10-Q: Borealis Foods Inc. Reports Second Quarter 2024 Results, Navigates Market Challenges and Focuses on Strategic Growth

Borealis Foods Inc. reports a net loss for the second quarter of 2024, while also showing improvements in gross profit and cost of goods sold, and navigating a strategic shift in customer and product mix.

Summary

• Borealis Foods Inc. reported a net loss of $6.3 million for the three months ended June 30, 2024, and a net loss of $14.7 million for the six months ended June 30, 2024.
• Net sales decreased by 17% in the second quarter and 11% in the first six months of 2024 compared to the same periods in 2023, primarily due to pricing negotiations and reductions with a major customer.
• The company experienced a 24% improvement in cost of goods sold as a percentage of net sales in the second quarter and 14% improvement in the first six months of 2024 compared to the same periods in 2023.
• Gross profit increased by 24% in the second quarter and 14% in the first six months of 2024 as a percentage of net sales, driven by customer diversification and product mix.
• Sales, marketing, and business development expenses increased by 20% in the second quarter and 17% in the first six months of 2024, due to one-time business development costs and brand ambassador expenses.
• General and administrative expenses increased by 5% in the second quarter and 18% in the first six months of 2024, primarily due to professional fees related to the reverse recapitalization and increased stock compensation expenses.
• The company changed its depreciation method for manufacturing lines to a machine-hour-based method, resulting in an increase in net income of $590,000 for both the three-month and six-month periods ended June 30, 2024.
• Borealis is focusing on diversifying its customer base and product mix to improve profitability and reduce reliance on a single customer.
• The company expects lower operating costs for the remainder of 2024 due to the completion of the reverse recapitalization and related expenses.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While there are positive developments like improved gross profit and cost management, the significant net losses, going concern doubts, and reliance on a few customers raise concerns. The company is in a challenging position and needs to demonstrate its ability to execute its strategic plans and secure additional funding.

Positives

• The company achieved a significant improvement in gross profit margin, indicating better cost management and pricing strategies.
• Borealis is actively diversifying its customer base, reducing reliance on a single major customer.
• The change in depreciation method to machine-hour-based is expected to provide a more accurate reflection of asset utilization.
• The company is optimizing its supply chain to achieve better pricing from suppliers.
• Borealis is seeing positive results from its strategic approach to product diversification and market adaptability.

Negatives

• The company experienced a decrease in net sales of 17% in the second quarter and 11% in the first six months of 2024 compared to the same periods in 2023.
• Borealis continues to operate at a net loss, indicating ongoing financial challenges.
• The company has identified material weaknesses in its internal control over financial reporting.
• A significant portion of revenue is still concentrated with a limited number of customers, posing a risk.
• The company's independent auditor has expressed substantial doubt about its ability to continue as a going concern.

Risks

• The company's limited operating history makes it difficult to evaluate its business and prospects.
• Borealis may be unable to execute its business plan or maintain its competitive position if it fails to maintain adequate operational and financial resources.
• The company has a substantial debt burden, a significant portion of which matures soon and requires repayment or refinancing.
• The management team has limited experience managing a public company.
• Borealis is an early-stage and emerging growth company, subject to all the risks associated with such companies.
• The company has identified material weaknesses in its internal control over financial reporting.
• A significant portion of revenue is concentrated with a limited number of customers.
• Adverse climate conditions may have an adverse effect on the business.
• The company's dependence on suppliers may materially adversely affect operating results and financial position.
• Manufacturing and production forecasts are based on multiple assumptions, and overestimation of demand could lead to underutilized assets.
• The company may experience volatility in costs for ingredients and packaging.
• The company's future success depends on its ability to maintain technological leadership, enhance products, and develop new products.
• The business depends on the use of proprietary technology and laws to protect it.
• The company will incur significant increased costs as a result of operating as a public company.

Future Outlook

Borealis expects lower operating costs for the remainder of 2024 due to the completion of the reverse recapitalization. The company anticipates new retail distribution, strategic partnerships, and institutional sales to commence in the third and fourth quarters of 2024. Borealis will require additional capital to meet its anticipated funding needs through June 30, 2025.

Management Comments

• Management chose to seek to improve profitability through customer and product mix diversification.
• Management has decided to adopt a machine-hour-based depreciation method for its manufacturing lines and related assets.
• Management believes that the new approach better aligns with the actual usage and utilization of the assets.
• Management is seeking to optimize the supply chain with better pricing from suppliers as inflation pressures decrease.

Industry Context

The report highlights the challenges faced by companies in the plant-based food industry, including competition, changing consumer preferences, and supply chain issues. Borealis is navigating these challenges by diversifying its customer base and product mix, and by focusing on cost management and operational efficiency. The company's strategic partnerships and expansion into new markets are aligned with industry trends towards increased demand for plant-based products.

Comparison to Industry Standards

• The company's gross profit margin improvement is a positive sign, but its net losses are concerning compared to more established players in the food industry.
• The company's reliance on a few major customers is a risk, which is not uncommon for early-stage companies but needs to be addressed for long-term stability.
• The change in depreciation method is a move towards more accurate accounting practices, which is in line with industry standards.
• The company's focus on sustainability and affordability aligns with growing consumer demand for such products, but it needs to demonstrate its ability to scale and compete effectively.
• Compared to companies like Beyond Meat and Impossible Foods, Borealis is still in an early stage of development and needs to show consistent revenue growth and profitability.

Related Party Transactions

• Amounts due to related parties total $15,427,453 as of June 30, 2024, and $7,825,790 as of December 31, 2023. This includes a note payable to a shareholder in the amount of $7,325,790, due on demand and bearing interest at 10% annually.
• An additional note payable to a shareholder in the amount of $500,000 at June 30, 2024 and December 31, 2023, respectively, bears interest at 10% annually and is due December 31, 2024.
• The remaining $7,601,661 shareholder note payable was a result of expenses recognized by Oxus and resulted in reduction of contributed equity at the Reverse Recapitalization. This note matures in February 2025, and is non interest bearing.

Stakeholder Impact

• Shareholders face the risk of further dilution and potential loss of investment due to the company's financial challenges and need for additional capital.
• Employees may be affected by potential cost-cutting measures or changes in the company's operations.
• Customers may experience changes in product availability or pricing as the company adjusts its strategies.
• Suppliers may be impacted by the company's efforts to optimize its supply chain and reduce costs.
• Creditors face the risk of potential default if the company is unable to secure additional financing or improve its financial performance.

Next Steps

• The company will focus on diversifying its customer base and product mix.
• Borealis will continue to optimize its supply chain and manage costs.
• The company will seek additional financing to meet its funding needs.
• Borealis will implement a remediation plan to address material weaknesses in internal control over financial reporting.
• The company will continue to monitor and respond to changes in consumer preferences and market trends.

Key Dates

Keywords

plant-based food, ramen, food technology, financial results, net loss, gross profit, cost of goods sold, reverse recapitalization, customer diversification, internal control, debt, going concern