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’s current source of revenue is 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 produced under the brand name
Little Cedar Farms for distribution in Canada.
On
November 26, 2019, Keeler & Co., a wholly-owned direct subsidiary of the Company, entered into an Agreement and Plan of Merger and
Reorganization (the “Coastal Merger Agreement”) with Coastal Pride Company, Inc., a South Carolina corporation, Coastal Pride
Seafood, LLC, a Florida limited liability company and newly-formed, wholly-owned subsidiary of the Purchaser (the “Acquisition
Subsidiary” and, upon the effective date of the Merger, the “Surviving Company” or “Coastal Pride”), and
The Walter F. Lubkin, Jr. Irrevocable Trust dated January 8, 2003 (the “Trust”), Walter F. Lubkin III (“Lubkin III”),
Tracy Lubkin Greco (“Greco”) and John C. Lubkin (“Lubkin”), constituting all of the shareholders of Coastal Pride
Company, Inc. immediately prior to the Coastal Merger (collectively, the “Sellers”). Pursuant to the terms of the Coastal
Merger Agreement, Coastal Pride Company, Inc. merged with and into the Acquisition Subsidiary, with the Acquisition Subsidiary being
the surviving company (the “Coastal Merger”).
Coastal
Pride is 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.
On
April 27, 2021, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with TOBC, and Steve Atkinson
and Janet Atkinson (the “Sellers”), the owners of all of the capital stock of TOBC (the “TOBC Shares”), pursuant
to which the Company acquired all of the TOBC Shares from the Sellers for an aggregate purchase price of CAD$4,000,000 for: (i) an aggregate
of CAD$1,000,000 in cash (with each Seller receiving a pro rata amount based upon the total number of TOBC Shares held by such Seller);
(ii) promissory notes in the aggregate principal amount of CAD$200,000 (the “Notes”) with the principal amount of each Seller’s
Note based on such Seller’s pro rata portion of the TOBC Shares); and (iii) 987,741 shares of the Company’s common stock
(representing CAD$2,800,000 of shares based on USD$2.30 per share) with each Seller receiving a pro rata portion of such shares based
upon the total number of TOBC Shares held by such Seller.
On
June 24, 2021, the Purchase Agreement was amended (the “Amendment”), to increase the Purchase Price up to an aggregate of
CAD$5,000,000 and the acquisition closed. Pursuant to the Amendment, on August 3, 2021, an aggregate of 344,957 shares of the Company’s
common stock (representing CAD$1,000,000 of additional shares calculated at USD$2.30 per share) was put in escrow until the 24-month
anniversary of the closing. If, within 24 months of the closing, TOBC has cumulative revenue of at least CAD$1,300,000, the Sellers will
receive all of the escrowed shares. If, as of the 24-month anniversary of the closing, TOBC has cumulative revenue of less than CAD$1,300,000,
the Sellers will receive a prorated number of the escrowed shares based on the actual cumulative revenue of TOBC as of such date.
TOBC
is a land-based recirculating aquaculture systems salmon farming operation, based in Nanaimo, British Columbia, Canada, which sells its
steelhead salmon to distributors 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 $359,250 and the issuance of 167,093 shares of common stock of the Company with a fair value of $359,250. Such
shares are subject to a leak-out agreement pursuant to which Gault Seafood may not sell or otherwise transfer the shares until February
3, 2023.
Note
2. Basis of Presentation and 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, 2021 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, 2021 filed with the SEC on March 31, 2022 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, inclusive 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, 2022, and December 31, 2021, the balance due from the related party for future shipments was approximately $1,300,000.
No new purchases have been made from Bacolod during the nine months ended September 30, 2022. Cost of revenue related to inventories
purchased from Bacolod represented approximately $0
of total cost of revenue for the nine months ended September 30, 2022 and 2021.
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 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 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.
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.
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. The
Company recorded an inventory adjustment to reduce the carrying value of inventory to the lower of cost or net realizable value in the
amount of $514,912 which was charged to cost of goods sold.
The
Company’s inventory as of September 30, 2022 and December 31 2021 consists of:
Schedule
of Inventory
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Inventory purchased for resale | |
$ | 3,314,773 | | |
$ | 863,967 | |
Feeds and eggs processed | |
| 105,910 | | |
| 72,733 | |
In-transit inventory
| |
| 2,698,037 | | |
| 1,182,741 | |
Inventory, net | |
$ | 6,118,720 | | |
$ | 2,119,441 | |
Lease
Accounting
We
account for our leases under ASC 842, Leases, which requires all leases to be reported on the balance sheet as right-of-use assets
and lease obligations. We 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.
We
categorize leases with contractual terms longer than twelve months as either operating or finance. Finance leases are generally those
leases that would allow us 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. We did not have any finance
leases as of September 30, 2022. Our leases generally have terms that range from three years for equipment and five years for property.
We elected the accounting policy to include both the lease and non-lease components of our agreements as a single component and account
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.
The
table below presents the lease-related assets and liabilities recorded on the consolidated balance sheet as of September 30, 2022.
Schedule of Lease-related
Assets and Liabilities
| |
September 30, 2022 | |
Assets | |
| | |
Operating lease assets | |
$ | 209,321 | |
| |
| | |
Liabilities | |
| | |
Current | |
| | |
Operating lease liabilities | |
$ | 57,702 | |
Noncurrent | |
| | |
Operating lease liabilities | |
$ | 151,075 | |
Supplemental
cash flow information related to leases were as follows:
Schedule of Supplemental Cash Flow Information Related to Leases
| |
Nine Months Ended September 30, 2022 | |
| |
| |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
Operating cash flows from operating leases | |
$ | 46,942 | |
ROU assets recognized in exchange for lease obligations: | |
| | |
Operating leases | |
$ | 185,135 | |
The
table below presents the remaining lease term and discount rates for operating leases.
Schedule
of Remaining Lease Term and Discount Rates for Operating Leases
| |
September 30, 2022 | |
Weighted-average remaining lease term | |
| | |
Operating leases | |
| 3.88 years | |
Weighted-average discount rate | |
| | |
Operating leases | |
| 6.6 | % |
Maturities
of lease liabilities as of September 30, 2022 were as follows:
Schedule of Maturities of Lease Liabilities
| |
Operating Leases | |
| |
| |
2022 (three months remaining) | |
| 16,488 | |
2023 | |
| 69,672 | |
2024 | |
| 58,258 | |
2025 | |
| 43,198 | |
2026 | |
| 43,198 | |
Thereafter | |
| 10,799 | |
Total lease payments | |
| 241,613 | |
Less: amount of lease payments representing interest | |
| (32,836 | ) |
Present value of future minimum lease payments | |
$ | 208,777 | |
Less: current obligations under leases | |
$ | (57,702 | ) |
Non-current obligations | |
$ | 151,075 | |
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.
The
Company reviews its indefinite lived intangibles and 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 indefinite lived intangibles and goodwill and recognized an impairment loss on goodwill of $748,997 for the nine months
ended September 30, 2022. No impairment was recognized for the nine months ended September 30, 2021.
Long-lived
Assets
The
Company 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. 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 finite-lived intangibles and recognized an impairment loss on
customer relationships intangible asset of $374,300
for the year ended December 31, 2021. No impairment
was recognized during the nine months ended September 30, 2022.
Foreign
Currency Exchange Rates Risk
We
manage our exposure to fluctuations in foreign currency exchange rates through our normal operating activities. Our primary focus is
to monitor our exposure to, and manage, the economic foreign currency exchange risks faced by our operations and realized when we exchange
one currency for another. Our operations primarily utilize the U.S. dollar and Canadian dollar as their functional currencies. Movements
in foreign currency exchange rates affect our financial statements.
Recently
Adopted Accounting Pronouncements
ASU
2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s
Own Equity (Subtopic 815-40).
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40). The ASU simplifies the accounting for certain financial instruments with characteristics
of liabilities and equity. The FASB reduced the number of accounting models for convertible debt and convertible preferred stock instruments
and made certain disclosure amendments to improve the information provided to users. In addition, the FASB amended the derivative guidance
for the “own stock” scope exception and certain aspects of the EPS guidance. The guidance is effective for smaller reporting
companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is
permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The
Company early adopted the ASU effective January 1, 2022 and applied the provisions of the ASU to the convertible note issued during the
nine months ended September 30, 2022.
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, 2022, the Company incurred a net loss of $6,229,168, had an accumulated deficit of $22,373,319 and
a working capital surplus of $562,756, with the current liabilities inclusive of $893,000 in stockholder loans that are subordinated
to the provider of the working capital facility, and $57,702 in the current portion of the lease liability recognized. These circumstances
raise substantial doubt as to the Company’s ability to continue as a going concern. The Company’s ability to continue as
a going concern is dependent upon the Company’s ability to increase revenues, execute on its business plan to acquire complimentary
companies, raise capital, and to continue to sustain adequate working capital to finance its operations. The consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note
4. Other Current Assets
Other
current assets totaled $2,054,999 as of September 30, 2022 and $3,702,661 as of December 31, 2021. As of September 30, 2022, approximately
$1.83 million of the balance was related to prepaid inventory to our suppliers. The remainder of the balance is related to prepaid insurance
and other prepaid expenses.
Note
5. Fixed Assets, Net
Fixed
assets comprised the following:
Schedule of Fixed Assets
| |
September 30, 2022 | | |
December 31, 2021 | |
Computer equipment | |
$ | 97,624 | | |
$ | 90,707 | |
RAS system | |
| 2,009,587 | | |
| 1,963,734 | |
Automobiles | |
| 122,431 | | |
| 23,188 | |
Leasehold improvements | |
| 89,055 | | |
| 4,919 | |
Total | |
| 2,318,697 | | |
| 2,082,548 | |
Less: Accumulated depreciation | |
| (286,541 | ) | |
| (178,145 | ) |
Fixed assets, net | |
$ | 2,032,156 | | |
$ | 1,904,403 | |
For
the nine months ended September 30, 2022 and 2021, depreciation expense totaled approximately $168,900 and $55,100, respectively.
Note
6. Intangible Assets, Net
The
following table sets forth the components of the Company’s intangible assets as of September 30, 2022:
Schedule of Intangible Assets
| |
Amortization
Period (Years) | | |
Cost | | |
Accumulated
Amortization | | |
Net Book
Value | |
| |
| | |
| | |
| | |
| |
Intangible Assets Subject to amortization | |
| | | |
| | | |
| | | |
| | |
Trademarks – Coastal Pride | |
| 14 | | |
$ | 850,000 | | |
$ | (160,548 | ) | |
$ | 689,452 | |
Trademarks – TOBC | |
| 15 | | |
| 406,150 | | |
| (30,240 | ) | |
| 375,910 | |
Customer Relationships – Coastal Pride | |
| 12 | | |
| 1,486,832 | | |
| (328,221 | ) | |
| 1,158,611 | |
Customer Relationships – TOBC | |
| 15 | | |
| 592,979 | | |
| (44,163 | ) | |
| 548,816 | |
Non-Compete Agreements – Coastal Pride | |
| 3 | | |
| 40,000 | | |
| (28,322 | ) | |
| 11,678 | |
Non-Compete Agreements – TOBC | |
| 4 | | |
| 121,845 | | |
| (34,020 | ) | |
| 87,825 | |
Total | |
| | | |
$ | 3,497,806 | | |
$ | (625,514 | ) | |
$ | 2,872,292 | |
The
aggregate amortization remaining on the intangible assets as of September 30, 2022 is as follows:
Schedule of Amortization of Intangible Assets
| |
Intangible Amortization | |
2022 (3 months remaining) | |
$ | 71,643 | |
2023 | |
$ | 286,572 | |
2024 | |
$ | 296,697 | |
2025 | |
$ | 246,848 | |
2026 | |
$ | 246,848 | |
Thereafter | |
$ | 1,723,684 | |
Note
7. 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 $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.
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 paid 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. 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 and security 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.
As of September 30, 2022, the interest rate was 14% which includes a default rate of 3%.
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. As of September 30, 2022, the Company was in
compliance with all financial covenants under the Loan Agreement, except for the requirement to maintain a greater than $50,000 cash
flow in the months of July, August, and September 2022. Lighthouse has notified the Borrowers as to this default but
has elected not to exercise its rights and remedies under the loan documents with the Borrowers. The outstanding balance owed to Lighthouse
as of September 30, 2022 was $1,862,301.
First
West Credit Union CEBA Loan
On
June 24, 2021, the Company assumed a commercial term loan with First West Credit Union Canada Emergency Business Account (“CEBA”)
in the principal amount of CAD$60,000 in connection with the acquisition of TOBC. The loan initially bears no interest and is due on
December 31, 2025. The borrower may prepay all or part of the loan commencing November 1, 2022 and, if by December 31, 2022 the Company
has paid 75% of the loan amount, the remaining 25% will be forgiven as per the loan agreement. If less than 75% of the loan amount is
outstanding by December 31, 2022, the then outstanding balance will be converted to interest only monthly payments at 5.0%.
John
Keeler Promissory Notes – Subordinated
The
Company had unsecured promissory notes outstanding to John Keeler of approximately $893,000 of principal at September 30, 2022 and interest
expense of $41,700 and $58,600 during the nine months ended September 30, 2022 and 2021, respectively. These notes are payable on demand,
bear an annual interest rate of 6% and are subordinated to the Lighthouse note. The Company made principal payments of $67,000 during
the nine months ended September 30, 2022.
Walter
Lubkin Jr. Note – Subordinated
On
November 26, 2019, the Company issued a five-year unsecured promissory note in the principal amount of $500,000 to Walter Lubkin Jr.
as part of the purchase price for the Coastal Pride acquisition. The note bears interest at the rate of 4% per annum and is payable quarterly
in an amount equal to the lesser of (i) $25,000 or (ii) 25% of the EBITDA of Coastal Pride, as determined on the first day of each quarter.
The first payment was scheduled for February 26, 2020, however, the EBITDA generated for Coastal Pride during the preceding quarter did
not warrant a principal payment. This note is subordinated to the working capital line of credit. Principal payments are permitted so
long as the borrower is not in default of its working capital line of credit.
On
October 8, 2021, $34,205 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
February 1, 2022, $29,789 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
April 28, 2022, $4,523 of the outstanding accrued interest to date was paid on the note by the Company.
On
August 16, 2022, $4,487 of the outstanding accrued interest to date was paid on the note by the Company.
Interest
expense for the Walter Lubkin Jr. note totaled approximately $13,500 and $14,900 during the nine months ended September 30, 2022 and
2021, respectively.
Walter
Lubkin III Convertible Note – Subordinated
On
November 26, 2019, the Company issued a thirty-nine-month unsecured promissory note in the principal amount of $87,842 to Walter Lubkin
III as part the purchase price for the Coastal Pride acquisition. The note bears interest at the rate of 4% per annum. The note is payable
in equal quarterly payments over six quarters beginning August 26, 2021. At the election of the holder, at any time after the first anniversary
of the issuance of the note, the then outstanding principal and accrued interest may be converted into the Company’s common stock
at a rate of $2.00 per share. This note is subordinated to the working capital line of credit. Principal payments are permitted so long
as the borrower is not in default of its working capital line of credit.
On
October 8, 2021, $16,257 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
February 1, 2022, $15,378 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
April 28, 2022, $15,267 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
August 16, 2022, $15,117 of the outstanding principal and accrued interest to date was paid on the note by the Company.
Interest
expense for the Walter Lubkin III note totaled approximately $1,400 and $2,600 during the nine months ended September 30, 2022 and 2021,
respectively.
Tracy
Greco Convertible Note – Subordinated
On
November 26, 2019, the Company issued a thirty-nine-month unsecured promissory note in the principal amount of $71,372 to Tracy Greco
as part of the purchase price for the Coastal Pride acquisition. The note bears interest at the rate of 4% per annum. The note is payable
in equal quarterly payments over six quarters beginning August 26, 2021. At the election of the holder, at any time after the first anniversary
of the issuance of the note, the then outstanding principal and accrued interest may be converted into the Company’s common stock
at a rate of $2.00 per share. This note is subordinated to the working capital line of credit. Principal payments are permitted so long
as the borrower is not in default of its working capital line of credit.
On
October 8, 2021, $13,209 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
February 1, 2022, $12,494 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
April 28, 2022, $12,405 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
August 16, 2022, $12,282 of the outstanding principal and accrued interest to date was paid on the note by the Company.
Interest
expense for the Tracy Greco note totaled approximately $1,200 and $2,100 during the nine months ended September 30, 2022 and 2021, respectively.
John
Lubkin Convertible Note – Subordinated
On
November 26, 2019, the Company issued a thirty-nine-month unsecured promissory note in the principal amount of $50,786 to John Lubkin
as part the Coastal Pride acquisition. The note bears interest at the rate of 4% per annum. The note is payable in equal quarterly payments
over six quarters beginning August 26, 2021. At the election of the holder, at any time after the first anniversary of the issuance of
the note, the then outstanding principal and accrued interest may be converted into the Company’s common stock at a rate of $2.00
per share. This note is subordinated to the working capital line of credit. Principal payments are permitted so long as the borrower
is not in default of its working capital line of credit.
On
October 8, 2021, $9,399 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
February 1, 2022, $8,891 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
April 28, 2022, $8,827 of the outstanding principal and accrued interest to date was paid on the note by the Company.
On
August 16, 2022, $8,740 of the outstanding principal and accrued interest to date was paid on the note by the Company.
Interest
expense for the John Lubkin note totaled approximately $800 and $1,500 during the nine months ended September 30, 2022 and 2021, respectively.
Lind
Global Fund II LP investment
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 $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. 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 $87,144 of debt issuance costs. The Company recorded a total of $1,943,445 debt discount at issuance of the
debt, including original issuance discount of $750,000, commitment fee $150,000, $87,144 direct issuance cost, and $956,301 related to
warrants issued. Amortization expense recorded in interest expense totaled $685,074 during the nine months ended September 30, 2022.
The
outstanding principal under the note is 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”), 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 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 other than certain amounts under the current line of credit facility with
Lighthouse. 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 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 is convertible into common stock at $5.00 per share, 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
are issued by the Company at less than the conversion price, the conversion price will be reduced to such price.
Upon
a change of control of the Company, as defined in the note, Lind has the right to require the Company to prepay 10% of the outstanding
principal amount of the note. The Company may prepay the outstanding principal amount of the note, provided Lind may convert up to 25%
of the principal amount of the note at a price per share equal to the lesser of the Repayment Share Price or the conversion price. The
Note contains certain negative covenants, including restricting the Company from certain distributions, stock repurchases, borrowing,
sale of assets, loans and exchange offers.
Upon
an event of default as described in the note, the note will become immediately due and payable at a default interest rate of 125% of
the then outstanding principal amount. Upon a default, all or a portion of the outstanding principal amount may be converted into shares
of common stock by Lind at the lower of the conversion price and 80% of the average of the three lowest daily VWAPs.
During
the quarter ended September 30, 2022, the Company made principal payments on the note totaling $999,999
through the issuance of an aggregate of 444,444
shares of common stock with a fair value of $447,777
and cash payments of $609,307
pursuant to the terms of the note, and recorded a loss on settlement of debt of $57,085.
Note
8. Business Combination
Acquisition
of Taste of BC Aquafarms
On
June 24, 2021, the Company consummated the acquisition of TOBC and TOBC became a wholly owned subsidiary of the Company. The acquisition
was accounted for as a business combination under the provisions of ASC 805. The aggregate purchase price of CAD$5,000,000 was paid as
follows: (i) an aggregate of CAD$1,000,000 in cash to the Sellers; (ii) promissory notes in the aggregate principal amount of CAD$200,000
to the Sellers; (iii) 987,741 shares of the Company’s common stock and an aggregate of 344,957 shares of the Company’s common
stock were issued on August 3, 2021 and put in escrow until June 24, 2023. If, within 24 months of the closing, TOBC has cumulative revenue
of at least CAD$1,300,000, the Sellers will receive all of the escrowed shares. If, as of the 24-month anniversary of the closing, TOBC
has cumulative revenue of less than CAD$1,300,000, the Sellers will receive a prorated number of the escrowed shares based on the actual
cumulative revenue of TOBC as of such date.
The
transaction costs incurred in connection with the acquisition of TOBC amounted to $31,000 which were expensed as incurred.
Fair
Value of Consideration Transferred and Recording of Assets Acquired
The
following table summarizes the acquisition date fair value of the consideration paid, identifiable assets acquired, and liabilities assumed.
Schedule
of Fair Value of Assets Acquired and Liabilities Assumed
| |
| | |
Consideration Paid: | |
| | |
Cash | |
$ | 814,000 | |
Common stock, 987,741 shares of common stock of the Company | |
| 1,975,483 | |
Promissory notes to Sellers | |
| 162,400 | |
Contingent consideration - Common stock, 344,957 shares of common stock of the Company in escrow | |
| 689,914 | |
Fair value of total consideration | |
$ | 3,641,797 | |
| |
| | |
Purchase Price Allocation: | |
| | |
Tangible assets acquired | |
$ | 2,137,650 | |
Trademarks | |
| 406,150 | |
Customer relationships | |
| 592,979 | |
Non-compete agreements | |
| 121,845 | |
Goodwill | |
| 836,669 | |
Liabilities assumed | |
| (453,496 | ) |
Fair market value of net assets acquired | |
$ | 3,641,797 | |
In
determining the fair value of the common stock issued, the Company considered the value of the stock as estimated by the Company at the
time of closing which was determined to be $2.00, based on the Company’s private placement offering price.
Liabilities
assumed included three mortgage loans of approximately CAD$490,000 which were paid off by the Company on July 9, 2021. The Company has
one commercial loan outstanding for CAD$60,000 which is due on December 31, 2025.
Unaudited
Pro Forma Information
The
following unaudited pro forma information assumes the business acquisition occurred on January 1, 2021. Depreciation and amortization
have been included in the calculation of the below pro forma information based upon the actual acquisition costs.
Schedule of Proforma Information
| |
Three Months Ended September 30, 2021 | | |
Nine Months Ended September 30, 2021 | |
Revenue | |
$ | 3,774,754 | | |
$ | 8,711,550 | |
Net loss attributable to common shareholders | |
$ | (543,458 | ) | |
$ | (1,311,249 | ) |
Basic and diluted loss per share | |
$ | (0.01 | ) | |
$ | (0.05 | ) |
The
information included in the pro forma amounts is derived from historical information obtained from the Sellers of the business.
Note
9. Stockholders’ Equity
On
July 21, 2021, the Company entered into a consulting agreement as amended on November 10, 2021, with Intelligent Investments I, LLC (“Intelligent”).
In consideration for consulting services, the Company agreed to issue Intelligent a total of 52,326 shares of common stock with a fair
value of $171,106 which is amortized to expense over the term of the agreement. The Company recognized stock compensation expense of
$102,664 for the nine months ended September 30, 2022 in connection with these shares.
On
January 24, 2022, the Company issued 125,000 shares of common stock to an investor upon the exercise of warrants for total proceeds of
$250,000.
On
February 3, 2022, the Company issued 167,093 shares of common stock with a fair value of $359,250 to Gault Seafood as partial consideration
for the purchase of certain of its assets.
On
March 31, 2022, the Company issued 15,385 shares of common stock to Intelligent Investments I LLC, with a fair value of $30,000, for
legal services provided to the Company.
On
March 31, 2022, the Company issued 5,000 shares of common stock with a fair value of $9,750 to TraDigital Marketing Group for consulting
services provided to the Company.
On
April 1, 2022, the Company issued 2,871 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital LLC
(“Clear Think Capital”) for consulting services provided to the Company.
On
April 4, 2022, the Company issued 9,569 shares of common stock with a fair value of $20,000 to SRAX, Inc. for consulting services provided
to the Company which is amortized to expense over the term of the agreement. The Company recognized stock compensation expense of $10,000
for the nine months ended September 30, 2022 in connection with these shares.
On
April 5, 2022, the Company issued an aggregate of 24,816 shares of common stock with a fair value of $156,341 to Newbridge Securities
Corporation and its affiliates for consulting services provided to the Company.
On
May 1, 2022, the Company issued 3,922 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital for consulting
services provided to the Company.
On
June 1, 2022, the Company issued 4,444 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital for
consulting services provided to the Company.
On
June 3, 2022, the Company issued 10,000 shares of common stock with a fair value of $13,800 to TraDigital Marketing Group for consulting
services provided to the Company.
On
June 30, 2022, the Company issued 24,194 shares of common stock to Intelligent Investments I LLC, with a fair value of $30,000, for legal
services provided to the Company.
On
July 1, 2022, the Company issued 4,839 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital for
consulting services provided to the Company.
On
August 1, 2022, the Company issued 4,615 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital for
consulting services provided to the Company.
On
August 25, 2022, the Company issued 222,222 shares of common stock to Lind, with a fair value of $271,111, in satisfaction of the convertible
promissory note.
On
September 1, 2022, the Company issued 5,217 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital
for consulting services provided to the Company.
On
September 26, 2022, the Company issued 222,222 shares of common stock to Lind, with a fair value of $176,666, in satisfaction of the
convertible promissory note.
Note
10. Options
The
following table represents option activity for the nine months ended September 30, 2022:
Schedule
of Option Activity
| |
Number of
Options | | |
Weighted Average Exercise Price | | |
Weighted
Average
Remaining Contractual Life in Years | | |
Aggregate
Intrinsic Value | |
Outstanding – December 31, 2021 | |
| 4,429,680 | | |
$ | 2.00 | | |
| 6.23 | | |
| | |
Exercisable – December 31, 2021 | |
| 3,807,127 | | |
$ | 2.00 | | |
| 6.83 | | |
$ | - | |
Granted | |
| 202,552 | | |
$ | 1.84 | | |
| | | |
| | |
Forfeited | |
| (176,417 | ) | |
$ | 2.30 | | |
| | | |
| | |
Vested | |
| 4,075,097 | | |
| | | |
| | | |
| | |
Outstanding – September 30, 2022 | |
| 4,455,815 | | |
$ | 2.00 | | |
| 5.51 | | |
| | |
Exercisable – September 30, 2022 | |
| 4,075,097 | | |
$ | 2.00 | | |
| 5.53 | | |
$ | - | |
On
April 20, 2022, the Company’s existing directors and two newly appointed directors each entered into a one-year director service
agreement with the Company, which will automatically renew for successive one-year terms unless either party notifies the other of its
desire not to renew the agreement at least 30 days prior to the end of the then current term, or unless earlier terminated in accordance
with the terms of the agreement. As compensation for serving on the Board of Directors, each director will be entitled to a $25,000 annual
stock grant and for serving on a Committee of the Board, an additional $5,000 annual stock grant, both based upon the closing sales price
of the common stock on the last trading day of the calendar year. Each director who serves as chairman of the Audit Committee, Compensation
Committee and Nominating and Governance Committee will be entitled to an additional $15,000, $10,000 and $7,500 annual stock grant, respectively.
As additional consideration for such Board service, on April 20, 2022, each director was granted a five-year option to purchase 25,000
shares of the Company’s common stock at an exercise price of $2.00 per share, which shares will vest in equal quarterly installments
of 1,250 shares during the term of the option. The agreement also includes customary confidentiality provisions and one-year non-competition
and non-solicitation provisions.
On
September 16, 2022, the Company granted an employee a three-year option to purchase 27,552 shares of common stock at an exercise price
of $0.86 which vests in equal monthly installments during the term of the option.
Under
the Black-Scholes option pricing model, the fair value of the 175,000
and 27,552
options granted during the nine months ended September 30, 2022 is estimated at $84,334
and $8,409,
respectively, on the date of grant using the following assumptions: stock price of $1.57
and $0.86
at the grant date, exercise price of the option, option term, volatility rate of 39.23%
and 46.72%
and risk-free interest rate of 2.87%
and 3.81%,
respectively. The unrecognized portion of the expense remaining at September 30, 2022 is $76,837
and $8,300, respectively, which is expected to be recognized to expense over a period of five
years.
For
the nine months ended September 30, 2022, the Company recognized $299,173 of compensation expense for vested stock options issued to
directors, contractors and employees during 2019 to 2021 and accrued a portion of the 2022 stock grants to directors and officers. The
non-vested options outstanding are 380,718 as of September 30, 2022.
For
the nine months ended September 30, 2022, the Company determined that the five-year
option to purchase 176,417
shares of common stock at an exercise price of $2.30
granted to an employee of TOBC in 2021 will not meet the vesting requirements pursuant to the agreement and accordingly, reversed
the expense recorded of approximately $76,400
as of September 30, 2022 and $79,023 as of December 31, 2021.
Note
11. Warrants
The
following table represents warrant activity for the nine months ended September 30, 2022:
Schedule
of Warrant Activity
| |
Number of
Warrants | | |
Weighted Average Exercise Price | | |
Weighted
Average
Remaining Contractual Life in Years | | |
Aggregate
Intrinsic Value | |
Outstanding – December 31, 2021 | |
| 1,538,500 | | |
$ | 2.11 | | |
| 2.50 | | |
| | |
Exercisable – December 31, 2021 | |
| 1,538,500 | | |
$ | 2.11 | | |
| 2.50 | | |
$ | - | |
Granted | |
| 1,000,000 | | |
$ | - | | |
| | | |
| | |
Exercised | |
| (125,000 | ) | |
$ | 2.00 | | |
| | | |
| | |
Forfeited or Expired | |
| - | | |
$ | - | | |
| | | |
| | |
Outstanding – September 30, 2022 | |
| 2,413,500 | | |
$ | 3.11 | | |
| 1.58 | | |
| | |
Exercisable – September 30, 2022 | |
| 2,413,500 | | |
$ | 3.11 | | |
| 1.58 | | |
$ | - | |
On
January 24, 2022, in connection with the issuance of the $5,750,000 promissory note to Lind pursuant to a securities purchase agreement,
the Company issued Lind a five-year warrant to purchase 1,000,000 shares of common stock at an exercise price of $4.50 per share. The
warrant provides for cashless exercise and full ratchet anti-dilution if the Company issues securities at less than $4.50 per share.
Under the Black-Scholes pricing model, the fair value of the warrants issued to purchase 1,000,000 shares of common stock was estimated
at $1,412,213 on the date of issuance of the warrant using the following assumptions: stock price of $3.97 at the date of the agreement,
exercise price of the warrant, warrant term, volatility rate of 43.21% and risk-free interest rate of 1.53% from the Department of Treasury.
The relative fair value of $956,031 was calculated using the net proceeds of the convertible note and accounted for as paid in capital.
During
the nine months ended September 30, 2022, the Company issued 125,000 shares of common stock at an exercise price of $2.00 to an investor
upon exercise of warrants.
Note
12. Commitment and Contingencies
Office
lease
The
Company leased its Miami office and warehouse facility from JK Real Estate, a related party through common family beneficial ownership.
The lease which had a 20-year term, expiring in July 2021, was terminated on December 31, 2020, upon the sale of the facility to an unrelated
third-party. In connection with the sale, the Company retained approximately 4,756 square feet of such space, rent-free for 12 months.
On January 1, 2022, the Company entered into a verbal month-to-month lease agreement for its executive offices with an unrelated third
party. The Company has paid $46,400 to date under this lease.
Coastal
Pride leases approximately 1,100 square feet of office space in Beaufort, South Carolina. This office space consists of two leases with
related parties that expire in 2024.
On
February 3, 2022, in connection with the acquisition of certain assets of Gault, the Company entered into a one-year lease agreement
for 9,050 square feet from Gault in Beaufort, South Carolina for $1,000 per month until a new facility is completed.
TOBC’s
facilities are on land leased to TOBC for approximately $2,500 per month plus taxes from Steve and Janet Atkinson, the former TOBC owners,
under a lease agreement that expired December 2021. On April 1, 2022, the lease was renewed with Steve and Janet Atkinson for approximately
$2,000 per month plus taxes and an additional new lease was entered into with Kathryn Atkinson for approximately $1,800 per month plus
taxes. Both leases expire in 2027.
Rental
and equipment lease expenses amounted to approximately $122,100 and $45,700 for the nine months ended September 30, 2022 and 2021, respectively.
Legal
The
Company has reached a settlement agreement with a former employee. Although the agreement is not finalized, the Company has reserved
$70,000, representing the entire amount of the settlement.
Note
13. COVID-19 Pandemic
On
March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13,
2020, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the
Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus
pandemic. The coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact
on the economies and financial markets of the geographical areas in which the Company operates. On March 27, 2020, the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act) was enacted to amongst other provisions, provide emergency assistance for individuals,
families and businesses affected by the novel coronavirus pandemic for 2020 and into 2021. The Company’s business not being deemed
essential resulted in decreased financial performance that may not be indicative of future financial results. Government-mandated closures
of businesses and shipping delays have affected our sales and inventory purchases. The Company continues to face uncertainty and increased
risks concerning its employees, customers, supply chain and government regulation. In 2022, the Company’s sales and supply continue
to be adversely affected due to COVID-19 and plans continue to be developed to ensure a prompt response is given to address the effects
of the pandemic.
Note
14. Subsequent Events
On
October 1, 2022, the Company issued 9,524 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital for
consulting services provided to the Company.
On
October 24, 2022, the Company paid Lind $333,333 of principal under the outstanding $4,570,001 convertible promissory note.
On
November 1, 2022, the Company issued 6,593 shares of common stock with a fair value of $6,000 to the designee of Clear Think Capital
for consulting services provided to the Company.