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 created a new subsidiary, in part, for this purpose. 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. This Agreement and the Senior Facilities were extended on similar terms during September 2023 with a termination date of September 30, 2025. The Company has been in compliance with the terms of these Senior Facilities since 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 (8.0% as of September 30, 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. 13 Table of Contents The Senior Facilities matured on September 30, 2023 and were amended to extend the maturity date to 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 the September 30, 2023 amendment, 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 September 30, 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 September 30, 2024 and December 31, 2023, the term loan balance amounted to $0.6 million and $0.7 million, respectively, which consisted of the principal and interest payable balance of $0.6 million and $0.7 million, respectively, and deferred financing costs of approximately $24,000 and $40,000, respectively. The balance of the Revolving Line of Credit as of September 30, 2024 and December 31, 2023 amounted to $4,062,000 and $4,991,000, respectively. Note Payable, Related Party The Company is party to a note payable to John H. Schwan, Director and former Chairman of the Board, with a loan balance of $1.3 million and interest rate of 6% as of December 31, 2023. The Company repaid $1 million 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. This related party note payable is subordinate to the Senior Facilities. Results of Operations Net Sales . For the three month periods ended September 30, 2024 and 2023, net sales were $2,540,000 and $1,923,000, respectively. For the three-month period ended September 30, 2024 and 2023, net sales by product category were as follows: Three Months Ended September 30, 2024 September 30, 2023 $ $ Product Category (000) Omitted % of Net Sales (000) Omitted % of Net Sales Variance % change Foil Balloons $ 2,322 91 % $ 1,701 88 % $ 621 37 % Film Products 129 5 % 68 4 % 61 90 % Other 89 4 % 154 8 % (65 ) (42 )% Total $ 2,540 100 % $ 1,923 100 % $ 617 32 % For the nine month periods ended September 30, 2024 and 2023, net sales were $11,788,000 and $11,033,000, respectively. 14 Table of Contents For the nine month period ended September 30, 2024 and 2023, net sales by product category were as follows: September 30, 2024 September 30, 2023 $ $ Product Category (000) Omitted % of Net Sales (000) Omitted % of Net Sales Variance % change Foil Balloons $ 8,493 72 % $ 8,113 74 % $ 380 5 % Film Products 605 5 % 746 7 % (141 ) (19 )% Other 2,690 23 % 2,174 19 % 516 24 % Total $ 11,788 100 % $ 11,033 100 % $ 755 7 % Foil Balloons . Revenues from the sale of foil balloons increased during the three months period from $1,701,000 ending September 30, 2023 compared to $2,322,000 during the three month period of 2024. Revenues from the sale of foil balloons increased during the nine month period from $8,113,000 ending September 30, 2023 compared to $8,493,000 during the nine month period of 2024. Order flow from our largest customer was the cause of this increase. Films . Revenues from the sale of commercial films were $129,000 and $605,000 during the three and nine month periods ended September 30, 2024, compared to $68,000 and $746,000 during the same periods of 2023. 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 $89,000 and $2,690,000 during the three and nine month periods ended September 30, 2024, compared to $154,000 and $2,174,000 during the same periods of 2023. 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, and (iii) the sale of accessories and supply items related to balloon products. The increase in Other Revenues during the nine months ended September 30, 2024 was driven by increased orders for balloon-inspired gifts from the Company’s second largest customer. 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, 2024 and 2023. Three Months Ended September 30, % of Sales 2024 2023 Top 3 Customers 79 % 75 % Top 10 Customers 90 % 87 % Nine Months Ended September 30, % of Sales 2024 2023 Top 3 Customers 83 % 80 % Top 10 Customers 93 % 91 % 15 Table of Contents During the three and nine months ended September 30, 2024 and 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 and nine months ended September 30, 2024 and 2023 are as follows: Three Months Ended Three Months Ended September 30, 2024 September 30, 2023 Customer Net Sales % of Net Sales Net Sales % of Net Sales Customer A $ 1,731,000 68 % $ 1,097,000 56 % Customer B $ 129,000 5 % $ 239,000 12 % Nine Months Ended Nine Months Ended September 30, 2024 September 30, 2023 Customer Net Sales % of Net Sales Net Sales % of Net Sales Customer A $ 6,651,000 56 % $ 6,007,000 53 % Customer B $ 2,823,000 24 % $ 2,559,000 23 % As of September 30, 2024, the total amounts owed to the Company by these customers were approximately $2,077,000 or 95% of the Company’s consolidated net accounts receivable. The amounts owed at September 30, 2023 by these customers were approximately $806,000 or 81% of the Company’s consolidated net accounts receivable. Cost of Sales . During the three and nine month period ended September 30, 2024, the cost of sales was $2,560,000 and $10,220,000, compared to $1,903,000 and $9,372,000 respectively for the same periods of 2023, with the change driven largely by changes in sales volume. As a percentage of sales, cost of sales was 101% and 87% during the three and nine months ended September 30, 2024, compared to 99% and 85% during the three and nine months ended September 30, 2023. During July 2024 we experienced a fire sprinkler failure in our warehouse which forced us to dispose of $0.2 million of product. Net of insurance proceeds, our inventory loss was approximately $40,000. Also, fourth quarter 2024 shipments are scheduled later in the quarter than in 2023, which reduced the amount of manufacturing cost capitalized into the annual seasonal inventory build. General and Administrative . During the three and nine month periods ended September 30, 2024, general and administrative expenses were $751,000 and $2,449,000 compared to $677,000 and $2,294,000, respectively, for the same periods in 2023. The Company had higher than usual audit fees in both years. Of note are the one-time costs associated with reperforming audit procedures related to 2023 due to the Company’s former auditor being suspended from practicing before the SEC during May 2024. This resulted in $170,000 higher audit expenses during the three months ended September 2024 as compared to the same period of 2023. Selling, Advertising and Marketing . During the three and nine month periods ended September 30, 2024, selling, advertising and marketing expenses were $220,000 and $633,000 as compared to $172,000 and $474,000, respectively, for the same periods in 2023. 2023 marked a low point in these expenses while 2024 inflected higher, including $45,000 in additional sales commissions based on product mix and the payroll cost associated with new product design. Other Income (Expense) . During the three and nine month periods ended September 30, 2024, the Company incurred interest expense of $201,000 and $655,000 compared to interest expense of $124,000 and $421,000, respectively, during the same periods of 2023. Interest expense increased as a result of market rate increases that remained elevated throughout 2024. The September 2023 refinance caused a shift from bank fees to interest, with the net result of this process change being approximately even. 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 2023. As such, income of $895,000 was recognized during the 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, 2024, net cash provided by operations was $862,000, compared to net cash used in operations during the nine months ended September 30, 2023 of $442,000. Significant changes in working capital items during the nine months ended September 30, 2024 included: ● A decrease in accounts receivable of $1,779,000 compared to a decrease in accounts receivable of $685,000 in the same period of 2023. ● An increase in inventory of $61,000 compared to an increase in inventory of $203,000 in 2023. ● An increase in trade payables of $651,000 compared to an increase in trade payables of $87,000 in 2023. ● An increase in prepaid expenses and other assets of $23,000 compared to an increase of $22,000 in 2023. ● An increase in accrued liabilities of $384,000 compared to a decrease in accrued liabilities of $496,000 in 2023. Investing Activity . During the nine months ended September 30, 2024, cash used in investing activity was $302,000, compared to cash used investing activity for the same period of 2023 in the amount of $136,000. Financing Activities . During the nine months ended September 30, 2024, cash used in financing activities was $1,476,000 compared to cash provided by financing activities for the same period of 2023 in the amount of $496,000. Uses of cash in financing activity during the nine months ended September 30, 2024 consisted principally of changes in the balance of revolving debt of $0.9 million and a $1.0 million repayment of the related party note payable. $0.5 million of cash was provided by the issuances of convertible preferred stock during the nine months ended September 30, 2024. Liquidity and Capital Resources . At September 30, 2024, the Company had cash balances of $5,000 compared to a cash balance of $64,000 as of September 30, 2023. 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 expires per its terms on September 30, 2025, unless it is extended by the parties or replaced. 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. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 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 & Company, P.C. 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 was no longer use audit reports or consent from BFB in future filings. Without the 2023 audit report, the Company’s new auditors needed 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 periods ended March 31, 2024 and June 30, 2024. Until this was completed, the Company was not able to issue filings during 2024. The Company issued these filings on September 25 and September 26, 2024, respectfully. Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Not applicable.