|9 Months Ended|
Sep. 30, 2023
Note 2 - Liquidity
The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In accordance with ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued.
The Company has historically funded its operations with cash flow from operations, equity capital raises, and note payable agreements from investors, in addition to bank loans. The Company's principal uses of cash have been debt service, capital expenditures, working capital, and funding operations. The Company incurred net losses of approximately $13.7 million during the nine months ended September 30, 2023. Cash used in operating activities was approximately $6.4 million for the nine months ended September 30, 2023. As of September 30, 2023, the Company has approximately $11.4 million of indebtedness and working capital excluding cash and debt of $3.6 million which compares to the $7.6 million as of December 31, 2022 .
During the third quarter of 2022, the Company secured a term loan in the maximum amount of $6.0 million, with $4.0 million being advanced upon execution and up to two additional $1.0 million advances available to the Company subject to performance hurdles. Additionally, the Company secured an asset based line of credit with a $8.0 million credit limit subject to accounts receivable and inventory balances. The term loan and asset based line of credit were secured in order to augment the Company's liquidity, as needed, through the execution of management's plan. The Company had drawn $4.0 million of the term loan and $2.9 million (net of repayments) of the asset based line of credit as of September 30, 2023. See Note 5 for a description of the asset based line of credit and Note 6 for a description of the term loan.
The Company has experienced a slower sell-through of its rationalized slow-moving, and obsolete inventory than expected due to many other consumer packaged goods companies conducting similar inventory management and rationalization programs at the same time creating a surplus of goods in the channels commonly used to sell off this type of rationalized slow-moving, or obsolete inventory. Additionally, as previously mentioned, in the fourth quarter of 2022 and during the first half of 2023, the Company experienced irregular order patterns from its retail and distribution customers due to what it believes to be working capital management activities not specific to the Company's products in which retailers and distributors may have sought to bring down their inventory levels broadly.
In 2023, the Company has had to make significant investments in its working capital to support increased distribution with marquee retailers coming online throughout the year. Many of these distribution gains have been secured in large part due to the new packaging design. Accordingly, the Company has had to build and projects continuing to build net new inventories to support these upcoming resets.
The investment in inventory ahead of sales has put pressure on the Company's liquidity position given the structure and terms of its credit facilities and has required it to seek external financing. Ultimately, these conditions, events, and general uncertainty around the current state of the capital markets has raised substantial doubt about the Company's ability to continue as a going concern.
On April 19, 2023, the Company issued an aggregate of $4.1 million in principal amount of secured promissory notes to select accredited investors carrying a 12% accrued interest rate to help support the working capital and growth needs of the business. The aggregate principal amount of the notes is inclusive of $1.2 million from related parties. These notes have a maturity date of December 31, 2023.
In June 2023, the Company entered into an at-the-market equity offering sales agreement with Craig-Hallum Capital Group LLC, that established a program pursuant to which they may offer and sell up to $5.7 million of our Class A common stock from time to time in at-the-market transactions. The Company sold an aggregate of 194,949 shares under the at-the-market equity facility for gross proceeds of $1.0 million as of September 30, 2023. As of September 30, 2023, $4.7 million remains available under the facility.
Throughout the third quarter of 2023, the Company has strategically managed down its inventory levels, as planned, which has yielded a positive contribution to operating cash flow of approximately $2.0 million.
While these most recent financings have provided the Company with liquidity to support its near-term goals, given the December 31, 2023 maturity date of the April 2023 debt financing, the Company is still evaluating several different strategies to enhance its liquidity position. These strategies may include, but are not limited to, pursuing additional actions under the Company's business reorganization plan, seeking to refinance or extend the term of such debt and seeking additional financing from both the public and private markets through the issuance of equity or debt securities. The outcome of these matters cannot be predicted with any certainty at this time. If capital is not available to the Company when, and in the amounts needed, it could be required to delay, scale back, or abandon some of its operations, which could materially harm its business, financial condition and results of operations.
Notwithstanding the foregoing, the Company has examined spending throughout its business and continues to identify ways to drive efficiencies, eliminate unnecessary expense, and focus on the highest and best use of each dollar. The Company has also sought to optimize its channel strategy and rationalize its customer and product portfolio to eliminate sales that detract from its profitability goals. The Company also anticipates further reductions in its inventory levels through the balance of the year which could be a near-term source of liquidity augmenting its existing debt and equity facilities.
The Company has prepared cash flow forecasts which indicate that based on its expected operating losses and cash consumption due to growth in working capital, it believes that absent an infusion of sufficient capital there is substantial doubt about its ability to continue as a going concern for twelve months after the date the condensed consolidated financial statements for the quarter ended September 30, 2023 are issued. The Company's plan includes the items noted above as well as securing external financing which may include raising debt or equity capital. These plans are not entirely within the Company's control including its ability to raise sufficient capital on favorable terms, if at all.