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, 2022 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. Summary of Significant Events 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 prior Agreements and for the Company’s working capital. The Senior Facilities are secured by substantially all assets of the Company. 14 Table of Contents Interest on the Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (8% as of March 31, 2023), 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. During August 2022 the terms were modified to reduce the collateral monitoring fee to 2.77% and added a provision that barred the Company from repaying the facility prior to September 2023. 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 during every relevant month, including as of December 31, 2022 and March 31, 2023. 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, 2023 and December 31, 2022, the term loan balance amounted to $0.5 million, which consisted of the principal and interest payable balance of $0.6 million and deferred financing costs of $0.1 million. The balance of the Revolving Line of Credit as of March 31, 2023 and December 31, 2022 amounted to $4.3 and $2.9 million, respectively. 15 Table of Contents Results of Operations Net Sales . For the three month periods ended March 31, 2023 and 2022, net sales were $5,051,000 and $5,797,000, respectively. For the three-month period ended March 31, 2023 and 2022, net sales by product category were as follows: Three Months Ended March 31, 2023 March 31, 2022 $ % of $ % of (000) Net (000) Net % Product Category Omitted Sales Omitted Sales Variance change Foil Balloons $ 3,474 69 % $ 3,832 66 % $ (358 ) (9 )% Film Products 89 2 % 828 14 % (739 ) (89 )% Other $ 1,488 29 % $ 1,112 19 % $ 376 34 % Total $ 5,051 100 % $ 5,797 100 % $ (746 ) (13 )% Foil Balloons . Revenues from the sale of foil balloons decreased during the three-month period from $3,832,000 ending March 31, 2022 compared to $3,474,000 during the three month period of 2023. While the price of helium has reduced from its 2022 peak, it remains elevated from the beginning of 2022, which negatively impacts the demand for balloons primarily filled with helium. Films . Revenues from the sale of commercial films decreased, from $828,000 during the three-month period ended March 31, 2022, compared to $89,000 during the same period of 2023. The Company’s largest customer increased its demand for the line that the Company supplies in 2022 and finished the year with inventory, negatively impacting early 2023 orders. Other Revenues . Revenues from the sale of other products were $1,112,000 during the three-month period ended March 31, 2022, compared to $1,488,000 during the same period of 2023. 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, 2023 and 2022. Three Months Ended March 31, % of Sales 2023 2022 Top 3 Customers 86 % 80 % Top 10 Customers 91 % 90 % 16 Table of Contents During the three-month period ended March 31, 2023, 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, 2023 were $2,563,000 and $1,652,000, or 50% and 32%, respectively, of consolidated net sales. Sales to these customers for the three months ended March 31, 2022 were $2,502,000 and $1,347,000, or 43% and 23%, respectively of consolidated net sales. As of March 31, 2023, the total amount owed to the Company by these customers was approximately $962,000 and $2,245,000, or 29% and 67%, respectively of the Company’s consolidated net accounts receivable. The amount owed at March 31, 2022 by these customers was approximately $696,000 and $1,669,000, or 20% and 48%, respectively, of the Company’s consolidated net accounts receivable. Cost of Sales . During the three month period ended March 31, 2023, the cost of sales was $3,924,000, compared to $4,758,000 for the same period of 2022 due to lower sales volume and increased cost and mix efficiencies during 2023. General and Administrative . During the three month period ended March 31, 2023, general and administrative expenses were $961,000 as compared to $837,000 for the same period in 2022. The Company incurred start up expenses with a new audit firm partner during 2023 as well as transition cost inefficiencies. Selling, Advertising and Marketing . During the three month period ended March 31, 2023, selling, advertising and marketing expenses were $154,000 as compared to $221,000 for the same period in 2022. The Company made small investments during 2022 that were not repeated during 2023. Other Income (Expense) . During the three month period ended March 31, 2023, the Company incurred interest expense of $142,000 as compared to interest expense of $96,000 during the same period of 2022. The dramatic increase in interest rates during 2022 flowed through to the Company’s Prime interest rate based borrowing structure. Financial Condition, Liquidity and Capital Resources Cash Flow Items. Operating Activities . During the three months ended March 31, 2023, net cash used by operations was $1,369,000, compared to net cash provided by operations during the three months ended March 31, 2022 of $2,000. Significant changes in working capital items during the three months ended March 31, 2023 included: ● An increase in accounts receivable of $1,726,000 compared to a decrease in accounts receivable of $125,000 in the same period of 2022. ● An decrease in inventory of $381,000 compared to an increase in inventory of $620,000 in 2022. ● An increase in trade payables of $35,000 compared to an increase in trade payables of $215,000 in 2022. ● An increase in prepaid expenses and other assets of $100,000 compared to a decrease of $339,000 in 2022. ● A decrease in accrued liabilities of $372,000 compared to a decrease in accrued liabilities of $165,000 in 2022. Investing Activity . During the three months ended March 31, 2023, cash used in investing activity was $56,000, compared to cash used in investing activity for the same period of 2022 in the amount of $15,000. Financing Activities . During the three months ended March 31, 2023, cash provided by financing activities was $1,409,000 compared to cash provided by financing activities for the same period of 2022 in the amount of $155,000. Financing activity during 2023 consisted principally of changes in the balances of revolving and long-term debt. Liquidity and Capital Resources . At March 31, 2023, the Company had cash balances of $130,000 compared to cash balances of $208,000 for the same period of 2022. 17 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, inflationary pressures, and the cost and commercial availability of helium 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. We believe that we have been in compliance with covenants since refinancing with Line Financial in September 2021. That Credit Agreement expires per its terms on September 30, 2023, unless it is extended by the parties or replaced. While the Company expects to find an acceptable credit facility, there can be no assurance of success, and as such, might negatively impact the Company’s ability to continue as a going concern. 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 11-20 of our Annual Report on Form 10-K for the year ended December 31, 2022 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, 2023. Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Not applicable.