Borealis Foods Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements and the related notes included in Part I, Item 1 of this Quarterly Report, and our audited consolidated financial statements and related notes included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2023 (“ Annual Report ”) and our Form 8-K/A filed with the Securities and Exchange Commission (“ SEC ”) on April 15, 2024. This discussion and analysis may contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties, and assumptions, including, but not limited to, risks and uncertainties discussed under the heading ‘Cautionary Note on Forward-Looking Statements,’ in this Quarterly Report and in Part I, Item 1A “Risk Factors” included in our Annual Report. In this section, unless otherwise indicated or the context otherwise requires, references in this section to “Borealis,” the “Company,” “we,” “us,” “our” and other similar terms refer to Borealis Foods Inc. References to “Oxus” refer to Oxus Acquisition Corp. Overview Borealis is a food technology company that has developed a high-quality, affordable, sustainable, and nutritious range of plant-based, ready-to-eat meals, which are sold in the U.S., Canada, and Europe. Borealis has a mission to address global food security challenges by developing highly nutritious and functional food products that are both affordable and sustainable. Borealis’ focus on affordability and sustainability reflects its commitment to making a positive impact on both human life and the planet. With its unique approach, Borealis has a significant opportunity to create a meaningful and profound impact on the world. Borealis has developed and launched mass-produced plant-based ramen meals with 20 grams of complete protein per serving. This achievement in the plant-based protein industry underscores Borealis’ commitment to developing cutting-edge solutions to tackle global food challenges. 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. 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 22 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.” Accounting Impact of the Reverse Recapitalization The Reverse Recapitalization transaction was accounted for as a reverse recapitalization. Oxus Acquisition Corp. 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 acquiror 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’ condensed consolidated financial statements were prepared in accordance with U.S. GAAP. See Note 1 to our condensed consolidated financial statements for a full description of our basis of presentation. 23 Results of Operations Comparison of the Six Months Ended June 30, 2024 and 2023 The following sets forth a summary of our results of operations for the presented months (in $ thousands): For the Six Months Ended, June 30, 2024 (Unaudited) 2023 (Unaudited) 2024 vs 2023 Variance $ % of Revenues, net $ % of Revenues, net $ % of Prior Period Revenues Gross sales 13,961 15,605 (1,644) Sales discounts & allowances (740) (6)% (803) (5)% 63 (1)% Revenue, net 13,221 14,802 (1,581) Total cost of goods sold 12,556 95% 16,185 109% (3,629) (14)% Gross profit (loss) 665 5% (1,383) (9)% 2,048 14% Total sales, marketing and business development 3,950 30% 1,896 13% 2,054 17% Total training 887 7% 1,479 10% (592) (3)% Total general & administrative expenses 7,990 60% 6,254 42% 1,736 18% 12,827 97% 9,629 65% 3,198 32% Loss from operations (12,162) (92)% (11,012) (74)% (1,150) (18)% Total other expense (2,553) (19)% (3,210) (22)% 657 3% Loss before income taxes (14,715) (111)% (14,222) (96)% (493) (15)% Income Tax expense (14) —% (15) —% 1 —% Net loss $ (14,729) (111)% $ (14,237) (96)% (492) (15)% 24 Net Sales. We generate revenue from the sale of plant-based, ready-to-eat meals. Net Sales are reported net of discounts, returns, and allowances. In the six months ended June 30, 2024, net sales decreased by $1.6 million or 11%, over the six months ended June 30, 2023 due to pricing negotiations with our largest customer and significant price reductions. At the end of 2023, management chose to seek to improve profitability through customer and product mix diversification. Our strategic approach to product diversification and market adaptability is yielding positive results. By balancing our portfolio, tapping into new segments, and re-engaging with existing products, we believe that we are well-positioned for sustained growth. We believe this data underscores our resilience and strategic vision in navigating market dynamics and driving business success. Our efforts in diversifying our client base and strengthening relationships have resulted in notable improvements, setting a positive trajectory for anticipated sustained growth. The first and second quarters of our fiscal years have historically been our slow seasons due to cultural practices of consuming soup products in fall and winter months. Our new retail distribution, strategic partnerships with major multi-national food companies and institutional sales are expected to commence in third and fourth quarters of 2024. Sales discounts and allowances increased to 6% of net sales in the second fiscal quarter of 2024 from 5% in the corresponding quarter of 2023. This increase can be attributed primarily to changes in product mix and a decreased reliance on one single customer. Slotting fees increased as we reduced our concentration of credit risk by diversifying our customer mix. We anticipate that the impact of sales discounts and allowances, including slotting fees, will soften as we expand our distribution globally. Cost of Goods Sold. Our cost of goods sold decreased by $3.6 million in the six months ended June 30, 2024, representing a 14% improvement as a percentage of net sales compared to the six months ended June 30, 2023. Cost of goods sold is divided into five categories: raw material costs, direct and indirect labor, overhead costs (primarily energy expenses) and depreciation. We are seeking to optimize our supply chain with better pricing from suppliers as inflation pressures decrease. We experienced a decrease in raw material costs, direct and indirect labor, and energy expenses as a percentage of net revenues that were disproportionately high due to plant capacity utilization under 12%. As we increase our plant utilization the labor and overhead rates, as a percentage of sales are expected to improve. Depreciation Expense. Depreciation expense decreased by $0.5 million in the six months ended June 30, 2024, and as a percentage of sales, it decreased 2%, compared to the six months ended June 30, 2023. Following a comprehensive review in the first quarter of 2024, management has decided to adopt a machine-hour-based depreciation method for its manufacturing lines and related assets. We believe this new approach better aligns with the actual usage and utilization of the assets. As a result, effective April 1, 2024, the Company changed its estimates of the useful lives of its machinery to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the machinery and equipment that was previously calculated in years were changed to hours of production method. Gross Profit. Gross profit increased by $2.0 million, or 14%, as a percentage of net sales for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. Gross profit improvement is a direct result of customer diversification and product mix. During the second quarter of 2024, higher margin products accounted for 55% of net sales, for the six months ended June 30, 2024 compared to 7% for the six months ended June 30, 2023. 25 By the end of the second quarter of 2023, raw material pricing began to stabilize from the peaks observed in 2022. During the first quarter of 2024, a major retailer requested significant price deductions by way of promotions. Management’s decision in not agreeing to price deductions resulted in our ability to manage customer and product mix which contributed to our gross profit improvement for the six month period. Food service sales slated for 2023 were postponed to 2024 due to the timing of the school calendar. Numerous bids have been awarded which we anticipate will result in a significant increase in school orders for the 2024-2025 school year. Training. Training costs decreased by 3% as a percentage of net sales during the six months ended June 30, 2024, driven by enhanced operational efficiency as two production lines entered their second year. Personnel numbers are expected to fluctuate in response to demand and capacity requirements. Our emphasis on providing training and continuing education continues to have a positive impact on efficiency and productivity, improving Borealis' competitive position to compete in the highly competitive food sector on a global scale. Sales, Marketing and Business Development . Sales, Marketing and Business Development expenses increased by $2.1 million in the six months ended June 30, 2024, representing a 17% increase as a percentage of net sales compared to the Sales and Marketing expenses in the six months ended June 30, 2023. We allocate a significant portion of our Sales and Marketing budget to cover various expenses, including personnel costs, advertising expenditures, and associated occupancy expenses. The increase in Sales, Marketing, Business Development expenses is primarily attributable to one time business development costs to Walmart and Sam’s Club of $1.4 million in the Second quarter, brand ambassador costs $0.8 million and Feeding America $0.2 million are included in the six months ended June 30, 2024.Marketing spend will continue to focus on creating awareness of the food brands and supporting sales. Our strategic approach has balanced traditional and digital marketing tactics in support of our retail relationships. This has included retailer specific, digital advertising, e-commerce programs, social media content and ads, social media influencers as well as major celebrity alliances to drive sales. Our multi-platform approach is a competitive strategy that leverages advanced algorithmic and artificial intelligence (AI) tools to increase our speed of execution as well as being able to geo-target ads and content to specific customer markets. G&A . General and Administrative expenses increased by $1.7 million and represented 60% of net sales in the six months ended June 30, 2024 compared to 42% in the six months ended June 30, 2023. The increase is primarily due to professional fees incurred in connection with the Reverse Recapitalization of approximately $1.5 million. Salaries and benefits increased by $0.7 million, insurance increased $0.1 million due to additional insurance as a result of the Reverse Recapitalization, and increase of $1.1 million in stock compensation expense during the first quarter of 2024 as a result of stock options fully vesting and converting into shares of the Company in conjunction with the Reverse Recapitalization. Other Expense (Income). Other expenses decreased by $0.7 million in the six months ended June 30, 2024, with interest expenses accounting for a significant portion of the decrease in conjunction with the Reverse Recapitalization. Other expense decreased by 3% as a percentage of sales over the six months ended June 30, 2023, resulting from higher aggregate principal amounts of indebtedness outstanding and increased interest accruals. Future increases in interest expense are expected to depend on market conditions as well as capital needs, availability, and financing decisions. 26 Comparison of the Three Months Ended June 30, 2024 and 2023 The following sets forth a summary of our results of operations for the presented months (in $ thousands): For the Three Months Ended, June 30, 2024 (Unaudited) 2023 (Unaudited) 2024 vs 2023 Variance $ % of Revenues, net $ % of Revenues, net $ % of Prior Period Revenues Gross sales 5,476 6,827 (1,351) Sales discounts & allowances (151) (3)% (380) (6)% 229 3% Revenue, net 5,325 6,447 (1,122) Total cost of goods sold 4,903 92% 7,486 116% (2,583) (24)% Gross profit (loss) 422 8% (1,039) (16)% 1,461 24% Total sales, marketing and business development 2,402 45% 1,606 25% 796 20% Total training 405 8% 699 11% (294) (3)% Total general & administrative expenses 2,805 53% 3,104 48% (299) 5% 5,612 105% 5,409 84% 203 21% Loss from operations (5,190) (97)% (6,448) (100)% 1,258 3% Total other expense (1,094) (21)% (1,839) (29)% 745 8% Loss before income taxes (6,284) (118)% (8,287) (129)% 2,003 11% Income Tax expense (14) —% (15) —% 1 —% Net loss $ (6,298) (118)% $ (8,302) (129)% $ 2,004 11% 27 Net Sales. We generate revenue from the sale of plant-based, ready-to-eat meals. Net Sales are reported net of discounts, returns, and allowances. In the three months ended June 30, 2024, net sales decreased by $1.1 million, or 17%, over the three months ended June 30, 2023 due to pricing negotiations with our largest customer and significant price reductions. At the end of 2023, management chose to seek to improve profitability through customer and product mix diversification. We believe that, despite the challenges over the past quarters, our customer revenue mix highlights resilience and strategic gains across key customer segments. Our efforts in diversifying our client base and strengthening relationships have resulted in notable improvements, setting a positive trajectory for anticipated sustained growth. The first and second quarters of our fiscal years have historically been our slow seasons due to cultural practices of consuming soup products in fall and winter months. Our new retail distribution, strategic partnerships with major multi-national food companies and institutional sales are expected to commence in third and fourth quarters of 2024. Sales discounts and allowances decreased to 3% of net sales in the second fiscal quarter of 2024 from 6% in the corresponding quarter of 2023. This increase can be attributed primarily to changes in product mix and decreased reliance on one single customer. Slotting fees increased as we reduced our concentration of credit risk by diversifying our customer mix. We anticipate that the impact of sales discounts and allowances, including slotting fees, will soften as we expand our distribution globally. Cost of Goods Sold. Our cost of goods sold decreased by $2.6 million in the three months ended June 30, 2024, representing a 24% improvement as a percentage of net sales compared to the three months ended June 30, 2023. Cost of goods sold is divided into five categories: raw material costs, direct and indirect labor, freight (including inbound and inter-company), overhead costs (primarily energy expenses) and depreciation. We are seeking to optimize our supply chain with better pricing from suppliers as inflation pressures decrease. We experienced a decrease in raw material costs, direct and indirect labor, and energy expenses as a percentage of net revenues that were disproportionately high due to plant capacity utilization under 12%. As we increase our plant utilization the labor and overhead rates, as a percentage of sales are expected to improve. Depreciation Expense. Depreciation expense decreased by $0.6 million in the three months ended June 30, 2024, and as a percentage of sales, it decreased 8%, compared to the three months ended June 30, 2023. Following a comprehensive review in the first quarter of 2024, management has decided to adopt a machine-hour-based depreciation method for its manufacturing lines and related assets. We believe that this new approach better aligns with the actual usage and utilization of the assets. As a result, effective April 1. 2024, the Company changed its estimates of the useful lives of its machinery to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the machinery and equipment that was previously calculated in years were changed to hours of production method. Gross Profit. Gross profit increased by $1.5 million, or 24%, as a percentage of net sales for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Gross profit improvement is a direct result of customer diversification and product mix. During the second quarter of 2024, higher margin products accounted for 22% of net sales, for the three months ended June 30, 2024 compared to 7% for the three months ended June 30 2023. 28 By the end of the second quarter of 2023, raw material pricing began to stabilize from the peaks observed in 2022. During the first quarter of 2024, a major retailer requested significant price deductions by way of promotions. Management’s decision in not agreeing to price deductions resulted in our ability to manage customer and product mix which contributed to our gross profit improvement for the quarter. Food service sales slated for 2023 were postponed to 2024 due to the timing of the school calendar. Numerous bids have been awarded which we anticipate will result in a significant increase in school orders for the 2024-2025 school year. Training. Training costs decreased by 3% as a percentage of net sales during the three months ended June 30, 2024, driven by enhanced operational efficiency as two production lines entered their second year. Personnel numbers are expected to fluctuate in response to demand and capacity requirements. Our emphasis on providing training and continuing education continues to have a positive impact on efficiency and productivity, improving Borealis' competitive position in the highly competitive food sector on a global scale. Sales, Marketing and Business Development . Sales, Marketing and Business Development expenses increased by $0.8 million in the three months ended June 30, 2024, representing a 20% increase as a percentage of net sales compared to the Sales and Marketing expenses in the three months ended June 30, 2023. We allocate a significant portion of our Sales and Marketing budget to cover various expenses, including personnel costs, advertising expenditures, distribution costs, and associated occupancy expenses. The increase in Sales, Marketing and Business Development expenses is primarily attributable to one time business development costs to Walmart and Sam’s Club of $1.2 million, brand ambassador costs $0.4 million and Feeding America $0.2 million are included in the three months ended June 30, 2024. Marketing spend will continue to focus on creating awareness of the food brands and supporting sales. Our strategic approach has balanced traditional and digital marketing tactics in support of our retail relationships. This has included retailer specific, digital advertising, e-commerce programs, social media content and ads, social media influencers as well as major celebrity alliance to drive sales. Our multi-platform approach is a competitive strategy that leverages advanced algorithmic and artificial intelligence (AI) tools to increase our speed of execution as well as being able to geo-target ads and content to specific customer markets. G&A. General and Administrative expenses decreased by $0.3 million and represented 53% of net sales in the three months ended June 30, 2024 compared to 48% in the three months ended June 30, 2023. The increase is primarily due to professional fees incurred, in connection with now being publicly traded, of approximately $0.6 million. Salaries and benefits increased by $0.5 million, insurance increased $0.5 million due to additional insurance as a result of the Reverse Recapitalization, and increased freight costs of $0.7 million as a result of customer diversification. Other Expense (Income). Other expenses decreased by $0.7 million in the three months ended June 30, 2024, with interest expenses accounting for a significant portion of the decrease in conjunction with the Reverse Recapitalization. Other expense increased by 8% as a percentage of sales over the three months ended June 30, 2023, resulting from higher aggregate principal amounts of indebtedness outstanding and increased interest accruals. Future increases in interest expense are expected to depend on market conditions as well as capital needs, availability, and financing decisions. 29 Liquidity and Capital Resources On September 8, 2021, Oxus consummated its initial public offering of 15,000,000 units, at a price of $10.00 per unit, generating gross proceeds of $150.00 million. Simultaneously with the closing of the initial public offering, Oxus consummated the sale of 8,400,000 Private Warrants at a price of $1.00 per warrant in a private placement to the transaction sponsor and the underwriters, generating gross proceeds of $8.40 million. On September 13, 2021, the underwriters exercised the over-allotment option in full and purchased an additional 2,250,000 units, generating gross proceeds of $22.50 million. In connection with the underwriters’ exercise of the over-allotment option, Oxus issued an additional 900,000 Private Warrants at a price of $1.00 per warrant in a private placement to the transaction sponsor and the underwriters, generating gross proceeds of $0.90 million. Following the initial public offering and the private placement, a total of $175.95 million was placed in the Trust Account (at $10.20 per Unit). Oxus incurred $4.15 million in transaction costs, including $3.45 million of underwriting fees and $0.70 million of other offering costs in connection with the initial public offering and the private placement. On August 10, 2023, Legacy Borealis entered into a $25,000,000 financing agreement with a maturity date in July 2026. Under this agreement, Borealis (as successor-in-interest to Legacy Borealis) has a $15,000,000 term facility which was used to pay off amounts outstanding under, and to terminate, a then existing line of credit. In addition to the term facility, Legacy Borealis entered into a $10,000,000 revolving line of credit. The term facility and the revolving line of credit are secured by liens on substantially all of the assets of Borealis and its subsidiaries. Interest is payable under the term facility and the revolving line of credit at the annual rate of Prime + 4.75 % and Prime + 4.5%, respectively. As of June 30, 2024, $15 million principal amount was outstanding under the term facility and $5 million principal amount was outstanding under the revolving line of credit. In February 2024, Borealis completed its Reverse Recapitalization, resulting in approximately $50.3 million of convertible debt converting into equity. At the completion of the Reverse Recapitalization, Borealis had marketable securities in the Trust Account of $0.6 million. The reduction in Trust Account holdings resulted principally from shareholder redemptions. Borealis expects lower operating expenses in 2024 with the completion of the Reverse Recapitalization. Based on Borealis’ present business plan and taking into account its working capital and cash anticipated to be generated through operations, Borealis will require additional capital to meet its anticipated funding needs through June 30, 2025. The amount of additional capital required to fund Borealis through June 30, 2025 has been reduced as a result of a change in its business plan that reduced the need for additional capital expenditures relating to the expansion of our production lines beyond the current four production lines. In addition, Borealis continues to seek additional financing. There can be no assurance that such additional financing will be available to Borealis on terms acceptable to it or at all. In the event Borealis’ additional financing efforts are not successful, Borealis may seek to pursue alternatives which may include, among other things, scaling down research and development, business develop investments, and global distribution expansion until such time that new capital has been secured. 30 Going Concern The unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. In connection with Borealis’ assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Update (“ ASU ”) “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, management has determined that recurring losses and cash used in operations in both 2023 and continuing into 2024 raises substantial doubt about Borealis’ ability to continue as a going concern. See Item 1A “Risk Factors” in this Form 10-Q. Cash Flows The following table sets forth our cash flows for the periods indicated (in thousands): Six Months Ended June 30, Year Ended December 31, 2024 2023 2023 2022 Net cash (used in) provided by: Operating Activities $ (11,003) $ (11,209) $ (18,005) $ (24,053) Investing Activities (1,212) (2,855) (4,466) (3,329) Financing Activities 7,728 21,629 24,940 29,624 Cash Flows Used in Operating Activities Net cash used in operating activities during the six months ended June 30, 2024 was $11 million, resulting primarily from a net loss of $14.7 million, adjusted for non-cash charges of $1.4 million in depreciation and amortization, and $1.3 million in stock-based compensation. Net cash used in operating activities during the six months ended June 30, 2023 was $11.2 million, resulting primarily from a net loss of $14.2 million, adjusted for non-cash charges of $1.9 million in depreciation and amortization and $0.3 million in stock-based compensation. Cash Flows Used in Investing Activities Net cash used in investing activities during the six months ended June 30, 2024 was $1.2 million, representing $1.1 million in property and equipment purchases. Net cash used in investing activities during the six months ended June 30, 2023 was $2.9 million, representing additions of $2.9 million in property and equipment purchases. 31 Cash Flows Provided by Financing Activities Net cash provided by financing activities during the six months ended June 30, 2024 was $7.7 million, representing proceeds from convertible debt of $3.0 million, $5.0 million in borrowing on the line of credit, offset by $0.3 million in finance lease payments. Net cash provided by financing activities during the six months ended June 30, 2023 was $21.6 million, which represents $25.0 million in proceeds from convertible debt less $0.5 million in payments to related parties, $2.6 million in note payments and $0.2 million in finance lease payments. Contractual Obligations and Commitments The following table summarizes our non-cancellable contractual obligations and other commitments as of June 30, 2024, 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 * $ 52,126 $ 28,656 $ 11,303 $ 12,167 $ — (*) 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 June 30, 2024 and December 31, 2023, we did not engage in any off-balance sheet arrangements, including the use of structured finance, special purpose entities, or variable interest entities. Emerging Growth Company Status Section 102(b)(1) of 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 32 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 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’ 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. Borealis 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 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 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. Implications of being a Smaller Reporting Company Additionally, Borealis is 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. Borealis 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) Borealis’ 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 Borealis takes advantage of such reduced disclosure obligations, it may also make comparison of its 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 33 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 its 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. “Adjusted EBITDA,” a non-GAAP measure, is defined as net income attributable to us before (1) income taxes, (2) interest expense, of $2.6 million, (3) depreciation and amortization, of $1.4 million (4) other non-operating items, net, of $0.1 million, (5) Training, of $0.9 million, (6) M&A due diligence costs, of $1.5 million, (7) new product launch of $0.8 million, and (8) one-time formulation and product development costs, of $1.3 million, all for the six months ended June 30, 2024. “Adjusted EBITDA,” a non-GAAP measure, is defined as net income attributable to us before (1) income taxes, (2) interest expense, of $1.1 million, (3) depreciation and amortization, of $0.4 million (4) other non-operating items, net, of $0.0 million, (5) Training, of $0.7 million, (6) M&A due diligence costs, of $0.0 million, (7) new product launch, of $0.4 million, and (8) one-time formulation and product development costs, of $0.4 million all for the three months ended June 30, 2024. 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 GAAP. “Adjusted EBITDA,” a non-GAAP measure, is defined as net income attributable to us before (1) income taxes, (2) interest expense, of $3.4 million, (3) depreciation and amortization, of $1.9 million (4) other non-operating items, (5) Training, of $1.5 million, (6) M&A due diligence costs, $2.9 million, (7) new product launch, $0.6 million, and (8) one-time formulation and product development costs, $0.3 million all for the six months ended June 30, 2023. “Adjusted EBITDA,” a non-GAAP measure, is defined as net income attributable to us before (1) income taxes, (2) interest expense, of $1.8 million, (3) depreciation and amortization, of $1.0 million (4) other non-operating items, net, of $0.0 million, (5) Training, of $0.7 million, (6) M&A due diligence costs, $1.3 million, (7) new product launch, of $0.3 million, and (8) one-time formulation and product development costs, 34 $0.0 million all for the three months ended June 30, 2023. 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 GAAP. Recent Accounting Pronouncements See Note 1 to Borealis’ financial statements included elsewhere in this Amended Report for information about recent accounting pronouncements, the timing of their adoption, and Borealis’ assessment, if any, of their potential impact on Borealis’ financial condition and results of operations.