YUNHONG GREEN CTI LTD. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   Forward Looking Statements   This Quarterly Report on Form 10-Q includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Quarterly Report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors.”   Overview   We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and most of our foil balloons at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, and Latin America. We also market and sell Candy Blossoms and party goods.   18 Table of Contents   Summary of Subsequent Events   On July 30, 2021, Yunhong CTI Ltd. (the “Company”) entered into an agreement (the “Agreement”) whereby it agreed to the redemption of all of its equity interests in Flexo Universal S. de R.L. de C.V., a Mexican corporation (“Flexo”), in a transaction whereby Kingman Distributions, S.A. DE C.V, a Mexican corporation (the “Buyer”), will become the majority owner of Flexo (the “Transaction”).   In connection with the Transaction, Flexo will purchase and redeem all of the Company’s equity interests in Flexo in return for a purchase price of Five Hundred Thousand Dollars ($500,000), of which One Hundred Thousand Dollars ($100,000) is to be paid at the closing of the Transaction, and the remainder is to be paid in installments over twelve months following the closing date (the “Installment Obligations”). The Installment Obligations are to be secured by a pledge of the assets of Flexo, as well as by guaranties provided by the Buyer and Pablo Gortazar, an individual with an ownership interest in Flexo, pursuant to a Guaranty and Security Agreement to be entered into among the Company, the Buyer, Flexo and Mr. Gortazar at the closing.   The closing is conditioned on, among other things, (i) the Company being released from all obligations in connection with its guaranty of the real property lease for Flexo’s operating location in Guadalajara, Mexico, and (ii) the Company repaying its obligations in full to PNC Bank, National Association (“PNC”) pursuant to the terms of the Revolving Credit, Term Loan and Security Agreement, dated as of December 14, 2017, as amended, between the Company and the bank. The Transaction closed on October 28, 2021.       Comparability   In July 2019, management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they were not accretive to the Company overall, added complexity to the Company’s structure and utilized resources. Therefore, as of July 19, 2019, the Board authorized management to divest these international subsidiaries. These actions were taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these international operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter of 2019, its Ziploc product line in the first quarter of 2020, and its CTI Europe (Germany) subsidiary in the second quarter of 2021.       Results of Operations   Net Sales . For the three month periods ended September, 2021 and 2020, net sales were $6,234,000 and $5,981,000, respectively.   For the three-month period ended September, 2021 and 2020, net sales by product category were as follows:       Three Months Ended       September 30, 2021     September 30, 2020       $     % of     $     % of   Product Category   (000) Omitted     Net Sales     (000) Omitted     Net Sales                                     Foil Balloons     4,295       69%       4,515       76%                                     Latex Balloons     1,052       17%       1,014       17%                                     Film Products     689       11%       78       1%                                     Other     198       3%       374       6%                                     Total     6,234       100%       5,981       100%     19 Table of Contents   For the nine-month periods ended September 30, 2021 and 2020, net sales were $19,975,000 and $18,794,000, respectively.   For the nine-month period ended September 30, 2021 and 2020, net sales by product category were as follows:       September 30, 2021     September 30, 2020       $     % of     $     % of   Product Category   (000) Omitted     Net Sales     (000) Omitted     Net Sales                                     Foil Balloons     13,900       70%       12,380       66%                                     Latex Balloons     2,359       12%       3,712       20%                                     Film Products     1,639       8%       664       3%                                     Other     2,078       10%       2,038       11%                                     Total     19,975       100%       18,794       100%     Foil Balloons . Revenues from the sale of foil balloons decreased during the three-month period ending September 30, 2020 from $4,515,000 compared to $4,295,000 during the three-month period of 2021. Revenues from the sale of foil balloons increased during the nine-month period ending September 30, 2020 from $12,380,000 compared to $13,900,000 during the nine-month period of 2021. Due to COVID-19 related issues, graduation season did not occur as it normally does during 2020. This is the third strongest event in our annual sales period.   Latex Balloons. Revenues from the sale of latex balloons were $1,052,000 and $2,359,000 during the three- and nine-month periods ended September 30, 2021, compared to $1,014,000 and $3,712,000 during the same periods of 2020. Latex balloons encountered a COVID-19 constraint, as production activities were severely limited by the Mexican government.   Films . Revenues from the sale of commercial films were $689,000 and $1,639,000 during the three- and nine-month periods ended September 30, 2021, compared to $78,000 and $664,000 during the same periods of 2020.   Other Revenues . Revenues from the sale of other products were $198,000 and $2,078,000 during the three- and nine-month periods ended September 30, 2021, compared to $374,000 and $2,038,000 during the same periods of 2020. The revenues from the sale of other products during the first nine months of 2021 and 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- and nine-month periods ended September 30, 2021 and 2020.       Three Months Ended September 30,       % of Sales       2021     2020                     Top 3 Customers     71 %     73 %                   Top 10 Customers     86 %     88 %   20 Table of Contents       Nine Months Ended September 30,       % of Sales       2021     2020                     Top 3 Customers     71 %     62 %                   Top 10 Customers     87 %     91 %   During the three and nine months ended September 30, 2021 and 2020, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three and nine months ended September 30, 2021 and 2020 are as follows:       Three Months Ended     Three Months Ended       September 30, 2021     September 30, 2020   Customer   Net Sales     % of Net Sales     Net Sales     % of Net Sales   Customer A   $ 3,304,000       53 %   $ 3,737,000       63 % Customer B   $ 617,000       10 %   $ -       0   %         Nine Months Ended     Nine Months Ended       September 30, 2021     September 30, 2020   Customer   Net Sales     % of Net Sales     Net Sales     % of Net Sales   Customer A   $ 10,648,000       53 %   $ 8,190,000       44 % Customer B   $ 2,384,000       12 %   $ 2,912,000       16 %   As of September 30, 2021, the total amounts owed to the Company by these customers were approximately $1,422,000 or 27% of the Company’s consolidated net accounts receivable. The amounts owed at September 30, 2020 by these customers were approximately $2,220,000 or 42% of the Company’s consolidated net accounts receivable.   Cost of Sales . During the three- and nine-month period ended September 30, 2021, the cost of sales was $5,659,000 and $17,442,000, compared to $5,720,000 and $16,442,000 respectively for the same period of 2020 due to higher sales volume.    General and Administrative . During the three- and nine-month period ended September 30, 2021, general and administrative expenses were $1,062,000 and $3,439,000 compared to $1,067,000 and $3,254,000 respectively for the same period in 2020.   Selling, Advertising and Marketing . During the three- and nine-month period ended September 30, 2021, selling, advertising and marketing expenses were $103,000 and $350,000 as compared to $101,000 and $384,000 respectively for the same period in 2020.   Gain on Sale of Assets . On April 23, 2021, the Company sold its facility in Lake Barrington, Illinois and as a result of the sale recognized a gain amounting to $3,357,000.   Other Income (Expense) . During the three- and nine-month period ended September 30, 2021, the Company incurred interest expense of $114,000 and $527,000 compared to interest expense of $255,000 and $1,033,000 respectively during the same period of 2020.  Interest expense decreased due to the reduction of the Company's senior debt facility.   For the three- and nine-month period ended September 30, 2021, the Company had a foreign currency transaction loss of $27,000 and $18,000 as compared to a gain of $15,000 and $169,000 respectively during the same period of 2020.   Financial Condition, Liquidity and Capital Resources   Cash Flow Items.   Operating Activities . During the nine months ended September 30, 2021, net cash used in operations was $2,939,000, compared to net cash provided by operations during the nine months ended September 30, 2020 of $995,000.   21 Table of Contents   Significant changes in working capital items during the nine months ended September 30, 2021 included:     ● An increase in accounts receivable of $52,000 compared to a decrease in accounts receivable of $2,916,000 in the same period of 2020.   ● An increase in inventory of $551,000 compared to a decrease in inventory of $2,315,000 in 2020.   ● A decrease in trade payables of $833,000 compared to an increase in trade payables of $852,000 in 2020.   ● A gain on sale of assets of $3,357,000 in 2021 and nil in 2020   ● A decrease in prepaid expenses and other assets of $844,000 compared to a decrease of $290,000 in 2020.    ● An increase in accrued liabilities of $680,000 compared to a decrease in accrued liabilities of $140,000 in 2020.     Investing Activity . During the nine months ended September 30, 2021, cash provided by investing activity was $3,401,000, compared to cash used in investing activity for the same period of 2020 in the amount of $140,000. Investing activity consisted principally of the cash flows from the sale and leaseback of our Lake Barrington, Illinois facility, as further described below under the heading "Liquidity and Capital Resources".   Financing Activities . During the nine months ended September 30, 2021, cash used in financing activities was $650,000 compared to cash used in financing activities for the same period of 2020 in the amount of $2,237,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt.   Liquidity and Capital Resources .   At September 30, 2021, the Company had cash balances of $426,000 compared to cash balances of nil for the same period of 2020.     The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing, continuing to focus our Company on the most profitable elements, and exploring alternative funding sources on an as needed basis. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.   The Company’s primary sources of liquidity have traditionally been comprised of cash and cash equivalents as well as availability under its credit agreements with PNC prior to September 30, 2021 and with Line Financial effective September 30, 2021 (see Note 4). As of September 30, 2021, the Company has $1.0 million available under its credit agreements with Line Financial.   Additionally, during 2021 the Company has undertaken additional efforts to generate cash to fund operations and repay debt.   On April 23, 2021, the Company entered into a Purchase and Sale Agreement (“PSA”) with an unaffiliated purchaser (the “Purchaser”) pursuant to which the Company sold its facility in Lake Barrington, Illinois (the “Lake Barrington Facility”), in which our headquarters office, production and warehouse space are located, to the Purchaser. The sale price for the Lake Barrington Facility was $3,500,000, consisting of $2,000,000 in cash and a promissory note with a principal amount of $1,500,000, due and payable on May 3, 2021 (the “Purchaser Promissory Note”). As part of the its agreements with PNC, the Company agreed that the full $2,000,000 in cash proceeds from the sale of the Lake Barrington Facility would be applied to repay the $2,000,000 term loan owed to PNC pursuant to the Loan Agreement. The Company further agreed that $1,500,000 in proceeds from the Purchaser Promissory Note was applied to amounts due and owing to PNC under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”).   Concurrently with the closing under the PSA, the Company and the Purchaser entered into a lease agreement pursuant to which the Company agreed to lease the Lake Barrington Facility from the Purchaser for a period of ten years. The annual base rent commences at $500,000 for the first year of the term and escalates annually to $652,386 during the last year of the term of the lease.     22 Table of Contents   Seasonality   In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years.   Please see pages 11-13 of our Annual Report on Form 10-K for the year ended December 31, 2020 for a description of policies that are critical to our business operations and the understanding of our results of operations. 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 and nine months ended September 30, 2021.   Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk   Not applicable.