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 facility 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, including balloon-inspired gift items (e.g., balloons and candy arranged to look like a flower bouquet for gifting) and flexible containers for consumer use primarily in the United States. We have also begun to support and offer for sale compostable material solutions intended for the North American market. 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. 13 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 $15,000, 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 September 2023 extension further modified the fee structure, eliminating the Asset Monitoring Fee on the Revolving Credit Facility while increasing the interest rate to Prime plus 7.82% per annum, with the intent of being cash flow neutral between the parties but more straightforward in administration. The Term Loan maintains an asset monitoring fee of 0.385% per month pursuant to the renewal agreement. The Senior Facilities matured on September 30, 2023 and were extended by agreement between the parties until September 30, 2025. This amended facility 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 September 30, 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. We have extended this facility with the lender on September 30, 2023. As of September 30, 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 less than $0.1 million. The balance of the Revolving Line of Credit as of September 30, 2023 and December 31, 2022 amounted to $3.4 and $2.9 million, respectively. Pursuant to the extension, the Lender advanced the Company $0.2 million and increased the Term Loan to $0.7 million, which will be reflected in the Company’s October 2023 financial statements. Pursuant to agreement between the parties, the Company paid a $50,000 renewal fee for the renewal, as opposed to the formula described above. Results of Operations Net Sales . For the three month periods ended September 30, 2023 and 2022, net sales were $1,923,000 and $2,263,000, respectively. For the three-month period ended September 30, 2023 and 2022, net sales by product category were as follows: Three Months Ended September 30, 2023 September 30, 2022 $ $ Product Category (000) Omitted % of Net Sales (000) Omitted % of Net Sales Variance % change Foil Balloons 1,701 88 % 1,612 71 % 89 6 % Film Products 68 4 % 537 24 % (469 ) (87 %) Other 154 8 % 114 5 % 40 35 % Total 1,923 100 % 2,263 100 % (340 ) (15 )% For the nine month periods ended September 30, 2023 and 2022, net sales were $11,330,000 and $12,478,000, respectively. 14 Table of Contents For the nine month period ended September 30, 2023 and 2022, net sales by product category were as follows: September 30, 2023 September 30, 2022 $ $ Product Category (000) Omitted % of Net Sales (000) Omitted % of Net Sales Variance % change Foil Balloons 8,113 74 % 8,118 65 % (5 ) (1 )% Film Products 746 7 % 1,900 15 % (1,154 ) (61 )% Other 2,174 19 % 2,460 20 % (286 ) (12 )% Total 11,330 100 % 12,478 100 % (1,445 ) (12 )% Foil Balloons . Revenues from the sale of foil balloons increased during the three months period from $1,612,000 ending September 30, 2022 compared to $1,701,000 during the three month period of 2023. Revenues from the sale of foil balloons decreased during the nine month period from $8,118,000 ending September 30, 2022 compared to $8,113,000 during the nine month period of 2023. An increase in the price of helium during 2022 negatively impacted customers of most types of foil balloons beginning the second quarter 2022. This price increase was the result of both the broad inflationary pressures and restrictions on trade with Russia, as we believe the latter supplied approximately 5% of the helium used in the marketplace. This combined with temporary individual supply issues created increased pricing in the market. The market price of helium remains elevated based on historical norms, but less elevated than during the middle of 2022. We also discontinued certain products during 2022 for which we were not able to secure adequate inflationary price increases. Finally, our seasonality demonstrates a low point in revenue during the third quarter with a high point during the fourth quarter. Films . Revenues from the sale of commercial films were $68,000 and $746,000 during the three and nine month periods ended September 30, 2023, compared to $537,000 and $1,900,000 during the same periods of 2022. Order flow in this area has been historically inconsistent, impacted in part by consolidation in the industry, including our customers, as well as a large number of competitors. Other Revenues . Revenues from the sale of other products were $154,000 and $2,174,000 during the three and nine month periods ended September 30, 2023, compared to $114,000 and $2,460,000 during the same periods of 2022. The revenues from the sale of other products during these periods include (i) sales of a line of balloon-inspired gift items and similar products consisting of candy and small inflated balloons sold in small containers, (ii) latex balloons, (iii) the sale of accessories and supply items related to balloon products, and going forward (iv) sales of compostable materials. The largest shipments of candy inspired gift items during 2023 occurred during March, while the same shipments during 2022 occurred during April. In addition, shipments related to Valentine’s Day were complete as of December 2022, while in the prior year they went into January 2022. This timing impacts comparability in an area where total order flow has been increasing. 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 September 30, 2023 and 2022. Three Months Ended September 30, % of Sales 2023 2022 Top 3 Customers 75 % 79 % Top 10 Customers 87 % 96 % Nine Months Ended September 30, % of Sales 2023 2022 Top 3 Customers 80 % 89 % Top 10 Customers 91 % 92 % 15 Table of Contents During the three and nine months ended September 30, 2023 and 2022, there were two customer 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, 2023 and 2022 are as follows: Three Months Ended Three Months Ended September 30, 2023 September 30, 2022 Customer Net Sales % of Net Sales Net Sales % of Net Sales Customer A $ 1,097,000 56 % $ 1,104,000 49 % Customer B $ 239,000 12 % $ 176,000 8 % Nine Months Ended Nine Months Ended September 30, 2023 September 30, 2022 Customer Net Sales % of Net Sales Net Sales % of Net Sales Customer A $ 6,007,000 53 % $ 5,438,000 43 % Customer B $ 2,559,000 23 % $ 2,846,000 23 % As of September 30, 2023, the total amounts owed to the Company by these customers were approximately $806,000 or 81% of the Company’s consolidated net accounts receivable. The amounts owed at September 30, 2022 by these customers were approximately $679,000 or 45% of the Company’s consolidated net accounts receivable. Cost of Sales . During the three and nine month period ended September 30, 2023, the cost of sales was $1,903,000 and $9,372,000, compared to $2,021,000 and $10,394,000 respectively for the same periods of 2022 due to lower sales volume. As a percentage of sales, cost of sales was 85% during the nine months ended September 30, 2023, compared to 83% during the nine months ended September 30, 2022. The Company designs its cost structure around its seasonality, with lower revenue and spend during the third quarter and higher activity during the fourth quarter. With revenue for the three months ended September 30, 2023 reduced by $0.3 million from the three months ended September 30, 2022, there were greater inefficiencies and reduced fixed cost coverage during the 2023 quarter, resulting in the nine month period difference noted above. General and Administrative . During the three and nine month period ended September 30, 2023, general and administrative expenses were $677,000 and $2,294,000 compared to $896,000 and $2,731,000, respectively, for the same periods in 2022. When the price of helium increased during 2022, the Company established greater control over its expenses, resulting in lower personnel, professional, and ancillary service cost during the nine months ended September 30, 2023 as compared to the same period of 2022. Selling, Advertising and Marketing . During the three and nine month period ended September 30, 2023, selling, advertising and marketing expenses were $172,000 and $474,000 as compared to $103,000 and $435,000, respectively, for the same periods in 2022. Other Income (Expense) . During the three and nine month period ended September 30, 2023, the Company incurred interest expense of $124,000 and $421,000 compared to interest expense of $120,000 and $325,000, respectively, during the same periods of 2022. Interest expense increased as a result of market rate increases throughout 2022. The Company applied for Employee Retention Tax Credits during 2021, most of which were factored during 2022 and cash received. Income related to the factored credit filings was recognized when the returns were processed by the US Government during the first six months of 2023. As such, income of none and $895,000 was recognized during the three and nine months ended September 30, 2023, respectively, for which cash was received during 2022. Financial Condition, Liquidity and Capital Resources Cash Flow Items. Operating Activities . During the nine months ended September 30, 2023, net cash used in operations was $442,000, compared to net cash provided by operations during the nine months ended September 30, 2022 of $1,187,000. Significant changes in working capital items during the nine months ended September 30, 2023 included: ● A decrease in accounts receivable of $685,000 compared to a decrease in accounts receivable of $2,032,000 in the same period of 2022. ● An increase in inventory of $203,000 compared to an increase in inventory of $1,286,000 in 2022. ● An increase in trade payables of $87,000 compared to an decrease in trade payables of $54,000 in 2022. ● A decrease in prepaid expenses and other assets of $22,000 compared to an increase of $562,000 in 2022. ● A decrease in accrued liabilities of $496,000 compared to an increase in accrued liabilities of $878,000 in 2022. Investing Activity . During the nine months ended September 30, 2023, cash used in investing activity was $136,000, compared to cash used investing activity for the same period of 2022 in the amount of $121,000. Financing Activities . During the nine months ended September 30, 2023, cash provided by financing activities was $496,000 compared to cash used in financing activities for the same period of 2022 in the amount of $1,031,000. Liquidity and Capital Resources . At September 30, 2023, the Company had cash balances of $64,000 compared to cash balances of $101,000 for the same period of 2022. 16 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 expired per its terms on September 30, 2023, and was replaced by a new agreement between the parties until September 30, 2025. The subordinated note is maturing in the near term. While the Company expects to address the note maturity and find acceptable credit as it requires, 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 and nine months ended September 30, 2023. Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Not applicable.