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

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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."



Overview



We produce film products for novelty, packaging and container applications.
These products include foil balloons, latex balloons and related products, films
for packaging and custom product applications, and flexible containers for
packaging and consumer storage applications. We produce all of our film products
for packaging, container applications and most of our foil balloons at our plant
in Lake Barrington, Illinois. We used to produce our latex balloons and latex
products at a majority-owned facility in Guadalajara, Mexico (Flexo Universal,
or Flexo). This facility was sold during October 2021. Now the Company purchases
latex balloons from an unrelated vendor and distributes in the United States,
particularly to those customers that prefer a combined solution for foil and
latex balloons.. Substantially all of our film products for packaging and custom
product applications are sold to customers in the United States. We market and
sell our novelty items, 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.



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Summary of important events



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. As the decision to sell the lake Barrington Facility was made in April
2021, the facility is not classified as held for sale as of March 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 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, including:



  ? The Maximum Revolving Advance Amount was reduced from $18,000,0000 to
    $9,000,000;

? The termination date of the loan agreement was changed from December 14, 2022

to December 31, 2021;

? On or before June 30, 2021or at a later date agreed to by the previous lender

at its own discretion, the company will receive an equity investment from at

at least $1,500,000 and apply 100% of the proceeds towards a reduction of

Revolving Credit Advance under the Loan Agreement (the “capital investment“);

? On or before August 15, 2021or at a later date agreed by the previous lender

at its sole discretion, the Company will provide the Lender with (i) a binding deadline

sheet, acceptable in form and content Previous Lenderfrom financing

Source arranging for refinancing and payment in full in cash

Obligations under the loan agreement on or before September 30, 2021or

(ii) Evidence, in a form and substance satisfactory to the Senior Lender, that

certain shareholders of the Company have available and identifiable funds

which are deposited with a custodian institution, which are sufficient for payment

fully, in cash, all of the company’s obligations arising from the loan agreement

or before September 30, 2021;

? On or before September 30, 2021the company will cause all amounts

Debts under the Loan Agreement to be paid entirely in cash;

? The Forbearance Reserve (as defined in Amendment No. 5 of the Loan Agreement)

from has been increased $1,025,000 to $2,525,000;

? Effective August 1, 2021Claims against Wal-Mart Stores and its

affiliated companies were no longer considered legitimate claims;

? Changes are 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.



September 30, 2021 financing

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.



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Interest on the Senior Facilities shall be the prime rate published from time to
time published in the Wall Street Journal (3.25% as of September 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 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.



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
as of 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 March 31, 2022 and December 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 of March 31, 2022 and December 31, 2021 amounted to
$5.2 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.



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Results of Operations


net sales. For the past three months March 31, 2022 and 2021 was net sales $5,797,000 and $6,599,000respectively.



For the three-month period ended March 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 %)




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Foil Balloons. Revenues from the sale of foil balloons decreased during the
three-month period from $4,935,000 ending March 31, 2021 compared to $3,832,000
during the three month period of 2022. The timing of larger Mother'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 ended March 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 during October
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 ended March 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 ended March 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 ended March 31, 2022 and
2021.



                      Three Months Ended March 31,
                               % of Sales
                       2022                   2021

Top 3 Customers              80 %                   84 %

Top 10 Customers             90 %                   92 %




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During the three-month period ended March 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 ended March 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 ended March 31, 2021
were $3,991,000 and $1,294,000, or 60% and 19%, respectively of consolidated net
sales. As of March 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 at March 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 ended March 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 ended March 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 ended March
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 ended March 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 of
September 2021, charges a smaller rate of interest but adds an asset monitoring
fee that is included in general and administrative  expense.

Financial position, liquidity and capital resources


Cash Flow Items.


operational activities. During the three months ended March 31, 2022Net cash provided by operations was $2,000compared to the net cash used in operations over the past three months March 31, 2021 from $1,421,000.

Significant changes in working capital items during the past three months March 31, 2022 included:

? A decrease in accounts receivable of $125,000 compared to an increase

demands from $1,860,000 in the same period of 2021.

? A stock increase of $620,000 compared to an inventory decline of

$16,000 in 2021.

? A decrease in trade payables from $215,000 compared to a drop in trade

liabilities of $753,000 in 2021.

? A decrease in prepaid expenses and other assets from $339,000 compared to one

rise from $212,000 in 2021.

? A decrease in accrued liabilities from $165,000 compared to an increase

    accrued liabilities of $159,000 in 2021.



investment activity. During the three months ended March 31, 2022cash was used for investing activities $15,000compared to cash used in investing activities in the same period in 2021 of $46,000.



Financing Activities. During the three months ended March 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 March 31, 2021Cash from discontinued operations was $464,000 with associated exchange rate implications of a cash use of $554,000.

liquidity and capital resources.



At March 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 of March 31, 2022
and 2021, respectively.



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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) 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 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 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, including:



  ? The Maximum Revolving Advance Amount is reduced from $18,000,0000 to
    $9,000,000;

? The termination date of the loan agreement is changed from December 14, 2022

to December 31, 2021;

? On or before June 30, 2021or at a later date agreed upon by the lender in his

at its sole discretion, the Company shall receive an equity interest of at least

$1,500,000 and apply 100% of the proceeds towards a revolving reduction

Credit Advance under the Loan Agreement (the “capital investment“);

? On or before August 15, 2021or at a later date agreed upon by the lender in his

at its sole discretion, the Company will provide the Lender with (i) a Binding Term Sheet,

in form and content acceptable to the lender, from a funding source that

ensures the refinancing and full cash payment of the obligations

owed under the loan agreement on or before September 30, 2021or (ii)

Evidence, in form and content satisfactory to the lender, that certain

Shareholders of the Company have available and identifiable funds

on deposits with a custodian institution that are sufficient for full payment,

in cash all of the Company’s obligations under the Loan Agreement on or before

September 30, 2021;

? On or before September 30, 2021the company will cause all amounts

Debts under the Loan Agreement to be paid entirely in cash;

? The Forbearance Reserve (as defined in Amendment No. 5 of the Loan Agreement)

be increased from $1,025,000 to $2,525,000;

? Effective August 1, 2021Claims against Wal-Mart Stores and its

affiliated companies are no longer valid claims;

? Changes are 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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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 months ended March 31, 2022.

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