Borealis Foods: Interesting Product But Poor Investment Prospects (NASDAQ:BRLS)

Borealis Foods (NASDAQ:BRLS) recently went public via a SPAC transaction and, like most SPACs, it unfortunately does not meet my investment criteria. I was initially intrigued because the company has a quality product that fits nicely into a market niche, but after a closer look at the financials, I don’t think that the business model is viable. In this article, I will discuss BRLS’s market positioning, operating metrics, possible growth scenarios, and my rationale for passing on this particular investment.

The Product Fills a Market Niche

BRLS sells instant ramen noodles with an emphasis on nutritional value. The company’s flagship brand, “Chef Woo”, offers a vegan, high-protein alternative to the more basic ramen packs and cups you mostly see in the grocery store. BRLS doesn’t sell their Chef Woo line directly to consumers, but its products are sold by well-known retailers such as Walmart, Costco, Amazon.com, and Aldi. I don’t eat much ramen and haven’t tried their products myself, but the reviews on retailer sites are pretty good and in-line with their competitors.

The focus on nutritional value pushes the product to a higher price point than a lot of basic ramen competitors. A 12-pack of their standard beef-flavored noodles currently sells for $30 on Walmart.com, compared to a 24-pack of Nissin Cup Noodles that sells for just $20. But, as advertised, Chef Woo noodles have much more protein per serving (20 grams vs 8 grams for Nissin), less sodium (1130 milligrams vs 1250 milligrams), and less saturated fat (1.5 grams vs 6 grams).

Chef Woo compares favorably to other high-protein ramen brands on price and generally matches their nutritional content. “immi” is another line of high-protein ramen I came across in my research. immi sells direct-to-consumer and are currently charging a whopping $72 for a 12-pack of their noddle cups, which are also smaller than a Chef Woo cup (59 grams vs 71 grams). immi cups provide more fiber, iron, and potassium, but also have more saturated fat and a little less protein.

I see the Chef Woo brand falling into a happy medium niche (rather than an uncanny valley) between nutritional value and price. The product isn’t cheap relative to the more familiar ramen brands, but in absolute terms it remains quite affordable and is a lot cheaper than other high-protein competitors. A Chef Woo cup of noodles has the same calorie count as a McDonald’s cheeseburger, for example, but is only half the price.

I’ll note that BRLS also produces a whole-wheat variety of ramen with a higher fiber count (named “Woodles”); these noodles are sold exclusively in bulk to schools for use in lunch programs. The company has contracts in place for the 2024-2025 school year, but so far, they haven’t shipped any product, and it isn’t clear what percentage of sales this business line will be in the future. BRLS is also targeting other institutions (the military, correctional facilities, and relief organizations) as potential customers, but so far, no deals have been made.

Operating Metrics

Digging into BRLS’s financials, it starts to become clear how they can charge so little compared to other niche players: at this stage they aren’t interested in turning a profit. So far, we only have Q1 data for the post-SPAC entity, but the situation isn’t great. For the quarter, BRLS generated ~$8mm of revenue but made only $243k of gross profit and had just over $7mm of operational expenses and an additional $1.5mm of interest expense. The 10-Q notes that the quarter included ~$2.75mm of one-time expenses related to closing the SPAC deal, but that doesn’t improve their miniscule 3% gross margin. BRLS used over $6.5mm in operational cash flow in just the first quarter and had an additional $.5mm of capital expenditures. The terms of the SPAC merger left BRLS with only $8mm of cash, and the company has needed to add $35mm of debt in the interim.

Can Growth Fix BRLS’s Problems?

In a recent letter to shareholders, CEO Reza Soltanzadeh expressed optimism about the company’s ability to grow revenue in the near future. He highlighted that sales to schools are set to ramp up later this summer and noted that Chef Woo noodles were recently added to over 600 Sam’s Club stores. I have not seen any exact sales estimates from management for these initiatives, but even if they are successful, the company has a tough road ahead of it.

Despite a presence in major retailers, BRLS is only on track for ~$32mm in annual sales and gross margins are thin. I think it is fair to assume that gross margins will increase if sales increase, but raw material cost alone made up over 60% of the cost of goods sold. Even if revenue doubled to $64mm, and we assumed the remaining 40% of cogs somehow stayed fixed, gross margins would only be 22%, well below the average gross margin for the industry of 29%. In order to cover SG&A and annual interest expense, I estimate that BRLS would need to reach about $85mm in annual revenue. Even if margins doubled every year for the next three years and revenue grew at 40% a year over that time, BRLS would barely be breaking even. I am skeptical that this type of growth is possible, and it still wouldn’t be enough for BRLS to reach meaningful profitability. I will note that revenue declined in Q1 compared to Q1 of 2023, so if anything the numbers have been going in the wrong direction.

BRLS is on a tight schedule to show revenue improvements, as they have significant cash burn and limited cash on the balance sheet. If nothing improves, the company only has enough cash to last another 4-5 months without increasing debt or raising additional equity. It would not surprise me to see them issue more shares in the next few months and dilute existing shareholders.

Using the share count from the company’s latest 10-Q, I estimate BRLS’s market cap to be ~$150mm at the time of this writing. For a company with liquidity risks and unproven revenue growth, I don’t think a 5x sales multiple is reasonable. I might change my position if the school contracts can double or triple annual revenue, but without hard numbers to look at or management estimates to assess, I wouldn’t be comfortable investing at that valuation.

Risks to Both a Long and Short Thesis

Despite a product that has market appeal, I think investors in BRLS face many risks. First and foremost, it seems pretty clear that the company is going to need to raise cash sooner rather than later. I think an equity raise is more likely than debt, which means investors face potential dilution risk. I also think there is a real question if the business is viable in the long term. BRLS can’t cut prices enough to compete with the cheap ramen options without hitting negative gross margins, and it is unclear if they can raise prices without subjecting themselves to increased competition from other high-protein options.

That being said, I wouldn’t be comfortable shorting the company either. BRLS has a decent story behind it, real products, and an enthusiastic CEO. The announcement of a large contract with a major school system or other institution could lead to a spike in the share price, and it isn’t impossible for management to raise enough cash to keep the company afloat indefinitely. I don’t think a short position would be practical anyway, given the company’s relatively low liquidity (under $1mm in daily volume) and lack of put options.

Conclusion

While I am interested in BRLS’s product line, I am not interested in an investment in the company. I think BRLS is likely going to have to do an equity raise later this year, and I’m not sure that their business model is viable in the long term. Sentiment traders might be able to make money on short-term price movements in the stock, but that isn’t my area of expertise, and I’d rather find something else to buy.