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, 2023 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, Balloon inspired gifts (balloons and candy arranged to look like a flower bouquet for gifting) and flexible containers for consumer use primarily in the United States. During 2023 we changed our name to include “Green”, to communicate our intention to supply biodegradable and compostable materials to the marketplace that our developed by our partners in Asia. We are in the process of creating a new subsidiary for this purpose. Summary of Significant Events September 30, 2021 financing, amended and extended to September 30, 2025 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”). The Senior Facilities are secured by substantially all assets of the Company. The Company believes it has been in compliance with the terms of these Senior Facilities since their inception in September 2021. Interest on the Senior Facilities was set at the prime rate published from time to time published in the Wall Street Journal (8.5% as of March 31, 2024), 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 paid 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. 11 Table of Contents The Senior Facilities matured on September 30, 2023 and were extended with a maturity date of September 30, 2025. The facility automatically extends 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. With this September 30, 2023 extension, the parties agreed changes in terms including: - Replace the asset monitoring fee on the Revolving Credit Facility with an increase in interest rate, to Prime plus 7.82% per annum. This change was intended by the parties to be financially neutral while easier to administer. - Reduce the interest rate on the Term Loan to Prime plus 1.45% per annum, with lender making a one-time additional advance of $206,000 to reset the Term Loan to $731,000. - Reduce the renewal fee for this transaction to $50,000 from the formula described above. - Set the Term Loan asset monitoring fee to 0.385% per month. The Senior Facilities require that the Company 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 for all relevant months, including as of March 31, 2024 and December 31, 2023, respectively. 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 $1,000,000 in the aggregate in any fiscal year. As of March 31, 2024 and December 31, 2023, the term loan balance amounted to $0.7 million, which consisted of the principal and interest payable balance of $0.7 million and deferred financing costs of approximately $30,000. The balance of the Revolving Line of Credit as of March 31, 2024 and December 31, 2023 amounted to $5,556,000 and $4,991,000, respectively. By virtue of the September 30, 2023 extension above, the Company was advanced $206,000 and the Term Loan was reset to $731,000. The Term Loan is repaid by approximately $15,000 per month, offset by related charges. As of January 1, 2019, the Company had a note payable to John H. Schwan, Director and former Chairman of the Board, for $1.6 million, including accrued interest. This loan accrues interest, is due December 31, 2023, and is subordinate to the Senior Facilities. During January 2019, Mr. Schwan converted $600,000 of the note into approximately 181,000 shares of our common stock at the then market rate of $3.32 per share. As a result of the conversion, the loan balance decreased to $1 million. The loan and interest payable to Mr. Schwan amounted to $1.3 million as of December 31, 2023. $1 million of this was paid to Mr. Schwan during January 2024. The parties agreed to the payment of the remaining $0.3 million at a future date to be determined. 12 Table of Contents Results of Operations Net Sales . For the three month periods ended March 31, 2024 and 2023, net sales were $4,894,000 and $5,051,000, respectively. For the three-month period ended March 31, 2024 and 2023, net sales by product category were as follows: Three Months Ended March 31, 2024 March 31, 2023 $ % of $ % of (000) Net (000) Net % Product Category Omitted Sales Omitted Sales Variance change Foil Balloons $ 2,919 60 % $ 3,474 69 % $ (555 ) (16 )% Film Products 305 6 % 89 2 % 216 243 % Other 1,670 34 % 1,488 29 % 182 12 % Total $ 4,894 100 % $ 5,051 100 % $ (157 ) (3 )% Foil Balloons . Revenues from the sale of foil balloons decreased during the three-month period from $3,474,000 ending March 31, 2023 compared to $2,919,000 during the three month period of 2024. The Company believes this decline is related to the timing of orders and shipments, as open orders for foil balloons were $0.5 million higher as of March 31, 2024 as compared to March 31, 2023. Films . Revenues from the sale of commercial films increased, from $89,000 during the three-month period ended March 31, 2023, compared to $305,000 during the same period of 2024. Sales in this area have been inconsistent due to a small number of customers and significant number of competitors. Other Revenues . Revenues from the sale of other products were $1,488,000 during the three-month period ended March 31, 2023, compared to $1,670,000 during the same period of 2024. The revenues from the sale of other products during these periods include (i) sales of a line of Balloon Inspired Gifts 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, 2024 and 2023. Three Months Ended March 31, % of Sales 2024 2023 Top 3 Customers 86 % 86 % Top 10 Customers 93 % 91 % 13 Table of Contents During the three-month period ended March 31, 2024, 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, 2024 were $2,226,000 and $1,710,000, or 46% and 35%, respectively, of consolidated net sales. Sales to these customers for the three months ended March 31, 2023 were $2,563,000 and $1,652,000, or 50% and 32%, respectively of consolidated net sales. As of March 31, 2024, the total amount owed to the Company by these customers was approximately $2,272,000 and $1,855,000, or 51% and 42%, respectively of the Company’s consolidated net accounts receivable. The amount owed at March 31, 2023 by these customers was approximately $962,000 and $2,245,000, or 29% and 67%, respectively, of the Company’s consolidated net accounts receivable. Cost of Sales . During the three month period ended March 31, 2024, the cost of sales was $3,999,000, compared to $3,924,000 for the same period of 2023. Lower sales volume and mix inefficiencies, as well as unusual repair and maintenance expenses, impacted 2024 vs. 2023, with gross margin of 18% during the 2024 period as compared to 22% during the same period of 2023. General and Administrative . During the three month period ended March 31, 2024, general and administrative expenses were $1,040,000 as compared to $961,000 for the same period in 2023. The largest change was a $50,000 increase in the cost of professional services, particularly the annual audit cost. On April 1, 2024, the Company made a change with respect to its independent auditing firm, ending the relationship with BF Borgers, CPA PC (BFB) and engaging Wolf and Company, PC. On May 3, 2024, the Company became aware that BFB had agreed to be suspended from appearing or practicing before the SEC. Because of this, the Company may no longer use audit reports or consent from BFB in future filings. Without the 2023 audit report, the Company’s new auditors will need to perform procedures related to 2023 balances in order to be able to perform an effective review of required 2024 filings, including the Form 10-Q for the period ended March 31, 2024. Until this was completed, the Company was not able to issue filings during 2024. This effort will also increase administrative expenses in 2024 related to audit services. Selling, Advertising and Marketing . During the three month period ended March 31, 2024, selling, advertising and marketing expenses were $208,000 as compared to $154,000 for the same period in 2023. Other Income (Expense) . During the three month period ended March 31, 2024, the Company incurred interest expense of $218,000 as compared to interest expense of $142,000 during the same period of 2023. Interest rates increased during 2023 and, despite expectations of reductions during 2024, have not yet been reduced. The Company also changed its borrowing structure to replace lender fees with interest payments at approximately the same net payment levels. Financial Condition, Liquidity and Capital Resources Cash Flow Items. Operating Activities . During the three months ended March 31, 2024, net cash used by operations was $767,000, compared to net cash used in operations during the three months ended March 31, 2023 of $1,369,000. Significant changes in working capital items during the three months ended March 31, 2024 included: ● An increase in accounts receivable of $423,000 compared to an increase in accounts receivable of $1,726,000 in the same period of 2023. ● An decrease in inventory of $81,000 compared to a decrease in inventory of $381,000 in 2023. ● An increase in trade payables of $47,000 compared to a decrease in trade payables of $35,000 in 2023. ● An increase in prepaid expenses and other assets of $62,000 compared to an increase of $100,000 in 2023. ● A decrease in accrued liabilities of $18,000 compared to a decrease in accrued liabilities of $372,000 in 2023. Investing Activity . During the three months ended March 31, 2024, cash used in investing activity was $154,000, compared to cash used in investing activity for the same period of 2023 in the amount of $56,000. Financing Activities . During the three months ended March 31, 2024, cash provided by financing activities was $49,000 compared to cash provided by financing activities for the same period of 2023 in the amount of $1,409,000. Financing activity during 2024 consisted principally of changes in the balances of revolving and long-term debt, along with issuance of convertible preferred stock. During the period ended March 31, 2024, $0.5 million was received for convertible preferred stock while $1.0 million of Notes Payable was repaid. Liquidity and Capital Resources . At March 31, 2024, the Company had cash balances of $49,000 compared to cash balances of $130,000 for the same period of 2023. 14 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. While the Company expects to have access to needed capital at reasonable cost, 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. Critical Accounting Estimates The critical accounting estimates utilized by the Company in preparation of the accompanying financial statements are set forth in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. There have been no material changes to these policies since December 31, 2023. Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Not applicable.