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 , 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 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 . 18
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Summary of Significant Events
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. As the decision to sell the lake Barrington Facility was made inApril 2021 , the facility is not classified as held for sale as ofMarch 31, 2021 . 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 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 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, including: ? The Maximum Revolving Advance Amount was reduced from$18,000,0000 to$9,000,000 ;
? The Termination Date of the Loan Agreement was revised from
to
? On or before
its sole discretion, the Company shall receive an equity investment of at
least
Revolving Credit Advance under the Loan Agreement (the "
? On or before
its sole discretion, the Company shall deliver to Lender (i) a binding term
sheet, in form and substance acceptable to
source that provides for the refinance and payment in full, in cash, of the
obligations owing under the Loan Agreement on or before
(ii) evidence, in form and substance satisfactory to the Prior Lender, that
certain equity holders of the Company have available and identifiable funds
that are on deposit with a depository institution that are sufficient to pay
in full, in cash, all of the Company obligations under the Loan Agreement on
or before
? On or before
owing under the Loan Agreement to be paid in full in cash;
? The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement)
was increased from
? Effective
affiliates was no longer considered eligible receivables;
? Modifications will be made to the budget, testing and variance provisions of
the Loan 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 the Equity Investment by June 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
before September 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. 19
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Interest on the Senior Facilities shall be the prime rate published from time to time published in theWall Street Journal (3.25% as ofSeptember 30, 2021 ), 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. 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 as ofDecember 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 ofMarch 31, 2022 andDecember 31, 2021 , the term loan balance amounted to$0.6 million , which consisted of the principal and interest payable balance of$0.7 million and deferred financing costs of$155,000 . The balance of the Revolving Line of Credit as ofMarch 31, 2022 andDecember 31, 2021 amounted to$5.2 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 . 20
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Table of Contents Results of Operations
For the three-month period endedMarch 31, 2022 and 2021, net sales by product category were as follows: Three Months Ended March 31, 2022 March 31, 2021 $ $ (000) % of (000) % of Product Category Omitted Net Sales Omitted Net Sales Variance % change Foil Balloons$ 3,832 66 %$ 4,935 75 %$ (1,103 ) (22 %) Latex Balloons 25 0 % 2 0 % 23 - Film Products 828 14 % 306 5 % 522 171 % Other$ 1,112 19 %$ 1,356 20 %$ (244 ) (18 %) Total$ 5,797 100 %$ 6,599 100 %$ (802 ) (12 %) 21
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Foil Balloons. Revenues from the sale of foil balloons decreased during the three-month period from$4,935,000 endingMarch 31, 2021 compared to$3,832,000 during the three month period of 2022. The timing of largerMother's Day and Graduation season shipments occurred during April of 2022, as compared to March of 2021. In addition, the Company implemented price increases to address the impact of additional material and labor costs. Certain low value, or no value, sales were discontinued when price increases were not successful. Latex Balloons. Revenues from the sale of latex balloons increased during the three-month period from$2,000 during the three period endedMarch 31, 2021 , to$25,000 during the same period of 2022. Sales of latex balloons are substantially reduced as we sold our latex balloon manufacturer duringOctober 2021 . After that time, latex balloon are resold on an as-needed basis for customers that require a combined foil and latex solution. Films. Revenues from the sale of commercial films increased, from$306,000 during the three-month period endedMarch 31, 2021 , compared to$828,000 during the same period of 2022. The Company's largest customer increased its demand for the line that the Company supplies. Other Revenues. Revenues from the sale of other products were$1,356,000 during the three-month period endedMarch 31, 2021 , compared to$1,112,000 during the same period of 2022. 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 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 endedMarch 31, 2022 and 2021. Three Months Ended March 31, % of Sales 2022 2021 Top 3 Customers 80 % 84 % Top 10 Customers 90 % 92 % 22
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During the three-month period endedMarch 31, 2022 , 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 endedMarch 31, 2022 were$2,502,000 and$1,347,000 , or 43% and 23%, respectively, of consolidated net sales. Sales to these customers for the three months endedMarch 31, 2021 were$3,991,000 and$1,294,000 , or 60% and 19%, respectively of consolidated net sales. As ofMarch 31, 2022 , the total amount owed to the Company by these customers was approximately$696,000 and$1,669,000 , or 20% and 48%, respectively of the Company's consolidated net accounts receivable. The amount owed atMarch 31, 2021 by these customers was approximately$2,426,000 and$1,554,000 , or 51% and 33%, respectively, of the Company's consolidated net accounts receivable. Cost of Sales. During the three month period endedMarch 31, 2022 , the cost of sales was$4,758,000 , compared to$5,313,000 for the same period of 2021 due to lower sales volume and partially offset by higher costs of materials and labor. General and Administrative. During the three month period endedMarch 31, 2022 , general and administrative expenses were$837,000 as compared to$849,000 for the same period in 2021 due mainly to 2021 payments related to lender covenant violations that did not continue in 2022. In addition, the Company's current lending structure carries relatively small interest payments but larger asset monitoring fees that are reflected in the 2022 general and administrative expense. If not for this, the reduction from the prior year would be larger. Selling, Advertising and Marketing. During the three month period endedMarch 31, 2022 , selling, advertising and marketing expenses were$221,000 as compared to$139,000 for the same period in 2021. With smaller customers continuing to increase their activity, the Company is making small investments in the marketing function. Other Income (Expense). During the three month period endedMarch 31, 2022 , the Company incurred interest expense of$96,000 as compared to interest expense of$200,000 during the same period of 2021. The Company's current lender, as ofSeptember 2021 , charges a smaller rate of interest but adds an asset monitoring fee that is included in general and administrative expense.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the three months ended
Significant changes in working capital items during the three months ended
? A decrease in accounts receivable of
accounts receivable of
? An increase in inventory of
? A decrease in trade payables of
payables of
? A decrease in prepaid expenses and other assets of
increase of
? A decrease in accrued liabilities of
accrued liabilities of $159,000 in 2021.
Investing Activity. During the three months ended
Financing Activities. During the three months endedMarch 31, 2022 , cash provided by financing activities was$155,000 compared to cash provided by financing activities for the same period of 2021 in the amount of$1,557,000 . Financing activity during 2022 consisted principally of changes in the balances of revolving and long-term debt.
Discontinued Operations. During the three months ended
Liquidity and Capital Resources.
AtMarch 31, 2022 , the Company had cash balances of$208,000 compared to cash balances of$66,000 for the same period of 2021. These amounts do not include cash related to discontinued operations of none and$20,000 as ofMarch 31, 2022 and 2021, respectively. 23
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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 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 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). Additionally, certain additions and amendments to the Loan Agreement were set forth in the Amendment Agreement, including: ? The Maximum Revolving Advance Amount is reduced from$18,000,0000 to$9,000,000 ;
? The Termination Date of the Loan Agreement is revised from
to
? On or before
sole discretion, the Company shall receive an equity investment of at least
Credit Advance under the Loan Agreement (the "
? On or before
sole discretion, the Company shall deliver to Lender (i) a binding term sheet,
in form and substance acceptable to Lender, from a financing source that
provides for the refinance and payment in full, in cash, of the obligations
owing under the Loan Agreement on or before
evidence, in form and substance satisfactory to the Lender, that certain
equity holders of the Company have available and identifiable funds that are
on deposit with a depository institution that are sufficient to pay in full,
in cash, all of the Company obligations under the Loan Agreement on or before
? On or before
owing under the Loan Agreement to be paid in full in cash;
? The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement)
shall be increased from
? Effective
affiliates no longer considered eligible receivables;
? Modifications will be made to the budget, testing and variance provisions of
the Loan Agreement.
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
the Equity Investment by June 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 before September 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 .
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Table of Contents 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 months endedMarch 31, 2022 .
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