YUNHONG GREEN CTI LTD. 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 endedDecember 31, 2021 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 inLake Barrington, Illinois . We used to produce our latex balloons and latex products at a majority-owned facility inGuadalajara, Mexico (Flexo Universal, or Flexo). This facility was sold duringOctober 2021 . Now the Company purchases latex balloons from an unrelated vendor and distributes inthe United States , primarily 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 inthe 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 inthe United States . OnApril 23, 2021 , the Company entered into a Purchase and Sale Agreement ("PSA") with an unaffiliated purchaser (the "Purchaser") pursuant to which the Company sold its facility inLake Barrington, Illinois (the "Lake Barrington Facility"), in which our headquarters office, production and warehouse space are located, to the Purchaser. The sale price for the Lake Barrington Facility was$3,500,000 , consisting of$2,000,000 in cash and a promissory note with a principal amount of$1,500,000 , due and payable onMay 3, 2021 (the "Purchaser Promissory Note"). Concurrently with the closing under the PSA, the Company and the Purchaser entered into a lease agreement pursuant to which the Company agreed to lease the Lake Barrington Facility from the Purchaser for a period of ten years. The annual base rent commences at$500,000 for the first year of the term and escalates annually to$652,386 during the last year of the term of the lease. Concurrently with the entry into the PSA and the Lease, the Company entered into a Consent, Forbearance and Amendment No. 6 to Revolving Credit, Term Loan and Security Agreement (the "Amendment Agreement") with its then-lender PNC for itself and for the other participant lenders thereunder (collectively, the "Prior Lender"). Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement (the "Existing Defaults") and were continuing. Pursuant to the Amendment Agreement, the Prior Lender consented to the transactions contemplated by the PSA and the Lease, as required under the Loan Agreement. As a condition to the Amendment Agreement, the Company agreed that the full$2,000,000 in cash proceeds from the sale of theLake Barrington Facility would be applied to repay the$2,000,000 term loan owed to the Prior Lender pursuant to the Loan Agreement. The Company further agreed that$1,500,000 in proceeds from the Purchaser Promissory Note will be applied to amounts due and owing to the Prior Lender under revolving credit advances made pursuant to the Loan Agreement (the "Revolving Loans"). Pursuant to the Amendment Agreement, the Prior Lender agreed to forbear from exercising its rights and remedies with respect to the Existing Event of Defaults under the Loan Agreement for a period ending on the earlier ofSeptember 30, 2021 , the occurrence of a new event of default under the Loan Agreement, or the occurrence of a Termination Event (as defined therein). Additionally, certain additions and amendments to the Loan Agreement were set forth in the Amendment Agreement. In consideration for entering into the Loan Amendment, the Company agreed to pay the Prior Lender a Forbearance Fee of$1,000,000 . Provided, however, that, so long as no Event of Default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by$1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates theEquity Investment byJune 30, 2021 , the Forbearance Fee shall be reduced by$250,000 , to$750,000 , and (ii) if the Company causes all of the obligations under the Loan Agreement to be paid in full, in cash, on or beforeSeptember 30, 2021 , the Forbearance Fee shall be reduced by an additional$500,000 , to$250,000 . All commitments were accomplished by the required dates, resulting in a final Forbearance Fee of$250,000 paid during 2021.
OnSeptember 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 PNC Agreements and for the Company's working capital. The Senior Facilities are secured by substantially all assets of the Company. 16 Table of Contents Interest on the Senior Facilities shall be the prime rate published from time to time published in theWall Street Journal (6.25% as ofOctober 7, 2022 ), 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 onNovember 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. DuringAugust 2022 , these terms were modified to reduce the collateral monitoring fee to 2.77% and prevent the Company from repaying the facility prior toSeptember 2023 . The Senior Facilities mature onSeptember 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, commencingDecember 31, 2021 , maintain TangibleNet Worth of at least$4,000,000 or greater ("Minimum TangibleNet Worth "). Minimum TangibleNet 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 TangibleNet 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 each relevant month, including as ofSeptember 30, 2022 andDecember 31, 2021 . 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 ofSeptember 30, 2022 andDecember 31, 2021 , the term loan balance amounted to$0.5 million and$0.6 million , respectively, which consisted of the principal and interest payable balance of$0.6 million and$0.7 million and deferred financing costs of$0.1 million . The balance of the Revolving Line of Credit as ofSeptember 30, 2022 andDecember 31, 2021 amounted to$3.9 and$5.0 million , respectively. Comparability
InJuly 2019 , management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company's structure and utilize resources. Therefore, as ofJuly 19, 2019 , the Board authorized management to divest these international subsidiaries. These actions were taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based inNorth America . The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these International operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom ) subsidiary in the fourth quarter 2019, its Ziploc product line in the first quarter 2020, and its CTI Europe (Germany ) subsidiary in 2021. Additionally, the Company sold its latex balloon manufacturer inMexico (Flexo Universal) duringOctober 2021 .
17 Table of Contents Results of Operations
For the three-month period ended
Three Months Ended
September 30, 2022 September 30, 2021
$ % of $ % of
(000) (000) %
Product Category Omitted Net Sales Omitted Net Sales Variance change
Foil Balloons 1,612 71 % 4,295 83 % (2,683 ) (62 )%
Film Products 537 24 % 689 13 % (152 ) (22 )%
Other 114 5 % 200 4 % (86 ) (43 )%
Total 2,263 100 % 5,184 100 % (2,921 ) (56 )%
For the nine month periods ended
For the nine month period ended
September 30, 2022 September 30, 2021
$ % of $ % of
(000) (000) %
Product Category Omitted Net Sales Omitted Net Sales Variance change
Foil Balloons 8,118 65 % 13,793 79 % (5,675 ) (41 )%
Film Products 1,900 15 % 1,500 9 % 400 27 %
Other 2,460 20 % 2,202 12 % 258 12 %
Total 12,478 100 % 17,495 100 % (5,017 ) (29 )%
Foil Balloons. Revenues from the sale of foil balloons decreased during the three months period from$4,295,000 endingSeptember 30, 2021 compared to$1,612,000 during the three month period of 2022. Revenues from the sale of foil balloons decreased during the nine month period from$13,793,000 endingSeptember 30, 2021 compared to$8,118,000 during the nine month period of 2022. An increase in the price of helium during 2022 negatively impacted customers of most types of foil balloons. This price increase was the result of both the broad inflationary pressures and restrictions on trade withRussia , as we believe the latter supplies approximately 5% of the helium used in the marketplace. This combined with temporary individual supply issues created increased pricing in the market. We also discontinued certain products for which we were not able to secure adequate inflationary price increases. The price of helium has reduced during recent months and there are reasons to believe that it will continue to trend lower over the next several months. This dynamic had a severe impact on the sales of foil balloons, particularly for our largest customer. 18 Table of Contents Films. Revenues from the sale of commercial films were$537,000 and$1,900,000 during the three and nine month periods endedSeptember 30, 2022 , compared to$689,000 and$1,500,000 during the same periods of 2021. Other Revenues. Revenues from the sale of other products were$114,000 and$2,460,000 during the three and nine month periods endedSeptember 30, 2022 , compared to$200,000 and$2,202,000 during the same periods of 2021. The revenues from the sale of other products during these periods include (i) sales of a line of "Candy Blossoms" and similar products consisting of candy and small inflated balloons sold in small containers, (ii) latex balloons, and (iii) the sale of accessories and supply items related to balloon products. Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales of our top three and ten customers for the three month periods endedSeptember 30, 2022 and 2021. Three Months Ended September 30, % of Sales 2022 2021 Top 3 Customers 79 % 83 % Top 10 Customers 96 % 90 % Nine Months Ended September 30, % of Sales 2022 2021 Top 3 Customers 89 % 82 % Top 10 Customers 92 % 89 % During the three and nine months endedSeptember 30, 2022 and 2021, there were two customer whose purchases represented more than 10% of the Company's consolidated net sales. Sales to these customers for the three and nine months endedSeptember 30, 2022 and 2021 are as follows: Three Months Ended Three Months Ended September 30, 2022 September 30, 2021 % of Net % of Net Customer Net Sales Sales Net Sales Sales Customer A$ 1,104,000 49 %$ 3,398,000 66 % Customer B$ 176,000 8 %$ 277,000 5 % Nine Months Ended Nine Months Ended September 30, 2022 September 30, 2021 % of Net % of Net Customer Net Sales Sales Net Sales Sales Customer A$ 5,436,000 44 %$ 10,876,000 62 % Customer B$ 2,846,000 23 %$ 2,384,000 14 % As ofSeptember 30, 2022 , the total amounts owed to the Company by these customers were approximately$679,000 or 45% of the Company's consolidated net accounts receivable. The amounts owed atSeptember 30, 2021 by these customers were approximately$1,451,000 or 38% of the Company's consolidated net accounts receivable. 19 Table of Contents Cost of Sales. During the three and nine month period endedSeptember 30, 2022 , the cost of sales was$2,021,000 and$10,394,000 , compared to$4,528,000 and$14,559,000 respectively for the same period of 2021 due to lower sales volume. As a percentage of sales, cost of sales was 89% and 83% during the three and nine months endedSeptember 30, 2022 , compared to 87% and 83% during the three and nine months endedSeptember 30, 2021 .
General and Administrative. During the three and nine month period ended
Selling, Advertising and Marketing. During the three and nine month period endedSeptember 30, 2022 , selling, advertising and marketing expenses were$103,000 and$435,000 as compared to$104,000 and$350,000 respectively for the same periods in 2021. The Company expanded its customer outreach and engagement activities during 2022 Gain on Sale of Assets. OnApril 23, 2021 , the Company sold its facility inLake Barrington, Illinois and as a result of the sale recognized a gain amounting to$3,357,000 . Other Income (Expense). During the three and nine month period endedSeptember 30, 2022 , the Company incurred interest expense of$120,000 and$325,000 compared to interest expense of$89,000 and$437,000 respectively during the same period of 2021. Interest expense decreased due to the reduction of the Company's senior debt facility, as well as the manner of charges from the Company's lender during the relevant period. The lender during 2021 charged more interest, while the lender during 2022 charges lower interest and a monitoring fee that is recorded in General and Administrative expenses.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the nine months endedSeptember 30, 2022 , net cash provided by operations was$1,187,000 , compared to net cash used by operations during the nine months endedSeptember 30, 2021 of$1,204,000 .
Significant changes in working capital items during the nine months ended
? A decrease in accounts receivable of
accounts receivable of $169,000 in the same period of 2021.
? An increase in inventory of
$401,000 in 2021.
? A decrease in trade payables of
payables of $714,000 in 2021.
? A gain on sale of assets of $3,357,000 in 2021
? An decrease in prepaid expenses and other assets of
increase of
? An increase in accrued liabilities of
accrued liabilities of
20 Table of Contents Investing Activity. During the nine months endedSeptember 30, 2022 , cash used in investing activity was$121,000 , compared to cash provided by investing activity for the same period of 2021 in the amount of$3,406,000 . Investing activity consisted principally of the cash flows from the sale and leaseback of ourLake Barrington, Illinois facility, as further described below under the heading "Liquidity and Capital Resources".
Financing Activities. During the nine months ended
Discontinued Operations. During the nine months endedSeptember 30, 2021 , cash used by discontinued operations was$1,227,000 with related exchange rate impact of a cash use of$12,000 .
Liquidity and Capital Resources.
At
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 and inflationary pressures 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 with prior lender PNC (see Note 4) untilSeptember 30, 2021 , at which time we refinanced with a new facility fromLine Capital . ThroughSeptember 2021 , we entered into a series of forbearance agreements with PNC related to compliance failures with covenants. We believe that we have been in compliance with covenants since refinancing with Line Financial. OnApril 23, 2021 , the Company entered into a Purchase and Sale Agreement ("PSA") with an unaffiliated purchaser (the "Purchaser") pursuant to which the Company sold its facility inLake Barrington, Illinois (the "Lake Barrington Facility"), in which our headquarters office, production and warehouse space are located, to the Purchaser. The sale price for the Lake Barrington Facility was$3,500,000 , consisting of$2,000,000 in cash and a promissory note with a principal amount of$1,500,000 , due and payable onMay 3, 2021 (the "Purchaser Promissory Note"). Concurrently with the closing under the PSA, the Company and the Purchaser entered into a lease agreement pursuant to which the Company agreed to lease the Lake Barrington Facility from the Purchaser for a period of ten years. The annual base rent commenced at$500,000 for the first year of the term and escalates annually to$652,386 during the last year of the term of the lease. Concurrently with the entry into the PSA and the Lease, the Company entered into a Consent, Forbearance and Amendment No. 6 to Revolving Credit, Term Loan and Security Agreement (the "Amendment Agreement") with PNC for itself and for the other participant lenders thereunder (collectively, the "Prior Lender"). Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement (the "Existing Defaults") and were continuing. Pursuant to the Amendment Agreement, the Prior Lender consented to the transactions contemplated by the PSA and the Lease, as required under the Loan Agreement. As a condition to the Amendment Agreement, the Company agreed that the full$2,000,000 in cash proceeds from the sale of the Lake Barrington Facility would be applied to repay the$2,000,000 term loan owed to the Prior Lender pursuant to the Loan Agreement. The Company further agreed that$1,500,000 in proceeds from the Purchaser Promissory Note would be applied to amounts due and owing to the Prior Lender under revolving credit advances made pursuant to the Loan Agreement (the "Revolving Loans"). Pursuant to the Amendment Agreement, the Prior Lender agreed to forbear from exercising its rights and remedies with respect to the Existing Event of Defaults under the Loan Agreement for a period ending on the earlier ofSeptember 30, 2021 , the occurrence of a new event of default under the Loan Agreement, or the occurrence of a Termination Event (as defined therein). 21 Table of Contents In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender a Forbearance Fee of$1,000,000 . Provided, however, that, so long as no Event of Default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by$1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates theEquity Investment byJune 30, 2021 , the Forbearance Fee shall be reduced by$250,000 , to$750,000 , and (ii) if the Company caused all of the obligations under the Loan Agreement to be paid in full, in cash, on or beforeSeptember 30, 2021 , the Forbearance Fee shall be reduced by an additional$500,000 , to$250,000 . As these requirements were met, the final Forbearance Fee was$250,000 .
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 12-20 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 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 endedSeptember 30, 2022 .
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