YUNHONG CTI LTD. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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, 2021 under the heading "Risk Factors."

Insight

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,
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 in the 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
in the United States.

On April 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 in Lake 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 on May 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 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 of September 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 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.

September 30, 2021 funding

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").
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 the Wall Street Journal (6.25% as of October 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 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 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. During August 2022, these terms were modified to
reduce the collateral monitoring fee to 2.77% and prevent the Company from
repaying the facility prior to September 2023.

The Senior Facilities mature on September 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, commencing December 31,
2021, 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
during each relevant month, including as of September 30, 2022 and December 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 of September 30, 2022 and December 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
of September 30, 2022 and December 31, 2021 amounted to $3.9 and $5.0 million,
respectively.

Comparability

In July 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
of July 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 in North 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 in Mexico (Flexo Universal) during October 2021.

17


  Table of Contents



Results of Operations

Net sales. For periods of three months ended September 30, 2022 and 2021, net sales were $2,263,000 and $5,184,000respectively.

For the three-month period ended September 30, 2022 and 2021, net sales by product category were as follows:

                                                         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 September 30, 2022 and 2021, net sales were
$12,478,000 and $17,495,000respectively.

For the nine-month period ended September 30, 2022 and 2021, net sales by product category were as follows:

                                        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 ending September 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 ending
September 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 with Russia, 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 ended September 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 ended September 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 ended September 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 ended September 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
ended September 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 of September 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 at September 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 ended September 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 ended September 30, 2022, compared to 87% and 83% during the three
and nine months ended September 30, 2021.

General and administrative. During the three and nine month periods ended
September 30, 2022general and administrative expenses were $896,000 and
$2,731,000 compared to $833,000 and $2,730,000 respectively for the same periods in 2021.

Selling, Advertising and Marketing. During the three and nine month period ended
September 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. On April 23, 2021, the Company sold its facility in Lake
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 ended September
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 position, liquidity and capital resources

Cash flow elements.

Operating Activities. During the nine months ended September 30, 2022, net cash
provided by operations was $1,187,000, compared to net cash used by operations
during the nine months ended September 30, 2021 of $1,204,000.

Significant changes in working capital items during the nine months ended
September 30, 2022 included:

? A decrease in accounts receivable of $2,032,000 compared to a decrease in

    accounts receivable of $169,000 in the same period of 2021.

? An increase in inventory of $1,286,000 compared to an increase in stocks of

    $401,000 in 2021.

? A decrease in trade payables of $54,000 compared to a decline in trade

    payables of $714,000 in 2021.



  ? A gain on sale of assets of $3,357,000 in 2021

? A decrease in prepaid expenses and other assets of $562,000 compared to a

increase of $694,000 in 2021.

? An increase in accrued expenses of $877,000 compared to an increase of

accrued charges of $490,000 in 2021.

20


  Table of Contents



Investing Activity. During the nine months ended September 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
our Lake Barrington, Illinois facility, as further described below under the
heading "Liquidity and Capital Resources".

Fundraising activities. In the nine months ended September 30, 2022cash used in financing activities has been $1,031,000 compared to cash used in financing activities for the same period of 2021 of an amount of $650,000. Financing activity consisted primarily of changes in revolving and long-term debt balances, as well as additional investments in 2021.

Discontinued Operations. During the nine months ended September 30, 2021, cash
used by discontinued operations was $1,227,000 with related exchange rate impact
of a cash use of $12,000.

Cash and capital resources.

To September 30, 2022the Company had cash balances of $101,000 compared to the cash balances of $379,000 for the same period of 2021.

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) until September 30, 2021, at which time we
refinanced with a new facility from Line Capital. Through September 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.

On April 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 in Lake 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 on May 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 of
September 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
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.

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 ended
December 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 ended September 30, 2022.

© Edgar Online, source Previews