statements contained in this Quarterly Report, which we have prepared in
accordance with United States generally accepted accounting principles. You
should read the discussion and analysis together with such financial statements
and the related notes thereto.
Overview
We are an international seafood company that imports, packages and sells
refrigerated pasteurized crab meat, and other premium seafood products. Our
current source of revenue is from importing blue and red swimming crab meat
primarily from Indonesia, the Philippines and China and distributing it in the
United States and Canada under several brand names such as Blue Star, Oceanica,
Pacifika, Crab & Go, First Choice, Good Stuff and Coastal Pride Fresh. The crab
meat which we import is processed in 13 plants throughout Southeast Asia. Our
suppliers are primarily via co-packing relationships, including two affiliated
suppliers. We sell primarily to food service distributors. We also sell our
products to wholesalers, retail establishments and seafood distributors.
In November 2019, we acquired Coastal Pride, a seafood company, based in
Beaufort, South Carolina, that imports pasteurized and fresh crabmeat sourced
primarily from Mexico and Latin America and sells premium branded label crabmeat
throughout North America
In June 2021, we acquired Taste of BC Aquafarms, Inc., a family-owned and
operated land-based recirculating aquaculture systems salmon farming operation,
based in Nanaimo, British Columbia, Canada which sells its steelhead salmon to
distributors in Canada.
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COVID-19
The current COVID-19 pandemic has adversely affected our business operations,
including disruptions and restrictions on our ability to travel or to distribute
our seafood products, as well as temporary closures of our facilities. Any such
disruption or delay may impact our sales and operating results. In addition,
COVID-19 has resulted in a widespread health crisis that adversely affected the
economies and financial markets of many other countries. As a result of
COVID-19, the Company has experienced a significant decrease in revenue for the
year ended December 31, 2020 and continues to have losses in the six months
ended June 30, 2021 although such losses have significantly decreased in
comparison to the six months ended June 30, 2020.
As a result of the business interruption experienced to date, management has
taken steps to reduce expenses across all areas of its operations, including
payroll, marketing, sales and warehousing expenses. The extent to which we are
affected by COVID-19 will largely depend on future developments and restrictions
which may disrupt interactions with customers, suppliers, staff and advisors
which cannot be accurately predicted, including the duration and scope of the
pandemic, governmental and business responses to the pandemic and the impact on
the global economy, our customers' demand for our products, and our ability to
provide our products. We continue to monitor the effects of the pandemic on our
business.
Results of Operations
The information set forth below should be read in conjunction with the financial
statements and accompanying notes elsewhere in this Report.
Three months ended June 30, 2021 and 2020
Net Revenue. Revenue for the three months ended June 30, 2021 decreased 25.7% to
$2,129,389 as compared to $2,865,103 for the three months ended June 30, 2020 as
a result of a decrease in poundage sold due to the impact of the COVID-19
pandemic.
Cost of Goods Sold. Cost of goods sold for the three months ended June 30, 2021
decreased to $1,559,490 as compared to $2,882,541 for the three months ended
June 30, 2020. The decrease is attributable to the revenue decline.
Gross Profit. Gross profit margin for the three months ended June 30, 2021
increased to $569,899 as compared to the gross loss of $17,438 in the three
months ended June 30, 2020. This increase is attributable to higher market
prices and lower cost of goods sold in comparison with the three months ended
June 30, 2020.
Commissions Expense. Commissions expense decreased to $13,606 for the three
months ended June 30, 2021 from $25,534 for the three months ended June 30,
2020. This decrease is due to lower commissionable revenues.
Salaries and Wages Expense. Salaries and wages expense decreased to $228,859 for
the three months ended June 30, 2021 as compared to $241,072 for the three
months ended June 30, 2020. This decrease is mainly attributable to a strategic
reduction in salaries and stock-based compensation.
Depreciation and Amortization. Depreciation and amortization expense decreased
to $55,911 for the three months ended June 30, 2021 as compared to $153,195 for
the three months ended June 30, 2020. The decrease is attributable to lower
fixed assets and lower corresponding depreciation recognized.
Other Operating Expense. Other operating expense increased to $638,585 for the
three months ended June 30, 2021 from $158,749 for the three months ended June
30, 2020. This increase is mainly attributable to legal and professional fees
and stock compensation expense associated with the TOBC acquisition and a Nasdaq
uplisting application.
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Other Income. Other income increased for the three months ended June 30, 2021 to
$28,672 from $0 for the three months ended June 30, 2020. This increase is
mainly attributable to collections made by Coastal Pride for debt existing prior
to the acquisition of Coastal Pride by the Company.
Forbearance Fee Expense (Non-Cash). Forbearance fee expense decreased to $0 for
the three months ended June 30, 2021 from $2,655,292 for the three months ended
June 30, 2020. This decrease is a result of a one-time, non-cash expense related
to the issuance of common stock for a forbearance fee in connection with the
Kenar Note in 2020.
Interest Expense. Interest expense decreased to $98,737 for the three months
ended June 30, 2021 from $239,653 for the three months ended June 30, 2020. The
decrease is attributable to a decrease in loans and line of credit outstanding
to $4,141,479 for the three months ended June 30, 2021 from $8,963,605 for the
three months ended June 30, 2020.
Net Loss. Net loss was $437,127 for the three months ended June 30, 2021 as
compared to a net loss of $3,490,933 for the three months ended June 30, 2020.
The decrease in net loss is primarily attributable to reductions of depreciation
and amortization, interest and other expenses.
Six months ended June 30, 2021 and 2020
Net Revenue. Revenue for the six months ended June 30, 2021 decreased 37.9% to
$4,615,280 as compared to $7,436,717 for the six months ended June 30, 2020 as a
result of a decrease in poundage sold due to the impact of the COVID-19
pandemic.
Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2021
decreased to $3,742,602 as compared to $7,030,939 for the six months ended June
30, 2020. The decrease is attributable to the revenue decline.
Gross Profit. Gross profit margin for the six months ended June 30, 2021
increased to $872,678 as compared to $405,778 for the six months ended June 30,
2020. This increase is attributable to higher market prices and lower cost of
goods sold in comparison to the six months ended June 30, 2020.
Commissions Expense. Commissions expense decreased to $18,400 for the six months
ended June 30, 2021 from $92,363 for the six months ended June 30, 2020. This
decrease is due to lower commissionable revenues.
Salaries and Wages Expense. Salaries and wages expense decreased to $609,455 for
the six months ended June 30, 2021 as compared to $650,253 for the six months
ended June 30, 2020. This decrease is mainly attributable to a strategic
reduction in salaries and stock-based compensation.
Depreciation and Amortization. Depreciation and amortization expense decreased
to $99,990 for the six months ended June 30, 2021 as compared to $230,960 for
the six months ended June 30, 2020. The decrease is attributable to lower fixed
assets and lower corresponding depreciation recognized.
Other Operating Expense. Other operating expense increased to $955,983 for the
six months ended June 30, 2021 from $605,182 for the six months ended June 30,
2020. This increase is mainly attributable to legal and professional fees and
stock compensation expense associated with the TOBC acquisition and a Nasdaq
uplisting application.
Other Income. Other income increased for the six months ended June 30, 2021 to
$105,190 from $0 for the six months ended June 30, 2020. This increase is mainly
attributable to collections made by Coastal Pride for debt existing prior to the
acquisition of Coastal Pride by the Company.
Forbearance Fee Expense (Non-Cash). Forbearance fee expense (non-cash) decreased
to $0 for the six months ended June 30, 2021 from $2,655,292 for the six months
ended June 30, 2020. This decrease is the result of a one-time, non-cash expense
related to the issuance of common stock for a forbearance fee in connection with
the Kenar Note in 2020.
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Interest Expense. Interest expense decreased to $209,271 for the six months
ended June 30, 2021 from $516,308 for the six months ended June 30, 2020. The
decrease is attributable to a decrease in loans and line of credit outstanding
to $4,476,878 for the six months ended June 30, 2021 from $9,928,084 for the six
months ended June 30, 2020.
Net Loss. Net loss was $915,231 for the six months ended June 30, 2021 as
compared to $4,344,580 for the six months ended June 30, 2020. The decrease in
net loss is primarily attributable to reductions of depreciation and
amortization, interest and other expenses.
Liquidity and Capital Resources
The Company had cash of $1,630,732 as of June 30, 2021. At June 30, 2021, the
Company had a working capital deficit of $1,128,803, including $1,299,712 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
$582,762 and accounts receivable of $610,355.
The Company has historically financed its operations through the cash flow
generated from operations, capital investment, notes payable and a working
capital line of credit.
The COVID-19 pandemic has caused significant disruptions to the global financial
markets. The full impact of the COVID-19 outbreak continues to evolve, is highly
uncertain and subject to change. The Company is not able to estimate the
possible continuing effects of the COVID-19 outbreak on its operations or
financial condition for the next 12 months.
Cash Provided by Operating Activities. Cash provided by operating activities
during the six months ended June 30, 2021 was $311,707 as compared to cash
provided by operating activities of $3,105,786 for the six months ended June 30,
2020. The decrease is primarily attributable to reductions in inventory of
$2,284,228, receivables of $236,122 and other current liabilities of $205,291
for the six months ended June 30, 2021.
Cash Utilized in Investing Activities. Cash used for investing activities for
the six months ended June 30, 2021 was $790,593 as compared to cash used for
investing activities of $47,179 for the six months ended June 30, 2020. The
increase was attributable to the acquisition of TOBC for the six months ended
June 30, 2021.
Cash Provided by (Utilized in) Financing Activities. Cash provided by financing
activities for the six months ended June 30, 2021 was $1,770,995 as compared to
cash utilized in financing activities of $3,225,404 for the six months ended
June 30, 2020. Reduction of the Company's revolving working capital line of
credit of $1,173,949 was partially offset by the proceeds from the PPP loan of
$371,944 for the six months ended June 30, 2021, compared to loan payment and
loan costs paid on the working capital line of credit of $3,165,404 for the six
months ended June 30, 2020. As of June 30, 2021, the Company had $2,573,000 of
proceeds from a common stock private offering.
Working Capital Line of Credit
Keeler & Co. entered into a $14,000,000 revolving line of credit with ACF on
August 31, 2016, the proceeds of which were used to pay off the prior line of
credit, pay new loan costs of approximately $309,000 and provide additional
working capital to Keeler & Co. This facility was amended on November 18, 2016,
June 19, 2017, October 16, 2017, September 19, 2018, November 8, 2018, July 29,
2019, November 26, 2019 and May 7, 2020 and was secured by all of the assets of
Keeler & Co. and Coastal Pride. The interest rate under the line of credit was
equal to the greater of (i) the 3-month LIBOR rate plus 9.25%, (ii) the prime
rate plus 6.0%, and (iii) a fixed rate of 6.5%. As of December 31, 2020, the
interest rate was 12.48%.
On March 31, 2021, Keeler & Co. and Coastal Pride entered into a loan and
security agreement ("Loan Agreement") with Lighthouse pursuant to the terms of
the Loan Agreement, Lighthouse made available to Keeler & Co. and Coastal Pride
(together, the "Borrowers") a $5,000,000 revolving line of credit for a term of
thirty-six months, renewable annually for one-year periods thereafter. Amounts
due under the line of credit are represented by a revolving credit note issued
to Lighthouse by the Borrowers.
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The advance rate of the revolving line of credit is 85% with respect to eligible
accounts receivable and the lower of 60% of the Borrowers' eligible inventory,
or 80% of the net orderly liquidation value, subject to an inventory sublimit of
$2,500,000. The inventory portion of the loan will never exceed 50% of the
outstanding balance. Interest on the line of credit is the prime rate (with a
floor of 3.25%), plus 3.75%. The Borrowers will pay Lighthouse a facility fee of
$50,000 in three instalments of $16,667 in March, April and May 2021 and will
pay an additional facility fee of $25,000 on each anniversary of March 31, 2021.
The line of credit is secured by a first priority security interest on all the
assets of each Borrower. Pursuant to the terms of a guaranty agreement, the
Company guaranteed the obligations of the Borrowers under the note and John
Keeler, Executive Chairman and Chief Executive Officer of the Company, provided
a personal guaranty of up to $1,000,000 to Lighthouse.
The Borrowers utilized $784,450 of the Lighthouse revolving line of credit to
repay all the outstanding indebtedness owed to the ACF as of March 31, 2021. As
a result, all obligations owed to ACF were satisfied and the loan agreement with
ACF was terminated. The outstanding balance owed to Lighthouse as of June 30,
2021 amounted to $631,958.
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 June 30, 2021 and December 31,
2020, approximately $1,299,000 of principal remains outstanding and
approximately $39,100 and $174,000 of interest was paid under the notes,
respectively. These notes are subordinated to the Lighthouse note. After
satisfaction of the terms of the subordination, the Company may prepay the notes
at any time first against interest due thereunder. If an event of default occurs
under the notes, interest will accrue at 18% per annum and if not paid within 10
days of payment becoming due, the holder of the note is entitled to a late fee
of 5% of the amount of payment not timely made.
Kenar Note
On March 26, 2019, the Company issued a four-month promissory note in the
principal amount of $1,000,000 (the "Kenar Note") to Kenar Overseas Corp., a
company registered in Panama ("Kenar"). The note bears interest at the rate of
18% per annum during the initial four months which rate will increase to 24%
during any extension thereof. The note may be prepaid in whole or in part
without penalty. John Keeler, the Company's Chief Executive Officer and
Executive Chairman pledged 5,000,000 shares of common stock to secure the
Company's obligations under the note. The Kenar Note matured on July 26, 2019
and was extended on a month-to-month basis and on November 19, 2019, the Kenar
Note was extended to March 31, 2020 on the same terms and conditions.
On May 21, 2020, the Kenar Note was amended to (i) extend the maturity date to
March 31, 2021, (ii) provide that the Company use one-third of any capital raise
from the sale of its equity to reduce the outstanding principal under the Kenar
Note, (iii) set the interest rate at 18% per annum, payable monthly commencing
October 1, 2020, and (iv) reduce the number of pledged shares by Mr. Keeler to
4,000,000. As consideration therefor, the Company issued 1,021,266 shares of
Common Stock to Kenar on May 27, 2020. The outstanding principal amount of the
note at March 31, 2021 and December 31, 2020 was $872,500. On April 28, 2021,
the Kenar Note was further amended to extend the maturity date to May 31, 2021.
On July 6, 2021, the Company entered into a note payoff indemnity agreement with
Kenar pursuant to which the Company paid Kenar $918,539 of principal and accrued
interest in full satisfaction of the amounts due to Kenar under the Second Loan
Amendment, dated April 26, 2021, between the Company and Kenar, and the Kenar
Note was extinguished, and the shares pledged by Mr. Keeler were released.
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Lobo Note
On April 2, 2019, the Company issued a four-month unsecured promissory note in
the principal amount of $100,000 (the "Lobo Note") to Lobo Holdings, LLLP, a
stockholder of the Company ("Lobo"). The Lobo Note bears interest at the rate of
18% per annum. The Lobo Note may be prepaid in whole or in part without penalty.
John Keeler, the Company's Executive Chairman and Chief Executive Officer,
pledged 1,000,000 shares of common stock of the Company to secure the Company's
obligations under the Lobo Note. The Lobo Note matured on August 2, 2019 and was
extended through December 2, 2019 on the same terms and conditions. On November
15, 2019, the Company paid off the Lobo Note with the issuance to Lobo of an
unsecured promissory note in the principal amount of $100,000 which accrued
interest at the rate of 15% per annum and matured on March 31, 2020. On April 1,
2020, the Company paid off the November 15, 2019 Lobo Note with the issuance to
Lobo of a six-month unsecured promissory note in the principal amount of
$100,000, which accrued interest at the rate of 10% per annum and matured on
October 1, 2020. On October 1, 2020, the Company paid off the April 1, 2020 note
with the issuance of a three-month unsecured promissory note in the principal
amount of $100,000, which bears interest at the rate of 10% per annum and
matured on December 31, 2020. On January 1, 2021, the Company paid off the
October 1, 2020 note with the issuance of a six-month unsecured promissory note
in the principal amount of $100,000, which bears interest at the rate of 10% per
annum and matures on June 30, 2021. On July 1, 2021, the Company paid off the
January 1, 2021 note with the issuance of a three-month unsecured promissory
note in the principal amount of $100,000 which accrued interest at the rate of
10% per annum and matures on September 30, 2021.
Paycheck Protection Program Loan
On March 2, 2021, the Company received proceeds of $371,944 and issued an
unsecured promissory note to US Century in the principal amount of $371,944 in
connection with a PPP Loan. The note accrues interest at 1.0% per annum, matures
five years from the date of issuance and is fully guaranteed by the SBA and may
be forgiven provided certain criteria are met. The Company may apply for
forgiveness after August 17, 2021 and may be required to make monthly payments
of approximately $8,500 beginning June 2, 2022.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
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BLUE STAR FOODS CORP. 
