Borealis Foods Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Borealis sells plant-based ready-to-eat meals, including ramen, primarily in the U.S. and Canada. The company completed its reverse recapitalization with Oxus on February 7, 2024; its financial statements reflect the transaction from that date.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Gross revenue | $8.48 million | $8.78 million |
| Net revenue | $7.90 million | $8.35 million |
| Gross profit (loss) | $0.24 million | $(0.34) million |
| Gross margin | 3% | (4)% |
| Operating loss | $(6.97) million | $(4.56) million |
| Net loss | $(8.43) million | $(5.94) million |
| Cash used in operations | $(6.77) million | $(5.91) million |
- Net revenue declined about 5%. Gross margin improved, but SG&A rose to $7.22 million from $4.22 million, contributing to a wider operating and net loss. Basic and diluted loss per share was $0.49, versus $0.55.
- At March 31, cash was $8.21 million and current assets were $22.18 million, against current liabilities of $28.81 million—a working-capital deficit of approximately $6.63 million.
- Total liabilities were $54.13 million. Borrowings included $5.0 million drawn on a revolving line, $3.0 million of convertible debt, and approximately $27.3 million of notes payable; finance leases and $7.83 million due to related parties were also outstanding. Related-party amounts include $7.33 million due on demand at 10% and a $0.5 million note due December 2024 at 10%.
- Financing activities provided $7.85 million, including $5.0 million of line-of-credit borrowing and $3.0 million of convertible-note proceeds. Investing activities used $0.49 million, principally for property and equipment. Cash increased by $0.60 million during the quarter.
Changes versus the prior comparable period
- Net sales allowances increased to $0.59 million, or 7% of gross revenue, from $0.42 million, or 5%. Management attributed this to product mix, customer diversification and higher slotting fees.
- Cost of goods sold fell $1.05 million, and the gross result improved by $0.59 million. Higher-margin products were 35% of net sales, compared with 10% a year earlier. Management said plant utilization remained below 20%, weighing on labor and overhead costs.
- Sales and marketing expense increased to $2.42 million from $0.72 million, primarily due to a brand ambassador and increased marketing. General and administrative expense increased to $4.32 million from $2.52 million; Q1 2024 included approximately $1.51 million of transaction costs and $1.27 million of stock compensation.
- Depreciation was approximately $0.99 million, while interest expense was $1.46 million. Net loss increased despite the improvement in gross profit.
Outlook, risks and unusual items
- Going concern: Management states that recurring losses and operating cash outflows raise substantial doubt about the company’s ability to continue as a going concern within one year from May 20, 2024. The company says it needs additional capital to meet anticipated funding needs through March 31, 2025; financing availability and terms are uncertain.
- Management expects lower operating costs for the rest of 2024, citing transaction expenses and recapitalization-related stock compensation in Q1. It also reduced planned capital needs by limiting production-line expansion beyond the current four lines.
- Management said new retail distribution and institutional sales were expected to commence in Q3 and Q4 2024, and anticipated increased school orders for the 2024–2025 school year. These are expectations, not reported results or quantified guidance.
- The company amended its $15 million term facility in March 2024 to extend maturity to March 2028. Monthly principal payments of $83,000 are scheduled to begin in March 2025, with a $12.167 million lump sum due at maturity. The $10 million revolving facility had $5 million drawn at quarter-end.
- Customer concentration remains material: two customers generated approximately 58% of Q1 net revenue, and two customers represented approximately 74% of accounts receivable. The filing also identifies supplier concentration, low facility utilization, input-cost volatility, competition, and foreign-exchange exposure as risks.
- Management reported that disclosure controls and internal control over financial reporting were not effective at March 31, 2024, citing material weaknesses in inventory controls and complex technical accounting. Remediation measures have begun but were not yet considered complete.
- The reverse recapitalization converted significant convertible debt into equity. The filing reports 26.55 million public and private warrants outstanding, exercisable at $11.50 per share, creating potential dilution. No material legal proceedings or subsequent events requiring disclosure were reported.
Important facts for investors to verify
- Whether Borealis secures sufficient financing to address its stated funding needs through March 31, 2025, and the resulting effect on liquidity, debt and dilution.
- Whether planned retail, institutional and school sales materialize, and whether customer concentration and receivable collection risks decline.
- Whether plant utilization improves from below 20% enough to support sustainable gross margins and operating performance.
- Progress in remediating the material weaknesses in inventory controls and technical accounting, including whether controls are tested and become effective.
- The terms and cash-flow implications of debt maturities and scheduled payments, and the potential dilution from warrants and other equity-linked instruments.