Note 2 - Liquidity and Going Concern

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 shareholders and private investors, in addition to institutional 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 $10.0 million during the nine months ended September 30, 2024. Cash used in operating activities was approximately $5.1 million for the nine months ended September 30, 2024. As of September 30, 2024, the Company has a working capital deficit of $14.3 million which compares to $7.4 million as of December 31, 2023.

Late in the third quarter of 2022, the Company secured a term loan in the amount of $4.0 million. 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 transformation plan. The Company's initial draw on the term loan was $4.0 million taken in 2022 and as of September 30, 2024, $4.0 million (net of repayments) has been drawn on the asset based line of credit. The unused committed capacity under the asset based line of credit is approximately $4.0 million as of September 30, 2024, however, actual borrowing availability at any time is subject to advance rates on accounts receivable and inventory balances. No amount remained available to draw under the term loan as of September 30, 2024. See Note 5 for a description of the asset based line of credit and Note 6 for a description of the term loan.

During the nine months ended September 30, 2024, the Company issued an aggregate of $3.4 million in principal amount of unsecured convertible promissory notes (the “Convertible Notes”) to select accredited investors to fund operations. The aggregate principal amount of the Convertible Notes is inclusive of $1.7 million from related parties. During the third quarter of 2024, the Company issued $0.8 million in principal amount of an unsecured promissory note (the “Nonconvertible Note”) to a related party to fund operations. See Note 6 for further discussion.

The Company is currently evaluating several different strategies to enhance our liquidity position. These strategies may include, but are not limited to, pursuing additional actions under our business transformation plan, seeking additional financing from both the public and private markets through the issuance of equity securities and seeking to extend the term of outstanding debt. The outcome of these matters cannot be predicted with any certainty at this time. There can be no assurance that the Company will be able to raise the capital it needs to continue its operations on satisfactory terms or at all. In November 2024, the Company closed on a public offering receiving gross proceeds of approximately $2.9 million before deducting estimated offering expenses; however, the Company needs additional funding to execute its business plan and continue operations. If capital is not available to the Company when, and in the amounts needed, the Company could be required to liquidate our inventory and assets, cease or curtail operations, which could materially harm its business, financial condition and results of operations, or seek protection under applicable bankruptcy laws or similar state proceedings.

The Company has prepared cash flow forecasts which indicate that based on its expected operating losses and cash consumption in order to fund working capital growth, the Company 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, 2024 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 our ability to raise sufficient capital on favorable terms, if at all.