Blue Star Foods Corp. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements appearing in this Annual Report Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . The various sections of this discussion contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this prospectus as well as other matters over which we have no control. See “Forward-Looking Statements.” Our actual results may differ materially. The Company does not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this prospectus. 33 Overview We are an international seafood company that imports, packages and sells refrigerated pasteurized crab meat, and other premium seafood products. Our current source of revenue is from importing blue and red swimming crab meat primarily from Indonesia, the Philippines and China and distributing it in the United States and Canada under several brand names such as Blue Star, Oceanica, Pacifika, Crab & Go, First Choice, Good Stuff and Coastal Pride Fresh, 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. 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 decreases in revenue for the year ended December 31, 2021. 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. Recent Developments NASDAQ Listing The Company’s common stock was approved to list on the NASDAQ Capital Market under the symbol “BSFC” and began trading on November 3, 2021. Public Offering In connection with the NASDAQ uplisting, on November 2, 2021, the Company consummated an underwritten public offering of 800,000 shares of common stock at a public offering price of $5.00 per share for total gross proceeds of $4 million, before deducting underwriting discounts, commissions and other expenses. The over-allotment option to purchase up to an additional 120,000 shares of common stock at the public offering price was not exercised by the underwriters. Fingerlings Supply Agreement On December 3, 2021, TOBC enter into a 30-month agreement supply agreement with West Coast Fishculture (Lois Lake) Ltd. (“West Coast”) pursuant to which TOBC will supply rainbow trout fingerlings to West Coast on an exclusive basis to meet all of West Coast’s stocking requirements with the initial shipments currently scheduled to begin in June 2022. West Coast paid $140,000 upon execution of the agreement and TOBC currently estimates supplying a total $1 million of fingerlings under the agreement. 34 Gault Asset Acquisition On February 3, 2022, Coastal Pride acquired certain assets relating to Gault’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 the Seller may not sell or otherwise transfer the shares until February 3, 2023. The audited financial statements included in this annual report for our fiscal year ended December 31, 2021 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, 2021 compared to the Year Ended December 31, 2020 Net Sales. Revenue for the year ended December 31, 2021 decreased 29.3% to $9,973,264 as compared to $14,111,368 for the year ended December 31, 2020 as a result of a decrease in poundage sold due to the impact of the COVID-19 pandemic during the year ended December 31, 2021. Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2021 decreased to $7,979,830 as compared to $12,623,576 for the year ended December 31, 2020. The decrease is primarily attributable to the revenue decline. Gross Profit . Gross profit for the year ended December 31, 2021 increased to $1,993,434 as compared to gross profit of $1,487,792 for the year ended December 31, 2020. This increase is attributable to higher market prices and lower cost of goods sold in comparison to the year ended December 31, 2020. Gross Profit Margin. Gross profit margin for the year ended December 31, 2021 increased to 20.0% as compared to 10.5% for the year ended December 31, 2020. This increase is attributable to the price increases of our products. Commissions Expenses. Commissions expenses decreased to $42,332 for the year ended December 31, 2021 from $96,594 for the year ended December 31, 2020. The decrease is attributable to lower commissionable revenues. Salaries and Wages Expense . Salaries and wages increased to $1,827,607 for the year ended December 31, 2021 as compared to $1,286,879 for the year ended December 31, 2020. This increase is primarily attributable to the acquisition of TOBC. Depreciation and Amortization . Depreciation and amortization expense increased to $384,963 for the year ended December 31, 2021 as compared to $268,341 for the year ended December 31, 2020. The increase is attributable to an increase in depreciation and amortization as a result of the TOBC acquisition. Impairment Loss. Impairment loss increased to $374,300 for the year ended December 31, 2021 as compared to $0 for the year ended December 31, 2020. This increase is attributable to the effects of the COVID-19 pandemic on our business. Other Operating Expense. Other operating expenses increased 31.0% to $2,147,873 for the year ended December 31, 2021 as compared to $1,639,484 for the year ended December 31, 2020. This increase is primarily attributable to legal and professional fees and stock compensation expense associated with the TOBC acquisition and NASDAQ uplisting application. Other Income . Other income decreased to $498,791 for the year ended December 31, 2021 from $891,667 for the year ended December 31, 2020. This decrease is primarily attributable to fixed assets sold in 2020 and lower collections received by Coastal Pride from previously written off receivables. 35 Forbearance Fee Expense (Non-Cash) . Forbearance fee expense decreased to $0 for the year ended December 31, 2021 from $2,655,292 for the year ended December 31, 2020. This decrease is the result of a one-time, non-cash expense related to the issuance of common stock for a forbearance fee in connection with the Kenar Note in 2020. Interest Expense. Interest expense decreased to $320,524 for the year ended December 31, 2021 as compared to $870,303 for the year ended December 31, 2020. This decrease is attributable to a decrease in the aggregate principal amount of loans outstanding to $4,009,463 as of December 31, 2021 from $4,788,118 as of December 31, 2020. Net Loss. The Company had a net loss of $2,605,374 for the year ended December 31, 2021 as compared to the net loss of $4,437,434 for the year ended December 31, 2020. The decrease in net loss is primarily attributable to reduction in interest and other operating expenses. Liquidity and Capital Resources The Company had cash of $1,155,513 as of December 31, 2021, of which $0 was restricted cash. At December 31, 2021, the Company had a working capital surplus of $2,831,718 including $960,000 in stockholder loans that were subordinated to its working capital line of credit as compared to a working capital deficit of $2,527,059 at December 31, 2020, including $1,299,712 in stockholder loans. The Company’s primary sources of liquidity consisted of inventory of $2,119,441 and accounts receivable of $1,231,181 at December 31, 2021. The increase in working capital was due primarily to an increase of inventory of $286,780, accounts receivable of $148,713 and other current assets of $3,525,736 and the decrease of related party notes payable of $1,534,612. 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 continues to estimate the effects of the COVID-19 outbreak on its operations or financial condition in the next year. 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. Cash (Used in) Provided by Operating Activities. Cash used in operating activities during the year ended December 31, 2021 was $4,833,029 as compared to cash provided of $4,575,575 for the year ended December 31, 2020, representing a decrease of $9,408,604. The decrease is primarily attributable to a decrease in the net loss of $1,832,060 for the year ended December 31, 2021 as well as a decrease in the changes in inventory of $6,236,801, receivables of $1,075,699, other current assets of $3,576,243 and other assets of $76,057 netted against the increase in changes in lease liability of $128,093 and payables of $2,326,839 for the year ended December 31, 2021 compared with the year ended December 31, 2020. Cash (Used in) Provided by Investing Activities. Cash used in investing activities for the year ended December 31, 2021 was $775,445 as compared to $343,237 cash provided by investing activities for the year ended December 31, 2020. The increase was attributable to the acquisition of TOBC in the year ended December 31, 2021. Cash Provided by (Used in) Financing Activities. Cash provided by financing activities for the year ended December 31, 2021 was $6,480,540 as compared to cash used in financing activities of $4,800,635 for the year ended December 31, 2020. Repayments in the Company’s related party notes of $1,534,612 and principal payments of long-term debt of $398,385 were partially offset by the proceeds from the PPP loan of $371,944 for the year ended December 31, 2021, compared to loan payment and loan costs paid on the working capital line of credit of $5,112,061 for the year ended December 31, 2020. As of December 31, 2021, the Company had $6,596,500 of net proceeds from common stock private offerings and $882,800 proceeds from common stock warrants exercised. 36 Working Capital Line of Credit Keeler & Co. entered into a $14,000,000 revolving line of credit with ACF on August 31, 2016, the proceeds of which were used to pay off the prior line of credit, pay new loan costs of approximately $309,000 and provide additional working capital to 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. and Coastal Pride. The interest rate under the line of credit was equal to the greater of (i) the 3-month LIBOR rate plus 9.25%, (ii) the prime rate plus 6.0%, and (iii) a fixed rate of 6.5%. As of December 31, 2021, the interest rate was 0%. 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. As of December 31, 2021, 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 for the fourth quarter of 2021 which was accepted by Lighthouse. 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. As of December 31, 2021, the interest rate was 7.0%. The line of credit is secured by a first priority security interest on all the assets of each Borrower. Pursuant to the terms of a guaranty agreement, the Company guaranteed the obligations of the Borrowers under the note and John Keeler, Executive Chairman and Chief Executive Officer of the Company, provided a personal guaranty of up to $1,000,000 to Lighthouse. The Borrowers utilized $784,450 of the Lighthouse revolving line of credit to repay the outstanding indebtedness owed to ACF as of March 31, 2021. As a result, all obligations owed to ACF were satisfied and the loan agreement with ACF was terminated. The outstanding balance owed to Lighthouse as of December 31, 2021 was $2,368,200. 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, 2021, $960,000 of principal remains outstanding and approximately $75,900 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. The Company made principal payments during the year ended December 31, 2021 of $339,712. 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. 37 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. On April 28, 2021, the Kenar Note was further amended to extend the maturity date to May 31, 2021. On July 6, 2021, the Company entered into a note payoff indemnity agreement with Kenar pursuant to which the Company paid Kenar $918,539 of principal and accrued interest in full satisfaction of the amounts due to Kenar under the Second Loan Amendment, dated April 26, 2021, between the Company and Kenar, and the Kenar Note was extinguished, and the shares pledged by Mr. Keeler were released. Lobo Note On April 2, 2019, the Company issued a four-month unsecured promissory note in the principal amount of $100,000 (the “Lobo Note”) to Lobo Holdings, LLLP, a stockholder of the Company (“Lobo”). The Lobo Note bears interest at the rate of 18% per annum. The Lobo Note may be prepaid in whole or in part without penalty. John Keeler, the Company’s Executive Chairman and Chief Executive Officer, pledged 1,000,000 shares of common stock of the Company to secure the Company’s obligations under the Lobo Note. The Lobo Note matured on August 2, 2019 and was extended through December 2, 2019 on the same terms and conditions. On November 15, 2019, the Company paid off the Lobo Note with the issuance to Lobo of an unsecured promissory note in the principal amount of $100,000 which accrued interest at the rate of 15% per annum and matured on March 31, 2020. On April 1, 2020, the Company paid off the November 15, 2019 Lobo Note with the issuance to Lobo of a six-month unsecured promissory note in the principal amount of $100,000, which accrued interest at the rate of 10% per annum and matured on October 1, 2020. On October 1, 2020, the Company paid off the April 1, 2020 note with the issuance of a three-month unsecured promissory note in the principal amount of $100,000, which bears interest at the rate of 10% per annum and matured on December 31, 2020. On January 1, 2021, the Company paid off the October 1, 2020 note with the issuance of a six-month unsecured promissory note in the principal amount of $100,000, which bears interest at the rate of 10% per annum and matures on June 30, 2021. On July 1, 2021, the Company paid off the January 1, 2021 Lobo note with the issuance of a three-month unsecured promissory note in the principal amount of $100,000 which accrued interest at the rate of 10% per annum and matured on September 30, 2021. On October 1, 2021, the Company paid off the July 1, 2021 Lobo Note with the issuance of a one-month unsecured promissory note in the principal amount of $100,000, which accrued interest at the rate of 10% per annum and matured on November 1, 2021. On November 1, 2021, the Company paid Lobo $100,877 of principal and accrued interest in full satisfaction of the amounts due to Lobo under the one-month unsecured promissory note dated October 1, 2021, between the Company and Lobo, and the Lobo Note was extinguished. 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. In September 2021, the Company applied for loan forgiveness by the SBA through US Century Bank for the full amount which was granted in October 2021. Offering 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. 38 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 to 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 of the Company 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. 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 Financial Corp. 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 an investor 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. 39 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. 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 indefinite-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 2021 annual impairment analysis for goodwill, trademarks and non-compete agreements, we concluded that it is more likely than not that the fair value of goodwill, trademarks and non-compete agreements exceeded its carrying value. No impairment was recorded for goodwill, trademarks and non-compete agreements. For customer relationships, the analysis concluded an impairment of $374,300 as a result of the COVID-19 pandemic during year-end December 31, 2021. The fair value conclusions as of December 31, 2021 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. 40 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 had in-transit inventory of approximately $1,468,000 and $522,000 as of December 31, 2021 and December 31, 2020, 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 $0 for the year ended December 31, 2021 as compared to approximately $71,400 for the year ended December 31, 2020. 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 Mexico, 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. 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. 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 determined that the standard has no impact on its consolidated financial statements and related disclosures. 41 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. On November 15, 2019, FASB issued an Accounting Standard Update No. 2019-10 to amend the implementation date to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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. 42