Borealis Foods Inc. 10-K

Item 7. 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 audited financial statements and the notes thereto included in Part II, Item 8 of this Annual Report. The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Annual Report. Certain information contained in the discussion and analysis set forth below includes 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 this Annual Report on Form 10-K. The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. Management has not applied any critical accounting estimates but has identified certain accounting policies as critical to understanding the financial condition and results of operations. For a detailed discussion on the application of these and other accounting policies, see the notes to the consolidated financial statements included in this Annual Report on Form 10-K. Our historical financial statements have been prepared under the assumption that we will continue as a going concern. Our registered public accounting firm has issued a report on our consolidated financial statements for the years ended December 31, 2024 and 2023, that includes an explanatory paragraph expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to obtain additional equity or debt financing. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. However, if adequate funds are not available to us when we need them, we could be unable to fund our ongoing business, which, in turn, could cause our customers or suppliers to decrease the amount of business they do with us or terminate their relationship with us, or we could be unable to fund our ongoing business, which, in turn, could cause our customers or suppliers to decrease the amount of business they do with us or terminate their relationship with us, or we could go into default on our outstanding indebtedness, which, in turn, would permit our creditors to enforce remedies against us and cause us to consider reducing, discontinuing, or selling operations or seeking protection from creditors. The substantial doubt regarding our potential ability to continue as a going concern may adversely affect our ability to obtain new financing on reasonable terms or at all. Additionally, if we are unable to continue as a going concern, our shareholders may lose some or all of their investment in our Company. Any one or more of such events would have a material adverse effect on our business, financial condition, results of operations and cash flow. 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 2024, 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 27 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. 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 7 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’ consolidated financial statements were prepared in accordance with U.S. GAAP. See Note 1 to our consolidated financial statements for a full description of our basis of presentation. 28 Results of Operations The following sets forth a summary of our results of operations for the presented months ($ in thousands): Comparison of the Years Ended December 31, 2024 and 2023 Years Ended December 31, 2024 2023 2024 vs 2023 Variance $ % of Revenues, net $ % of Revenues, net $ % of Prior Period Revenues Gross sales 29,100 31,377 (2,277) Sales discounts & allowances (1,431) (5)% (1,392) (5)% (39) —% Revenue, net 27,669 29,985 (2,316) Cost of goods sold 23,156 84% 27,352 91% (4,196) (7)% Depreciation 2,324 8% 3,937 13% (1,613) (5)% Total cost of goods sold 25,480 92% 31,289 104% (5,809) (12)% Gross profit (loss) 2,189 8% (1,304) (4)% 3,493 12% Sales & marketing 5,733 21% 2,238 7% 3,495 14% Business development 2,395 9% 819 3% 1,576 6% Training 1,715 6% 2,727 9% (1,012) (3)% General & administrative expenses 12,751 46% 12,861 43% (110) 3% Total sales, general & administrative expenses 22,594 82% 18,645 62% 3,949 20% Loss from operations (20,405) (74)% (19,949) (67)% (456) (7)% Total other expense (5,057) (18)% (7,866) (26)% 2,809 8% Loss before income taxes (25,462) (92)% (27,815) (93)% 2,353 1% Income tax benefit 135 —% 336 1% (201) (1)% Net loss $ (25,327) (92)% $ (27,479) (92)% $ 2,152 —% Other financial Data Adjusted EBITDA $ (4,822) (17)% $ (5,133) (17)% $ 312 —% Adjusted EBITDA is a non-GAAP financial metric. See “Reconciliation of EBITDA and Adjusted EBITDA” below for a reconciliation of net income to EBITDA and Adjusted EBITDA for each applicable period. Revenue and Customer Trends Net Revenue declined 8% year-over-year to $27.7 million in 2024. The decline was primarily driven by the rationalization of low-margin SKUs and the reduction in volume with mass retail partners. Gross profit improved to $2.2 million, compared to a gross loss of $1.3 million in the prior year. Net gross margin, less depreciation improved from 9% ($-1.3 million + $3.9 million divided by $30.0 million) to 16% ($2.2 million + $2.3 million divided by $27.7 million), a 7% increase year-over-year. Revenue concentration with Walmart was reduced to 22% of total sales, from 57% in the prior year. We replaced most of our Ramen Express brand shelf space to launch Chef Woo and Gordon Ramsay products in the soup aisle, a major pivot to our high margin flag ship brands. This change in strategy allows major national ramp up of our high protein ramen products without pricing pressure from low cost competition. The launch of our products in food service to supply educational and other institutional customers is expected to be a major driver of the company's future revenues. 29 Product Mix and Margin Enhancement Chef Woo - High Protein Ramen, our flag ship brand, generated revenue of $10.4 million, an increase of 200% year over year, representing 38% of total gross sales. We also launched our Food Service product line, which generated revenue totaling $3.75 million in its first year. Gross margin less depreciation improved to 16% in 2024, compared to 9% in 2023. This turnaround was driven by an improved product mix, SKU optimization, and enhanced operational controls. Key drivers of margin expansion included: • Product Mix • Customer Mix • Operational efficiencies The increased contribution from Chef Woo and the launch of Food Service product lines played a significant role in enhancing profitability, reflecting our efforts to emphasize branded, premium-positioned offerings. Operating Expenses and SG&A Trends Sales, General, and Administrative (SG&A) expenses rose 21% year over year to $22.6 million, or 82% of net revenue, compared to 62% in the prior year. The increase reflected ongoing investments in organizational development, brand building, and customer acquisition. Sales and Marketing expenses nearly doubled to $5.73 million. Within that, advertising costs increased to $4.49 million, primarily associated with brand development and influencer/social media driven marketing for national launch of products. Major effort was made in 2024 to develop new business channels and strategic partnerships with significant monetization opportunity. Administrative expenses decreased to $12.75 million, a decrease of 1% year-over-year, driven by: • A decline in professional fees of $2.1 million, as one-time legal and audit costs from the prior year did not recur. Professional fees and transactional expenses related to the merger, meeting public-company regulatory requirements in the prior year. • A 50% increase in wages and benefits to $3.8 million, reflecting added headcount and increased compensation results in a 5% increase as a percentage of sales. • An $832,000 increase in freight costs due to our broader distribution and diversification of customer mix. Stock-based compensation expense, related to the immediate vesting of stock options associated with the reverse recapitalization, totaled $1.3 million, representing non-cash charges related to long-term incentive programs. Interest and Other Income/Expense Interest expense totaled $5.1 million, a decline from $7.9 million in the prior year. The reduction resulted from: . • Conversion of debt to equity • Lower reliance on high-interest debt instruments. 30 No gains or losses were recognized on the sale of assets in the current year as compared to $963,000 loss recognized during the prior year. Foreign currency gains were minimal, totaling $3,600. Liquidity and Capital Resources As of year-end, we had $0.6 5 million in cash, $1.97 million in accounts receivable, net and $2.23 million in finished good inventory compared to $7.62 million in cash, $1.78 million in accounts receivable net and $1.94 million in finished goods inventory as of the prior year end. The reduction in cash was attributable to operating cash use, inventory build-up to support institutional accounts, and SG&A expenditures. Following our SPAC merger and public listing on Nasdaq, we did not receive any proceeds from the SPAC trust, as redemption totaled 100%. Additionally, the Company incurred substantial transaction-related costs, which placed immediate strain on available working capital. This liquidity constraint limited the Company’s ability to pursue new customer relationships, fund promotions, and invest in broader marketing initiatives. In addition, one-time extraordinary cost of shipping in raw materials precluded the Company from taking advantage of quantity discounts. Liquidity constraints had a major impact on the cost of raw materials impacting the company's gross margin significantly. With improved liquidity savings in cost of raw materials and shipping is expected to have a significant impact on the Company's gross margins. Current liabilities decreased 62% to $25.4 million, primarily driven by the conversion of notes payable to equity as a result of the reverse recapitalization. Cash Flows The following table sets forth our cash flows for the periods indicated ($ in thousands): Years Ended December 31, 2024 2023 Net cash (used in) provided by: Operating Activities $ (15,090) $ (18,005) Investing Activities (1,907) (4,466) Financing Activities 10,034 24,940 31 Operating Activities Net cash used in operating activities for the year ended December 31, 2024, was $15.09 million, primarily driven by the net loss of $25.33 million, adjusted for non-cash charges of $2.32 million for depreciation and amortization, and $1.27 million for stock-based compensation. This represents an improvement from the $18.01 million used in the same period of 2023, as Borealis Foods benefited from enhanced gross profit due to the performance of high-margin products like Chef Woo and Woodles, which partially offset operational expenses. Investing Activities Net cash used in investing activities was $1.91 million for the year ended December 31, 2024, primarily attributable to purchases of property and equipment, offset by proceeds from the reverse recapitalization, to support production scale and efficiency improvements. This increase from $4.47 million in 2023 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 year ended December 31, 2024, was $10.03 million, driven by proceeds from convertible debt and additional credit facility utilization. In comparison, financing activities in the year ended December 31, 2023, were $24.94 million, largely attributable to the Reverse Recapitalization proceeds and debt restructuring efforts. The financing activities in 2024 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 2025, particularly to support our expansion in retail and digital channels. As of December 31, 2024, we had cash-on-hand of $0.65 million and negative working capital of $13.61 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. 32 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 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 April 15, 2025. The Company expects that operating costs will decrease in future periods. During 2024, the Company incurred approximately $1.51 million of transaction expenses, and $1.27 million in employee stock compensation expenses associated with a Reverse Recapitalization. These were non-recurring costs, and management anticipates improved operating efficiency moving forward. Despite the Company’s current financial position, management is actively pursuing several strategic and operational initiatives to improve liquidity and profitability, including: • Continued efforts to reduce sales, general, and administrative expenses for the year ended December 31, 2025. • Exploration of financing options, including equity or debt issuances, to strengthen the balance sheet. Contractual Obligations and Commitments The following table summarizes our non-cancellable contractual obligations and other commitments as of December 31, 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 * $ 59,242 $ 25,406 $ 33,836 $ — $ — (*) 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 December 31, 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. 33 Warrants The following represents a summary of warrants outstanding and exercisable on December 31, 2024: Description Issue Date Classification Exercise Price Expiration Date Outstanding Shares Exercisable Shares Private Placement Warrants 9/13/2021 Equity $ 11.50 2/7/2029 9,300,000 9,300,000 Public Warrants 9/13/2021 Equity $ 11.50 2/7/2029 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, except the private placement warrants were not transferable, assignable or salable until 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 34 Emerging Growth Company Status (continued) 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. 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 35 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 tax benefit, of $(0.13) million, (2) grant revenue, of $—, (3) exchange rate, of $—, (4) loss on disposal, of $—, (5) interest expense, of $5.06 million, (6) depreciation and amortization, of $2.32 million, (7) training, of $1.72 million, (8) business transaction costs, of $3.17 million, (9) new product launch of $3.73 million, (10) business development and other extraordinary charges, of $3.37 million, and (11) deferred stock compensation $1.27 million, all for the fiscal year ended December 31, 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 tax benefit, of $(0.34) million, (2) grant revenue, of $(0.30) million, (3) exchange rate, of $(0.07) million, (4) loss on disposal, of $0.96 million, (5) interest expense, of $7.24 million, (6) depreciation and amortization, of $3.94 million, (7) training, of $2.73 million, (8) business transaction costs, $5.41 million, (9) new product launch, $0.82 million, (10) business development and other extraordinary charges, $1.46 million, and (11) deferred stock compensation $0.49 million, all for the fiscal year end December 31, 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 Foods’ financial statements included elsewhere in this Annual 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. 36 Item 7.A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risk in the ordinary course of our business. Market Risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rates. Concentration Risk The Company extends unsecured credit to its customers in the ordinary course of business. Payment terms are generally net 30 days with discounts amounting up to 10% for early payments. Accounts receivables are written off when they are determined to be uncollectible based on the financial stability of its customers and existing economic conditions. Sales to two customers accounted for approximately 33% and sales to one customer accounted for approximately 57% of net revenues for the fiscal year December 31, 2024 and 2023, respectively. Accounts receivable from three and two customers amounted to approximately 37% and 50% of total accounts receivable as of December 31, 2024 and 2023, respectively. Substantially all of the Company's sales for the years ended December 31, 2024 and 2023 occurred in the United States, Canada, Central America, South America, and Europe. Purchases from 10 vendors accounted for approximately 47% and 50% of purchases during the fiscal year December 31, 2024 and 2023, respectively. Accounts payable to these vendors totaled approximately $3,217,000 and $430,000 as of December 31, 2024 and 2023, respectively. Foreign Currency Risk Our customers are primarily located in the United States, Central America, South America, Germany, and Canada; therefore, foreign exchange risk exposures arise from transactions denominated in currencies other than our functional and reporting currency (U.S. dollars). To date, a majority of our sales have been denominated in U.S. dollars and a significant portion of our operating expenses are denominated in Canadian dollars. We also purchase certain of our key manufacturing inputs in Euros. As we expand our presence in international markets, our results of operations and cash flows may increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign currency exchange rates. To date, we have not entered into any hedging arrangements to minimize the impact of these fluctuations in the exchange rates. We will periodically reassess our approach to manage our risk relating to fluctuations in currency rates. We do not believe that foreign currency risk had a material effect on our business, financial condition, or results of operations during the periods presented. Inflation Risk We do not believe that inflation had a significant impact on our results of operations for any periods presented in our consolidated financial statements. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs with product price increases, and our inability or failure to do so could harm our business, financial condition, and results of operations. 37 Matching Revenues with Costs Certain Selling, General and Administrative costs have been expensed in the period incurred. These costs, include business development costs, transaction costs and research and development costs, consist primarily of personnel and related expenses including salaries, benefits, share-based compensation, scale-up expenses, depreciation and amortization expenses, and facility lease costs. Scale-up expenses includes material waste costs, production personnel costs and various related expenses. These costs are focused on enhancements to our existing product formulations and production processes, as well as the scientific development of new products and economic verticals. We believe continued innovation and these new verticals are expected to capture a larger share of consumers. Monetization of future opportunities created by the above investment are expected to be realized in future quarters. 38