What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-19 · 131 added, 95 removed, 61 unchanged (79% of the section changed)

23 unchanged sentences

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.

We used to produce our latex balloons and latex products at a majority-owned facility in Guadalajara, Mexico (Flexo Universal, or Flexo).

This facility was sold during October 2021.

Now the Company purchases latex balloons from an unrelated vendor and distributes in the United States, particularly to those customers that prefer a combined solution for foil and latex balloons..

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.

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 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.

We market and sell our novelty items, Candy Blossoms (balloons and candy arranged to look like a flower bouquet for gifting) and flexible containers for consumer use primarily in the United States.

Summary of Significant Events

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”).

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.

As the decision to sell the lake Barrington Facility was made in April 2021, the facility is not classified as held for sale as of March 31, 2021.

Concurrently with the entry into the PSA and the Lease, the Company entered into a Consent, Forbearance and Amendment No.

6 to Revolving Credit, Term Loan and Security Agreement (the “Amendment Agreement”) with its then-lender PNC for itself and for the other participant lenders thereunder (collectively, the “Prior Lender”).

Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement (the “Existing Defaults”) and were continuing.

Pursuant to the Amendment Agreement, the Prior Lender consented to the transactions contemplated by the PSA and the Lease, as required under the Loan Agreement. 

As a condition to the Amendment Agreement, 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 the Prior Lender pursuant to the Loan Agreement.

The Company further agreed that $1,500,000 in proceeds from the Purchaser Promissory Note will be applied to amounts due and owing to the Prior Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”).

Pursuant to the Amendment Agreement, the Prior Lender agreed to forbear from exercising its rights and remedies with respect to the Existing Event of Defaults under the Loan Agreement for a period ending on the earlier of September 30, 2021, the occurrence of a new event of default under the Loan Agreement, or the occurrence of a Termination Event (as defined therein).

Additionally, certain additions and amendments to the Loan Agreement were set forth in the Amendment Agreement, including:

The Maximum Revolving Advance Amount was reduced from $18,000,0000 to $9,000,000;

The Termination Date of the Loan Agreement was revised from December 14, 2022 to December 31, 2021;

On or before June 30, 2021, or such later date as the Prior Lender agreed in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the Revolving Credit Advance under the Loan Agreement (the “Equity Investment”);

On or before August 15, 2021, or such later date as the Prior Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Prior Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Prior Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021;

On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash;

The Forbearance Reserve (as defined in Amendment No.

5 to the Loan Agreement) was increased from $1,025,000 to $2,525,000;

Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates was no longer 

considered eligible receivables;

Modifications will be made to the budget, testing and variance provisions of the Loan Agreement.

In consideration for entering into the Loan Amendment, the Company agreed to pay the Prior Lender a Forbearance Fee of $1,000,000.

Provided, however, that, so long as no Event of Default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by $1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates the Equity Investment by June 30, 2021, the Forbearance Fee shall be reduced by $250,000, to $750,000, and (ii) if the Company causes all of the obligations under the Loan Agreement to be paid in full, in cash, on or before September 30, 2021, the Forbearance Fee shall be reduced by an additional $500,000, to $250,000.

All commitments were accomplished by the required dates, resulting in a final Forbearance Fee of $250,000 paid during 2021.

September 30, 2021 financing

On September 30, 2021 (the “Closing Date”), the Company entered into a loan and security agreement (the “Agreement”) with Line Financial (the “Lender”), which provides for a senior secured financing consisting of a revolving credit facility (the “Revolving Credit Facility) in an aggregate principal amount of up to $6 million (the “Maximum Revolver Amount”) and term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $731,250 (“Term Loan Amount”

and, together with the Revolving Credit Facility, the “Senior Facilities”).

Proceeds of loans borrowed under the Senior Facilities were used to repay all amounts outstanding under the Company's PNC Agreements and for the Company’s working capital.

The Senior Facilities are secured by substantially all assets of the Company.

Interest on the Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (3.25% as of September 30, 2021), plus 1.95% per annum, accruing daily and payable monthly.

Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed.

The Term Loan Facility shall be repaid by the Company to Lender in 48 equal monthly installments of principal and interest, each in the amount of $15,234, commencing on November 1, 2021, and continuing on the first day of each month thereafter until the Term Loan Maturity Date (as defined in the Agreement).

Also, the Company will pay the Lender collateral monitoring fees of 4.62% of the eligible accounts receivable, inventory, and equipment supporting the Revolving Credit Facility and the Term Loan.

In addition, the Company paid the Lender a loan fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon the execution of the Agreement.

The Senior Facilities mature on September 30, 2023 and shall automatically be extended for successive periods of one year each, unless the Company or the Lender gives the other party written notice of termination not less than 90 days prior to the end of such term or renewal term, as applicable.

If the Senior Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the anniversary of the Closing Date.

The Company has the option to prepay the Term Loan Facility (together with all accrued but unpaid interest and a Term Loan Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not less than 60 days prior written notice to the Lender.

The Senior Facilities require that the Company shall, commencing December 31, 2021, maintain Tangible Net Worth of at least $4,000,000 or greater (“Minimum Tangible Net Worth”).

Minimum Tangible Net Worth may be adjusted downward by the Lender, from time to time, in its sole and absolute discretion, based on the effect of non-cash charges and other factors on the calculation of Tangible Net Worth.

Other debt subordinated to Lender is not considered as a reduction of this calculation.

The Company believes it was in compliance with this covenant as of December 31, 2021.

The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, and acquisitions, pay dividends and make other restricted payments, or make capital expenditures exceeding $1 million in the aggregate in any fiscal year.

As of March 31, 2022 and December 31, 2021, the term loan balance amounted to $0.6 million, which consisted of the principal and interest payable balance of $0.7 million and deferred financing costs of $155,000. 

The balance of the Revolving Line of Credit as of March 31, 2022 and December 31, 2021 amounted to $5.2 and $5.0 million, respectively.

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.

In July 2019, management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources.

Therefore, as of July 19, 2019, the Board authorized management to divest these international subsidiaries.

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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 of 2019, its Ziploc product line in the first quarter of 2020, and its CTI Europe (Germany) subsidiary in the second quarter of 2021.

The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019, its Ziploc product line in the first quarter 2020, and its CTI Europe (Germany) subsidiary in 2021.

Additionally, the Company sold its latex balloon manufacturer in Mexico (Flexo Universal) during October 2021.

Results of Operations

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:

For the three month periods ended March 31, 2022 and 2021, net sales were $5,797,000 and $6,599,000, respectively.

For the three-month period ended March 31, 2022 and 2021, net sales by product category were as follows:

Three Months Ended

September 30, 2021

September 30, 2020

Product Category

(000) Omitted

Foil Balloons

Latex Balloons

Film Products

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

March 31, 2022

March 31, 2021

Product Category

(000) Omitted

Foil Balloons

2 unchanged sentences

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.

Revenues from the sale of foil balloons decreased during the three-month period from $4,935,000 ending March 31, 2021 compared to $3,832,000 during the three month period of 2022.

The timing of larger Mother’s Day and Graduation season shipments occurred during April of 2022, as compared to March of 2021. 

In addition, the Company implemented price increases to address the impact of additional material and labor costs. 

Certain low value, or no value, sales were discontinued when price increases were not successful.

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.

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.

Revenues from the sale of latex balloons increased during the three-month period from $2,000 during the three period ended March 31, 2021, to $25,000 during the same period of 2022.

Sales of latex balloons are substantially reduced as we sold our latex balloon manufacturer during October 2021.

After that time, latex balloon are resold on an as-needed basis for customers that require a combined foil and latex solution.

Revenues from the sale of commercial films increased, from $306,000 during the three-month period ended March 31, 2021, compared to $828,000 during the same period of 2022. 

The Company's largest customer increased its demand for the line that the Company supplies.

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”

Revenues from the sale of other products were $1,356,000 during the three-month period ended March 31, 2021, compared to $1,112,000 during the same period of 2022.

The revenues from the sale of other products during these periods 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,

Top 3 Customers

Top 10 Customers

Nine Months Ended

September 30,

The table below illustrates the impact on sales of our top three and ten customers for the three month periods ended March 31, 2022 and 2021.

Three Months Ended March 31,

Top 3 Customers

Top 10 Customers

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

September 30, 2021

September 30, 2020

Nine Months Ended

September 30, 2021

September 30, 2020

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.

During the three-month period ended March 31, 2022, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales.

Sales to these customers for the three month period ended March 31, 2022 were $2,502,000 and $1,347,000, or 43% and 23%, respectively, of consolidated net sales.

Sales to these customers for the three months ended March 31, 2021 were $3,991,000 and $1,294,000, or 60% and 19%, respectively of consolidated net sales.

As of March 31, 2022, the total amount owed to the Company by these customers was approximately $696,000 and $1,669,000, or 20% and 48%, respectively of the Company’s consolidated net accounts receivable.

The amount owed at March 31, 2021 by these customers was approximately $2,426,000 and $1,554,000, or 51% and 33%, respectively, 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. 

During the three month period ended March 31, 2022, the cost of sales was $4,758,000, compared to $5,313,000 for the same period of 2021 due to lower sales volume and partially offset by higher costs of materials and labor. 

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.

During the three month period ended March 31, 2022, general and administrative expenses were $837,000 as compared to $849,000 for the same period in 2021 due mainly to 2021 payments related to lender covenant violations that did not continue in 2022. 

In addition, the Company's current lending structure carries relatively small interest payments but larger asset monitoring fees that are reflected in the 2022 general and administrative expense. 

If not for this, the reduction from the prior year would be larger.

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.

During the three month period ended March 31, 2022, selling, advertising and marketing expenses were $221,000 as compared to $139,000 for the same period in 2021. 

With smaller customers continuing to increase their activity, the Company is making small investments in the marketing function.

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.

During the three month period ended March 31, 2022, the Company incurred interest expense of $96,000 as compared to interest expense of $200,000 during the same period of 2021. 

The Company's current lender, as of September 2021, charges a smaller rate of interest but adds an asset monitoring fee that is included in general and administrative 

expense.   

Financial Condition, Liquidity and Capital Resources

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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.

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.

During the three months ended March 31, 2022, net cash provided by operations was $2,000, compared to net cash used in operations during the three months ended March 31, 2021 of $1,421,000.

Significant changes in working capital items during the three months ended March 31, 2022 included:

A decrease in accounts receivable of $125,000 compared to an increase in accounts receivable of $1,860,000 in the same period of 2021.

An increase in inventory of $620,000 compared to a decrease in inventory of $16,000 in 2021.

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.

A decrease in trade payables of $215,000 compared to a decrease in trade payables of $753,000 in 2021.

A decrease in prepaid expenses and other assets of $339,000 compared to an increase of $212,000 in 2021. 

A decrease in accrued liabilities of $165,000 compared to an increase in accrued liabilities of $159,000 in 2021.

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".

During the three months ended March 31, 2022, cash used in investing activity was $15,000, compared to cash used in investing activity for the same period of 2021 in the amount of $46,000.

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.

During the three months ended March 31, 2022, cash provided by financing activities was $155,000 compared to cash provided by financing activities for the same period of 2021 in the amount of $1,557,000.

Financing activity during 2022 consisted principally of changes in the balances of revolving and long-term debt.

Discontinued Operations .

During the three months ended March 31, 2021, cash provided by discontinued operations was $464,000 with related exchange rate impact of a cash use of $554,000.

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.

At March 31, 2022, the Company had cash balances of $208,000 compared to cash balances of $66,000 for the same period of 2021.  These amounts do not include cash related to discontinued operations of none and $20,000 as of March 31, 2022 and 2021, respectively.

The ability of the Company to continue as a going concern is dependent on the Company executing its business plan and, if unable to do so, in obtaining adequate capital on acceptable terms to fund any operating losses.

Management’s plans to continue as a going concern include executing its business plan, 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”).

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.

The COVID-19 pandemic, supply chain constraints and inflationary pressures have impacted the Company’s business operations to some extent and is expected to continue to do so and, 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 generate or otherwise 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 the Credit Agreement with prior lender PNC (see Note 4) until September 30, 2021, at which time we refinanced with a new facility from Line Capital.

Through September 2021, we entered into a series of forbearance agreements with PNC related to compliance failures with covenants.

We believe that we have been in compliance with covenants since refinancing with Line Financial. 

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.

Concurrently with the entry into the PSA and the Lease, the Company entered into a Consent, Forbearance and Amendment No.

6 to Revolving Credit, Term Loan and Security Agreement (the “Amendment Agreement”) with PNC for itself and for the other participant lenders thereunder (collectively, the “Prior Lender”).

Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement (the “Existing Defaults”) and were continuing.

Pursuant to the Amendment Agreement, the Prior Lender consented to the transactions contemplated by the PSA and the Lease, as required under the Loan Agreement. 

The Company further agreed that $1,500,000 in proceeds from the Purchaser Promissory Note would be applied to amounts due and owing to the Prior Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”).

Additionally, certain additions and amendments to the Loan Agreement were set forth in the Amendment Agreement, including:

The Maximum Revolving Advance Amount is reduced from $18,000,0000 to $9,000,000;

The Termination Date of the Loan Agreement is revised from December 14, 2022 to December 31, 2021;

On or before June 30, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the Revolving Credit Advance under the Loan Agreement (the “Equity Investment”);

On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021;

On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash;

The Forbearance Reserve (as defined in Amendment No.

5 to the Loan Agreement) shall be increased from $1,025,000 to $2,525,000;

Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates no longer considered eligible receivables;

Modifications will be made to the budget, testing and variance provisions of the Loan Agreement.

In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender a Forbearance Fee of $1,000,000.

Provided, however, that, so long as no Event of Default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by $1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates the Equity Investment by June 30, 2021, the Forbearance Fee shall be reduced by $250,000, to $750,000, and (ii) if the Company caused all of the obligations under the Loan Agreement to be paid in full, in cash, on or before September 30, 2021, the Forbearance Fee shall be reduced by an additional $500,000, to $250,000.

As these requirements were met, the final Forbearance Fee was $250,000.

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.

1 unchanged sentence

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.

No material changes to such information have occurred during the three months ended March 31, 2022.

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