Blue Star Foods Corp. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our Common Stock has been quoted on the OTC pink sheets under the symbol “BSFC” since February 18, 2020. There has been limited trading in our Common Stock and there can be no assurances that an active trading market will ever develop. 30 On December 26, 2019, the Company entered into lock-up and resale restriction agreements with fifteen shareholders with respect to an aggregate of 16,074,939 shares of Common Stock, which provide, among other things, that the shareholder may not until June 26, 2020 (the “Lock-Up Period”), sell or transfer in any way, the shares of Common Stock held by such shareholder, except that each shareholder may sell 1,000 shares of Common Stock per month during the Lock-Up Period. Holders As of April 15, 2021, there were 19,633,161 shares of Common Stock outstanding held by 51 stockholders of record. Dividends We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements. Our Loan and Security Agreement with Lighthouse contains terms prohibiting or limiting the amount of dividends that may be declared or paid on our Common Stock. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. Securities Authorized for Issuance under Equity Compensation Plans The following table provides information regarding our equity compensation plans as of December 31, 2020: Equity Compensation Plan Information Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans Equity compensation plans approved by security holders 3,810,000 (1) 2.00 3,660,000 Equity compensation plans not approved by security holders 0 0 0 (1) Represents (i) a 10-year option to purchase 3,120,000 shares of common stock at an exercise price of $2.00 per share granted to Christopher Constable, our former chief financial officer and director (ii) 10-year options to purchase an aggregate of 665,000 shares of common stock at an exercise price of $2.00 per share to certain employees, and (iii) 10-year options to purchase an aggregate of 25,000 shares of common stock at an exercise price of $2.00 per share to certain contractors under the 2018 Plan. Recent Sales of Unregistered Securities Except as set forth below, there were no sales of equity securities during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K filed by the Company. On December 24, 2020, the Company issued 55,814 shares of common stock to the designee of a law firm in lieu of legal fees owed to such firm for services provided to the Company. On December 24, 2020, the Company issued an aggregate of 60,000 shares of common stock to Newbridge Securities Corporation and its affiliates as compensation under an investment banking and corporate advisory agreement. 31 On December 30, 2020, the Company issued 796,650 shares of common stock to a third party designated by John Keeler pursuant to a debt repayment agreement with Mr. Keeler as repayment for an aggregate principal amount of $1,593,300 due under four demand promissory notes. On December 31, 2020, the Company issued an aggregate of 52,286 shares of common stock to Series A preferred stockholders as a common stock dividend for the quarters ended March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. On February 8, 2021, the Company issued 25,000 shares to an investor relations firm for services provided to the Company under an investor relations consulting agreement. On March 30, 2021, the Company issued 10,465 shares of common stock to the designee of a law firm for services provided to the Company. On March 31, 2021, the Company issued 11,975 shares of common stock to Series A preferred stockholders as a common stock dividend for the quarter ended March 31, 2021. On March 31, 2021, the Company issued 5,000 shares to an investor relations firm for services provided to the Company under an investor relations consulting agreement. The above issuances did not involve any underwriters, underwriting discounts or commissions, or any public offering and we believe is exempt from the registration requirements of the Securities Act of 1933 by virtue of Section 4(2) thereof. Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ITEM 6. SELECTED FINANCIAL DATA We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this Item. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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,” above, 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 Annual Report. Recent Developments On March 29, 2021, the board of directors increased the size of the Company’s Board from two to five members and appointed Jeffrey J. Guzy, Timothy McLellan and Trond Ringstad as directors, effective April 12, 2021, to fill the vacancies created by such increase. 32 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 in the year ended December 31, 2020 as compared to the year ended December 31, 2019. 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 audited financial statements for our fiscal year ended December 31, 2020 include a summary of our significant accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in these audited financial statements. All such adjustments are of a normal recurring nature. Results of Operations The following discussion and analysis of financial condition and results of operations of the Company is based upon, and should be read in conjunction with, the audited financial statements and related notes elsewhere in this Annual Report. Year Ended December 31, 2020 compared to the Year Ended December 31, 2019 Net Sales. Revenue for the twelve months ended December 31, 2020 decreased 40.8% to $14,111,368 as compared to $23,829,463 for the twelve months ended December 31, 2019 as a result of a decrease in poundage sold due to the impact of the COVID-19 pandemic during the twelve months ended December 31, 2020, primarily affecting the first half of 2020. Cost of Goods Sold. Cost of goods sold for the twelve months ended December 31, 2020 decreased to $12,623,576 as compared to $20,610,000 for the twelve months ended December 31, 2019. The decrease is primarily attributable to the revenue decline. Gross Profit . Gross profit for the twelve months ended December 31, 2020 decreased to $1,487,792 as compared to gross profit of $3,219,463 for the twelve months ended December 31, 2019. This decrease is attributable to a reduction in poundage sold due to the COVID-19 pandemic, the reduction in the average selling price of the Company’s product, while the Company’s inventory cost of product sold during the period did not fully reflect the drop in value of the commodity. Gross Profit Margin. Gross profit margin for the twelve months ended December 31, 2020 decreased to 10.5% as compared to 13.5% for the twelve months ended December 31, 2019. This reduction is attributable to revenue and the gross profit decline. Commissions Expenses. Commissions expenses decreased from $106,671 for the twelve months ended December 31, 2019 to $96,594 for the twelve months ended December 31, 2020. The decrease is attributable to lower commissionable revenues. Salaries and Wages Expense . Salaries and wages decreased to $1,286,879 for the twelve months ended December 31, 2020 as compared to $3,897,541 for the twelve months ended December 31, 2019. This decrease is primarily attributable to the strategic reduction in salaries and stock-based compensation for the twelve months ended December 31, 2020. 33 Depreciation and Amortization . Depreciation and amortization expense increased to $268,341 for the twelve months ended December 31, 2020 as compared to $215,089 for the twelve months ended December 31, 2019. The increase is attributable to purchases of fixed assets and corresponding depreciation recognized during the twelve months ended December 31, 2020. Other Operating Expense. Other operating expenses decreased 44.5% to $1,639,484 for the twelve months ended December 31, 2020 as compared to $2,953,069 for the twelve months ended December 31, 2019. The decrease is attributable the Company’s overhead reduction efforts in all fixed expenses related to its operations. Other Income . Other income increased to $891,667 for the twelve months ended December 31, 2020 from $0 for the twelve months ended December 31, 2019. This increase is primarily attributable to the payroll protection program loan forgiveness obtained from US Century Bank, sale of equipment and tariff and prepaid tax reimbursements. Forbearance Fee Expense (Non-Cash) . Forbearance fee expense increased to $2,655,292 for the twelve months ended December 31, 2020 from $0 for the twelve months ended December 31, 2019, which represents a one-time, non-cash expense related to the issuance of common stock as a forbearance fee. Interest Expense. Interest expense decreased to $870,303 for the twelve months ended December 31, 2020 as compared to $1,068,796 for the twelve months ended December 31, 2019. This decrease is attributable to a decrease in the aggregate principal amount of loans outstanding to $8,158,106 as of December 31, 2020 from $11,510,968 as of December 31, 2019. Net Loss. The Company had a net loss of $4,437,434 for the twelve months ended December 31, 2020 as compared to the net loss of $5,021,703 for the twelve months ended December 31, 2019. The decrease in net loss is primarily attributable to reduction in salaries and wages, interest and other operating expenses. Net loss as of December 31, 2020 includes a non-cash expense related to a forbearance fee of $2,655,292 and not considering this expense, net loss would have decreased to $1,782,142 for the twelve months ended December 31, 2020. Cash Provided by Operating Activities. Cash provided by operating activities during the twelve months ended December 31, 2020 was $4,575,575 as compared to cash provided of $1,577,164 for the twelve months ended December 31, 2019, representing an increase of $2,998,411. The increase is primarily attributable to a decrease in the net loss of $584,269 for the twelve months ended December 31, 2020. Cash generated from Accounts Receivable for the twelve months ended December 31, 2020 decreased $1,574,929 as compared to the twelve months ended December 31, 2019, while cash generated from Inventory increased $4,219,232 for the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019. Cash used in Accounts Payable activities increased $1,415,648 for the twelve months ended December 31, 2020 as compared to the twelve months ended December 31, 2019. The Company used $14,049 for the twelve months ended December 31, 2020 in advances from Bacolod as compared to usage of $146,316 for the twelve months ended December 31, 2019. Cash Provided by (Used in) Investing Activities. Cash provided by investing activities for the twelve months ended December 31, 2020 was $343,237 as compared to $269,705 cash used in investing activities for the twelve months ended December 31, 2019. The Company received $407,198 in cash proceeds from the sale of equipment for the twelve months ended December 31, 2020. Cash Used in Financing Activities. Cash used in financing activities for the twelve months ended December 31, 2020 was $4,800,635 as compared to cash used in financing activities of $1,509,014 for the twelve months ended December 31, 2019. The primary use of cash was a reduction in the outstanding line of credit with ACF of $5,112,061 for the twelve months ended December 31, 2020, as compared to a decrease of $1,347,648 for the twelve months ended December 31, 2019. 34 Liquidity and Capital Resources The Company had cash of $337,687 as of December 31, 2020, of which $282,043 was restricted cash. At December 31, 2020, the Company had a working capital deficit of $2,527,059 including $1,299,712 in stockholder loans that were subordinated to ACF as compared to a working capital deficit of $2,786,086 at December 31, 2019, including $2,910,136 in stockholder loans. The Company’s primary sources of liquidity consisted of inventory of $1,832,661 and accounts receivable of $1,082,468 at December 31, 2020. The decrease in working capital was due primarily to a decrease of inventory of $6,151,831 and accounts receivable of $988,895, and the decrease of accounts payable of $1,920,976 and related party notes payable of $1,610,424 as compared to a decrease in the working capital line of credit of $5,112,061. The Company has historically financed its operations through the cash flow generated from operations, loans from stockholders and other related parties as well as a working capital line of credit and the sale of equity in private offerings. 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 effects of the COVID-19 outbreak on its operations or financial condition in the next 12 months. However, while significant uncertainty remains, the Company believes that the COVID-19 outbreak will have a negative impact the ability to raise financing and access capital. Working Capital Line of Credit The Company 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 the Company. 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. 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. 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 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 borrowed from Lighthouse 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. 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 December 31, 2020, approximately $1,299,000 of principal remains outstanding and approximately $174,000 of interest was paid under the notes. 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. 35 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 December 31, 2020 was $872,500. 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. Paycheck Protection Program Loan On April 17, 2020, the Company received proceeds of $344,762 and issued an unsecured promissory note to US Century Bank in the principal amount of $344,762 in connection with the Payroll Protection Program of the CARES Act (“PPP Loan”). The note accrues interest at 1% per annum, matures two years from the date of issuance and is fully guaranteed by the Small Business Administration (“SBA”) and may be forgiven provided certain criteria are met. The Company is required to make monthly payments of approximately $19,401 beginning November 17, 2020. In September 2020, the Company applied for the loan forgiveness by SBA through US Century Bank for the full amount which was granted on November 16, 2020. 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. 36 Critical Accounting Policies and Estimates Valuation of Goodwill and Other Intangible Assets Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the tangible net assets recorded in connection with an acquisition. Other intangible assets include customer relationships, non-compete agreements, and trademarks. For goodwill, our policy is to assess for impairment at year-end. For other intangible assets with definite lives, we assess for impairment only if events occur that indicate that the carrying amount of an asset may not be recoverable. Annually, we assess the recoverability of goodwill and indefinite-lived intangibles by determining whether the fair values exceed the carrying values of these assets. Our testing may be performed utilizing either a qualitative or quantitative assessment; however, if a qualitative assessment is performed and we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, a quantitative test is performed. When using a quantitative test, we arrive at our estimates of fair value using a discounted cash flow analysis. Our assessment for impairment of goodwill and definitive-lived intangible assets compared the fair value of the reporting unit to the corresponding carrying value. If the carrying value of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. Based on our year-end 2020 annual impairment analysis for goodwill and intangibles assets, we concluded that it is more likely than not that the fair value of goodwill and intangible assets exceeded its carrying value. No impairment was recorded for goodwill and intangible assets. The fair value conclusions as of December 31, 2020 are highly sensitive to changes in the assumptions used in the income approach, which include forecasted revenues, perpetual growth rates, among others, all of which require significant judgments by management. Fair value of the reporting unit is therefore determined using significant unobservable inputs, or level 3 in the fair value hierarchy. The Company has used recent historical performance, current forecasted financial information, and broad-based industry and economic statistics as a basis to estimate the key assumptions utilized in the forecasted cash flow model. These key assumptions are inherently uncertain and require a high degree of estimation and judgment and are subject to change based on future changes, industry and global economic and geo-political conditions, and the timing and success of the implementation of current strategic initiatives. The impact of the COVID-19 pandemic on estimated future cash flows is uncertain and will largely depend on the outcome of future events, which could result in goodwill impairments going forward. Variable Interest Entity Under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 810, Consolidation , when a reporting entity is the primary beneficiary of an entity that is a variable interest entity (“VIE”), as defined in ASC 810, the VIE must be consolidated into the financial statements of the reporting entity. The determination of which owner is the primary beneficiary of a VIE requires management to make significant estimates and judgments about the rights, obligations, and economic interests of each interest holder in the VIE. The Company evaluates its interests in VIE’s on an ongoing basis and consolidates any VIE in which it has a controlling financial interest and is deemed to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact its economic performance; and (ii) the obligation to absorb losses of the VIE that could potentially be significant to it or the right to receive benefits from the VIE that could be significant to the VIE. Effective April 1, 2014, the Company’s stockholder was transferred the controlling interest of Strike the Gold Foods, Ltd. (“Strike”), a related party entity which holds the Company’s inventory on consignment in United Kingdom (see Note 3). The Company evaluated its interest in Strike and determined that Strike is a VIE due to the Company’s implicit interest in Strike and the fact that Strike and the Company were under common control after the transfer of the controlling interest. Moreover, the Company determined that it is the primary beneficiary of Strike due to the fact that the Company had both the power to direct the activities that most significantly impact Strike and the obligation to absorb losses or the right to receive benefits from Strike. Therefore, the Company consolidated Strike in its financial statements as of April 1, 2014, the effective date of the controlling interest transfer. 37 During the third quarter of 2020, the Company determined that Strike was no longer a VIE because there was a verbal agreement with Strike that terminated the original agreement to hold the inventory on consignment and Strike has not engaged in transactions with the Company or its subsidiaries in 2020. The Company also evaluated its interest in three related party entities that are under common control with the Company, Bacolod, Bicol Blue Star Export Co. (“Bicol”) and John Keeler Real Estate Holding (“JK Real Estate”), in light of ASC 810. The Company purchased inventory from Bacolod, an exporter of pasteurized crab meat out of the Philippines. The Company purchased inventory, via Bacolod, from Bicol. The Company leased its office and warehouse facility from JK Real Estate, a landlord that is a related party through common family beneficial ownership until December 31, 2020. The Company determined that Bacolod and Bicol are not VIE’s as they do not meet the criteria to be considered a VIE per ASC 810. The Company does not directly or indirectly absorb any variability of Bacolod or Bicol. The relationship between the Company and Bacolod and Bicol is strictly a supplier/customer relationship. Moreover, Bacolod and Bicol have other customers besides the Company which will allow them to sustain their operations from selling their inventory to their other customers. As the Company concluded that Bacolod and Bicol are not VIE’s and the Company is not deemed their primary beneficiary, Bacolod or Bicol is not consolidated with the Company’s financial statements. The Company no longer leases its office and warehouse facility from JK Real Estate and no longer guarantees the mortgage on the facility. On December 31, 2020, this facility was sold to an unrelated third-party purchaser and the lease was terminated. Inventories Substantially all of the Company’s inventory consists of packaged crab meat located at the Company’s warehouse facility as well as public cold storage facilities and merchandise in transit from suppliers. The cost of inventory is primarily determined using the specific identification method. Inventory is valued at the lower of cost or net realizable value, cost being determined using the first-in, first-out method. Merchandise is purchased cost and freight shipping point and becomes the Company’s asset and liability upon leaving the suppliers’ warehouse. The Company had in-transit inventory of approximately $522,000 and $1,958,000 as of December 31, 2020 and December 31, 2019, respectively. 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 market based on its assessment of market conditions, inventory turnover and current stock levels. Inventory write-downs are charged to cost of goods sold. The Company recorded an inventory allowance of approximately $71,400 for the year ended December 31, 2020 as compared to $40,784 for the year ended December 31, 2019. Advances to Suppliers and Related Party In the normal course of business, the Company may advance payments to its suppliers, including Bacolod, a related party. 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 December 31, 2020, and December 31, 2019, the balance due from Bacolod for future shipments was approximately $1,300,000 and $1,286,000, respectively. No new purchases have been made from Bacolod since November 2020. Cost of revenue related to inventories purchased from Bacolod represented approximately $1,280,000 and $9,531,000 of total cost of revenue for the twelve months ended December 31, 2020 and 2019, respectively. 38 Revenue Recognition Effective with the January 1, 2018 adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and the associated ASUs (collectively, “Topic 606”), the Company recognizes revenue when its customer obtains control of 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. We sell primarily to food service distributors. We also sell our 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. Leases On January 1, 2019, we adopted Accounting Standards Codification 842 and all the related amendments using the modified retrospective method. We recognized the cumulative effect of initially applying the new lease standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods. The new lease standard 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 of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts entered into prior to adoption are leases or contain leases. 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 December 31, 2020. Our leases generally have terms that range from three years for equipment and six to seven 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 leases. 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. 39 The table below presents the lease-related assets and liabilities recorded on the balance sheets. December 31, 2020 Assets Operating lease assets $ 99,472 Liabilities Current $ 29,337 Operating lease liabilities Noncurrent Operating lease liabilities $ 69,844 Supplemental cash flow information related to leases were as follows: Twelve Months Ended December 31, 2020 Cash used in operating activities: Operating leases $ 156,582 ROU assets recognized in exchange for lease obligations: Operating leases $ 28,137 The table below presents the remaining lease term and discount rates for operating leases. December 31, 2020 Weighted-average remaining lease term Operating leases 3.39 years Weighted-average discount rate Operating leases 4.3 % Maturities of lease liabilities as of December 31, 2020, were as follows: Operating Leases 2021 33,552 2022 33,552 2023 26,474 2024 15,060 2025 - Thereafter - Total lease payments 108,638 Less: amount of lease payments representing interest (9,457 ) Present value of future minimum lease payments $ 99,181 Less: current obligations under leases $ (29,337 ) Non-current obligations $ 69,844 40 Recently Adopted Accounting Pronouncements ASU 2019-12 Income Taxes (Topic 740) In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosure. ASU 2016-13 Financial Instruments – Credit Losses (Topic 326) In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a forward-looking, expected loss model to estimate credit losses. It also requires entities to consider additional disclosures related to credit quality of trade and other receivables, including information related to management’s estimate of credit allowances. ASU 2016-13 was further amended in November 2018 by ASU 2018-19, Codification Improvements to Topic 236, Financial Instrument-Credit Losses. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers excluding smaller reporting companies, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. On October 16, 2019, FASB voted to delay implementation of ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” For all other entities, the amendments are now effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company continues to evaluate the impact of these amendments to the Company’s financial position and results of operations and currently expect no material impact of the adoption of the amendments on the Company’s consolidated financial statements. Off Balance Sheet Arrangements We currently have no off-balance sheet arrangements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item. 41