The following management's discussion and analysis should be read in conjunction with the 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 on Form 10-K filed with the SEC on March 31, 2022, 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.
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.
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, and steelhead salmon produced under the brand name Little Cedar Farms for distribution in Canada. 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.
On February 3, 2022, Coastal Pride entered into an asset purchase agreement with Gault Seafood, LLC, a South Carolina limited liability company (the "Gault Seafood"), and Robert J. Gault II, President of the Seller ("Gault") pursuant to which Coastal Pride acquired certain assets relating to Gault Seafood's soft-shell crab operations, including intellectual property, equipment and vehicles used in connection with its soft-shell crab operations. Coastal Pride did not assume any liabilities in connection with the acquisition. The purchase price for the assets consisted of $359,250 in cash 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.
Coastal Pride also entered into a consulting agreement with Gault under the terms of which Gault will provide consulting services to Coastal Pride at the rate of $100 per hour, however, the first 45 days of services will be provided at no cost. Gault also agreed not to compete with Coastal Pride and its affiliates for a period of five years in any market in which Coastal Pride is operating or is considering operating or solicit employees, consultants, customers or suppliers or in any way interfere with Coastal Pride's business relationships for a five-year period, Gault is also bound by customary confidentiality provisions. The consulting agreement may be terminated by either party upon five days written notice and by Costal Pride immediately for cause.
In connection with the asset acquisition, Coastal Pride will lease 9,050 square feet for $1,000 per month under a one-year lease agreement and will continue to operate the acquired soft-shell crab operations at such location in Beaufort, South Carolina unless a new facility is earlier completed.
Appointment of Chief Operating Officer
On April 19, 2022, Miozotis Ponce was appointed Chief Operating Officer of the Company.
Increase in Size of Board of Directors
On April 20, 2022, in accordance with the Company's bylaws, the number of directors constituting the Board of Directors was increased from five to seven directors and, effective as of April 20, 2022, Silva Alana and Juan Carlos Dalto were appointed directors.
On April 20, 2022, the existing directors and the two new 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.
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 decrease in revenue for the three months ended March 31, 2022.
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.
The information set forth below should be read in conjunction with the financial statements and accompanying notes elsewhere in this Report.
Three months ended March 31, 2022 and 2021
Net Revenue. Revenue for the three months ended March 31, 2022 increased 114.2% to $5,324,302 as compared to $2,485,891 for the three months ended March 31, 2021 as a result of higher market prices of our product together with sales of our new TOBC and soft-shell crab operations.
Cost of Goods Sold. Cost of goods sold for the three months ended March 31, 2022 increased to $4,836,563 as compared to $2,183,112 for the three months ended March 31, 2021. The increase is attributable to price increases.
Gross Profit. Gross profit for the three months ended March 31, 2022 increased to $487,739 as compared to $302,779 in the three months ended March 31, 2021. This increase is attributable to higher market prices of our product together with sales of our new TOBC and soft-shell crab operations.
Commissions Expense. Commissions expense decreased to $0 for the three months ended March 31, 2022 from $4,794 for the three months ended March 31, 2021. This decrease was due to no commissionable revenues for the three months ended March 31, 2022.
Salaries and Wages Expense. Salaries and wages expense increased to $575,449 for the three months ended March 31, 2022 as compared to $380,596 for the three months ended March 31, 2021. This increase is mainly attributable to the acquisition of TOBC and soft-shell crab operations.
Depreciation and Amortization. Depreciation and amortization expense increased to $164,595 for the three months ended March 31, 2022 as compared to $44,079 the three months ended March 31, 2021. The increase is attributable to higher depreciation due to the acquisition of TOBC and soft-shell crab operations.
Other Operating Expense. Other operating expense increased to $596,474 for the three months ended March 31, 2022 from $317,398 for the three months ended March 31, 2021. This increase is mainly attributable to legal and professional fees and stock compensation expense associated with the acquisition of the soft-shell crab operations.
Other Income. Other income decreased for the three months ended March 31, 2022 to $29,629 from $76,518 for the three months ended March 31, 2021. This decrease is mainly attributable to the ACF Finco I, LP loan paid off in 2021 and eliminating the loan commitment settlement.
Interest Expense. Interest expense increased to $234,716 for the three months ended March 31, 2022 from $110,534 for the three months ended March 31, 2021. The increase is attributable to the amortization of Lind convertible debt discount.
Net Loss. Net loss was $1,053,866 for the three months ended March 31, 2022 as compared to $478,104 for the three months ended March 31, 2021. The increase in net loss is primarily attributable to increases in salaries and wages and other expenses in connection with the acquisition of the soft-shell crab operations.
The Company had cash of $2,980,672 as of March 31, 2022. At March 31, 2022, the Company had a working capital surplus of $5,561,782, including $910,000 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 $3,041,184 and accounts receivable of $3,854,439.
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 continues to estimate the effects of the COVID-19 outbreak on its operations and financial. While significant uncertainty remains, the Company believes that the COVID-19 outbreak will continue to have a negative impact on the ability to raise financing and access capital.
Cash (Used in) Provided by Operating Activities. Cash used in operating activities during the three months ended March 31, 2022 was $3,013,910 as compared to cash provided by operating activities of $462,624 for the three months ended March 31, 2021. The decrease is attributable to the decrease in the changes in inventory of $2,105,665 and receivables of $2,987,795 netted against the increase in changes in other current assets of $1,616,146 and payables of $298,528 for the three months ended March 31, 2022 compared with the three months ended March 31, 2021.
Cash (Used in) Investing Activities. Cash used in investing activities for the three months ended March 31, 2022 was $472,352 as compared to cash used in investing activities of $0 for the three months ended March 31, 2021. The increase was mainly attributable to the acquisition of the soft-shell crab operation for the three months ended March 31, 2022.
Cash Provided by (Used in) Financing Activities. Cash provided by financing activities for the three months ended March 31, 2022 was $5,256,418 as compared to cash used in financing activities of $653,675 for the three months ended March 31, 2021. The increase is mainly attributable to the convertible debt net proceeds of $4,762,855 and proceeds from common stock warrants exercised of $250,000.
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. As of March 31, 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. 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 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 on March, April and May 2021 and paid an additional facility fee of $25,000 on March 31, 2022, which will continue to be required on each anniversary of March 31, 2021. In order to increase imports to meet customer demand, 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. As of March 31, 2022, the interest rate was 7.25%.
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.
John Keeler Promissory Notes - Subordinated
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 March 31, 2022, approximately $910,000 of principal remains outstanding and approximately $14,400 of interest was paid under the notes during the three months ended March 31, 2022. 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. The Company made principal payments of $50,000 during the three months ended March 31, 2022.
On November 2, 2021, the Company entered into an underwriting agreement (the "Underwriting Agreement") with Newbridge Securities Corporation ("Newbridge"), as representative of the underwriters listed therein (the "Underwriters"), pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public offering (the "Offering") an aggregate of 800,000 shares of the Company's common stock, at a public offering price of $5.00 per share. In addition, the Underwriters were granted an over-allotment option (the "Over-allotment Option") for a period of 45 days to purchase up to an additional 120,000 shares of common stock. The Offering closed on November 5, 2021 and the common stock began trading on the NASDAQ Capital Market under the symbol "BSFC" on November 3, 2021. The Over-allotment Option was not exercised by the Underwriters.
The net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters' fees and expenses and the Company's estimated Offering expenses, were approximately $3,600,000. The Company is using the net proceeds from the Offering for general corporate purposes, including working capital, operating expenses, and capital expenditures. The Company may also use a portion of the net proceeds to acquire or make investments in businesses, products, and offerings, although the Company does not have agreements or commitments for any material acquisitions or investments at this time.
In addition, pursuant to the terms of the Underwriting Agreement and related "lock-up" agreements, each director, executive officer, and beneficial owners of over 10% of the Company's common stock (for a period of 180 days after the date of the final prospectus relating to the Offering), have agreed, subject to customary exceptions, not to sell, transfer or otherwise dispose of securities of the Company, without the prior written consent of Newbridge.
On November 5, 2021, in connection with the Offering, the Company issued a warrant to purchase an aggregate of 56,000 shares of common stock at an exercise price of $5.00 per share to Newbridge. Such warrant is exercisable on a date which is 180 days from the closing of the Offering and expires on November 11, 2024.
Lind Global Fund II LP investment
On January 24, 2022, we 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 approximately $87,000 of debt issuance costs.
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.
Commencing on the earlier of July 24, 2022 or the effectiveness of the registration statement covering Lind's shares, 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 a resale registration statement is not effective covering the shares of common stock issuable to Lind in 180 days following January 24, 2022, the note will be in default. Lind was also granted piggyback registration rights.
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.
We currently have no off-balance sheet arrangements.
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