Borealis Foods Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the interim unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 of this Quarterly Report, and our audited consolidated financial statements and related notes in our Annual Report filed on Form 10-K for the year ended December 31, 2024 (“ Annual Report ”) filed with the Securities and Exchange Commission (“ SEC ”) on April 15, 2025. The following discussion and analysis may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, those set forth under Item 1.A., “Risk Factors,” included in Part I of the Annual Report. Overview Borealis Foods is a pioneering, integrated food science and manufacturing company that is redefining affordable nutrition. Known for popular ramen noodle brands like the high protein Chef Woo, Chef Ramsay, Ramen Express, and Woodles, Borealis Foods brings innovative fusion flavors from diverse culinary traditions, creating delicious and nutritious meal options for consumers. With U.S.-based production facilities, the company’s portfolio reflects a commitment to quality, innovation, and sustainability. The Company continued to execute a strategic repositioning of its revenue base and customer portfolio in 2025, with an emphasis on gross margin expansion and operational efficiency. While total revenue declined compared to the prior year, gross profit turned positive, reflecting improved pricing dynamics, a more favorable product mix, and a deliberate move away from low-margin, high-volume retail partnerships. The Reverse Recapitalization On February 23, 2023, Borealis Foods Inc., a corporation incorporated under the laws of Canada (“ Legacy Borealis ”), entered into a Business Combination Agreement (as amended, amended and restated, supplemented, or otherwise modified from time to time, the “ Business Combination Agreement ”) with Oxus Acquisition Corp. (“ Oxus ”) and 1000397116 Ontario Inc., an Ontario corporation and a wholly owned subsidiary of Oxus (“ Newco ”). On February 7, 2024, Legacy Borealis, Oxus, and Newco consummated the transactions (collectively, the “ Reverse Recapitalization ”) contemplated by the Business Combination Agreement by means of a statutory arrangement under the Canada Business Corporations Act and the Business Corporations Act (Ontario), implemented in accordance with the terms and conditions set forth in the Business Combination Agreement and the related plan of arrangement (as amended, amended and restated, supplemented, or otherwise modified from time to time, the “ Plan of Arrangement ”) following the approval at an extraordinary general meeting of the shareholders of Oxus held on February 2, 2024. 21 The Reverse Recapitalization (continued) Pursuant to the terms of the Business Combination Agreement, among other things: (i) Oxus domesticated and continued as a corporation under the laws of Ontario, Canada (“ New Oxus ”); and (ii) pursuant to the Plan of Arrangement, (a) Newco and Legacy Borealis amalgamated (the “ Legacy Borealis Amalgamation ”, and the amalgamated corporation resulting therefrom, “ Amalco ”), with Amalco surviving the Legacy Borealis Amalgamation as a wholly-owned subsidiary of New Oxus; and (b) following the Legacy Borealis Amalgamation, New Oxus and Amalco amalgamated (the “ Borealis Amalgamation ,” and together with the Legacy Borealis Amalgamation, the “Amalgamations,” and the corporation resulting therefrom. “Borealis,” as a corporation amalgamated under the Business Corporations Act (Ontario)), with Borealis surviving the Borealis Amalgamation. Borealis continues under the name “ Borealis Foods Inc. ”. Unless otherwise indicated, references to the “Company,” “our,” “us” or “we” in this Item 2 refer to Oxus Acquisition Corp., or Oxus, before the consummation of the Transaction. References to our “management” or our “management team” refer to our officers and directors, and references to the “sponsor” refer to Oxus Capital Pte. Ltd. The term “New Borealis” refers to Borealis Foods Inc. after the consummation of the Business Combination. Accounting Impact of the Reverse Recapitalization The Reverse Recapitalization transaction was accounted for as a reverse recapitalization. Oxus was deemed the accounting predecessor and Borealis is the successor SEC registrant. Under this method of accounting, Oxus was treated as the acquired company for financial statement reporting purposes. For accounting purposes, Legacy Borealis was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a reverse recapitalization of Legacy Borealis. Accordingly, the consolidated balance sheets and results of operations of Legacy Borealis became the historical financial statements of Borealis, and Oxus’ assets, liabilities, and results of operations were consolidated with Legacy Borealis’ beginning on February 7, 2024. The net assets of Oxus were recognized at carrying value, with no goodwill or other intangible assets recorded. Basis of Presentation Borealis Foods’ unaudited condensed consolidated financial statements were prepared in accordance with U.S. GAAP. See Note 1 to our unaudited condensed consolidated financial statements for a full description of our basis of presentation. 22 Results of Operations The following sets forth a summary of our results of operations for the presented months ($ in thousands): Comparison of the Three Months Ended March 31, 2025 and 2024 2025 (Unaudited) 2024 (Unaudited) 2025 vs 2024 Variance $ % of Revenues, net $ % of Revenues, net $ % of Prior Period Revenues Gross sales $ 7,225 $ 8,484 $ (1,259 ) Sales discounts & allowances (379 ) (6 )% (589 ) (7 )% 210 1 % Revenue, net 6,846 7,895 (1,049 ) Cost of goods sold 5,465 80 % 6,648 84 % (1,183 ) (4 )% Depreciation 481 7 % 1,005 13 % (524 ) (6 )% Total cost of goods sold 5,946 87 % 7,653 97 % (1,707 ) (10 )% Gross profit (loss) 900 13 % 242 3 % 658 10 % Sales & marketing 566 8 % 1,526 19 % (960 ) (11 )% Business development 607 9 % 759 10 % (152 ) (1 )% Training 201 3 % 482 6 % (280 ) (3 )% General & administrative expenses 2,442 36 % 4,449 56 % (2,007 ) (20 )% Total sales, general & administrative expenses 3,817 56 % 7,216 91 % (3,399 ) (35 )% Loss from operations (2,917 ) (43 )% (6,974 ) (88 )% 4,057 45 % Total other expense (1,270 ) (19 )% (1,459 ) (18 )% 189 (1 )% Loss before income taxes (4,187 ) (61 )% (8,433 ) (107 )% 4,246 46 % Income tax benefit 0 % 0 % 0 % Net loss $ (4,187 ) (61 )% $ (8,433 ) (107 )% $ 4,246 46 % Other financial Data: Adjusted EBITDA $ (557 ) (8 )% $ (387 ) (5 )% $ (170 ) (3 )% Adjusted EBITDA is a non-GAAP financial metric. See “How we Evaluate Our Operations” below for an explanation of the terms EBITDA and Adjusted EBITDA and a reconciliation of net income to EBITDA and Adjusted EBITDA for each applicable period. Revenue and Customer Trends For the quarter ended March 31, 2025, the Company reported net revenue was $6.8 million, representing a 14% decline from $7.9 million in the prior year period. This decline reflects the ongoing impact of SKU rationalization efforts and the strategic pullback from low-margin mass retail accounts initiated in 2024. 23 Revenue and Customer Trends (continued) Despite lower top-line revenue, gross profit improved significantly to $0.9 million compared to $0.2 million in the first quarter of 2024, driven by stronger product and customer mix and improved cost controls. Gross margin, excluding depreciation, a non-GAAP measurement, improved to 20% in the first quarter of 2025 (calculated as $0.9 million + $0.48 million / $6.85 million), compared to 16% in the prior-year quarter, illustrating the successful pivot to higher-margin branded products and institutional accounts. The Company continued to diversify its customer base in the first quarter of 2025. ● Revenue concentration from a previously dominant retail partner was reduced substantially. ● A major institutional customer became a significant contributor, generating $2.0 million in its first full quarter. ● Two additional institutional clients expanded their volume, contributing $1.95 million and $0.30 million, respectively. ● A prominent global brand was launched as a new customer, representing early traction in the premium retail segment. These results reflect the Company’s strategic focus on food service and institutional markets, which provide improved pricing power and margin stability. Product Mix and Margin Enhancement The Chef Woo High Protein Ramen brand continued to lead the Company’s branded portfolio, generating $1.66 million in the first quarter of 2025, accounting for approximately 24% of total sales. While this was down from its peak in the third quarter of 2024, Chef Woo remains central to the Company’s growth strategy. Ramen Express Flats, which had previously been a Walmart-focused product, demonstrated strong growth to $1.96 million, reflecting renewed demand in institutional channels. The continued shift toward Chef Woo, Gordon Ramsay Cups, and food service SKUs has allowed the Company to sustain margin improvements. Key drivers of margin expansion in the quarter included: ● An increase in institutional and branded sales mix ● Elimination of discount - driven mass retail exposure ● Lower freight and promotional costs relative to prior quarters Gross margin excluding depreciation (net gross margin, a non-GAAP measure) was 20% in the first quarter of 2025, compared to 16% in the first quarter of 2024, reflecting operational discipline and improved leverage on fixed production costs. Operating Expenses and SG&A Trends Total SG&A expenses declined 47% year-over-year to $3.82 million in the first quarter of 2025. This reduction reflects the conclusion of non-recurring professional fees and scaled-back marketing expenditures. ● Completion of non-recurring professional services ● Lower marketing and promotional spending ● Reduced training costs, which fell to $0.2 million as institutional customers onboarding processes became more efficient 24 Operating Expenses and SG&A Trends (continued) Adjusted EBITDA non-GAAP measure decreased slightly to $(0.6) million from $(0.4) million in the first quarter of 2024, a negative $0.2 million. This decrease is attributed to management’s cost reduction strategy within sales, marketing, and general and administrative costs. Liquidity and Capital Resources As of March 31, 2025, liquidity constraints continued to pose challenges, but operating improvements have begun to stabilize working capital requirements. Reduced SG&A expenditures, narrowing losses, and a more favorable product mix are expected to support improving cash conversion. The Company did not raise external capital in the first quarter of 2025. The Chairman and Chief Executive Officer advanced funds to the Company in the amounts of $700,000 and $385,000, respectively, in the three months ended March 31, 2025. If we cannot obtain adequate additional financing, among other things, we may have to substantially curtail or limit our research, marketing, production or distribution activities, sell assets of the Company or seek protection from creditors under bankruptcy laws, which could materially and adversely affect our business plan. The Company remains focused on cash preservation. Inventory levels are being managed conservatively to align with committed demand from large institutional accounts. With increased contribution from high-volume, predictable food service channels, management anticipates improved cash flows and working capital efficiency through the remainder of 2025. Cash Flows The following table sets forth our cash flows for the periods indicated ($ in thousands): Three Months Ended March 31, 2025 2024 Net cash (used in) provided by: Operating Activities $ (1,373 ) $ (6,769 ) Investing Activities (26 ) (487 ) Financing Activities 938 7,852 Operating Activities Net cash used in operating activities for the three months ended March 31, 2025 was $1.37 million, primarily driven by the net loss of $4.19 million, adjusted for non-cash charges of $0.48 million for depreciation and amortization, and $0.06 million for stock-based compensation. This represents an improvement from the $6.77 million used in the same period of 2024, as Borealis benefited from enhanced gross profit due to the performance of high-margin products like Chef Woo and Woodles, which partially offset operational expenses. 25 Investing Activities Net cash used in investing activities was $0.03 million for the three months ended March 31, 2025, primarily attributable to purchases of property and equipment to support production scale and efficiency improvements. This decrease from $0.49 million in 2024 aligns with our focused approach to capital expenditures, particularly as the Company seeks to improve asset utilization and operational efficiencies without significant expansion of its production line. Financing Activities Net cash provided by financing activities during the three months ended March 31, 2025, was $0.94 million, financing was driven by advances from related parties. In comparison, net cash provided by financing activities in the three months ended, was $7.85 million, and largely attributable to borrowings on the line of credit and proceeds from convertible debt. The financing activities in 2025 primarily support working capital needs and strategic investments in growth initiatives. Balance Sheet and Contractual Obligations Our cash position, though lower than prior periods, reflects its active investment in operational scale-up and the expansion of high-margin product lines. Borealis Foods’ contractual obligations, including operating leases, accounts payable, and convertible notes, remain in line with planned financial commitments and reflect our strategic focus on sustainable growth. Future Capital Requirements and Liquidity We need additional capital to meet our funding requirements through fiscal year 2025, particularly to support our expansion into the premium retail segment with a prominent global brand. As of March 31, 2025, we had cash-on-hand of $0.19 million and negative working capital of $25.30 million. Our current business plan has mitigated some capital expenditure requirements, as operational efficiencies in existing production lines have reduced the need for immediate expansion. We are actively exploring additional financing options to strengthen liquidity; however, there can be no assurance that such funding will be available on favorable terms or at all. If we cannot obtain adequate additional financing, among other things, we may have to substantially curtail or limit our research, marketing, production or distribution activities, sell assets of the Company or seek protection from creditors under bankruptcy laws, which could materially and adversely affect our business plan. Inadequate financial resources could also continue to raise substantial doubt about our ability to continue as a going concern. Going Concern Management has identified recurring losses and negative cash flows from operations as factors raising substantial doubt about our ability to continue as a going concern. We are focused on executing our strategic initiatives to drive revenue growth, manage expenses, and secure additional financing to address these risks. The unaudited condensed consolidated financial statements have been prepared under the assumption of ongoing operations, as we seek to navigate these challenges and achieve financial stability. Substantial doubt continues to exit about the ability of the Company to continue as a going concern within one year from May 20, 2025. 26 Going Concern (continued) Management has implemented several strategic and operational initiatives aimed at improving liquidity and financial performance. For the three months ended March 31, 2025, the Company significantly reduced sales, general, and administrative expenses by 47% year-over-year, driven by the conclusion of one-time transaction-related costs and a disciplined reduction in discretionary spending. Gross margin, excluding depreciation, a non-GAAP measurement, improved to 20% from 16% in the prior year period, reflecting a shift toward higher-margin branded and institutional sales. The Company has not raised external capital in the first quarter of 2025 but is actively evaluating financing alternatives, including debt and equity issuances, to support ongoing operations and strengthen the balance sheet. Management is also aligning inventory and production levels with committed demand from stable institutional customers, which is expected to enhance working capital efficiency and cash flow conversion through the remainder of the year. However, there can be no assurance that such funding will be available on favorable terms or at all. If we cannot obtain adequate additional financing, among other things, we may have to substantially curtail or limit our research, marketing, production or distribution activities, sell assets of the Company or seek protection from creditors under bankruptcy laws, which could materially and adversely affect our business plan. Inadequate financial resources could also continue to raise substantial doubt about our ability to continue as a going concern. Contractual Obligations and Commitments The following table summarizes our non-cancellable contractual obligations and other commitments as of March 31, 2025, and the effects that such obligations are expected to have on our liquidity and cash flow for future periods (in thousands): Payments due by period Total Less than 1 year 1-3 years 4-5 years More than 5 years Contractual obligations and other commitments * $ 61,763 $ 35,869 $ 25,894 $ — $ — (*) Includes operating lease liabilities for certain of our offices and facilities, accounts payable, and accrued expenses including related party notes. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. Off-Balance Sheet Arrangements As of March 31, 2025 and December 31, 2024, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities, or variable interest entities. 27 Warrants The following represents a summary of warrants outstanding and exercisable on March 31, 2025 and December 31, 2024: Description Issue Date Classification Exercise Price Expiration Date Outstanding Shares Exercisable Shares Private Placement Warrants 9/13/21 Equity $ 11.50 2/7/29 9,300,000 9,300,000 Public Warrants 9/13/21 Equity $ 11.50 2/7/29 17,250,000 17,250,000 26,550,000 26,550,000 Following the closing of the Reverse Recapitalization, Borealis Foods has the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of Common Shares equals or exceeds $18.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 days within a 30 trading day period commencing once the warrants become exercisable and ending on the third trading day prior to the date on which Borealis Foods gives proper notice of such redemption and provided certain other conditions are met. The public warrants are identical to the private placement warrants in material terms and provisions due to the expiration on the transfer of, the private placement warrants 30 days after the completion of the Reverse Recapitalization. Emerging Growth Company Status Section 102(b)(1) of the Jumpstart Our Business Startups Act (the “ JOBS Act ”) exempts “emerging growth companies” (as defined in Section 2(a) of the Securities Act) from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to not take advantage of the extended transition period is irrevocable. Oxus was an emerging growth company and elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. Following the consummation of the Reverse Recapitalization, Borealis Foods expects to continue taking advantage of the benefits of the extended transition period, although it may decide to early adopt new or revised accounting standards to the extent permitted by such standards and relevant laws and regulations. This may make it difficult or impossible to compare Borealis Foods’ financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of common shares that are held by non-affiliates equals or exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which Borealis Foods has total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which Borealis Foods has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2026, which is the last day of the fiscal year following the fifth anniversary of Oxus’ initial public offering. 28 Implications of being a Smaller Reporting Company Additionally, we are a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. Smaller reporting companies may take advantage of certain reduced disclosure obligations, including, among other things, providing only two years of audited financial statements. We will remain a smaller reporting company until the last day of the fiscal year in which (i) the market value of common shares held by non-affiliates exceeds $250 million as of the end of that year’s second fiscal quarter, or (ii) our annual revenues exceeded $100 million during such completed fiscal year and the market value of common shares held by non-affiliates equals or exceeds $700 million as of the end of that year’s second fiscal quarter. To the extent we take advantage of such reduced disclosure obligations, we may also make comparison of our financial statements with other public companies difficult or impossible. How We Evaluate Our Operations Net Income/(Loss) We measure performance based on our overall return to shareholders based on consolidated net income or net loss. We do not review a measure of operating result at a lower level than the consolidated company and we only have one reportable segment. Adjusted EBITDA Our adjustments to EBITDA are related to expenses and gains that we believe are not indicative of normal, ongoing operations. While these items may be recurring in nature and should not be disregarded in evaluation of our earnings performance, it is useful to exclude such items when analyzing current results and trends as these items can vary significantly from period to period depending on specific underlying transactions or events that may occur. Therefore, while we may incur or recognize these types of expenses and gains in the future, we believe that removing these items for purposes of calculating the Adjusted EBITDA financial measures provides a more focused presentation of our ongoing operating performance. We view EBITDA as an important indicator of performance. We define EBITDA as net income/(loss) plus net interest expense, income taxes, depreciation, and amortization. We define Adjusted EBITDA as EBITDA further adjusted for any foreign exchange gains/(losses), share-based compensation expense and non-recurring items if identified. EBITDA and Adjusted EBITDA are supplemental measures utilized by our management and other users of our financial statements such as investors, research analysts and others, to assess the financial performance of our assets without regard to financing methods, capital structure or historical cost basis. Adjusted EBITDA is a key performance measure that our management uses to assess the Company’s operating performance. We facilitate internal comparisons of our operating performance on a more consistent basis. We use these performance measures for business planning purposes and forecasting. We believe that EBITDA and Adjusted EBITDA enhances an investor’s understanding of our financial performance as they are useful in assessing our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. 29 Adjusted EBITDA (continued) For the three months ended March 31, 2025, “Adjusted EBITDA,” a non-GAAP measure, is defined as net income attributable to us before (1) depreciation and amortization, of $0.5 million, (2) interest expense, of $1.3 million, (3) new product launch of $0.6 million, (4) training, of $0.2 million, (5) deferred stock compensation $0.1 million, (6) business transaction costs, of $0.5 million, and (7) business development and other extraordinary charges, of $0.6 million. Management and our Board of Directors use this non-GAAP measure for purposes of evaluating our performance. Furthermore, the Compensation Committee of our Board of Directors uses such measure to evaluate management’s performance. We, therefore, believe that the use of this non-GAAP measure provides useful information to investors and other stakeholders by allowing them to view our business through the eyes of management and our Board of Directors, facilitating comparisons of results across historical periods and focus on the underlying ongoing operating performance of our business. As noted above, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. For the three months ended March 31, 2024, “Adjusted EBITDA,” a non-GAAP measure, is defined as net income attributable to us before (1) income taxes, (2) interest expense, of $1.5 million, (3) depreciation and amortization, of $1.0 million, (4) other non-operating items, net, of $1.5 million, (5) training, of $0.5 million, (6) deferred stock compensation, of $1.3 million ( 7) M&A due diligence costs, of $1.5 million, (8) new product launch of $0.8 million. Management and our Board of Directors use this non-GAAP measure for purposes of evaluating our performance. Furthermore, the Compensation Committee of our Board of Directors uses such measure to evaluate management’s performance. We, therefore, believe that the use of this non-GAAP measure provides useful information to investors and other stakeholders by allowing them to view our business through the eyes of management and our Board of Directors, facilitating comparisons of results across historical periods and focus on the underlying ongoing operating performance of our business. As noted above, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. 30 Recent Accounting Pronouncements See Note 1 to Borealis Foods’ unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for information about recent accounting pronouncements, the timing of their adoption, and Borealis Foods’ assessment, if any, of their potential impact on Borealis Foods’ financial condition and results of operations.