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, 2021 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 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, 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.   18 Table of Contents   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.   19 Table of Contents   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 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. 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 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.   20 Table of Contents   Results of Operations   Net Sales . 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                       March 31, 2022     March 31, 2021                         $           $                             (000)     % of     (000)     % of                   Product Category   Omitted     Net Sales     Omitted     Net Sales     Variance     % change                                                     Foil Balloons   $ 3,832       66 %   $ 4,935       75 %   $ (1,103 )     (22 %)                                                   Latex Balloons     25       0 %     2       0 %     23       -                                                     Film Products     828       14 %     306       5 %     522       171 %                                                   Other   $ 1,112       19 %   $ 1,356       20 %   $ (244 )     (18 %)                                                   Total   $ 5,797       100 %   $ 6,599       100 %   $ (802 )     (12 %)   21 Table of Contents   Foil Balloons . 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 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.   Films . 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 $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 month periods ended March 31, 2022 and 2021.       Three Months Ended March 31,       % of Sales       2022     2021                     Top 3 Customers     80 %     84 %                   Top 10 Customers     90 %     92 %   22 Table of Contents   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 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 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 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 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   Cash Flow Items.   Operating Activities . 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 $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 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 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 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.   23 Table of Contents   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, 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.    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. 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.  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 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”). 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 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.   24 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 12-20 of our Annual Report on Form 10-K for the year ended December 31, 2021 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 months ended March 31, 2022.   Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk   Not applicable.