YUNHONG GREEN CTI LTD. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward Looking Statements This Quarterly Report on Form 10-Q includes both historical and “forward-looking statements” within the meaning of federal securities law. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. 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, 2024 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. 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 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 are developed by our partners in Asia. We created a new subsidiary, in part, for this purpose. In recent periods, the U.S. government has imposed tariffs on certain goods imported from countries including China. Existing and future trade tariffs, import duties and quotas could also materially increase our costs of procuring the materials we use and disrupt the markets for the products we handle, which in turn could have a material adverse effect on our financial position, results of operations and cash flows. Summary of Significant Events On October 21, 2024, Yunhong Green CTI Ltd. received written notice from Nasdaq indicating that the Company’s common stock had not maintained a minimum closing bid price of $1.00 per share for 30 consecutive business days, thereby failing to comply with Nasdaq Listing Rule 5550(a)(2). The notice provided the Company with an initial 180-day grace period, through April 21, 2025, to regain compliance. As the Company did not meet the minimum bid requirement by the end of the initial period, Nasdaq granted a second 180-day compliance period on April 24, 2025, extending the deadline to October 19, 2025. The Company intends to continue actively monitoring the closing bid price of its common stock and will evaluate all available options to regain compliance, including, if necessary, effecting a reverse stock split. If, at any time before the extended deadline, the Company’s common stock closes at or above $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide written confirmation that the Company has regained compliance with the Minimum Bid Price Rule. Senior Credit Facilities 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 (7.5% as of March 31, 2025), plus 1.45% 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. 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, 2025 and December 31, 2024, 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 both March 31, 2025 and December 31, 2024, the term loan balance amounted to $0.6 million, which consisted of the principal and interest payable balance of $0.6 million and deferred financing costs of approximately $11,000 and $17,000 respectively. The balance of the Revolving Line of Credit as of March 31, 2025 and December 31, 2024 amounted to $5.6 million and $6.6 million, 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. 12 Table of Contents Results of Operations Net Sales: Net sales for the three-month periods ended March 31, 2025 and 2024 were approximately $4.80 million and $4.89 million, respectively, representing a slight decrease of $92,000, or 1.9% year-over-year. For the three-month period ended March 31, 2025 and 2024, net sales by product category were as follows: Three Months Ended March 31, 2025 March 31, 2024 Product Category $ (000) Omitted % of Net Sales $ (000) Omitted % of Net Sales Variance % change Foil Balloons $ 4,234 88 % $ 2,919 60 % $ 1,315 45 % Film Products 427 9 % 305 6 % 122 40 % Other 141 3 % 1,670 34 % (1,529 ) -92 % Total $ 4,802 100 % $ 4,894 100 % $ (92 ) -2 % Foil Balloons . Revenues from the sale of foil balloons increased during the three-month period ended March 31, 2025 to $4,234,000 compared to $2,919,000 during the same period of 2024. The majority of valentine’s day foil balloons this year were shipped in Q1 2025, whereas last year the majority of our valentine’s day foil balloons were shipped in Q4 2023. This increase is related to the timing of orders and shipments. Films . Revenues from the sale of commercial films increased during the three-month period ended March 31, 2025 to $427,000 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 a significant number of competitors. Other Revenues: Other revenues decreased to $141,000 for the three-month period ended March 31 , 2025, compared to $1,670,000 for the same period in 2024. The primary reason for the decrease was the timing of spring product shipments, which will occur in the second quarter of 2025 rather than the first quarter, as they did in 2024. Other revenues during these periods primarily consisted of: (i) sales of balloon-inspired gift products, including candy and small inflated balloons packaged in small containers; and(ii) sales 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, 2025 and 2024. Three Months Ended March 31, % of Sales 2025 2024 Top 3 Customers 81 % 86 % Top 10 Customers 93 % 93 % 13 Table of Contents During the three-month period ended March 31, 2025, 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, 2025 were $3,091,000 and $523,000, or 64% and 11%, respectively of consolidated net sales. Sales to these customers for the three months ended March 31, 2024 were $2,226,000 and $1,710,000, or 46% and 35%, respectively of consolidated net sales. As of March 31, 2025, the total amount owed to the Company by these customers was approximately $4,335,000, or 89% of the Company’s consolidated net accounts receivable. Cost of Sales . During the three-month period ended March 31, 2025, the cost of sales was $3,936,000, compared to $3,999,000 for the same period of 2024. Even though the volume was lower than 2024, the gross margin of 18% remained the same for both periods General and Administrative . During the three-month period ended March 31, 2025, general and administrative expenses were $839,000 as compared to $1,040,000 for the same period in 2024. The largest change was due to decrease in audit fees by $167,000 this was because of the timing of the audit by Borgers CPA LLC. Selling, Advertising and Marketing . During the three-month period ended March 31, 2025, selling, advertising and marketing expenses were $205,000 as compared to $208,000 for the same period in 2024. Other Income (Expense) . During the three-month period ended March 31, 2025, the Company incurred interest expense of $237,000 as compared to interest expense of $218,000 during the same period of 2024. The Company changed its borrowing structure to replace lender fees with interest payments. Financial Condition, Liquidity and Capital Resources Cash Flow Items. Operating Activities . During the three months ended March 31, 2025, net cash provided by operations was $970,000, compared to net cash used in operations during the three months ended March 31, 2024 of $767,000. Significant changes in working capital items during the three months ended March 31, 2025 included: ● A decrease in accounts receivable of $772,000 compared to an increase in accounts receivable of $423,000 in the same period of 2024. ● An increase in inventory of $175,000 compared to a decrease in inventory of $81,000 in 2024. ● An increase in trade payables of $334,000 compared to an increase in trade payables of $47,000 in 2024. ● A decrease in prepaid expenses and other assets of $63,000 compared to an increase of $62,000 in 2024. ● An increase in accrued liabilities of $220,000 compared to a decrease in accrued liabilities of $18,000 in 2024. Investing Activity . During the three months ended March 31, 2025, cash used in investing activity was $20,000, compared to cash used in investing activity for the same period of 2024 in the amount of $154,000. Financing Activities . During the three months ended March 31, 2025, cash used in financing activities was $998,000 compared to cash provided by financing activities for the same period of 2024 in the amount of $49,000. Financing activity during 2025 consisted principally of changes in the balances of revolving and long-term debt. 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, 2025, the Company had cash balances of $172,000 compared to cash balances of $49,000 for the same period of 2024. 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 supply chain constraints, inflationary pressures and tariffs are expected to impact to some extent our operations and 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, 2024, 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, 2024. Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Not applicable.