# Yunhong Green Cti LTD.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Yunhong Green Cti LTD.](/companies/yhgj.md) (CIK 1042187)
- Form: 10-Q
- Filed: 2022-11-18
- Accepted by EDGAR: Nov 18, 2022, 11:10 ET
- Period: 2022-09-30
- Accession: 0001493152-22-032813
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1042187/000149315222032813/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1042187/000149315222032813/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $2.3m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $12.5m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $2.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $10.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $242.0k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $2.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | −$757.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $120.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $325.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | −$969.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | −$1.4m | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2021-09-29 to 2022-09-30 | $24.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | −$0.28 | us-gaap:EarningsPerShareDiluted |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 9,261,972 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 7,028,920 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $121.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-09-30 | $101.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $11.3m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $16.3m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $8.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $13.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $2.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 26,510 characters.

### 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, 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 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.

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.

### Results of Operations

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

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

| Product Category | Three Months Ended September 30, 2022 $% of (000) Omitted | Net Sales | September 30, 2021 $% of (000) 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 $17,495,000, respectively.

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

| Product Category | September 30, 2022 $% of (000) Omitted | Net Sales | September 30, 2021 $% of (000) 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.

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:

| Customer | Three Months Ended September 30, 2022 Net Sales | % of Net Sales | Three Months Ended September 30, 2021 Net Sales | % of Net Sales |
| --- | ---: | ---: | ---: | ---: |
| Customer A | $1,104,000 | 49% | $3,398,000 | 66% |
| Customer B | $176,000 | 8% | $277,000 | 5% |

| Customer | Nine Months Ended September 30, 2022 Net Sales | % of Net Sales | Nine Months Ended September 30, 2021 Net Sales | % of Net 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.

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 period ended September 30, 2022, general 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 Condition, Liquidity and Capital Resources

Cash Flow Items.

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 inventory of $401,000 in 2021.
- A decrease in trade payables of $54,000 compared to an decrease in trade 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 $562,000 compared to an increase of $694,000 in 2021.
- An increase in accrued liabilities of $877,000 compared to an increase in accrued liabilities of $490,000 in 2021.

20

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”.

Financing Activities. During the nine months ended September 30, 2022, cash used in financing activities was $1,031,000 compared to cash used in financing activities for the same period of 2021 in the amount of $650,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt, as well as additional investment during 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.

Liquidity and Capital Resources.

At September 30, 2022, the Company had cash balances of $101,000 compared to 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).

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.

## Market risk

As filed, 3,904 characters.

On December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association and the other participant lenders thereunder (collectively, “Prior Lender”). This was the Company’s primary source of liquidity until it refinanced this facility with Line Capital during September 2021.

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 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:

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. These commitments were met and the final Forbearance Fee was $250,000.

The Company believes that it has been in compliance with the terms of the Line Capital financing since inception on September 30, 2021.

## Controls and procedures

As filed, 3,996 characters.

### (a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission’s rules and forms.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of September 30, 2021. Based on this evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q due to the material weaknesses described below.

### (b) Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as of September 30, 2022. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of our evaluation of our internal control over financial reporting, management identified the following material weaknesses in our internal control over financial reporting:

- We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for significant, unusual transactions that resulted in misapplications of GAAP, particularly with regard to the timing of recognition of certain non-cash charges, and
- We are overly dependent upon our Acting Chief Financial Officer, who at present is our Chief Executive Officer, within an environment that is highly manual in nature.

As a result of the material weaknesses, we have concluded that we did not maintain effective internal control over financial reporting as of September 30, 2022.

Filed Nov 18, 2022.
Source: SEC EDGAR, the filing index for accession 0001493152-22-032813. Last ingested by Listed: Oct 24, 2026, 15:04 ET. No prices; not investment advice.