What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-19 compared with 2020-06-29 · 69 added, 56 removed, 90 unchanged (58% of the section changed)

12 unchanged sentences

We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe.

We also market and sell vacuum sealing machines, home organizing and container products, Candy Blossoms and party goods.

We also market and sell Candy Blossoms and party goods.

As of January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method.

27 unchanged sentences

Summary of Subsequent Events

On April 30, 2020, the Company executed a promissory note (the “Note”) with PNC Bank National Association (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $1,047,700 (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”).

The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S.

Small Business Administration (“SBA”).

All the funds under the PPP Loan were disbursed to the Company on April 23, 2020.

The Note provides for a fixed interest rate of one percent per year with a maturity date of April 30, 2022 (the “Maturity Date”).

Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of disbursement of the PPP Loan.

The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums.

The Note contains customary event of default provisions.

Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP.

Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities.

In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal.

The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt.

The Company will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness;

however, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments

On June 1, 2020, Mr.

John Schwan resigned as Chairman of the Board of Directors, Mr.

Li was appointed as the Chairman of the Board of Directors, Mr.

Stephen Merrick resigned as Director, Corporate Secretary, and General Counsel and Frank Cesario was appointed as Secretary.

As previously disclosed on a Current Report on Form 8-K of Yunhong CTI Ltd., on December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association (“Lender”).

Prior to January 13, 2020, certain events of default under the Loan Agreement had occurred (the "Prior Defaults").

On January 13, 2020, a Limited Waiver, Consent, Amendment No.

5 and Forbearance Agreement (the “Forbearance Agreement”) between Lender and the Company became effective, pursuant to which Lender agreed to, among other things, forebear from exercising the rights and remedies in respect of the Prior Defaults afforded to Lender under the Loan Agreement for a period ending no later than December 31, 2020 (the “Forbearance Period”).

On June 15, 2020, the Lender provided the Company notice (the “Default Notice”) that (i) an additional Event of Default (as defined in the Loan Agreement) had occurred and is continuing as a result of the Company's failure to maintain a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the "March FCCR Default"), (ii) as a result of the occurrence and continuance of the March FCCR Default, the Forbearance Period has ended, and (iii) as a result of the termination of the Forbearance Period, the Lender is entitled to exercise immediately all of its rights and remedies under the Loan Agreement including, without limitation, ceasing to make further advances to the Company and declaring all obligations to be immediately due and payable in accordance with the Loan Agreement.

The Lender has continued to make advances to the Company (“Discretionary Advances”), although it is not required to do so under the terms of the Loan Agreement due to the Events of Default.

On July 17, 2020, the Lender provided the Company notice that multiple previously disclosed events, which each constitute an Event of Default, are continuing to occur.

Additionally, the Lender required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020.

Absent such commitment, the Lender advised that it may cease making discretionary advances to the Company.

On July 22, 2020, the Company’s board of directors (the “Board”) authorized the Company to seek such funding and, to ensure that the Company met the Lender’s equity funding commitment deadline, Mr.

Yubao Li, the Company’s Chairman, committed that, in the event the Company does not obtain funding of at least $3,000,000 by August 31, 2020, he would provide the necessary funding.

During 2020, warrants were issued in conjunction with the equity financing as described herein and the rebranding of the Company.

The majority of these warrants were exercised during July 2020.

During July 2020, Tradigital Marketing Group exercised 250,000 warrants in exchange for 171,000 shares of the Company’s common stock.

Also during July 2020, Garden State Securities and its executive managing director exercised a combined 250,000 warrants in exchange for 161,000 shares of the Company’s common stock.

During August 2020, an investor (Tobin) in the 2020 convertible preferred equity program exercised all 27,660 shares of convertible preferred stock into 276,600 shares of common stock.

An additional 11,000 shares of common stock were issued to the same investor representing the 8% interest on the convertible preferred shares.

Comparability

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These changes have been applied for all periods presented.

The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and expects to divest its CTI Europe (Germany) subsidiary in 2020.

The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and expects to divest its CTI Europe (Germany) subsidiary in September 2020.

Results of Operations

For the three month period ended March 31, 2020, net sales were $7,068,000, compared to net sales of $8,680,000 for the same period of 2019.

For the three month periods ended March 31, 2020 and 2019, net sales by product category were as follows:

For the three and six month periods ended June 30, 2020, net sales were $5,745,000 and $12,813,000, compared to net sales of $9,202,000 and $17,882,000 for the same periods of 2019, respectively.

For the three month period ended June 30, 2020 and 2019, net sales by product category were as follows:

Three Months Ended

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Product Category

4 unchanged sentences

Film Products

Home Organization

For the six month period ended June 30, 2020 and 2019 net sales by product category were as follows:

Six Months Ended

June 30, 2020

June 30, 2019

Product Category

(000) Omitted

Metalized Balloons

Latex Balloons

Film Products

Foil Balloons .

Revenues from the sale of foil balloons decreased from $5,554,000 during the three month period ended March 31, 2019 by to $4,492,000 during the three month period ended March 31, 2020, representing a decrease of 19%.

Sales to our largest balloon customer decreased from $3,861,000 during the first three months of 2019 to $3,222,000 during the first three months of 2020.

Revenues from the sale of foil balloons increased during the three months period from $2,857,000 ending June 30, 2019 compared to $3,372,000 during the three month period of 2020.

Revenues from the sale of foil balloons decreased during the six month period from $8,411,000 ending June 30, 2019 compared to $7,864,000 during the six month period of 2020.

Due to COVID-19 related issues, graduation season did not occur as it normally does.

This is the third strongest event in our annual sales period.

While we believe these orders were delayed and not cancelled, it nonetheless was impactful on our first quarter results.

On a related note, many smaller customers were forced to close for extended periods during shelter-in-place restrictions that began March 2020.

Anticipated delays by customers caused shipments to be lower during April and May.

As balloons were featured in many parties, including graduations, during shelter in place, June saw a significant increase in shipments.

On a related note, many smaller customers were forced to close for extended periods during shelter-in-place restrictions that began March 2020 and began to reopen during May and June 2020.

Latex Balloons.

Revenues from the sale of latex balloons decreased from $1,739,000 during the three month period ended March 31, 2019 to $1,583,000 during the three month period ended March 31, 2020, representing a decrease of 9%.

Revenues from the sale of commercial films decreased from $761,000 during the three month period ended March 31, 2019, to $215,000 during the three month period ended March 31, 2020, representing a decrease of 72%.

Revenues from the sale of latex balloons were $1,115,000 and $2,698,000 during the three and six month periods ended June 30, 2020, compared to $2,231,000 and $3,970,000 during the same periods of 2019.

Latex balloons encountered a similar COVID-19 constraint, as production activities were severely limited by the Mexican government.

Revenues from the sale of commercial films were $371,000 and $586,000 during the three and six month periods ended June 30, 2020, compared to $478,000 and $1,239,000 during the same periods of 2019.

Our main customer had restructured their program in the first quarter both related to COVID-19 disruption and also the integration of a merger partner.

Other Revenues .

Revenues from the sale of other products increased from $465,000 during the three month period ended March 31, 2019 to $778,000 during the three month period ended March 31, 2020, representing an increase of 67%.

The revenues from the sale of other products during the first three months of 2020 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers in the amount of $704,000 and (ii) the sale of accessories and supply items related to balloon products.

Revenues from the sale of other products were $887,000 and $1,665,000 during the three and six month periods ended June 30, 2020, compared to $3,636,000 and $4,262,000 during the same periods of 2019.

The revenues from the sale of other products during the first six months of 2020 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers and (ii) the sale of accessories and supply items related to balloon products.

Sales to a limited number of customers continue to represent a large percentage of our net sales.

The table below illustrates the impact on sales of our top three and ten customers for the three month periods ended March 31, 2020 and 2019.

Three Months Ende d March 31,

The table below illustrates the impact on sales of our top three and ten customers for the six month periods ended June 30, 2020 and 2019.

Three Months Ende d June 30 ,

Top 3 Customers

Top 10 Customers

During the three month period ended March 31, 2020, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales.

Sales to this customer for the three month period ended March 31, 2020 were $3,222,000, or 45% of consolidated net sales.

Sales to this customer for the three months ended March 31, 2019 was $3,861,000, or 45% of consolidated net sales.

As of March 31, 2020, the total amount owed to the Company by this customer was approximately $2,097,000, or 29% of the Company’s consolidated net accounts receivable.

The amount owed at March 31, 2019 by this customer was approximately $2,933,000, or 39% of the Company’s consolidated net accounts receivable.

Six Months Ende d June 30,

Top 3 Customers

Top 10 Customers

During the six month period ended June 30, 2020, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales.

Sales to this customer for the six month period ended June 30, 2020 was $5,675,000, or 44% of consolidated net sales.

Sales to this customer for the six months ended June 30, 2019 was $6,630,000, or 37% of consolidated net sales.

As of June 30, 2020, the total amount owed to the Company by this customer was approximately $1,757,000, or 25% of the Company’s consolidated net accounts receivable.

The amount owed at June 30, 2019 by this customer was approximately $1,044,000, or 15% of the Company’s consolidated net accounts receivable.

Cost of Sales .

During the three month period ended March 31, 2020, the cost of sales was $5,586,000, compared to $6,723,000 for the same period ended March 31, 2019.

The reduction in cost of sales was largely due to lower sales volume, net of related inefficiencies.

During the three and six month periods ended June 30, 2020, the cost of sales was $5,136,000 and $10,722,000, compared to $9,135,000 and $15,858,000, respectively, for the same periods of 2019.

The reduction in cost of sales was largely due to the termination of the vacuum sealing product line, reduced presence in the form of discontinued subsidiaries, and a temporary reduction in orders related to COVID-19.

General and Administrative .

During the three month period ended March 31, 2020, general and administrative expenses were $702,000 as compared to $1,359,000 for the same period in 2019.

During the three and six month periods ended June 30, 2020, general and administrative expenses were $1,484,000 and $2,186,000 as compared to $1,419,000 and $2,784,000 respectively, for the same periods in 2019.

Selling , Advertising and Marketing .

During the three month period ended March 31, 2020, selling, advertising and marketing expenses were $54,000 as compared to $119,000 for the same period in 2019.0.

During the three and six month periods ended June 30, 2020, selling, advertising and marketing expenses were $108,000 and $288,000 as compared to $282,000 and $566,000, respectively, for the same periods in 2019.

Other Income (Expense) .

During the three month period ended March 31, 2020, the Company incurred interest expense of $441,000 as compared to interest expense of $564,000 during the same period of 2019.

For the three month period ended March 31, 2020, the Company had a foreign currency transaction loss of $154,000 during 2019 and $6,000 loss during same period of 2019.

For the three month period ending March 31, 2019 the company recorded a $1.2 million charge related to goodwill impairment and no impairment charge was recorded in the three month period ended March 31, 2020.

During the three and six month periods ended June 30, 2020, the Company incurred interest expense of $337,000 and $778,000 as compared to interest expense of $533,000 and $1,097,000 during the same periods of 2019.

During the three months ended June 30,2020 the Company recorded $800,000 of other income for the Payroll Protection Program, PPP, anticipated grant related to payroll, utility and rent payments.

For the three month and six month periods ended June 30, 2020, the Company had a foreign currency transaction gain/(loss) of $(30,000) and $(184,000) as compared to a gain/(loss) of $9,000 and $3,000 during the same periods of 2019.

Financial Condition, Liquidity and Capital Resources

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Operating Activities .

During the three months ended March 31, 2020, net cash provided by operations was $842,000, compared to net cash provided by operations during the three months ended March 31, 2019 of $665,000.

Significant changes in working capital items during the nine months ended March 31, 2020 included:

During the six months ended June 30, 2020, net cash used in operations was $228,000, compared to net cash provided by operations during the six months ended June 30, 2019 of $3,198,000.

Significant changes in working capital items during the six months ended June 30, 2020 included:

A decrease in accounts receivable of $1,154,000 compared to a decrease in accounts receivable of $2,162,000 in the same period of 2019.

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Investing Activity.

During the three months ended March 31, 2020, cash used in investing activity was $19,000, compared to cash used in investing activity for the same period of 2019 in the amount of $52,000.

During the six months ended June 30, 2020, cash used in investing activity was $72,000, compared to cash used in investing activity for the same period of 2019 in the amount of $73,000.

Financing Activities .

During the three months ended March 31, 2020, cash used in financing activities was $1,700,000 compared to cash used in financing activities for the same period of 2019 in the amount of $808,000.

During the six months ended June 30, 2020, cash used in financing activities was $949,000 compared to cash used in financing activities for the same period of 2019 in the amount of $3,726,000.

Financing activity consisted principally of changes in the balances of revolving and long-term debt.

During 2020, the Company has sold 542,660 shares of Series A Preferred to multiple investors for an aggregate purchase price of $5.4 million.

Liquidity and Capital Resources .

At March 31, 2019, the Company had cash balances of $160,000 compared to cash balances of $175,000 for the same period of 2019.

As of March 31, 2020, the Company was not in compliance with its Credit Facility with PNC.

For this reason, $2.0 million of long-term debt was reclassified as current debt as of March 31, 2020.

At June 30, 2020, the Company had cash balances of $104,000 compared to cash balances of $178,000 for the same period of 2019.

As of June 30, 2020, the Company was not in compliance with its credit facility, operating under a forbearance agreement.

For this reason, $1.7 million of long-term debt was reclassified as current debt as of June 30, 2020.

Failure to ultimately regain compliance with the terms of our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to carry on our business up to and including our ability to continue as a going concern.

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The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

No material changes to such information have occurred during the three months ended March 31, 2020.

No material changes to such information have occurred during the three and six months ended June 30, 2020.

Quantitative and Qualitative Disclosures Regarding Market Risk

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis