brls-20240930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Borealis Foods Inc.

(Exact name of registrant as specified in its charter)

Ontario

001-40778

98-1638988

(State or other jurisdiction of

incorporation or organization)

(Commission File Number)

(I.R.S. Employer

Identification Number)


1540 Cornwall Rd. #104 Oakville, Ontario						L6J 7W5
(Address of principal executive offices)						(Zip Code)

Registrant’s telephone number, including area code: (905) 278-2200

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

Trading Symbol:

Name of Each Exchange on Which Registered:

Common Shares

BRLS

Nasdaq

Warrants

BRLSW

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	x
Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 13, 2024, 21,378,890 Common Shares of the registrant, no par value, were issued and outstanding.

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) filed by Borealis Foods Inc. contains statements that are forward-looking and as such are not historical facts. This includes, without limitation, statements regarding the financial position, business strategy and the plans and objectives of management for future operations. These statements constitute projections, forecasts, and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “strive,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. When we discuss our strategies or plans, we are making projections, forecasts, or forward-looking statements. Such statements are based on the beliefs of, as well as assumptions made by and information currently available to, Borealis’ management.

Forward-looking statements may include, for example, statements about:


			●			our limited operating history makes it difficult to evaluate our business and prospects;


			●			we may be unable to execute our business plan or maintain our competitive position and high-level customer satisfaction if we fail to maintain adequate operational and financial resources, fail to obtain additional financing, particularly if we continue to grow rapidly;
			●			we have substantial debt burden, a significant portion of which matures soon and requires repayment or refinancing;


			●			our management team has limited experience managing a public company;
			●			we are an early stage and emerging growth company and, as such, we are subject to all the risks associated with early stage and emerging growth companies;
			●			we have identified material weaknesses in our internal control over financial reporting; if we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our Common Shares;
			●			our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern;
			●			a significant portion of our revenue is concentrated with a limited number of customers;


			●			adverse climate conditions may have an adverse effect on our business. We may take various actions to mitigate our business risks associated with climate change, which may require us to incur substantial costs and may not be successful, due to, among other things, the uncertainty associated with the longer-term projections associated with managing climate risks;


			●			our dependence on suppliers may materially adversely affect our operating results and financial position;


			●			manufacturing and production forecasts are based on multiple assumptions. We must adequately estimate our manufacturing capacity and inventory supply. If we overestimate our demand and overbuild our capacity or inventory, we may have significantly underutilized assets. Underutilization of our manufacturing facilities can adversely affect our gross margin and other operating results;


			●			we may experience volatility in costs for ingredients and packaging due to conditions that are difficult to predict;


			●			our future success will depend, in part, on our ability to maintain our technological leadership, enhance our current food products, develop new food products that meet changing customer needs and preferences, advertise and market our food products, and influence and respond to emerging industry standards and other technological changes on a timely and cost-effective basis;


			●			our business depends on our use of proprietary technology relying heavily on laws to protect such technology;


			●			we will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives; and


			●			other factors detailed in Part II. Item 1A. “Risk Factors” in this Quarterly Report.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report or incorporated by reference in our Form 8-K/A filed with the U.S. Securities and Exchange Commission (the "SEC") on April 15, 2024.

These forward-looking statements are based on information available as of the date of this Quarterly Report and current expectations, forecasts, and assumptions, and involve a number of judgments, risks, and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities laws. We intend the forward-looking statements contained in this Quarterly Report to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”.

As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.

Borealis Foods Inc. and Subsidiaries

Form 10-Q for the Three and Nine Months Ended September 30, 2024


		Page
PART I. FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1

	Condensed Consolidated Balance Sheets (Unaudited)	1

	Condensed Consolidated Statements of Operations (Unaudited)	2

	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)	3

	Condensed Consolidated Statements of Cash Flows (Unaudited)	5

	Notes to the Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

SIGNATURES		56

iii

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Borealis Foods Inc. and Subsidiaries

Condensed Consolidated Balance Sheets


	September 30, 2024		December 31, 2023
	(Unaudited)
Assets
Current Assets
Cash	$	721,542	$	7,615,630
Accounts receivable, net of allowance for credit losses of $320,650 as of September 30, 2024 and $224,433 as of December 31, 2023	2,907,790		1,775,756
Inventories, net	8,750,399		6,945,028
Prepaid expenses	1,048,029		845,878
Total current assets	13,427,760		17,182,292

Property, plant and equipment, net	46,066,397		46,408,540
Intangible assets	253,017		—
Right - of-use asset, net	77,311		108,469
Goodwill	1,917,356		1,917,356
Other non-current assets	169,685		169,685
Total assets	$	61,911,526	$	65,786,342

Liabilities and Shareholders' equity (deficit)
Current liabilities:
Accounts payable and accrued expenses	$	8,596,330	$	10,887,730
Due to related parties	15,427,453		7,825,790

Convertible notes payable, current portion	—		47,300,000
Notes payable, current portion, net of capitalized loan costs	5,706,934		681,121
Operating lease payable, current portion	17,776		43,794
Finance leases payable, current portion	550,212		565,353
Total current liabilities	30,298,705		67,303,788

Line of credit	6,500,000		—
Convertible notes payable, net of current portion	3,000,000		3,000,000
Notes payable, net of current portion	14,149,885		13,509,189
Operating lease payable, net of current portion	43,793		71,119
Finance leases payable, net of current portion	1,283,129		1,683,308
Deferred tax liability	1,566,233		1,566,233
Total liabilities	56,841,745		87,133,637

Shareholders' equity (deficit)
Common shares, no par value	—		—
Additional paid-in capital	90,096,688		44,118,081
Accumulated deficit	(85,026,907)		(65,465,376)
Total shareholders' equity (deficit)	5,069,781		(21,347,295)
Total liabilities and shareholders' equity (deficit)	$	61,911,526	$	65,786,342

See accompanying notes to the unaudited condensed consolidated financial statements.

Borealis Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023

Gross sales	$	8,075,788	$	8,264,745	$	22,036,285	$	23,870,009
Sales discounts & allowances	(387,889)		(539,392)		(1,127,673)		(1,342,799)
Revenue, net	7,687,899		7,725,353		20,908,612		22,527,210
Cost of goods sold	5,953,089		7,205,527		17,109,095		21,449,469


Depreciation	461,540		996,625		1,861,351		2,938,098
Total cost of goods sold	6,414,629		8,202,152		18,970,446		24,387,567
Gross profit (loss)	1,273,270		(476,799)		1,938,166		(1,860,357)

Sales & marketing	1,123,460		312,289		5,073,810		1,677,316
Business development	1,306,589		196,243		2,475,764		435,015
Training	477,752		651,500		1,364,149		2,130,207
General & administrative expenses	1,986,517		2,786,155		8,807,852		9,332,345
Total sales, general & administrative expenses	4,894,318		3,946,187		17,721,575		13,574,883

Loss from operations	(3,621,048)		(4,422,986)		(15,783,409)		(15,435,240)


Other income expense
Other income (expense)	(2,765)		4,298		3,368		163,588



Interest expense	(1,207,524)		(2,166,413)		(3,766,542)		(5,535,932)
Total other expense	(1,210,289)		(2,162,115)		(3,763,174)		(5,372,344)
Loss before income taxes	(4,831,337)		(6,585,101)		(19,546,583)		(20,807,584)
Income tax expense	(832)		—		(14,948)		(15,092)
Net loss	$	(4,832,169)	$	(6,585,101)	$	(19,561,531)	$	(20,822,676)


Earnings per share from net loss
Basic	$	(0.23)	$	(0.61)	$	(0.98)	$	(1.94)
Diluted	$	(0.23)	$	(0.61)	$	(0.98)	$	(1.94)

Weighted average shares outstanding
Basic	21,378,890		10,731,583		19,951,016		10,731,583
Diluted	21,378,890		10,731,583		19,951,016		10,731,583

See accompanying notes to the unaudited condensed consolidated financial statements.

Borealis Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)


	Three and Nine Months Ended September 30, 2023
	Class A Common Shares			Class B Common Shares			Class C Common Shares			Additional Paid-In Capital	Accumulated Deficit				Total Shareholders’ Deficit
	Number of Shares	Common Shares		Number of Shares	Common Shares		Number of Shares	Common Shares
Balance at January 1, 2023	100,000,000	$	—	56,008,749	$	—	6,345,000	$	—		$	42,625,786	$	(37,986,129)		$	4,639,657
Expense related to stock options (Note 8)	—	—		—	—		—	—			193,554		—			193,554
Net loss	—	—		—	—		—	—			—		(5,935,580)			(5,935,580)
Balance at March 31, 2023	100,000,000	—		56,008,749	—		6,345,000	—			42,819,340		(43,921,709)			(1,102,369)
Expense related to stock options (Note 8)	—	—		—	—		—	—			98,436		—			98,436
Net loss	—	—		—	—		—	—			—		(8,301,995)			(8,301,995)
Balance at June 30, 2023	100,000,000	—		56,008,749	—		6,345,000	—			42,917,776		(52,223,704)			(9,305,928)
Expense related to stock options (Note 8)	—	—		—	—		—	—			100,151		—			100,151
Marketing representative issued equity (Note 1)	—	—		1,109,205	—		—	—			1,000,000		—					1,000,000
Net loss	—	—		—	—		—	—			—		(6,585,101)			(6,585,101)
Balance at September 30, 2023	100,000,000	$	—	57,117,954	$	—	6,345,000	$	—		$	44,017,927	$	(58,808,805)				$	(14,790,878)

See accompanying notes to the unaudited condensed consolidated financial statements.

Borealis Foods Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)


	Three and Nine Months Ended September 30, 2024
	Class A Common Shares			Class B Common Shares			Class C Common Shares			Additional Paid-In Capital	Accumulated Deficit				Total Shareholders’ Deficit
	Number of Shares	Common Shares		Number of Shares	Common Shares		Number of Shares	Common Shares
Balance at January 1, 2024	100,000,000	$	—	56,008,749	$	—	6,345,000	$	—		$	44,118,081	$	(65,465,376)		$	(21,347,295)
Expense related to stock options (Note 8)	—	—		—	—		—	—			1,273,053		—			1,273,053
Convertible debt converted to equity from reverse recapitalization	—	—		—	—		—	—			54,991,472		—			54,991,472
Assumption of debt from reverse recapitalization	—	—		—	—		—	—			(10,285,918)		—			(10,285,918)
Conversion to Newco shares from reverse recapitalization	(78,621,110)	—		(56,008,749)	—		(6,345,000)	—			—		—			—
Net loss	—	—		—	—		—	—			—		(8,431,622)			(8,431,622)
Balance at March 31, 2024	21,378,890	—		—	—		—	—			90,096,688		(73,896,998)			16,199,690

Net loss	—	—		—	—		—	—			—		(6,297,740)			(6,297,740)
Balance at June 30, 2024	21,378,890	$	—	—	$	—	—	$	—		$	90,096,688	$	(80,194,738)		$	9,901,950




Net loss	—	—		—	—		—	—			—		(4,832,169)			(4,832,169)
Balance at September 30, 2024	21,378,890	$	—	—	$	—	—	$	—		$	90,096,688	$	(85,026,907)		$	5,069,781

See accompanying notes to the unaudited condensed consolidated financial statements.


Borealis Foods Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)
	For the Nine Months Ended September 30, 2024		For the Nine Months Ended September 30, 2023
Cash Flows from Operating Activities:
Net loss	$	(19,561,531)	$	(20,822,676)


Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation expense related to stock options	1,273,053		392,141
Depreciation and amortization	1,861,351		2,938,098
Amortization of loan costs	232,798		28,266
Provision for credit losses	96,217		49,642
Provision for inventory reserve	(33,534)		(141,440)

Changes in operating assets and liabilities:
Accounts receivable	(1,228,251)		(726,552)
Inventories	(1,771,837)		(389,911)
Prepaid expenses and other	(202,151)		119,921
Operating lease payable	(22,185)		—
Accounts payable and accrued expenses	5,085,952		2,497,246
Net cash used in operating activities	(14,270,118)		(16,055,265)

Cash flows from investing activities
Purchases of property, plant and equipment	(1,519,208)		(3,516,490)
Purchases of intangible assets	(253,017)		—
Proceeds from reverse capitalization	63,575		—
Net cash used in investing activities	(1,708,650)		(3,516,490)

Cash flows from financing activities
Net payments to related parties	—		(500,000)
Proceeds from convertible notes payable	3,000,000		25,000,000
Payments on convertible notes payable	—		(4,500,000)
Payments on finance leases payable	(415,320)		(366,846)
Borrowings on line of credit	6,500,000		—
Payments on line of credit	—		(10,630,000)
Proceeds from notes payable	—		15,000,000
Payments on loan fees	—		(607,436)
Net cash provided by financing activities	9,084,680		23,395,718

Net change in cash	(6,894,088)		3,823,963
Cash, beginning of period	7,615,630		5,146,616

Cash, end of period	$	721,542	$	8,970,579

Supplemental cash flow data
Cash paid during the period for:
Interest	$	2,314,683	$	2,540,446
Income taxes	14,116		15,092

Non-cash investing and financing activities

Conversion of notes payable into Class A shares	(54,991,472)		—
Note payable supplier finance	2,747,833		—
Note payable accounted for as due to related party	7,601,661		—

See accompanying notes to the unaudited condensed consolidated financial statements.

Borealis Foods Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2024 and 2023

1. Description of Business and Summary of Significant Accounting Policies

Overview

These unaudited condensed consolidated financial statements include the financial statements of Borealis Foods Inc. (“Borealis”), and its subsidiaries: Palmetto Gourmet Foods (Canada) Inc., ("PGF Canada"), Palmetto Gourmet Foods, Inc. (“PGF”), PGF Real Estate I, Inc. (“PGF RE I”), PGF Real Estate II, Inc. (“PGF RE II”), and Borealis IP Inc ("Borealis IP") (collectively, the “Company”).

Borealis is a food technology integrator with a mission to address global food security challenges through the development and commercialization of tasty, affordable and sustainable functional foods. Borealis has developed a range of high-quality, affordable, sustainable, and nutritious premium, ready-to-eat meals sold in the United States, Canada, Central America, South America and Europe.

PGF Canada is a holding company, holding the shares of PGF.

PGF is a food manufacturing company with a BRC AA+ rated food grade facility .

PGF RE I and PGF RE II are holding companies that rent their fixed assets to PGF.

Borealis IP holds the intellectual property of the Company.

Intercompany balances and transactions have been eliminated in consolidation.

Reverse Recapitalization Transaction

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

Borealis Foods Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2024 and 2023

Reverse Recapitalization Transaction (continued)

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.”

Accounting Impact of the Reverse Recapitalization

The transaction was accounted for as a reverse recapitalization. Oxus Acquisition Corp. was deemed the accounting predecessor and Borealis is the successor Securities and Exchange Commission (“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 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. Transaction costs incurred and unpaid by Oxus were converted into debt (Note 4) and show as a reduction in additional paid-in capital.

Going Concern

The unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company suffered recurring losses from operations through September 30, 2024 that raise substantial doubt about its ability to continue as a going concern.

The Company was in a net loss position and had negative cash flows from operations for the periods ended September 30, 2024 and 2023.

The Company expects lower operating costs for the remainder of 2024 as the Company incurred approximately $1,506,000 of transaction expenses, and $1,273,000 of employee stock compensation expenses related to the Reverse Recapitalization.

As a result, substantial doubt continues to exist about the ability of the Company to continue as a going concern within one year from November 13, 2024, the date that the condensed consolidated financial statements were available to be issued.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and the Company’s functional currency is the U.S. Dollar.

Borealis Foods Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2024 and 2023

Basis of Presentation (continued)

We have condensed certain categories of information in our consolidated financial statements to enhance the readability and understanding of those statements by making them more succinct. As a result, certain footnote disclosures we normally include in our annual consolidated financial statements have been omitted but remain prepared in accordance with US GAAP and the rules and regulations of the SEC. In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These unaudited condensed consolidated financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2023 contained in Form 8-K/A filed with the SEC by Borealis on April 15, 2024. Certain prior period amounts have been reclassified to conform to current period presentation.

Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Company classifies all highly liquid securities with stated maturities of three months or less from the date of purchase as cash equivalents. There were no cash equivalents as of September 30, 2024 and December 31, 2023.

Inventories, net

Inventories are stated at the lower of cost or net realizable value. The cost of raw materials is determined using the first-in, first-out method. The cost of finished goods is determined using the weighted average cost method.

A reserve is recorded for any food inventory that is expired (or expected to expire before sale) and any raw materials for projects that have been discontinued.

Prepaid Expenses

Prepaid expenses include approximately $1,048,000 and $846,000 composed primarily of prepaid insurance, deposits on inventory purchases and property, plant and equipment purchases as of September 30, 2024 and December 31, 2023, respectively.

Property, Plant and Equipment, net

Property, plant, and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets or, where applicable, based on actual machine hours utilized.

Borealis Foods Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2024 and 2023

Property, Plant and Equipment, net (continued)

Management has opted to depreciate the manufacturing lines and related assets using the machine hours method, as it provides a more accurate reflection of the actual utilization and wear of these assets. This approach ensures that the depreciation expense aligns more closely with the assets' usage patterns, thereby improving the matching of costs with related revenues.

This change in depreciation method was a change in estimate effected by a change in accounting principle and accordingly was accounted for prospectively in accordance with relevant guidance. The change in the method of calculating depreciation resulted in an increase in net income of $548,000 for the three-month period ended and $1,158,000 for the nine-month period ended September 30, 2024. Since this adjustment is applied prospectively, it has no impact on the financial results for periods prior to June 30, 2024. The total cost basis of machinery subject to depreciation over machine hours was approximately $35,275,000 as of September 30, 2024 and $35,255,000 as of December 31, 2023.

Straight-line assets:


Buildings and improvements			10-30 years
Furniture, fixtures and equipment			3-15 years

Machine hours assets:


Furniture, fixtures and equipment			89,232 machine hours

Construction in progress includes the cost of property, plant and equipment being constructed or otherwise not yet in service. Costs include materials, labor, capitalized interest, engineering and testing costs, and other costs necessary to get the assets ready for their intended use.

Intangible Assets

Patents are recorded at cost and are amortized on a straight-line basis over their estimated useful lives. The carrying value of patents is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Loan Costs

The costs of obtaining equipment leases and debt issuance costs are amortized over the term of the respective obligations, using the straight-line method. US GAAP requires that the effective yield method be used to amortize debt issuance costs; however, the effect of using the straight-line method is not materially different from the results that would have been obtained under the effective yield method. Amortization of loan costs is included as a component of interest expense in the accompanying consolidated statements of operations. Loan costs are shown as reduction of related debt balances for financial statement presentation.

Borealis Foods Inc. and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2024 and 2023

Goodwill

The Company’s goodwill resulted from a prior year acquisition. Go

SEC Form 10-Q filed by Borealis Foods Inc.