UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021 |
|
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to_________
Commission File Number
000-23115
YUNHONG CTI LTD.
(Exact name of registrant as specified in its charter)
Illinois | 36-2848943 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
22160 N. Pepper Road | ||
Barrington, Illinois | 60010 | |
(Address of principal executive offices) | (Zip Code) |
(847)382-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, no par value per share | CTIB | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of the registrant’s common stock, no par value per share, as of November 20, 2020August 13th, 2021 was 5,783,6465,886,750 (excluding treasury shares).
Item No. 1. | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | ||
Item No. 2 |
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Item No. 3 | Quantitative and Qualitative Disclosures Regarding Market Risk | |
Item No. 4 | ||
Item No. 1 | ||
Item No. 1A |
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Item No. 2 |
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Item No. 3 |
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Item No. 4 |
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Item No. 5 |
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Item No. 6 |
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Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 32 | ||
Condensed Consolidated Balance Sheets |
September 30, 2020 | December 31, 2019 | |||||||||||||||
(unaudited) | June 30, 2021 | December 31, 2020 | ||||||||||||||
| ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | - | $ | 845,098 | $ | 272,631 | $ | 429,457 | ||||||||
Accounts receivable | 5,297,701 | 9,011,569 | 5,241,473 | 5,013,195 | ||||||||||||
Inventories, net | 10,643,911 | 13,959,499 | 11,505,248 | 10,969,711 | ||||||||||||
Prepaid expenses | 633,223 | 353,183 | 462,262 | 589,149 | ||||||||||||
Other current assets | 1,155,266 | 1,312,205 | 1,471,766 | 1,352,419 | ||||||||||||
Income Tax Receivable | 196,747 | 403,074 | ||||||||||||||
Receivable from related party | 1,026,813 | 1,387,131 | 0 | 100,000 | ||||||||||||
Current assets of discontinued operations | 748,386 | 756,031 | 0 | 294,219 | ||||||||||||
Total current assets | 19,505,300 | 27,624,716 | 19,150,127 | 19,151,224 | ||||||||||||
Property, plant and equipment: | ||||||||||||||||
Machinery and equipment | 21,796,644 | 23,822,808 | 19,911,519 | 19,833,903 | ||||||||||||
Building | 3,374,334 | 3,374,334 | 0 | 3,321,016 | ||||||||||||
Office furniture and equipment | 2,221,195 | 2,289,444 | 2,164,502 | 2,231,458 | ||||||||||||
Intellectual property | 783,179 | 783,179 | 783,179 | 783,179 | ||||||||||||
| Land | 250,000 | 250,000 | 0 | 250,000 | ||||||||||||
Leasehold improvements | 390,624 | 415,737 | 175,653 | 407,476 | ||||||||||||
Fixtures and equipment at customer locations | 518,450 | 518,450 | 518,450 | 518,450 | ||||||||||||
Projects under construction | 68,738 | 74,929 | 71,207 | 71,206 | ||||||||||||
| 29,403,164 | 31,528,881 | 23,624,510 | 27,416,688 | |||||||||||||
Less : accumulated depreciation and amortization | (27,397,950 | ) | (28,997,809 | ) | (22,308,630 | ) | (25,466,213 | ) | ||||||||
Total property, plant and equipment, net | 2,005,214 | 2,531,072 | 1,315,880 | 1,950,475 | ||||||||||||
Other assets: | ||||||||||||||||
Operating lease right-of-use | 359,802 | 1,046,438 | 3,927,357 | 361,720 | ||||||||||||
Other assets | 78,259 | 118,857 | 89,879 | 87,552 | ||||||||||||
Total other assets | 438,061 | 1,165,295 | 4,017,236 | 449,272 | ||||||||||||
TOTAL ASSETS | $ | 21,948,575 | $ | 31,321,083 | 24,483,243 | 21,550,971 | ||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Bank overdraft | $ | 29,837 | $ | - | ||||||||||||
Trade payables | 6,135,867 | 7,021,580 | $ | 5,553,496 | $ | 5,504,442 | ||||||||||
Line of credit | 5,613,063 | 14,518,107 | 2,884,678 | 5,363,340 | ||||||||||||
Notes payable - current portion | 2,467,741 | 3,451,880 | 2,256,957 | 3,913,666 | ||||||||||||
| Advance from investor | 1,500,000 | - | ||||||||||||||
Advance from Investor | 1,500,000 | 1,500,000 | ||||||||||||||
Notes payable affiliates - current portion | 9,937 | 12,684 | 0 | 8,045 | ||||||||||||
Notes payable - officers, subordinated | 1,157,906 | 1,123,769 | ||||||||||||||
Operating Lease Liabilities | 311,678 | 658,374 | 641,776 | 317,591 | ||||||||||||
Accrued liabilities | 1,262,139 | 1,205,027 | 1,250,445 | 871,761 | ||||||||||||
Current liabilities of discontinued operations | 273,782 | 656,753 | 0 | 184,577 | ||||||||||||
Total current liabilities | 17,604,044 | 27,524,405 | 15,245,258 | 18,787,191 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Notes payable - affiliates | 10,632 | 14,340 | ||||||||||||||
Notes payable, net of current portion | 1,445,683 | 1,024,441 | ||||||||||||||
Operating Lease Liabilities | 48,123 | 388,064 | 2,975,581 | 44,129 | ||||||||||||
Notes payable - officers, subordinated | 1,107,080 | 1,058,486 | ||||||||||||||
Deferred gain (non current) | - | 184,840 | ||||||||||||||
Total long-term liabilities | 2,611,518 | 2,670,171 | 2,975,581 | 44,129 | ||||||||||||
TOTAL LIABILITIES | 20,215,562 | 30,194,576 | 18,220,839 | 18,831,320 | ||||||||||||
| Stockholders' Equity | ||||||||||||||||
Mezzanine equity: | ||||||||||||||||
Series B Preferred stock -- no par value, 170,000 share authorized 170,000 shares issued and outstanding at June 30, 2021 and December 31, 2020 | 0 | 1,532,164 | ||||||||||||||
| Equity: | ||||||||||||||||
Yunhong CTI, Ltd stockholders' equity: | ||||||||||||||||
Preferred Stock -- no par value, 3,000,000 shares authorized, 548,200 shares issued and outstanding at September 30, 2020 and nil at December 31, 2019 respectively (liquidation preference - $5.482 million as of September 30, 2020) | 3,132,600 | - | ||||||||||||||
Common stock - no par value, 15,000,000 shares authorized, 5,271,698 and 3,835,930 shares issued and 5,228,040 and 3,835,930 shares outstanding at September 30, 2020 and December 31, 2019 respectively | 14,537,828 | 13,898,494 | ||||||||||||||
Series A Preferred Stock -- no par value, 3,000,000 shares authorized, 500,000 shares issued and outstanding at June 30, 2021 and December 31, 2020 (liquidation preference - $5.0 million as of June 30, 2021) | 2,954,583 | 2,754,583 | ||||||||||||||
Series B Preferred Stock -- no par value, 170,000 shares authorized, 170,000 shares issued and outstanding at June 30, 2021 and nil at December 31, 2020 respectively (liquidation preference - $1.7 million as of June 30, 2021) | 1,646,707 | 0 | ||||||||||||||
Series C Preferred Stock -- no par value, 170,000 shares authorized, 170,000 shares issued and outstanding at June 30, 2021 and nil at December 31, 2020 respectively (liquidation preference - $1.7 million as of June 30, 2021) | 1,562,333 | 0 | ||||||||||||||
Common stock - no par value, 50,000,000 shares authorized, 5,930,408 and 5,827,304 shares issued and 5,886,750 and 5,783,646 shares outstanding at June 30, 2021 and December 31, 2020 respectively | 14,537,828 | 14,537,828 | ||||||||||||||
Paid-in-capital | 4,695,658 | 3,587,287 | 4,664,635 | 5,041,511 | ||||||||||||
Accumulated earnings | (13,112,986 | ) | (9,992,841 | ) | ||||||||||||
Accumulated deficit | (13,022,167 | ) | (14,382,327 | ) | ||||||||||||
Accumulated other comprehensive loss | (6,640,664 | ) | (5,348,812 | ) | (5,945,588 | ) | (5,885,112 | ) | ||||||||
Less: Treasury stock, 43,658 shares | (160,784 | ) | (160,784 | ) | (160,784 | ) | (160,784 | ) | ||||||||
| - | ||||||||||||||||
Total Yunhong CTI, Ltd Stockholders' Equity | 2,451,652 | 1,983,344 | 6,237,547 | 1,905,699 | ||||||||||||
Noncontrolling interest | (718,639 | ) | (856,837 | ) | 24,857 | (718,212 | ) | |||||||||
Total Stockholders' Equity | 1,733,013 | 1,126,507 | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 21,948,575 | $ | 31,321,083 | ||||||||||||
Total Shareholders' Equity | 6,262,404 | 1,187,487 | ||||||||||||||
TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY | $ | 24,483,243 | $ | 21,550,971 | ||||||||||||
See accompanying notes to condensed consolidated unaudited financial statements |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Net Sales | $ | 5,980,766 | $ | 6,365,352 | $ | 18,793,620 | $ | 24,259,037 | $ | 6,325,241 | $ | 5,745,353 | $ | 13,741,409 | $ | 12,812,854 | ||||||||||||||||
Cost of Sales | 5,719,824 | 6,284,645 | 16,441,524 | 20,925,512 | 5,459,424 | 5,135,641 | 11,782,399 | 10,721,700 | ||||||||||||||||||||||||
Gross profit | 260,942 | 80,707 | 2,352,096 | 3,333,525 | 865,817 | 609,712 | 1,959,010 | 2,091,154 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
General and administrative | 1,067,122 | 1,167,207 | 3,253,561 | 3,865,527 | 1,257,268 | 1,484,008 | 2,377,618 | 2,186,439 | ||||||||||||||||||||||||
Selling | 31,723 | 55,907 | 112,113 | 285,015 | 32,604 | 26,636 | 65,357 | 80,390 | ||||||||||||||||||||||||
Advertising and marketing | 69,569 | 92,061 | 271,563 | 428,798 | 74,620 | 81,165 | 181,186 | 201,994 | ||||||||||||||||||||||||
Impairment of long-lived assets | - | - | - | 1,472,382 | ||||||||||||||||||||||||||||
Gain on loss of control of VIEs | - | (218,527 | ) | - | (218,527 | ) | ||||||||||||||||||||||||||
Gain on sale of assets | - | (23,054 | ) | (45,700 | ) | (70,263 | ) | (3,356,794 | ) | (20,016 | ) | (3,356,794 | ) | (45,700 | ) | |||||||||||||||||
Total operating expenses | 1,168,414 | 1,073,594 | 3,591,537 | 5,762,932 | ||||||||||||||||||||||||||||
Total operating (income) expenses | (1,992,302 | ) | 1,571,793 | (732,633 | ) | 2,423,123 | ||||||||||||||||||||||||||
Loss from operations | (907,472 | ) | (992,887 | ) | (1,239,441 | ) | (2,429,407 | ) | ||||||||||||||||||||||||
Income (loss) from operations | 2,858,119 | (962,081 | ) | 2,691,643 | (331,969 | ) | ||||||||||||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||||||||||
Interest expense | (255,138 | ) | (464,546 | ) | (1,033,240 | ) | (1,493,264 | ) | (181,490 | ) | (336,925 | ) | (412,649 | ) | (778,102 | ) | ||||||||||||||||
Gain on forgiveness of Payroll Protection Program Funding | 247,554 | - | 1,047,700 | - | 0 | 800,146 | 0 | 800,146 | ||||||||||||||||||||||||
Other Expense | (15,621 | ) | (82,873 | ) | (387,961 | ) | (485,742 | ) | (273,823 | ) | (330,006 | ) | (331,516 | ) | (372,340 | ) | ||||||||||||||||
Foreign currency loss | 15,100 | (25,747 | ) | (169,357 | ) | (27,458 | ) | |||||||||||||||||||||||||
Foreign currency gain | 35,882 | (30,374 | ) | 9,499 | (184,457 | ) | ||||||||||||||||||||||||||
Total other expense, net | (8,105 | ) | (573,166 | ) | (542,858 | ) | (2,006,464 | ) | ||||||||||||||||||||||||
Total other income (expense), net | (419,431 | ) | 102,841 | (734,666 | ) | (534,753 | ) | |||||||||||||||||||||||||
Loss from continuing operations before taxes | (915,577 | ) | (1,566,053 | ) | (1,782,299 | ) | (4,435,871 | ) | ||||||||||||||||||||||||
Income (Loss) from continuing operations before taxes | 2,438,688 | (859,240 | ) | 1,956,977 | (866,722 | ) | ||||||||||||||||||||||||||
Income tax expense | - | - | - | - | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Loss from continuing operations | (915,577 | ) | (1,566,053 | ) | (1,782,299 | ) | (4,435,871 | ) | ||||||||||||||||||||||||
Loss from discontinued operations , net of tax | (113,055 | ) | (658,518 | ) | (1,199,648 | ) | (2,105,755 | ) | ||||||||||||||||||||||||
Income (Loss) from continuing operations | 2,438,688 | (859,240 | ) | 1,956,977 | (866,722 | ) | ||||||||||||||||||||||||||
Net Loss | $ | (1,028,632 | ) | $ | (2,224,571 | ) | $ | (2,981,947 | ) | $ | (6,541,626 | ) | ||||||||||||||||||||
Less: Net (loss) income attributable to noncontrolling interest | (74,692 | ) | (282,985 | ) | 138,198 | (861,475 | ) | |||||||||||||||||||||||||
Gain (loss) from discontinued operations, net of tax | 44,890 | (599,956 | ) | 146,252 | (1,086,593 | ) | ||||||||||||||||||||||||||
Net loss before foreign currency adjustment and Preferred Share Dividends | $ | (953,940 | ) | $ | (1,941,586 | ) | $ | (3,120,145 | ) | $ | (5,680,151 | ) | ||||||||||||||||||||
Net Income (Loss) | $ | 2,483,578 | $ | (1,459,196 | ) | $ | 2,103,229 | $ | (1,953,315 | ) | ||||||||||||||||||||||
Less: Net income attributable to noncontrolling interest | 701,255 | 68,313 | 743,069 | 212,890 | ||||||||||||||||||||||||||||
Net income (loss) attributable to Yunhong CTI, Ltd | $ | 1,782,323 | $ | (1,527,509 | ) | $ | 1,360,160 | $ | (2,166,205 | ) | ||||||||||||||||||||||
Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
Foreign currency adjustment | 5,324 | (281,817 | ) | (1,291,852 | ) | 15,603 | 48,073 | 66,327 | 31,806 | (1,297,176 | ) | |||||||||||||||||||||
Comprehensive Loss | $ | (1,023,308 | ) | $ | (2,506,388 | ) | $ | (4,273,799 | ) | $ | (6,526,023 | ) | ||||||||||||||||||||
Reclassification of foreign currency translation gains to earnings | (92,282 | ) | 0 | (92,282 | ) | 0 | ||||||||||||||||||||||||||
Comprehensive Income Loss | $ | 2,439,369 | $ | (1,461,182 | ) | $ | 2,042,753 | $ | (3,463,381 | ) | ||||||||||||||||||||||
Deemed Dividends on preferred stock and amortization of beneficial conversion feature | $ | (114,561 | ) | $ | - | $ | (2,733,329 | ) | $ | - | $ | (168,000 | ) | $ | (237,824 | ) | $ | (1,876,876 | ) | $ | (2,618,768 | ) | ||||||||||
Net Loss attributable to Yunhong CTI Ltd Shareholders | $ | (1,068,501 | ) | $ | (1,941,586 | ) | $ | (5,853,474 | ) | $ | (5,680,151 | ) | ||||||||||||||||||||
Net Income (Loss) attributable to Yunhong CTI Ltd Shareholders | $ | 1,614,323 | $ | (1,699,066 | ) | $ | (516,716 | ) | $ | (6,082,149 | ) | |||||||||||||||||||||
Basic loss per common share | ||||||||||||||||||||||||||||||||
Basic income (loss) per common share | ||||||||||||||||||||||||||||||||
Continuing operations | $ | (0.19 | ) | $ | (0.34 | ) | $ | (1.05 | ) | $ | (0.93 | ) | $ | 0.27 | $ | (0.27 | ) | $ | (0.11 | ) | $ | (0.88 | ) | |||||||||
Discontinued operations | (0.02 | ) | (0.17 | ) | (0.27 | ) | (0.55 | ) | 0.01 | (0.14 | ) | 0.02 | (0.26 | ) | ||||||||||||||||||
Basic loss per common share | $ | (0.21 | ) | $ | (0.51 | ) | $ | (1.32 | ) | $ | (1.48 | ) | ||||||||||||||||||||
Basic income (loss) per common share | $ | 0.28 | $ | (0.41 | ) | $ | (0.09 | ) | $ | (1.14 | ) | |||||||||||||||||||||
Diluted loss per common share | ||||||||||||||||||||||||||||||||
Diluted income (loss) per common share | ||||||||||||||||||||||||||||||||
Continuing operations | $ | (0.19 | ) | $ | (0.34 | ) | $ | (1.05 | ) | $ | (0.93 | ) | $ | 0.12 | $ | (0.27 | ) | $ | (0.11 | ) | $ | (0.88 | ) | |||||||||
Discontinued operations | (0.02 | ) | (0.17 | ) | (0.27 | ) | (0.55 | ) | 0.00 | (0.14 | ) | 0.02 | (0.26 | ) | ||||||||||||||||||
Diluted loss per common share | $ | (0.21 | ) | $ | (0.51 | ) | $ | (1.32 | ) | $ | (1.48 | ) | ||||||||||||||||||||
Diluted income (loss) per common share | $ | 0.12 | $ | (0.41 | ) | $ | (0.09 | ) | $ | (1.14 | ) | |||||||||||||||||||||
Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||||||||||||||||||||||||||
Basic | 4,902,131 | 3,835,950 | 4,426,420 | 3,835,950 | 5,886,750 | 4,352,292 | 5,870,894 | 4,184,521 | ||||||||||||||||||||||||
Diluted | 4,902,131 | 3,835,950 | 4,426,420 | 3,835,950 | 14,286,750 | 4,352,292 | 5,870,894 | 4,184,521 | ||||||||||||||||||||||||
See accompanying notes to condensed consolidated unaudited financial statements |
Condensed Consolidated Statements of Cash Flows (Unaudited) |
For the Nine Months Ended September 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (2,981,947 | ) | $ | (6,541,626 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Net income (loss) | $ | 2,103,229 | $ | (1,953,315 | ) | |||||||||||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 792,104 | 835,302 | 317,150 | 249,551 | ||||||||||||
Amortization of deferred gain on sale/leaseback | (45,700 | ) | (82,422 | ) | 0 | (45,700 | ) | |||||||||
Amortization of ROU Asset | 274,228 | 400,515 | ||||||||||||||
Realized currency translation gain | (92,282 | ) | 0 | |||||||||||||
Gain on forgiveness of PPP Funding | (1,047,700 | ) | - | 0 | (800,146 | ) | ||||||||||
Gain on sale of building | (3,356,794 | ) | 0 | |||||||||||||
Provision for losses on accounts receivable | 20,666 | 399,463 | 22,217 | 20,457 | ||||||||||||
Provision for losses on inventories | (40,482 | ) | 1,249,519 | 0 | 99,169 | |||||||||||
Other | - | 248,974 | ||||||||||||||
Impairment on assets held for sale | - | 604,483 | ||||||||||||||
Gain on deconsolidation of Clever | - | (218,534 | ) | |||||||||||||
Impairment of Related Party Note Receivable | 350,000 | - | ||||||||||||||
Impairment of Prepaid, Current and Non Current Assets | - | 168,931 | ||||||||||||||
Impairment of long-lived assets | - | 1,252,283 | ||||||||||||||
Stock Based Compensation | - | 72,401 | ||||||||||||||
Loss on disposition of Asset | - | 17,480 | ||||||||||||||
Impairment of Note Receivable | 95,000 | 350,000 | ||||||||||||||
Change in assets and liabilities: | ||||||||||||||||
Accounts receivable | 2,915,506 | 2,776,396 | 162,152 | 1,153,616 | ||||||||||||
Inventories | 2,314,744 | 1,435,411 | (456,751 | ) | 1,681,646 | |||||||||||
Prepaid expenses and other assets | (289,820 | ) | 228,389 | 218,867 | 37,772 | |||||||||||
| Operating Lease Liability | (470,771 | ) | - | |||||||||||||
Change in ROU Liability | (274,228 | ) | (400,515 | ) | ||||||||||||
Trade payables | (852,231 | ) | 1,892,670 | 42,961 | (1,832,090 | ) | ||||||||||
Accrued liabilities | 330,695 | (166,823 | ) | 313,615 | 10,897 | |||||||||||
Net cash provided by operating activities | 995,064 | 4,172,297 | ||||||||||||||
Net cash used in operating activities | (630,636 | ) | (1,028,143 | ) | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property, plant and equipment | (139,708 | ) | (144,222 | ) | (45,784 | ) | (71,867 | ) | ||||||||
Sale of building | 3,500,000 | 0 | ||||||||||||||
Net cash used in investing activities | (139,708 | ) | (144,222 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 3,454,216 | (71,867 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Change in checks written in excess of bank balance | 29,837 | (391,313 | ) | |||||||||||||
Repayment of debt and revolving line of credit | (10,158,387 | ) | (4,721,867 | ) | (4,791,624 | ) | (6,657,777 | ) | ||||||||
| Advance from investor | 1,500,000 | |||||||||||||||
Proceeds from issuance of stock | 5,426,601 | - | ||||||||||||||
Proceeds from advance from investor | 1,500,000 | 0 | ||||||||||||||
Proceeds from issuance of Series A preferred stock | 0 | 5,426,600 | ||||||||||||||
Cash paid for stock issuance costs | (1,024,313 | ) | - | 0 | (1,024,313 | ) | ||||||||||
Amortization of deferred financing fees | 64,887 | (82,763 | ) | |||||||||||||
Cash paid for deferred financing fees | 0 | (43,263 | ) | |||||||||||||
Proceeds from PPP | 1,047,700 | - | 0 | 1,047,700 | ||||||||||||
Proceeds from issuance of long-term debt | 876,791 | 650,000 | ||||||||||||||
Proceeds from issuance of long-term debt and revolving line of credit | 596,560 | 904,583 | ||||||||||||||
Net cash used in financing activities | (2,236,884 | ) | (4,545,943 | ) | (2,695,064 | ) | (346,470 | ) | ||||||||
Effect of exchange rate changes on cash | 536,430 | 205,692 | (480,838 | ) | 705,050 | |||||||||||
Net decrease in cash and cash equivalents | (845,098 | ) | (312,176 | ) | (352,322 | ) | (741,430 | ) | ||||||||
Cash and cash equivalents at beginning of period | 845,098 | 428,150 | 624,953 | 845,098 | ||||||||||||
Cash and cash equivalents at end of period | $ | - | $ | 115,974 | $ | 272,631 | $ | 103,668 | ||||||||
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations.” | ||||||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash payments for interest | $ | 1,033,350 | $ | 1,558,817 | $ | 294,146 | $ | 778,148 | ||||||||
Common stock issued for accounts payable | $ | - | $ | 303,000 | ||||||||||||
Conversion of debt to Series A Preferred | $ | 478,000 | $ | - | $ | 0 | $ | 478,000 | ||||||||
Accrued Dividend on preferred stock | $ | 255,000 | $ | - | ||||||||||||
Accrued Divided and Accretion on preferred stock | $ | 376,876 | $ | 150,000 | ||||||||||||
Issuance of Placement agent warrants in connection with Series A Preferred offering | $ | 919,000 | $ | - | $ | 0 | $ | 919,000 | ||||||||
Issuance of Common stock to placement agent | $ | 306,000 | $ | - | $ | 0 | $ | 306,000 | ||||||||
Amortization of beneficial conversion feature and deemed dividend on Series A Preferred stock | $ | 2,200,000 | $ | - | ||||||||||||
Common stock issued for Notes Payable | $ | - | $ | 600,000 | ||||||||||||
Issuance of Series C Preferred in exchange from advance from investor | $ | 1,500,000 | $ | 0 | ||||||||||||
Lease right-of-use assets and lease liability | $ | 3,915,864 | $ | 0 | ||||||||||||
Amortization of beneficial conversion feature and deemed dividend on Series C Preferred stock | $ | 1,500,000 | $ | 2,500,000 | ||||||||||||
| Cash payments for tax | $ | 0 | $ | 0 | ||||||||||||
See accompanying notes to condensed consolidated unaudited financial statements |
Consolidated Statements of Stockholders' Equity |
Yunhong CTI, Ltd | Yunhong CTI, Ltd | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2020 | Three and Six Months Ended June 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Other | Less | Accumulated | Other | Less | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | (Deficit) | Comprehensive | Treasury Stock | Noncontrolling | Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Paid-in | (Deficit) | Comprehensive | Treasury Stock | Noncontrolling | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Interest | TOTAL | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Interest | TOTAL | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2019 | - | $ | - | 3,879,608 | $ | 13,898,494 | $ | 3,587,287 | $ | (9,992,841 | ) | $ | (5,348,812 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (856,837 | ) | $ | 1,126,507 | 0 | $ | 0 | 0 | $ | 0 | 0 | $ | 0 | 3,879,608 | $ | 13,898,494 | $ | 3,587,287 | $ | (9,992,841 | ) | $ | (5,348,812 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (856,837 | ) | $ | 1,126,507 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock Issuance - cash | 362,660 | 3,509,933 | 140,000 | 116,667 | - | - | - | - | - | - | 3,626,600 | 362,660 | 3,509,933 | 0 | 0 | 0 | 0 | 140,000 | 116,667 | 0 | 0 | 0 | 0 | 0 | 0 | 3,626,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock Issuance - conversion of debt | 48,200 | 478,017 | - | - | - | - | - | - | - | - | 478,017 | 48,200 | 478,017 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 478,017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for placement agent fees | - | (306,000 | ) | 200,000 | 306,000 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants issued to placement agent and other issuance costs | - | (752,924 | ) | - | - | 752,924 | - | - | - | - | - | - | - | 0 | - | 0 | - | 0 | 0 | 0 | 0 | 0 | - | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on BCF of Series A Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Placement agent fees and issuance costs | - | (820,160 | ) | - | - | - | - | - | - | - | - | (820,160 | ) | - | (820,160 | ) | - | 0 | - | 0 | - | 0 | 0 | 0 | 0 | - | 0 | 0 | (820,160 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beneficial Conversion feature on Preferred Stock | - | (2,328,473 | ) | - | - | 2,328,473 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on beneficial conversion feature of Preferred Stock | - | 2,328,473 | - | - | (2,328,473 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend | - | 52,741 | - | - | (52,741 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beneficial Conversion feature (BCF) on Series A Preferred Stock | - | (2,328,473 | ) | - | 0 | - | 0 | - | 0 | 2,328,473 | 0 | 0 | - | 0 | 0 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on BCF of Series A Preferred Stock | - | 2,328,473 | - | - | - | - | - | - | (2,328,473 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series A Preferred Stock | - | 52,741 | - | 0 | - | 0 | - | 0 | (52,741 | ) | 0 | 0 | - | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | (638,696 | ) | - | - | - | 144,577 | (494,119 | ) | - | 0 | - | 0 | - | 0 | - | 0 | 0 | (638,696 | ) | 0 | - | 0 | 144,577 | (494,119 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | - | - | - | - | - | - | (1,363,503 | ) | - | - | - | (1,363,503 | ) | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | (1,363,503 | ) | - | 0 | 0 | (1,363,503 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance March 31, 2020 | 410,860 | $ | 2,161,607 | 4,219,608 | $ | 14,321,161 | $ | 4,287,470 | $ | (10,631,537 | ) | $ | (6,712,315 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (712,260 | ) | $ | 2,553,342 | 410,860 | $ | 2,161,607 | 0 | $ | 0 | 0 | $ | 0 | 4,219,608 | $ | 14,321,161 | $ | 4,287,473 | $ | (10,631,537 | ) | $ | (6,712,315 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (712,260 | ) | 2,553,342 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock Issuance - cash | 180,000 | 1,583,334 | 260,000 | 216,667 | - | - | - | - | - | - | 1,800,001 | 180,000 | 1,583,334 | 0 | 0 | 0 | 0 | 260,000 | 216,667 | 0 | 0 | 0 | 0 | 0 | 0 | 1,800,001 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants issued to placement agent and other issuance costs | - | (166,181 | ) | - | - | 166,181 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Placement agent fees and issuance costs | - | (204,153 | ) | - | - | - | - | - | - | - | - | (204,153 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beneficial Conversion feature on Preferred Stock | - | (140,000 | ) | - | - | 140,000 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on beneficial conversion feature of Preferred Stock | - | 140,000 | - | - | (140,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend | - | 97,554 | - | - | (97,554 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | (1,527,509 | ) | - | - | - | 68,313 | (1,459,196 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible Preferred Stock Issuance - conversion of debt | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | 0 | - | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | - | - | - | - | - | - | 66,327 | - | - | - | 66,327 | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | 66,327 | - | 0 | 0 | 66,327 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance June 30, 2020 | 590,860 | $ | 3,472,161 | 4,479,608 | $ | 14,537,828 | $ | 4,356,097 | (12,159,046 | ) | $ | (6,645,988 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (643,947 | ) | $ | 2,756,321 | 590,860 | $ | 3,472,161 | 0 | $ | 0 | 0 | $ | 0 | 4,479,608 | $ | 14,537,828 | $ | 4,356,100 | $ | (12,159,046 | ) | $ | (6,645,988 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (643,947 | ) | $ | 2,756,321 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred Stock converted | (42,660 | ) | (444,607 | ) | 444,607 | - | 444,607 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for warrants exercised | - | - | 332,483 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | - | - | 15,000 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend | - | 105,046 | - | - | (105,046 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | (953,940 | ) | - | - | - | (74,692 | ) | (1,028,632 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | - | - | - | - | - | - | 5,324 | - | - | - | 5,324 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance September 30, 2020 | 548,200 | $ | 3,132,600 | 5,271,698 | $ | 14,537,828 | $ | 4,695,658 | (13,112,986 | ) | $ | (6,640,664 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (718,639 | ) | $ | 1,733,013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Other | Less | ||||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | (Deficit) | Comprehensive | Treasury Stock | Noncontrolling | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Interest | TOTAL | ||||||||||||||||||||||||||||||||||
Balance December 31, 2018 | - | $ | - | 3,578,885 | $ | 13,898,494 | $ | 2,506,437 | $ | (2,865,486 | ) | $ | (6,050,347 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (1,072,585 | ) | $ | 6,255,729 | ||||||||||||||||||||
Note Conversion - Schwan | - | - | 180,723 | - | 600,000 | - | - | - | - | - | 600,000 | |||||||||||||||||||||||||||||||||
Stock Issued | - | - | 20,000 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Stock Option Expense | - | - | - | - | 28,967 | - | - | - | - | - | 28,967 | |||||||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | (2,494,089 | ) | - | - | - | (62,388 | ) | (2,556,477 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | 235,876 | - | - | - | 235,876 | |||||||||||||||||||||||||||||||||
Balance March 31, 2019 | - | $ | - | 3,779,608 | $ | 13,898,494 | $ | 3,135,404 | $ | (5,359,575 | ) | $ | (5,814,471 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (1,134,973 | ) | $ | 4,564,095 | ||||||||||||||||||||
Note Conversion - Schwan | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Stock Issued | - | - | 100,000 | - | 303,000 | - | - | - | - | - | 303,000 | |||||||||||||||||||||||||||||||||
Stock Option Expense | - | - | - | - | 23,429 | - | - | - | - | - | 23,429 | |||||||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | (1,244,477 | ) | - | - | - | (516,102 | ) | (1,760,579 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | 61,333 | - | - | - | 61,333 | |||||||||||||||||||||||||||||||||
Balance June 30, 2019 | - | $ | - | 3,879,608 | $ | 13,898,494 | $ | 3,461,833 | $ | (6,604,052 | ) | $ | (5,753,138 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (1,651,075 | ) | $ | 3,191,278 | ||||||||||||||||||||
Note conversion - Schwan | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Less deconsolidation of VIE | - | - | - | - | - | - | - | - | - | 1,087,035 | 1,087,035 | |||||||||||||||||||||||||||||||||
Stock Issued | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Stock Option Expense | - | - | - | - | 20,005 | - | - | - | - | - | 20,005 | |||||||||||||||||||||||||||||||||
Net Income | - | - | - | - | - | (1,941,586 | ) | - | - | - | (282,985 | ) | (2,224,571 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | - | - | - | - | - | - | 15,603 | - | - | - | 15,603 | |||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | (297,209 | ) | - | - | - | (297,209 | ) | |||||||||||||||||||||||||||||||
Balance September 30, 2019 | - | $ | - | 3,879,608 | $ | 13,898,494 | $ | 3,481,838 | $ | (8,545,638 | ) | $ | (6,034,744 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (847,025 | ) | $ | 1,792,141 | ||||||||||||||||||||
Yunhong CTI, Ltd | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Other | Less | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Common Stock | Paid-in | (Deficit) | Comprehensive | Treasury Stock | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Interest | TOTAL | ||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2020 | 500,000 | $ | 2,754,583 | 0 | $ | 0 | 0 | $ | 0 | 5,827,304 | $ | 14,537,828 | $ | 5,041,511 | $ | (14,382,327 | ) | $ | (5,885,112 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (718,212 | ) | $ | 1,187,487 | ||||||||||||||||||||||||||||||
Series C Convertible Stock Issuance | - | - | - | 170,000 | 1,500,000 | - | - | - | - | - | - | - | - | 1,500,000 | ||||||||||||||||||||||||||||||||||||||||||||||
Series B Convertible Stock Modification | - | - | 170,000 | 1,612,707 | - | - | - | - | - | - | - | - | - | - | 1,612,707 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for warrants exercised - cashless | - | - | - | - | - | - | 103,104 | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Beneficial Conversion feature (BCF) on Series A Preferred Stock | - | (2,468,473 | ) | - | - | - | - | - | - | 2,468,473 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on BCF of Series A Preferred Stock | - | 2,468,473 | - | - | - | - | - | - | (2,468,473 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
BCF on Series C Preferred Stock | - | - | - | - | - | - | - | - | 1,500,000 | - | �� | - | - | - | - | 1,500,000 | ||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on BCF of Series C Preferred Stock | - | - | - | - | - | - | - | - | (1,500,000 | ) | - | - | - | - | - | (1,500,000 | ) | |||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series A Preferred Stock | - | 100,000 | - | - | - | - | - | - | (100,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series B Preferred Stock | - | - | - | - | - | - | - | - | (33,611 | ) | - | - | - | - | - | (33,611 | ) | |||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series C Preferred Stock | - | - | - | - | - | 28,333 | - | - | (28,333 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of Series B Preferred Stock | - | - | - | - | - | - | - | - | (46,932 | ) | - | - | - | - | - | (46,932 | ) | |||||||||||||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | - | - | - | (422,163 | ) | - | - | - | 41,814 | (380,349 | ) | |||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | - | - | - | - | - | - | - | - | - | - | (16,267 | ) | - | - | - | (16,267 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance March 31, 2021 | 500,000 | $ | 2,854,583 | 170,000 | $ | 1,612,707 | 170,000 | $ | 1,528,333 | 5,930,408 | $ | 14,537,828 | $ | 4,832,635 | $ | (14,804,490 | ) | $ | (5,901,379 | ) | (43,658 | ) | $ | (160,784 | ) | $ | (676,398 | ) | 3,823,035 | |||||||||||||||||||||||||||||||
Common stock issued - cashless | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Placement agent fees and issuance costs | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Beneficial Conversion feature (BCF) on Series A Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on BCF of Series A Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
BCF on Series C Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Deemed Dividend on BCF of Series C Preferred Stock | - | - | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series A Preferred Stock | - | 100,000 | - | - | - | - | - | - | (100,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series B Preferred Stock | - | - | - | 34,000 | - | - | - | - | (34,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Accrued Deemed Dividend - Series C Preferred Stock | - | - | - | - | - | 34,000 | - | - | (34,000 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of Series B Preferred Stock | - | 0 | - | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | - | - | - | - | 1,782,323 | - | - | - | 701,255 | 2,483,578 | |||||||||||||||||||||||||||||||||||||||||||||
Foreign Currency Translation | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 | (44,209 | ) | - | 0 | 0 | (44,209 | ) | |||||||||||||||||||||||||||||||||||||||||||
Balance June 30, 2021 | 500,000 | $ | 2,954,583 | 170,000 | $ | 1,646,707 | 170,000 | $ | 1,562,333 | 5,930,408 | $ | 14,537,828 | $ | 4,664,635 | $ | (13,022,167 | ) | $ | (5,945,588 | ) | (43,658 | ) | $ | (160,784 | ) | $ | 24,857 | $ | 6,262,404 | |||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated unaudited financial statements |
Yunhong CTI Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed (a) consolidated balance sheet as of SeptemberJune 30, 2020, which has been derived from unaudited consolidated financial statements, 2021 and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q10-Q and Article 8 of Regulation S-X.S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and ninesix months ended SeptemberJune 30, 2020 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. 2021. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K10-K for the fiscal year ended December 31, 2019.2020.
Principles of consolidation and nature of operations:
Yunhong CTI Ltd. (formerly CTI Industries Corporation), its former United Kingdom subsidiary (CTI Balloons Limited),Ltd, its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), its German subsidiary (CTI Europe GmbH) and its subsidiary CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products. As discussed in Note 2 Discontinued Operations, effective in the third quarter of 2019, the Company determined that it was exiting CTI Balloons Limited (“CTI Balloons”) andthe business formerly conducted by CTI Europe GmbH (“CTI Europe”). CTI Balloons has been fully liquidated as of the fourth quarter 2019.Accordingly,Accordingly, the operations of these entitiesthis entity are classified as discontinued operations in these financial statements. The entity has been fully disposed of in the second quarter of 2021.
The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd., its wholly owned subsidiaries CTI Balloons Limited and CTI Supply, Inc. and its majority owned subsidiaries, Flexo Universal and CTI Europe, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C. (“VL”), and Clever Organizing Solutions (formerly Clever Container Company, L.L.C. “Clever”). The last three entities have been consolidated as variable interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation. The treatment of VL and Clever changed during 2019 as described in the next section.
Variable Interest Entities (“VIEs”):
The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity.
The Company has variable interests in VL and Clever. Through June 30, 2019, the Company had determined that it was the primary beneficiary of these entities and included them in our consolidated results. In the third quarter 2019, we determined that operationally material changes in our involvement with Clever and VL resulted in us having no power over the decisions which impact their financial performance. Therefore, we are no longer the primary beneficiary of these entities. Effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. Upon deconsolidation of these entities, we recognized a gain of $219,000. In accordance with ASC 810-10 because the carrying value of the noncontrolling interest of Clever which was eliminated exceeded the net carrying value of the assets and liabilities of Clever. The Company determined that there was no fair value associated with its remaining noncontrolling interest in Clever based on an income approach.
Use of estimates:
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts inventory valuation, deferred tax assets, goodwill and intangible assetinventory valuation, and assumptions used as inputs in the Black-Scholes option-pricing model. In addition, issues pertaining to COVID-19 have added assumptions related to 2020 sales activities well as the timing of recovery and condition of the broader market after COVID-19 related shutdowns and limitations.
Earnings per share:
Basic earningsincome (loss) per share is computed by dividing net income (loss) attributable to Yunhong CTI Ltd shareholders by the weighted average number of shares of common stock outstanding during each period.
Diluted earningsincome (loss) per share is computed by dividing the net income (loss) attributable to Yunhong CTI Ltd shareholders by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
As of SeptemberJune 30, 2020 2021 and 2019,2020, shares to be issued upon the exercise of options and warrants aggregated 479,802nil and 471,144,792,660, respectively. The numberAs of June 30, 2021, shares to be issued upon the conversion of Series A, Series B, and Series C Preferred Stock was 5,000,000, 1,700,000, and 1,700,000, respectively. For the three months ended June 30, 2021, the dilutive effect of 8,400,000 shares was included in the determination of earnings on a diluted basis. For the six months ended June 30, 2021, no assumed conversions were included in the determination of earnings on a diluted basis, for the three months ended September 30, 2020 and 2019 were none, as doing so would have been anti-dilutive.
Significant Accounting Policies:
The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2019. 2020. There were no significant changes to these accounting policies during the three or nine and six months ended SeptemberJune 30, 2020.
On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods.
On January 1, 2018, we adopted ASC 606 (Revenue From Contracts With Customers) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.2021.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.
The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
Prior Period Reclassification
Certain amounts in prior periods have been reclassified to conform with current period presentation and had no effect on prior period net loss or stockholders’ equity.
Note 2– Discontinued Operations
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 of CTI Balloons and CTI Europe. These actions are beingwere 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 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 2019.2019 and divested its CTI Europe subsidiary in the second quarter of 2021.
In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. Our exit of the Ziploc® product line is considered a strategic shift and will havehad a major effect on our operations and financial results on a go forward basis therefore,results. Therefore, this product line has been presented as discontinued operations.
CTI Balloons recorded losses from discontinued operations, net of taxes of ($433,000) and ($996,000) for the three and nine months ended September 30, 2019.
CTI Europe recorded a loss from discontinued operations, net of taxes of $(76,000) for the three months ended September 30, 2020, compared to a gain from discontinued operations, net of taxes of $313,000$45,000 and $146,000 for the nine monthsthree and six month periods ended SeptemberJune 30, 2020.2021, respectively. The net losses,gains, net of taxes, were ($566,000)$92,000 and ($1,735,000)$241,000 for the three and ninesix month periods ended SeptemberJune 30, 2019, 2020, respectively.
Our Ziploc product line recorded a loss from discontinued operations, net of taxes of ($37,000)nil for the three and six months ended SeptemberJune 30, 2020, compared to a2021. The loss, from discontinued operations, net of taxes of ($1,513,000) for the nine months ended September 30, 2020. The net gain, net of taxes, was $340,000($746,000) and ($1,550,000) for the three months and six month periods ended SeptemberJune 30, 2019 compared to a gain from discontinued operations, net of taxes of $625,000 for the nine-month period ended September 30, 2019, 2020, respectively.
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items for the operations that are included in the income from discontinued operations, net of tax line item in the Unaudited Consolidated Statements of Comprehensive Income for the three months ended:
September 30, 2020 | September 30, 2019 | |||||||
Income Statement | ||||||||
Net Sales | $ | 655,896 | $ | 3,130,382 | ||||
Cost of Sales | 412,663 | 2,588,927 | ||||||
Gross profit (Loss) | 243,233 | 541,454 | ||||||
SG&A | 194,300 | 627,452 | ||||||
Operating income (loss) | 48,933 | (85,998 | ) | |||||
Other Expense | (10,848 | ) | (31,962 | ) | ||||
Total pretax income (loss) from discontinued operations | 38,085 | (54,035 | ) | |||||
Loss from classification to held for sale | (151,140 | ) | (604,483 | ) | ||||
Income Tax Expense | - | - | ||||||
Net loss prior to non-controlling interest | (113,055 | ) | (658,518 | ) | ||||
Non-controlling Interest share of profit/loss | (72,211 | ) | (760,813 | ) | ||||
Net loss | $ | (40,844 | ) | $ | 102,295 | |||
June 30, 2021 | June 30, 2020 | |||||||
Income Statement | ||||||||
Net Sales | $ | 7 | $ | 615,388 | ||||
Cost of Sales | 75,496 | 941,230 | ||||||
Gross Loss | (75,489 | ) | (325,842 | ) | ||||
SG&A | 34,884 | 330,446 | ||||||
Operating Income | (110,373 | ) | (656,288 | ) | ||||
Other Expense | (87,204 | ) | 9,233 | |||||
Pretax loss from discontinued operations | (23,169 | ) | (665,521 | ) | ||||
Gain from classification to held for sale | 68,059 | 65,565 | ||||||
Net Income (loss) from discontinued operations | 44,890 | (599,956 | ) | |||||
Non-controlling Interest share of profit/loss | 21,547 | 70,576 | ||||||
Net Loss | $ | 23,343 | $ | (670,532 | ) | |||
The following table summarizes the major line items for the operations that are included in the income from discontinued operations, net of tax line item in the Unaudited Consolidated Statements of Income for the ninesix months ended:
September 30, 2020 | September 30, 2019 | |||||||
Income Statement | $ | $ | ||||||
Net Sales | 2,328,341 | 10,191,188 | ||||||
Cost of Sales | 2,527,937 | 9,607,692 | ||||||
Gross Margin | (199,597 | ) | 583,496 | |||||
Impairment of Long-Lived Assets | - | |||||||
SG&A | 1,049,295 | 2,025,778 | ||||||
Operating Loss | (1,248,892 | ) | (1,442,283 | ) | ||||
Other Expense | (33,301 | ) | (58,990 | ) | ||||
Total pretax loss from discontinued operations | (1,282,193 | ) | (1,501,273 | ) | ||||
Gain (loss) from classification to held for sale | 82,545 | (604,483 | ) | |||||
Net Income prior to non-controlling interest | (1,199,648 | ) | (2,105,756 | ) | ||||
Non-controlling Interest share of profit/loss | 150,458 | (837,136 | ) | |||||
Net Loss | $ | (1,350,106 | ) | $ | (1,268,620 | ) | ||
June 30, 2021 | June 30, 2020 | |||||||
Income Statement | ||||||||
Net Sales | $ | 79,840 | $ | 1,672,445 | ||||
Cost of Sales | 202,402 | 2,115,275 | ||||||
Gross Loss | (122,562 | ) | (442,830 | ) | ||||
SG&A | 127,150 | 854,995 | ||||||
Operating Income | (249,712 | ) | (1,297,825 | ) | ||||
Other Expense (Income) | (77,242 | ) | 22,453 | |||||
Pretax loss from discontinued operations | (172,470 | ) | (1,320,278 | ) | ||||
Gain from classification to held for sale | 318,722 | 233,685 | ||||||
Income (Loss) from discontinued operations | 146,252 | (1,086,593 | ) | |||||
Non-controlling Interest share of profit/loss | 70,201 | 222,670 | ||||||
Net Income (Loss) | $ | 76,051 | $ | (1,309,263 | ) | |||
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
|
|
September 30, 2020 | December 31, 2019 | |||||||
Balance Sheet | ||||||||
Assets | ||||||||
Current Assets | ||||||||
Cash on hand and Banks | $ | 222,707 | $ | 4,307 | ||||
Accounts Receivable | 481,732 | 539,910 | ||||||
Inventory | - | 74,383 | ||||||
Prepaid & Other | 90,308 | 135,912 | ||||||
TOTAL Current Assets | 794,747 | 754,512 | ||||||
NET Property, Plant, and Equipment | 7,633 | 53,919 | ||||||
Other Assets | ||||||||
Operating lease right-of-use | 151,817 | 220,541 | ||||||
Other | 32,543 | 47,958 | ||||||
TOTAL Other Assets | 184,360 | 268,499 | ||||||
TOTAL Non-Current Assets | 191,993 | 322,418 | ||||||
Valuation Allowance on Assets Held for Sale | (238,354 | ) | (320,899 | ) | ||||
TOTAL Assets | $ | 748,386 | $ | 756,031 | ||||
Liabilities | ||||||||
Current Liabilities | ||||||||
Trade Accounts Payable | 68,013 | 384,333 | ||||||
Operating Lease Liabilities - Current | 89,119 | 203,291 | ||||||
Other/Accrued Liabilities | 19,276 | 19,562 | ||||||
TOTAL Current Liabilities | 176,408 | 607,187 | ||||||
Non-Current Liabilities | ||||||||
Operating Lease Liabilities - Non Current | 62,698 | 17,250 | ||||||
Other Non-Current | 34,676 | 32,317 | ||||||
TOTAL Non-Current Liabilities | 97,374 | 49,567 | ||||||
TOTAL Liabilities | $ | 273,782 | $ | 656,753 | ||||
The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. The following table summarizes depreciation from discontinued operations for each of the periods presented:
Nine Months Ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
Depreciation | $ | 320,731 | $ | 266,784 | ||||
Note 3– Liquidity and Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a cumulative net loss from inception to June 30, 2021 of over $13 million. The accompanying financial statements for the three and six months ended June 30, 2021 have been prepared assuming the Company will continue as a going concern. The Company’s cash resources from operations may be insufficient to meet its anticipated needs during the next twelve months. The Company will require additional financing to fund its future planned operations.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing, 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 has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, 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 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 arehave traditionally been comprised of cash and cash equivalents as well as availability under the credit agreementCredit Agreement with PNC Bank, National Association (“PNC”) (the “Credit Agreement”) (see Note 4)4). As indicated in Note 4, twice during 2018 we violated covenants in our credit facility and during of March 2019, October 2019 and January 2020, we entered into a forbearance agreementagreements with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identifiedWe encountered subsequent compliance failures were waived, butwith covenants during 2020 and we remainedwere out of compliance with the terms of our credit facility, as amended, including the covenants as of June 30, 2019 calculated on or about July 31, 2019. 2021.
On August 1, 2019, PNC issued a Default and Reservation of Rights letter to April 23, 2021, the Company in which PNC advised that line of credit advances would continue to be available to the Company at PNC’s sole discretion, and subject to its terms and conditions. On October 18, 2019, we entered into a new forbearancePurchase 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 (“Amendment 4”for itself and for the other participant lenders thereunder (collectively, the “Lender”). IdentifiedPrior 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 waived until January 10, 2020continuing. Pursuant to the Amendment Agreement, the 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 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 Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”). Pursuant to the Amendment Agreement, the Lender agreed to forbear from exercising its rights and remedies with respect to CTI Industries Corporation, but not its Mexican subsidiary (Flexo), subject to its terms and conditions. On January 13, 2020, we entered into a new forbearance agreement with PNC (“Amendment 5”). PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Event of Defaults afforded to PNC 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 $18,000,000 to $9,000,000 |
● | The Termination date of the loan agreement is revised from December 14, 2022 to December 31, 2021 |
● | On or before June 30, 2021 or such later date as the lender agrees in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the revolving line of credit advance under the loan agreement (the Equity Investment) |
● | On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021 |
● | On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash |
● | The Forbearance Reserve (as defined in Amendment No.5 to the Loan Agreement) shall be increased from $1,025,000 to $2,525,000 |
● | Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates shall no longer be considered eligible receivables |
● | Modifications will be made to the budget, testing and variance provisions of the Loan Agreement. |
In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender a Forbearance Fee of $1,000,000. Provided, however, that, so long as no later than December 31, 2020. 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.
Note 4 - Debt
During 2019, December 2017, we attemptedterminated a prior credit arrangement and entered in new financing agreements (as amended to executedate, the “PNC Agreements”) with PNC Bank, National Association (“PNC”). The PNC Agreements, included a major capital event$6 million term loan and a $9 million revolving credit facility, with a partner that would infuse money, amongtermination date of December 2021.
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).
Certain terms of the PNC Agreements include:
● | Negative Covenants: Negative covenants under which we are prohibited from, or restricted in our ability to: |
o | Borrow money; |
o | Pay dividends and make distributions; |
o | Make certain investments; |
o | Use assets as security in other transactions; |
o | Create liens; |
o | Enter into affiliate transactions; |
o | Merge or consolidate; or |
o | Transfer and sell assets. |
● | Financial Covenants: Financial covenants we are required to meet including: |
o | We are required to maintain a "Fixed Charge Coverage Ratio", which is defined as the ratio of (a) EBITDA for such fiscal period, minus Unfinanced Capital Expenditures made during such period, minus distributions (including tax distributions) and dividends made during such period, minus cash taxes paid during such period to (b) all Debt Payments made during such period. The highest values allowed for each quarterly calculation are as follow: |
Fiscal Quarter Ratio | ||||||
June 30, 2020 | 0.85 | to | 1.00 | |||
September 30, 2020 | 0.95 | to | 1.00 | |||
December 31, 2020 | 1.05 | to | 1.00 | |||
March 31, 2021 | 1.15 | to | 1.00 | |||
| June 30, 2021 and thereafter | 1.15 | to | 1.00 |
The PNC Agreements provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time.
Failure to comply with these covenants has caused us to pay a higher rate of interest (increased by 4% pursuant to the PNC Agreements), and other attributes. That effort was unsuccessfulpotential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as envisioned. Wewell as in Note 3, we remain out of compliance with the terms of this facility.
As of January 1, 2019, the Company had a note payable to John H. Schwan, Director and former Chairman of the Board, for $1.6 million, including accrued interest. This loan accrues interest at 6%, is due on demand, and is subordinate to the PNC Agreements. During January 2019, Mr. Schwan converted $600,000 of the note into approximately 181,000 shares of our common stock at the then market rate of $3.32 per share. As a result of the conversion, the loan balance decreased to $997,019 and Company and Mr. Schwan agreed to increase the interest rate to 6%.
The loan and interest payable to Mr. Schwan amounted to $1,157,906 and $1,123,769 as of June 30, 2021 and December 31, 2020, respectively.
NaN payments were subsequently successful in obtaining new financing during 2020. made to Mr. Schwan since 2019. Interest expense related to this loan amounted to $17,000 and $16,000 for the three months ended June 30, 2021 and 2020, respectively, and $34,000 and $32,000 for the six months ended June 30, 2021 and 2020, respectively.
During 2020, Flexo replaced a $260,000 line of credit with three lines of credit totaling $260,000. Flexo’s total debt instruments as of June 30, 2021 amounted to $2.3 million.
Note 5 - Shareholders' Equity
Series A Preferred Stock
On January 3, 2020, wethe Company entered into a securitiesstock purchase agreement as(as amended on February 24, 2020 and April 13, 2020 (the(the “LF Purchase Agreement”) with), pursuant to which the Company agreed to issue and sell, and LF International PtePte. Ltd., a Singapore private limited company (the “LF(“LF International”), which is controlled by Company Chairmandirector, President and Chief Executive Officer, Mr. Yubao Li, pursuantagreed to which we soldpurchase, up to LF International 500,000 shares of ourthe Company’s newly created shares of Series A Convertible Preferred Stock (“Series A Preferred”), with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, and for aggregate gross proceeds of $5,000,000. Pursuant to$5,000,000 (the “LF International Offering”). As permitted by the LF Purchase Agreement, we were authorizedthe Company may, in its discretion issue up to sell an additional $2 million200,000 shares of Series A to other investors under similar financial terms, approximatelyPreferred for a purchase price of $10.00 per share (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). Approximately $1 million of whichSeries A Preferred has been sold as of SeptemberJune 30, 2020, 2021, including to an investor which converted an accountsaccount receivable of $478,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. There wereThe Company completed several closings with the LF International from January 2020 through June 2020. The majority of the funds received reduced our bank debt. We issued a total of 400,000 shares of common stock to LF International and, pursuant to the LF Purchase Agreement, changed our name from CTI Industries Corporation to Yunhong CTI Ltd. During the transaction and subsequent interim closings, LF International hadhas the right to name three directors to serve on our Board. They are Mr. Yubao Li, our Chairman, of the Board, Ms. Wan Zhang and Ms. Yaping Zhang.
The Credit Agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We believe that, during the first three months of 2020, the Company’s standalone US business would have complied with the Credit Agreement’s requirement that the Company maintain a fixed charge coverage ratio of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the “Fixed Charge Coverage Ratio”).The Company, as a consolidated group, however, did not comply with the Fixed Charge Coverage Ratio, resulting in the noncompliance.
The Lender has continued to make advances to the Company (“Discretionary Advances”), although it is not required to do so under the terms of the Loan Agreement due to the Events of Default. On July 17, 2020, the Lender provided the Company notice that multiple previously disclosed events, which each constitute an Event of Default, are continuing to occur. Additionally, the Lender required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, the Lender advised that it may cease making discretionary advances to the Company. On July 22, 2020, the Company’s board of directors authorized the Company to seek such funding and, to ensure that the Company met the Lender’s equity funding commitment deadline. Mr. Yubao Li, the Company’s Chairman, committed that, in the event the Company does not obtain funding of at least $3,000,000, he would provide the necessary funding. In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Convertible Preferred Stock (the terms of which are currently being negotiated and finalized). Additionally, in October, the Company received a $1.5 million advance on a separate proposed equity financing for which the terms have not yet been finalized. The Lender has continued to make the Discretionary Advances throughout this period and has indicated that we have complied with their request.
In addition to the above, financial performance in 2017, 2018 and 2019, included net losses attributable to the Company of $1.6 million, $3.6 million, and $7.1 million, respectively. While these results included significant charges related to the disposition of subsidiaries, we believe that the result raises substantial doubt about our ability to continue as a going concern one year from the date these financial statements are issued.
Additionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs, along with a supply disruption in the helium market during 2019. These changes in cash flows have created very significant strain within our operations and have therefore increased our attempts to obtain additional funding resources.
In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed.
Finally, claims have been filed in court by certain vendors regarding claims of non-payment pursuant to contractual obligations. While many have been resolved, the sum of the outstanding claims made or threatened exceeds $0.5 million in the aggregate. The cost of defense and potential ultimate resolution increases the strain on our financial resources.
Management’s plans include:
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Management Assessment
Considering both quantitative and qualitative information, we believe that our plans to obtain additional financing may provide us with an ability to finance our operations through 2020 and, if successfully executed, may mitigate the substantial doubt about our ability to continue as a going concern.
Note 4 - Debt
During December 2017, we terminated a prior credit arrangement and entered in new financing agreements (the “PNC Agreements”) with PNC Bank, National Association (“PNC”). The PNC Agreements include a $6 million term loan and an $18 million revolving credit facility, with a termination date of December 2022.
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet two financial covenants as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (the “Amendment 1”) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in interest rate. During September 2018, we filed a preliminary prospectus on Form S-1 for a planned equity issuance. On October 8, 2018, we entered into Consent and Amendment No. 2 (the “Amendment 2”) to our PNC Agreements. Amendment 2 reduced the amount of new funding proceeds that must be used to repay the term loan from $5 million to $2 million and waived the calculation of financial ratios for the period ended September 30, 2018, in exchange for a new covenant committing to raise at least $7.5 million in gross proceeds from our equity issuance by November 15, 2018 and pay an amendment fee. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement.
We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures were waived and financial covenants as of March 31, 2019 were not considered, with the next calculation due July 31, 2019 for the period ended June 30, 2019. We received a temporary over-advance of $1.2 million, which declined to zero over a six-week period under the terms of this agreement and paid a fee of $250,000.
On August 1, 2019, PNC issued a Notice of Default and Reservation of Rights letter, indicating the end of the forbearance period and continued events of default with our credit agreement, as amended. We entered into a new forbearance agreement during October 2019 which completed January 2020. In conjunction with new equity financing, on January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) between PNC and the Company became effective, pursuant to which PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to PNC under the Loan Agreement for a period ending no later than December 31, 2020. In addition, on June 15, 2020, we received a notice of noncompliance and reservation of rights letter from the bank related to failing the covenant calculation during the first quarter of 2020. We remain noncompliant with the terms of our facility and have thus reclassified long-term bank debt to current liabilities on our balance sheet.
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).
Certain terms of the PNC Agreements include:
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Fiscal Quarter Ratio
March 31, 2020 | 0.75 | to | 1.00 |
June 30, 2020 | 0.85 | to | 1.00 |
September 30, 2020 | 0.95 | to | 1.00 |
December 31, 2020 | 1.05 | to | 1.00 |
March 31, 2021 and thereafter | 1.15 | to | 1.00 |
The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We believe that, during the first three months of 2020, the standalone US business would have complied with the fixed charge coverage ratio, but consolidated group did not result in a new condition of noncompliance.
Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as well as in Note 3, we remain out of compliance with the terms of this facility.
As of December 2017, Mr. Schwan was owed a total of $1,099,000, with additional accrued interest of $400,000, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. During January 2019, Mr. Schwan converted $600,000 of his balance into approximately 181,000 shares of our common stock at the then market rate. No payments were issued to Mr. Schwan during 2019 or the nine months ended September 30, 2020, with $49,000 and $46,000, respectively, of interest recorded as an expense during the first nine months of 2020 and 2019, respectively.
During 2020, Flexo replaced a $260,000 line of credit with three line of credit totaling $260,000. Flexo’s total debt instruments are $1.75 million.
On April 30, 2020, the Company executed a promissory note (the “Note”) with PNC Bank National Association (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $1,047,700 (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). All the funds under the PPP Loan were disbursed to the Company on April 23, 2020. The Note provides for a fixed interest rate of one percent per year with a maturity date of April 30, 2022 (the “Maturity Date”). Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of disbursement of the PPP Loan. The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company carefully monitored all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company has used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments. During the three months ended June 30, 2020 the Company recorded $800,000 in other income for the PPP anticipated grant related to payroll utility and rent payment. During the three months ended September 30, 2020 the Company recorded $248,000 in other income for the PPP anticipated grant related to payroll utility and rent payment, which resulted in no deferred other income liability balance as of September 30, 2020.
Note 5 - Stock-Based Compensation; Changes in Equity
The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.
The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest, 0.42% - 1.65%, to be applied, the estimated dividend yield and expected volatility, 153.73% - 161.48%, of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2020 and 2019. The expected volatility is based on historical volatility of the Company’s common stock.
The Company’s net loss for the three months ended September 30, 2020 and 2019 includes approximately none and $20,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 2020 and 2019 includes approximately none and $72,000, respectively, of compensation costs related to share based payments. As of September 30, 2020, there was no unrecognized compensation expense related to non-vested stock option grants and stock grants.
On April 10, 2009, the Board approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan and subsequent awards categorized as inducement of employment authorized the issuance of up to 510,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorized the issuance of up to 300,000 shares of our common stock in the form of equity-based awards. Because no registration on Form S-8 was filed for these additional shares within 12 months of approval by our shareholders, those additional shares are not available for issuance in the normal course. As of September 30, 2020, options for 20,000 shares remain outstanding.
A summary of the Company’s stock option activity, which includes grants of restricted stock, non-qualified stock options, incentive stock options, warrants and related information, is as follows:
Shares under Option | Weighted Average Exercise Price | |||||||
Balance at December 31, 2019 | 471,144 | $ | 3.95 | |||||
Granted | 792,660 | 1.00 | ||||||
Cancelled/Expired | (436,519 | ) | 3.95 | |||||
Exercised/Issued | (347,483 | ) | 1.19 | |||||
Outstanding at September 30, 2020 | 479,802 | 1.10 | ||||||
Exercisable at September 30, 2020 | 19,625 | $ | 5.49 | |||||
The instruments above have no aggregate intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended September 30, 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on September 30, 2020.
On January 3, 2020, the Company entered into a stock purchase agreement, as amended on February 24, 2020 and April 13, 2020 (the “LF Purchase Agreement”), pursuant to which the Company agreed to issue and sell, and LF International Pte. Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, agreed to purchase, up to 500,000 shares of the Company’s newly created shares of Series A Preferred, with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As permitted by the Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in the sale of 250,000 shares of Series A Preferred for aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company’s board of directors (the “Board”) (subject to certain adjustments), effective as of the first closing. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 12, 2020, the Company changed its name to Yunhong CTI Ltd.
On January 30, 2020, the Company sold 20,600 shares of Series A Preferred to an investor for an aggregate purchase price of $206,000.
On February 21, 2020, the Company sold 22,060 shares of Series A Preferred to an investor for an aggregate purchase price of $220,600.
The Purchase Agreement contemplates a second closing for the purchase and sale of an additional 250,000 shares of Series A Preferred (the “Second Closing”). On February 24, 2020, to permit an interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and LF International entered into an amendment to the Purchase Agreement (the “Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, 70,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $700,000 (the “Interim Closing”). As an inducement to enter into the Purchase Agreement Amendment, the Company i) granted to the Investor the right to appoint and elect a second member to the Company’s Board of Directors and ii) agreed to issue to LF International 140,000 shares of the Company’s common stock. On February 28, 2020, the Company and LF International closed on the Interim Closing.
On April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred.
On April 13, 2020, to permit an additional interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and LF International entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, 130,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $1,300,000 (the “Additional Interim Closing”). As an inducement to enter into the Second Purchase Agreement Amendment, the Company i) granted to LF International the right to appoint and elect a third member to the Board and ii) agreed to issue to LF International 260,000 shares of common stock.
On June 5, 2020, the Company and LF International conducted the Second Closing, as modified by the Interim Closing and Additional Interim Closing (the “Final Closing”), and closed on the issuance of 50,000 shares of Series A Preferred at a purchase price of $10.00 per share to LF International for aggregate gross proceeds of $500,000 to the Company. As a result of the Final Closing, LF International held, in the aggregate, approximately 57% of the voting control of the Company, resulting in a change in control of the Company.
The issuance of the Company’s Series A Preferred Stock generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series A Preferred was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the closing dates by approximately $2.5 million as of the closing dates. We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series A Preferred Stock.Preferred. As the Series A Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance. The accretion was recognized as dividend equivalents. Holders of the Series A Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. In the ninethree months ending SeptemberJune 30, 2021 and 2020 the Company accrued $255,341$100,000 of these dividends. In the six months ending June 30, 2021 and 2020 the Company accrued $200,000 and $152,741, respectively, of these dividends.
DuringSeries B Preferred
In November 2020, we issued 170,000 shares of Series B Preferred for an aggregate purchase price of $1,500,000. The Series B Preferred have an initial stated value of $10.00 per share and liquidation preference over common stock. The Series B Preferred is convertible into shares of our common stock equal to the three months ended September 30, 2020, 332,000number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series B Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock were issued uponstock. Initially, the exercise of 500,000 warrants. DuringSeries B Preferred, in whole or part, was redeemable at the third quarter 2020, 42,660 convertible preferred shares were converted into 426,600 shares of common stock. An additional 18,007 shares of common stock were issued as satisfactionoption of the holder (but not mandatorily redeemable) at any time on or after November 30, 2021 for the stated value, plus any accrued dividendand unpaid dividends and thus was classified as mezzanine equity and initially recognized at fair value of $1.5 million (the proceeds on the preferred shares.date of issuance). In March 2021, the terms of the Series B Preferred were modified to eliminate the ability of the holder to redeem the Series B Preferred. As the Series B Preferred is no longer redeemable, the Series B Preferred is not classified as mezzanine equity as of June 30, 2021. As a result, the carrying value as of June 30, 2021 amounted to $1,646,707 which consists of $1,500,000 original carrying value, $81,206 accrued dividends and $65,500 accretion ($46,932 which occurred in 2021).
Series C Preferred
In 2020,January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by the Chairman of the Board of Directors Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued 170,000 shares of Series C Preferred for an aggregate purchase price of $1,500,000. The Series C Preferred have an initial stated value of $10.00 per share and liquidation preference over common stock. The Series C Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series C Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock. The issuance of the Series C Preferred generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series C Preferred was convertible exceeded the allocated purchase price of the Series C Preferred at the closing dates by greater than the allocated purchase price. Therefore, the BCF was the purchase price of the Series C Preferred ($1.5 million) and was allocated to Additional Paid-in Capital, resulting in a discount on the Series C Preferred Stock. As the Series C Preferred Stock is immediately convertible, the Company issued 15,000 sharesaccreted the discount on the date of issuance. The accretion to its former presidentthe carrying value of the Series C Preferred is treated as a deemed dividend, recorded as a charge to Additional Paid in satisfaction of his stock compensation plan which accelerated upon his resignation.Capital and deducted in computing earnings per share.
Advance from Investor
In September 2020, June 2021, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series BD Redeemable Convertible Preferred Stock. As of September 30, 2020,June 30,2021, the Company was in the process of negotiating and finalizing the terms of the arrangement. On November 17, 2020, the Company finalized the associated stock purchase agreement for the sale of 170,000 new issued shares of Series B Redeemable Convertible Preferred Stock. Each share is convertible into ten shares of the Company’s common stock and Holders of the Series B Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. The stock purchase agreement is subject to customary conditions for closing. As the agreement was not finalized as of SeptemberJune 30, 2020, 2021, the $1.5 million advance is classified as Advance from Investor within liabilities on the accompanying balance sheet.
Warrants
Note 6 - Legal ProceedingsIn connection with the Series A Offering, in 2020 the Company issued 792,660 warrants to purchase 792,660 shares of the Company’s common stock for $1 per share. During 2020, 597,500 warrants were exercised in cash-less exchange for 391,308 shares of the Company’s common stock. In January and February 2021, the remaining 195,160 warrants were exercised in a cash-less exchange for 103,104 shares of the Company’s common stock.
The Company has applied the Black-Scholes model to value stock-based awards. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of the Company’s Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company’s Common Stock.
The valuation assumptions we have applied to determine the value of warrants granted in 2020 were as follows:
Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility.
Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities with a similar maturity in effect at the time of the grant, which was a range from .42% - 1.65%.
Expected life: The expected life of the warrants represents the period of time warrants were expected to be outstanding. The Company used an expected life of 5 years.
Dividend yield: The estimate for dividend yield is 0%, as the Company did not issue dividends during 2020 or 2019 and does not expect to do so in the foreseeable future.
Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.
A summary of the Company’s stock warrant activity is as follows:
Shares under Option | Weighted Average Exercise Price | |||||||
Balance at December 31, 2020 | 195,160 | $ | 1.00 | |||||
Granted | 0 | 1.00 | ||||||
Cancelled/Expired | 0 | 1.00 | ||||||
Exercised/Issued | (195,160 | ) | 1.00 | |||||
Outstanding at June 30, 2021 | 0 | 1.00 | ||||||
Exercisable at June 30, 2021 | 0 | $ | 1.00 | |||||
Note 6 - Legal Proceedings
The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.
DuringIn July, 2017, God’s Little Gift, Inc. (d\b\a) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company based on disputed compensation amounts over several years. This action was resolved by mutual agreement between the parties during January 2019. Mr. Page received 20,000 shares of CTI common stock, $5,000 in cash, and a minimum payout in his monthly royalty calculation of $7,667 beginning March 1, 2019 and 2020, claims have been filed against us claiming failure to pay contractually obligated amounts. Approximately $760,000 in aggregate claims are outstandingending August 1, 2021. The balance remaining as of SeptemberJune 30, 2020. These claims are being disputed, the ultimate outcome of which is unknown.2021 and December 31, 2020 amounted to $15,324 and $53,659, respectively.
FedEx Trade Networks Transport and Brokerage Inc. v. CTI Industries Corp., Case No.20 L 46, was filed on January 27, 2020 in the Circuit Court of the 19th Judicial Circuit, Lake County, Illinois. The complaint for breach of contract sought $163,965$163,964.75 in damages, plus interest and court costs. On October 15, 2020, the case was dismissed with leave to reinstate pursuant to settlement. The settlement calls for the payment of $100,400$100,400.00 in monthly installments of $10,000 per month for a period of ten (10) months and with the last payment being in the amount of $10,400. The first payment came due and was made on October 30, 2020.2020, and payments have been made monthly. The balance remaining as of June 30, 2021 and December 31, 2020 amounted to $10,400 and $70,400, respectively.
Airgas USA, LLC v. CTI Industries Corp., Case No.01-20-0014-7852 was filed with the American Arbitration Association on or about September 8, 2020. The claim seeks $212,000, plus interest, attorneys’ fees and costs for breach of contract. Claimant agreed to give CTI an extension to respond to the claim so the parties could attempt to resolve. On February 10, 2021, Airgas accepted CTI’s offer to pay $125,000 over 10 months. Airgas agreed to the settlement in March of 2021. The balance as of June 30, 2021 and December 31, 2020 amounted to $100,000 and 125,000, respectively.
On October 19, 2020, Jules and Associates, Inc. sent CTI a demand letter related to the lease of certain equipment. The letter demanded $65,847 for alleged past due amounts under the lease as well as a return of the equipment. Discussions regarding the return of the equipment are ongoing and no lawsuit has been filed. On April 5, 2020, Jules and Associates, Inc. filed and served on CTI a demand for arbitration with JAMS related to the lease of certain equipment. The demand requests $98,245 for alleged past due amounts, plus amounts that Jules alleges continue to accrue under the lease, attorneys’ fees and costs, as well as a return of the equipment or its fair market value. CTI has settled this matter with Jules for $90,000 to be paid in installments as follows: $15,000 upon execution of a settlement agreement, $25,000 on October 15, 2021; $25,000 on November 15, 2021; and $25,000 on December 15, 2021. Additionally, as part of the settlement, CTI is entitled to keep the equipment and Jules will execute a bill of sale to CTI for the equipment upon receipt of the settlement amount. CTI is waiting for Jules to send a draft settlement agreement on those terms.
Benchmark Investments, Inc. v. Yunhong CTI Ltd filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on CTI on March 31, 2021. The complaint seeks damages in excess of $500,000. CTI has filed our Answer and Counterclaim to the complaint.
On July 16, 2021, Transportation Solutions Group LLC d/b/a Redwood Multimodal filed a Complaint against CTI for breach of contract or in the alternative quantum alleging damages for unpaid invoices in the amount of $98,661, plus attorneys’ fees and costs. The case is pending in the Circuit Court of Cook County, Illinois, Law Division under Case Number 2021 L 7225. CTI was served on July 30 and its deadline to appear and answer or otherwise plead is August 30, 2021. The Company has reached out to Plaintiff to attempt to resolve this matter.
Note 7 - Other Comprehensive Income
In the ninethree months ended SeptemberJune 30, 2021 and 2020, the Company incurred other comprehensive lossincome of approximately $1,292,000$48,073 and $66,327, respectively, from foreign currency translation adjustments. In the six months ended June 30, 2021 and 2020, the Company incurred other comprehensive income (loss) of approximately $31,806 and $(1,297,176), respectively, from foreign currency translation adjustments. The main contributing factor for the large other comprehensive loss in the six months ended June 30, 2020 was athe sudden approximate 25% decline in the valuation of the Mexican peso related to the COVID-19COVID-19 pandemic discussed above and the resulting large-scale, rapid impacts to the world economy.
Note 8 - Geographic Segment Data
The Company has determined that it operates primarily in one business segment that designs, manufactures, and distributes film and film related products for use in packaging, storage, and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's continuing operations by geographic area is as follows:
Net Sales to Outside Customers | Net Sales to Outside Customers | |||||||||||||||
For the Nine Months Ended | For the Three Months Ended | |||||||||||||||
September 30, | June 30, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
United States | $ | 14,718,000 | $ | 17,911,000 | $ | 5,711,952 | $ | 4,542,484 | ||||||||
Mexico | 4,076,000 | 6,348,000 | 613,289 | 1,202,869 | ||||||||||||
| $ | 18,794,000 | $ | 24,259,000 | $ | 6,325,241 | $ | 5,745,353 | |||||||||
Net Sales to Outside Customers | ||||||||
For the Six Months Ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
United States | $ | 12,310,942 | $ | 9,968,423 | ||||
Mexico | 1,430,467 | 2,844,431 | ||||||
| $ | 13,741,409 | $ | 12,812,854 | |||||
Total Assets at | ||||||||
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
United States | $ | 15,801,575 | $ | 12,458,706 | ||||
Mexico | 8,681,668 | 8,798,046 | ||||||
Assets Held for Sale International Subsidiaries | 0 | 294,219 | ||||||
| $ | 24,483,243 | $ | 21,550,971 | |||||
Net Sales to Outside Customers | ||||||||
For the Three Months Ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
United States | $ | 4,749,000 | $ | 4,120,000 | ||||
Mexico | 1,232,000 | 2,245,000 | ||||||
| $ | 5,981,000 | $ | 6,365,000 | |||||
Total Assets at | ||||||||
September 30, | December 31, | |||||||
2020 | 2019 | |||||||
United States | $ | 13,215,000 | $ | 19,668,000 | ||||
Mexico | 7,986,000 | 10,897,000 | ||||||
Assets Held for Sale International Subsidiaries | 748,000 | 756,000 | ||||||
| $ | 21,949,000 | $ | 31,321,000 | |||||
Note 9 - Inventories, Net of Continuing Operations
June 30, 2021 | December 31, 2020 | |||||||
Raw materials | $ | 1,368,781 | $ | 1,175,763 | ||||
Work in process | 2,818,869 | 2,799,253 | ||||||
Finished goods | 7,418,578 | 7,223,902 | ||||||
In Transit | 127,740 | 88,315 | ||||||
Allowance for excess quantities | (228,720 | ) | (317,522 | ) | ||||
Total inventories | $ | 11,505,248 | $ | 10,969,711 | ||||
September 30, 2020 | December 31, 2019 | |||||||
Raw materials | $ | 1,385,000 | $ | 1,545,000 | ||||
Work in process | 2,808,000 | 3,110,000 | ||||||
Finished goods | 6,837,000 | 9,766,000 | ||||||
In Transit | 115,000 | 100,000 | ||||||
Allowance for excess quantities | (501,000 | ) | (562,000 | ) | ||||
Total inventories | $ | 10,644,000 | $ | 13,959,000 | ||||
Note 10 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the ninethree and six months ended SeptemberJune 30, 2020 2021 and 2019,2020, there was one customerwere two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to this customerthese customers for the ninethree and six months ended SeptemberJune 30, 2020 2021 and 20192020 are as follows:
Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
September 30, 2020 | September 30, 2019 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||||||||||||||
Customer A | $ | 3,737,000 | 63 | % | $ | 1,559,000 | 25 | % | $ | 3,421,000 | 54 | % | $ | 2,508,000 | 43 | % | ||||||||||||||||
Customer B | $ | 812,000 | 13 | % | $ | 947,000 | 16 | % | ||||||||||||||||||||||||
Nine Months Ended | Nine Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, 2020 | September 30, 2019 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||||||||||||||
Customer A | $ | 9,412,000 | 50 | % | $ | 8,890,000 | 37 | % | $ | 7,344,000 | 53 | % | $ | 5,675,000 | 44 | % | ||||||||||||||||
Customer B | $ | 2,106,000 | 15 | % | $ | 2,110,000 | 17 | % | ||||||||||||||||||||||||
As of SeptemberJune 30, 2020, 2021, the total amounts owed to the Company by this customerthese customers were approximately $1,724,000$2,202,000 or 33%42% of the Company’s consolidated net accounts receivable. The amounts owed at SeptemberJune 30, 2019 2020 by this customer wasthese customers were approximately $831,000$4,012,000 or 16%56% of the Company’s consolidated net accounts receivable.
Note 11 - Related Party Transactions
John H. Schwan, who resigned as Chairman of the Board on June 1, 2020, is the brother of Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance services to the Company. The Company made payments to Schwan Incorporated of approximately $2,700$31,000 and $12,000$2,700 during the ninesix months ended SeptemberJune 30, 2020 2021 and 2019,2020, respectively. As of June 30, 2021 the payable balance amounted to nil. Jana M. Schwan, Chief Operating Officer of the Company, is the daughter of John H. Schwan. As of September 30, 2020 the payable balance amounted to $8,800 and is included in trade payables.
During the period from January 2003 to the present, John H. Schwan has made loans to the Company which had outstanding balances of $1,157,908 and $1,123,769 as of June 30, 2021 and December 31, 2020, respectively. NaN payments were made to Mr. Schwan since 2019. Interest expense related to this loan amounted to $17,000 and $16,000 for the Company of $1.6 million as of December 31, 2018. During January 2019 he converted $0.6 million to equity atthree months ended June 30, 2021 and 2020, respectively and $34,000 and $32,000 for the then market price of our stock. Including accrued interest, his balance was $1.1 million as of Septembersix months ended June 30, 2020. During the first nine months of 2020 2021 and 2019, interest expense on these outstanding loans was $49,000 and $46,000,2020, respectively.
Items identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of SeptemberJune 30, 2021 and December 31, 2020 and 2019 include loans by shareholders to Flexo Universal totaling $20,000nil and $12,000,$9,000, respectively.
On July 1, 2019, the Company deconsolidated Clever, which resulted in a note receivable at that time of $1.387 million. During the nine months ended September 30, 2020and as result the Company recorded a reservenote receivable of $350,000.$1.3 million. One of owners of Clever is Mr.John Schwan from above. In 2020, the Company had reserved $1,277,000 of this receivable. In the three months ended June 30, 2021, the Company has fully reserved this receivable completely. The balance as of SeptemberDecember 31, 2020 and June 30, 2020 2021 amounted to $1,026,813.$100,000 and nil respectively.
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by the Chairman of the Board of Directors Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued 170,000 shares of Series C Preferred for an aggregate purchase price of $1,500,000. Additional details regarding the transaction are discussed in Note 5.
Note 12 - Derivative Instruments; Fair Value
The Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that all derivative instruments be recognized on the balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-oneone-to-one matching of the derivative instrument to our underlying transaction. As of SeptemberJune 30, 2020, 2021, we had no such instrument.
Note 13 - Leases
We adopted ASC Topic 842 (Leases) on January 1, 2019. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. Results for periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations.
Upon adoption of ASC 842 we recorded a $2.8 million increase in other assets, a $1.1 million increase in current liabilities, and a $1.7 million increase in non-current liabilities. We did not record any cumulative effect adjustments in opening retained earnings, and adoption of ASC 842 had no impact on cash flows from operating, investing, or financing activities.
In July 2020, the Company entered into a lease agreement for a building through June 2021 (with (with no extension options). The monthly lease payments are $38,000. The Company made a policy election to not recognize right of use assets and lease liabilities that arise from leases with an initial term of twelve months or less on the Consolidated Balance Sheets. However, the Company recognized these lease payments in the Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the expense was incurred. This lease terminated during 2021 and was replaced with a new lease. In March 2021, the Company entered into a lease agreement for a building through September 2022. The monthly lease payments are $34,000. As a result of this new lease, in March 2021, the Company recorded a right of use asset of $567,950 and a related operating lease liability and used the incremental borrowing rate of 11%. As discussed in Note 3, in April 2021, the Company sold its Lake Barrington Facility for $3.5 million and 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 fair value for this property was $3.81 million, the Company recognized a gain of $3,356,794 on the sale and established a prepaid rent of $310,000 for the difference between fair value and transaction price. As a result of this transaction, in April 2021, the Company recorded an operating lease liability of $3,037,914 and a corresponding right of use asset and used the incremental borrowing rate of 13.25%.
Note 14- Subsequent Events
On July 30, 2021, Yunhong CTI Ltd. (the “Company”) entered into an agreement (the “Agreement”) whereby it agreed to the redemption of all of its equity interests in Flexo Universal S DE RL DE CV, a Mexican corporation (“Flexo”), in a transaction whereby Kingman Distributions, S.A. DE C.V, a Mexican corporation (the “Buyer”), will become the majority owner of Flexo (the “Transaction”).
In connection with the Transaction, Flexo will purchase and redeem all of the Company’s equity interests in Flexo in return for a purchase price of Five Hundred Thousand Dollars ($500,000), of which One Hundred Thousand Dollars ($100,000) is to be paid at the closing of the Transaction, and the remainder is to be paid in installments over twelve months following the closing date (the “Installment Obligations”). The Installment Obligations are to be secured by a pledge of the assets of Flexo, as well as by guaranties provided by the Buyer and Pablo Gortazar, an individual with an ownership interest in Flexo, pursuant to a Guaranty and Security Agreement to be entered into among the Company, the Buyer, Flexo and Mr. Gortazar at the closing.
The closing is conditioned on, among other things, (i) the Company being released from all obligations in connection with its guaranty of the real property lease for Flexo’s operating location in Guadalajara, Mexico, and (ii) the Company repaying its obligations in full to PNC Bank, National Association pursuant to the terms of the Revolving Credit, Term Loan and Security Agreement, dated as of December 14, 2017, as amended between the Company and the bank. The Transaction will close when all of the closing conditions set forth in in the Agreement have been satisfied.
We determine if an arrangement is a lease at inception. Most of our operating leases do not provide an implicit rate of interest so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the course of ordinary business including warehouses and manufacturing facilities, as well as vehicles and equipment used in our operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of assets and related improvements are limited by the expected lease term unless there is a reasonably certain expected transfer or title or purchase option. Some lease agreements include renewal options at our sole discretion. Any guaranteed residual value is included in our lease liability.
The table below describes our lease position as of September 30, 2020:
Assets | As of September 30, 2020 | |||
Operating lease right-of-use assets | $ | 1,457,000 | ||
Accumulated amortization | (1,097,000 | ) | ||
Net lease assets | $ | 360,000 | ||
Liabilities | ||||
Current | ||||
Operating | 312,000 | |||
Noncurrent | ||||
Operating | 48,000 | |||
Total lease liabilities | $ | 360,000 | ||
Weighted average remaining term (years) – operating leases (in years) | 2 | |||
Weighted average discount rate – operating leases | 11.25 | % | ||
During the nine months ended September 30, 2020, we recorded expenses related to:
Operating right-of-use lease asset amortization | $ | 471,000 | ||
Total expense during nine months ended September 30, 2020 | $ | 471,000 |
Operating lease expenses were approximately $471,000 for the nine months ended September 30, 2020. Operating lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations. The Company does not have any finance leases. Cash paid for amounts included in the measurement of operating lease liabilities were approximately $471,000 for the nine months ended September 30, 2020.
|
(in thousands) | ||||
2020 | $ | 111 | ||
2021 | 373 | |||
2022 and thereafter | 51 | |||
Total lease payments | 535 | |||
less: Imputed interest | (175 | ) | ||
Present value of lease liabilities | $ | 360 |
Note 14 - Subsequent Events
In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Redeemable Convertible Preferred Stock. As of September 30, 2020, the Company was in the process of negotiating and finalizing the terms of the arrangement. On November 17, 2020, the Company finalized the associated stock purchase agreement for the sale of 170,000 new issued shares of Series B Redeemable Convertible Preferred Stock. Each share is convertible into ten shares of the Company’s common stock and Holders of the Series B Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. The stock purchase agreement is subject to customary conditions for closing. As the agreement was not finalized as of September 30, 2020, the $1.5 million advance is classified as Advance from Investor within liabilities on the accompanying balance sheet. In October 2020, the Company received a $1.5 million advance on a proposed equity financing for which the terms have not yet been finalized.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly reportQuarterly 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 reportQuarterly Report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly reportQuarterly 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, 2020 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 produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. 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 and flexible containers for consumer use in the United States, Mexico, and Latin America, and Europe.America. We also market and sell Candy Blossoms and party goods.
As of January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606. Revenue Recognition. Substantially all of the Company's revenues are derived from the sale of products. With respect to the sale of products, revenue from a transaction is recognized once it has (i) identified the contract(s) with a customer, (ii) identified the performance obligations in the contract, (iii) determined the transaction price, (iv) allocated the transaction price to the performance obligations in the contract, and (v) recognized revenue as the company satisfies a performance obligation. The Company generally recognizes revenue for the sale of products when the products have been shipped and invoiced. In some cases, product is provided on consignment to customers. In those cases, revenue is recognized when the customer reports a sale of the product.
We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
As of January 1, 2019, we adopted ASC Topic 842, Leases (“ASC Topic 842”). Refer to Note 13 for additional information. Our primary leases relate to the facilities we use in Mexico. We also have ancillary leases for items ranging from forklifts to printers. The majority of our leases are classified as operating lease right-of-use (“ROU”) assets and related operating lease liabilities. Finance leases are included in property and equipment and related liabilities. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at the commencement date for leases that exceed 12 months. The expected lease term includes options to renew when it is reasonably certain that we will exercise such option.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in the cost of sales or sales, general and administrative expense areas. Finance leases are amortized on a straight-line basis and included in similar areas of expense classification. Variable lease payments, non-lease component payments, and short-term rentals (leases less than 12 months in duration) are expensed as incurred.
Summary of Subsequent Events
As previously disclosed on a Current Report on Form 8-K ofOn July 30, 2021, Yunhong CTI Ltd. (the “Company”) entered into an agreement (the “Agreement”) whereby it agreed to the redemption of all of its equity interests in Flexo Universal S DE RL DE CV, a Mexican corporation (“Flexo”), on December 14, 2017,in a transaction whereby Kingman Distributions, S.A. DE C.V, a Mexican corporation (the “Buyer”), will become the majority owner of Flexo (the “Transaction”).
In connection with the Transaction, Flexo will purchase and redeem all of the Company’s equity interests in Flexo in return for a purchase price of Five Hundred Thousand Dollars ($500,000), of which One Hundred Thousand Dollars ($100,000) is to be paid at the closing of the Transaction, and the remainder is to be paid in installments over twelve months following the closing date (the “Installment Obligations”). The Installment Obligations are to be secured by a pledge of the assets of Flexo, as well as by guaranties provided by the Buyer and Pablo Gortazar, an individual with an ownership interest in Flexo, pursuant to a Guaranty and Security Agreement to be entered into among the Company, entered into athe Buyer, Flexo and Mr. Gortazar at the closing.
The closing is conditioned on, among other things, (i) the Company being released from all obligations in connection with its guaranty of the real property lease for Flexo’s operating location in Guadalajara, Mexico, and (ii) the Company repaying its obligations in full to PNC Bank, National Association pursuant to the terms of the Revolving Credit, Term Loan and Security Agreement, (the “Loan Agreement”) with PNC Bank, National Association (“Lender”).
Prior to January 13, 2020, certain eventsdated as of default under the Loan Agreement had occurred (the "Prior Defaults"). On January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”)December 14, 2017, as amended between Lender and the Company became effective, pursuant to which Lender agreed to, among other things, forebear from exercising the rights and remedies in respect of the Prior Defaults afforded to Lender under the Loan Agreement for a period ending no later than December 31, 2020 (the “Forbearance Period”).
On June 15, 2020, the Lender provided the Company notice (the “Default Notice”) that (i) an additional Event of Default (as defined in the Loan Agreement) had occurred and is continuing as a result of the Company's failure to maintain a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the "March FCCR Default"), (ii) as a result of the occurrence and continuance of the March FCCR Default, the Forbearance Period has ended, and (iii) as a result of the termination of the Forbearance Period, the Lender is entitled to exercise immediately all of its rights and remedies under the Loan Agreement including, without limitation, ceasing to make further advances to the Company and declaringthe bank. The Transaction will close when all obligations to be immediately due and payableof the closing conditions set forth in accordance within the Loan Agreement.Agreement have been satisfied.
The Lender has continued to make advances to the Company (“Discretionary Advances”), although it is not required to do so under the terms of the Loan Agreement due to the Events of Default. On July 17, 2020, the Lender provided the Company notice that multiple previously disclosed events, which each constitute an Event of Default, are continuing to occur. Additionally, the Lender required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, the Lender advised that it may cease making discretionary advances to the Company. On July 22, 2020, the Company’s board of directors authorized the Company to seek such funding and, to ensure that the Company met the Lender’s equity funding commitment deadline. Mr. Yubao Li, the Company’s Chairman, committed that, in the event the Company does not obtain funding of at least $3,000,000, he would provide the necessary funding. In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Convertible Preferred Stock (the terms of which are currently being negotiated and finalized). Additionally, in October 2020, the Company received a $1.5 million advance on a separate proposed equity financing for which the terms have not yet been finalized. The Lender has continued to make the Discretionary Advances throughout this period and has indicated that we have complied with their request.
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 is divestingdivested its CTI Europe (Germany) subsidiary and Ziploc product line in 2020.the second quarter 2021.
Results of Operations
Net Sales. For the three and nine month periods ended SeptemberJune 30, 2021 and 2020, net sales were $5,981,000$6,325,000 and $18,794,000, compared to net sales of $6,365,000 and $24,259,000 for the same periods of 2019,$5,745,000, respectively.
For the three monththree-month period ended SeptemberJune 30, 20202021 and 2019,2020, net sales by product category were as follows:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||
September 30, 2020 | September 30, 2019 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||||||||||
$ | % of | $ | % of | $ | % of | $ | % of | |||||||||||||||||||||||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | Variance | % change | ||||||||||||||||||||||||||||||
Foil Balloons | 4,516 | 76 | % | 3,681 | 62 | % | 4,573 | 72 | % | 3,372 | 59 | % | 1,201 | 35.6 | % | |||||||||||||||||||||||||
Latex Balloons | 1,014 | 17 | % | 2,059 | 34 | % | 609 | 10 | % | 1,115 | 19 | % | (506 | ) | -45.4 | % | ||||||||||||||||||||||||
Film Products | 78 | 1 | % | 236 | 4 | % | 505 | 8 | % | 371 | 6 | % | 134 | 36.0 | % | |||||||||||||||||||||||||
Other | 374 | 6 | % | 9 | 0 | % | 638 | 10 | % | 887 | 16 | % | (249 | ) | -28.1 | % | ||||||||||||||||||||||||
Total | 5,981 | 100 | % | 5,985 | 100 | % | 6,325 | 100 | % | 5,745 | 100 | % | 580 | 10.1 | % | |||||||||||||||||||||||||
For the six month periods ended June 30, 2021 and 2020, net sales were $13,741,000 and $12,813,000, respectively.
For the ninesix month period ended SeptemberJune 30, 20202021 and 20192020, net sales by product category were as follows:
Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
September 30, 2020 | September 30, 2019 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||||||||||||||||||||
$ | % of | $ | % of | $ | % of | $ | % of | |||||||||||||||||||||||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | Variance | % change | ||||||||||||||||||||||||||||||
Foil Balloons | 12,380 | 66 | % | 13,325 | 56 | % | 9,606 | 70 | % | 7,864 | 61 | % | 1,746 | 22.2 | % | |||||||||||||||||||||||||
Latex Balloons | 3,712 | 20 | % | 5,640 | 23 | % | 1,306 | 10 | % | 2,698 | 21 | % | (1,392 | ) | -51.6 | % | ||||||||||||||||||||||||
Film Products | 664 | 4 | % | 1,475 | 6 | % | 950 | 7 | % | 586 | 5 | % | 364 | 62.1 | % | |||||||||||||||||||||||||
Other | 2,038 | 11 | % | 3,571 | 15 | % | 1,879 | 14 | % | 1,665 | 13 | % | 214 | 12.9 | % | |||||||||||||||||||||||||
Total | 18,794 | 100 | % | 24,011 | 100 | % | 13,741 | 100 | % | 12,813 | 100 | % | 932 | 7.3 | % | |||||||||||||||||||||||||
Foil Balloons. Revenues from the sale of foil balloons increased during the three months period from $3,681,000$3,372,000 ending SeptemberJune 30, 20192020 compared to $4,516,000$4,573,000 during the three month period of 2020.2021. Revenues from the sale of foil balloons decreasedincreased during the ninesix month period from $13,325,000$7,864,000 ending SeptemberJune 30, 20192020 compared to $12,380,000$9,610,000 during the ninesix month period of 2020 mainly due2021. Due to decreased foil salesCOVID-19 related issues, graduation season did not occur as it normally does during 2020. This is the third strongest event in our Mexican subsidiary. annual sales period.
Latex Balloons. Revenues from the sale of latex balloons were $1,014,000$609,000 and $3,712,000$1,306,000 during the three and ninesix month periods ended SeptemberJune 30, 2020,2021, compared to $2,059,000$1,115,000 and $5,640,000$2,698,000 during the same periods of 2019.2020. Latex balloons encountered a COVID-19 constraint, as production activities were severely limited by the Mexican government.
Films. Revenues from the sale of commercial films were $78,000$505,000 and $664,000$950,000 during the three and ninesix month periods ended SeptemberJune 30, 2020,2021, compared to $236,000$371,000 and $1,475,000$586,000 during the same periods of 2019. Our main customer had restructured their program in the first quarter both related to COVID-19 disruption and also the integration of a merger partner.2020.
Other Revenues. Revenues from the sale of other products were $374,000$638,000 and $2,038,000$1,879,000 during the three and ninesix month periods ended SeptemberJune 30, 2020,2021, compared to $9,000$887,000 and $3,571,000$1,665,000 during the same periods of 2019. Revenues in 2019 include a discontinued line of organizing solutions that was fully deconsolidated in 2019.2020. The revenues from the sale of other products during the first ninesix months of 2021 and 2020 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 ninethree month periods ended SeptemberJune 30, 20202021 and 2019.2020.
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||
% of Sales | % of Sales | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Top 3 Customers | 77 | % | 43 | % | 71 | % | 66 | % | ||||||||
Top 10 Customers | 88 | % | 58 | % | 82 | % | 83 | % | ||||||||
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
% of Sales | % of Sales | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Top 3 Customers | 71 | % | 53 | % | 73 | % | 65 | % | ||||||||
Top 10 Customers | 82 | % | 71 | % | 87 | % | 81 | % | ||||||||
During the nine month periodthree and six months ended SeptemberJune 30, 2021 and 2020, there was onewere two customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to this customerthese customers for the nine month period ended September 30, 2020 was $9,412,000 or 50% of consolidated net sales. Sales to this customer for the ninethree and six months ended SeptemberJune 30, 2019 was $8,190,000, or 34% of consolidated net sales. 2021 and 2020 are as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 3,421,000 | 54 | % | $ | 2,508,000 | 43 | % | ||||||||
Customer B | $ | 812,000 | 13 | % | $ | 947,000 | 16 | % | ||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2021 | June 30, 2020 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 7,344,000 | 53 | % | $ | 5,675,000 | 44 | % | ||||||||
Customer B | $ | 2,106,000 | 15 | % | $ | 2,110,000 | 17 | % | ||||||||
As of SeptemberJune 30, 2020,2021, the total amountamounts owed to the Company by this customer wasthese customers were approximately $1,725,000,$2,202,000 or 33%42% of the Company’s consolidated net accounts receivable. The amountamounts owed at SeptemberJune 30, 20192020 by this customer wasthese customers were approximately $831,000,$4,012,000 or 16%56% of the Company’s consolidated net accounts receivable.
Cost of Sales. During the three and ninesix month periodsperiod ended SeptemberJune 30, 2020,2021, the cost of sales was $5,720,000$5,459,000 and $16,442,000,$11,782,000, compared to $6,285,000$5,136,000 and $20,926,000,$10,722,000 respectively for the same periodsperiod of 2019. The reduction in cost of sales was largely2020 due to the termination of the vacuum sealing product line, reduced presence in the form of discontinued subsidiaries, and a temporary reduction in orders related to COVID-19.higher sales volume.
General and Administrative. During the three and ninesix month periodsperiod ended SeptemberJune 30, 2020,2021, general and administrative expenses were $1,067,000$1,257,000 and $3,254,000 as$2,378,000 compared to $1,167,000$1,484,000 and $3,866,000$2,186,000 respectively for the same periodsperiod in 2019. Decrease is due mainly to headcount reductions. 2020.
Selling, Advertising and Marketing. During the three and ninesix month periodsperiod ended SeptemberJune 30, 2020,2021, selling, advertising and marketing expenses were $101,000$107,000 and $384,000$247,000 as compared to $148,000$108,000 and $714,000,$282,000 respectively for the same periodsperiod in 2019. Decrease is due mainly to headcount reductions. 2020.
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 ninesix month periodsperiod ended SeptemberJune 30, 2020,2021, the Company incurred interest expense of $255,000$181,000 and $1,033,000 as$413,000 compared to interest expense of $465,000$337,000 and $1,493,000$778,000 respectively during the same periodsperiod of 2019. During2020. Interest expense decreased due to the three months ended September 30, 2020reduction of the Company recorded $248,000 of other income for the Payroll Protection Program, PPP, anticipated grant related to payroll, utility and rent payments. During the nine months ended September 30, 2020 the Company recorded $1,048,000 of other income for the Payroll Protection Program, PPP, anticipated grant related to payroll, utility and rent payments.Company's senior debt facility.
For the three and six month and nine month periodsperiod ended SeptemberJune 30, 2020,2021, the Company had a foreign currency transaction gain/(loss)gain of $15,000$36,000 and $(169,000)$9,000 as compared to a gain/(loss)loss of $(26,000)$30,000 and $(27,000)$184,000 respectively during the same periodsperiod of 2019.2020.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the ninesix months ended SeptemberJune 30, 2020,2021, net cash provided byused in operations was $995,000,$631,000, compared to net cash providedused by operations during the ninesix months ended SeptemberJune 30, 20192020 of $4,172,000.$1,028,000.
Significant changes in working capital items during the ninethree months ended SeptemberJune 30, 20202021 included:
● | A decrease in accounts receivable of |
● |
|
● | An increase in trade payables of |
| ● | A gain on sale of assets of $3,357,000 in 2021 and nil in 2020 |
● | A decrease in prepaid expenses and other assets of $219,000 compared to a decrease of $38,000 in 2020. | |
● | An increase in accrued liabilities of |
In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Redeemable Convertible Preferred Stock. As of September 30, 2020, the Company was in the process of negotiating and finalizing the terms of the arrangement. As the agreement was not finalized as of September 30, 2020, the $1.5 million advance is classified as Advance from Investor within liabilities on the accompanying balance sheet.
Investing Activity.Activity. During the ninesix months ended SeptemberJune 30, 2020,2021, cash used inprovided by investing activity was $140,000,$3,454,000, compared to cash used in investing activity for the same period of 20192020 in the amount of $144,000.$72,000. 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 ninesix months ended SeptemberJune 30, 2020,2021, cash used in financing activities was $2,237,000$2,695,000 compared to cash used in financing activities for the same period of 20192020 in the amount of $4,546,000.$346,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt. During 2020, the Company sold 542,660 shares of Series A Preferred to multiple investors for an aggregate purchase price of $5.4 million. The Company has also received an advance of $1.5 million in from an investor for a Series B stock purchase that was not finalized as of September, 30 2020.
Liquidity and Capital Resources.
At SeptemberJune 30, 2020,2021, the Company had cash balances of none$273,000 compared to cash balances of $115,000$104,000 for the same period of 2019.2020.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing, 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 has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, 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 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 PNC (see Note 4). As of March 2019, October 2019 and January 2020, we entered into forbearance agreements with PNC. We encountered subsequent compliance failures with covenants during 2020 and we were out of compliance with the terms of our credit facility, as amended, as of March 31, 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 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 “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 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 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 Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”). Pursuant to the Amendment Agreement, the 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 revised from December 14, 2022 to December 31, 2021; |
● | On or before June 30, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the Revolving Credit Advance under the Loan Agreement (the “Equity Investment”); |
● | On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021; |
● | On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash; |
● | The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement) shall be increased from $1,025,000 to $2,525,000; |
● | Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates shall no longer be considered eligible receivables; |
● | Modifications will be made to the budget, testing and variance provisions of the Loan Agreement. |
In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender a Forbearance Fee of $1,000,000. Provided, however, that, so long as no Event of Default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by $1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates the Equity Investment by June 30, 2021, the Forbearance Fee shall be reduced by $250,000, to $750,000, and (ii) if the Company 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.
As of September 30, 2020, the Company was not in compliance with its credit facility, operating under a forbearance agreement. For this reason, $1.4 million of long-term debt was reclassified as current debt as of September 30, 2020. Failure to ultimately regain compliance with the terms of our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to carry on our business up to and including our ability to continue as a going concern. Additionally, we have encountered difficulties with seasonal cash flow needs, including increased costs associated with recruiting and retaining workers in the Chicago area. The failure to either regain compliance with the terms of our credit facility or properly manage seasonal cash needs could put a strain on the Company, up to and including our ability to continue as a going concern. See Note 3 for additional discussion.
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 25-2811-13 of our Annual Report on Form 10-K for the year ended December 31, 20192020 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 ninesix months ended SeptemberJune 30, 2020.2021.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Not applicable.
Item 4. Controls and Procedures
(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 SeptemberJune 30, 2020.2021. 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 SeptemberJune 30, 2020,2021, 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 SeptemberJune 30, 2020.2021. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—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 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 Chief Financial Officer within an environment that is highly manual in nature.
• | We are overly dependent upon our Chief Financial 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 SeptemberJune 30, 2020.2021.
The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.
In July, 2017, God’s Little Gift, Inc. (d\b\a) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company based on disputed compensation amounts over several years. This action was resolved by mutual agreement between the parties during January 2019. Mr. Page received 20,000 shares of CTI common stock, $5,000 in cash, and a minimum payout in his monthly royalty calculation of $7,667 beginning March 1, 2019 and ending August 1, 2021. The balance remaining as of June 30, 2021 and December 31, 2020 amounted to $15,324 and $53,659, respectively.
FedEx Trade Networks Transport and Brokerage Inc. v. CTI Industries Corp., Case No. 20 L 46, was filed on January 27, 2020 in the Circuit Court of the 19th Judicial Circuit, Lake County, Illinois. The complaint for breach of contract sought $163,964.75 in damages, plus interest and court costs. On October 15, 2020, the case was dismissed with leave to reinstate pursuant to settlement. The settlement calls for the payment of $100,400.00 in monthly installments of $10,000 per month for a period of ten (10) months and with the last payment being in the amount of $10,400. The first payment came due and was made on October 30, 2020, and payments have been made monthly. The balance remaining as of June 30, 2021 and December 31, 2020 amounted to $10,400 and $70,400, respectively.
Airgas USA, LLC v. CTI Industries Corp., Case No. 01-20-0014-7852 was filed with the American Arbitration Association on or about September 8, 2020. The claim seeks $212,000, plus interest, attorneys’ fees and costs for breach of contract. Claimant agreed to give CTI an extension to respond to the claim so the parties could attempt to resolve. On February 10, 2021, Airgas accepted CTI’s offer to pay $125,000 over 10 months. Airgas agreed to the settlement in March of 2021. The balance as of June 30, 2021 and December 31, 2020 amounted to $100,000 and 125,000, respectively
On October 19, 2020, Jules and Associates, Inc. sent CTI a demand letter related to the lease of certain equipment. The letter demanded $65,846.99 for alleged past due amounts under the lease as well as a return of the equipment. Discussions regarding the return of the equipment are ongoing and no lawsuit has been filed. On April 5, 2020, Jules and Associates, Inc. filed and served on CTI a demand for arbitration with JAMS related to the lease of certain equipment. The demand requests $98,244.55 for alleged past due amounts, plus amounts that Jules alleges continue to accrue under the lease, attorneys’ fees and costs, as well as a return of the equipment or its fair market value. CTI has settled this matter with Jules for $90,000 to be paid in installments as follows: $15,000 upon execution of a settlement agreement, $25,000 on October 15; $25,000 on November 15; and $25,000 on December 15. Additionally, as part of the settlement, CTI is entitled to keep the equipment and Jules will execute a bill of sale to CTI for the equipment upon receipt of the settlement amount. CTI is waiting for Jules to send a draft settlement agreement on those terms. The liability recorded by the Company as of June 30, 2021 and December 31, 2020 amounted to $107,410 and $75,187, respectively.
Benchmark Investments, Inc. v. Yunhong CTI Ltd filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on CTI on March 31, 2021. The complaint seeks damages in excess of $500,000. CTI has filed our Answer and Counterclaim to the complaint.
On July 16, 2021, Transportation Solutions Group LLC d/b/a Redwood Multimodal filed a Complaint against CTI for breach of contract or in the alternative quantum alleging damages for unpaid invoices in the amount of $98,660.88, plus attorneys’ fees and costs. The case is pending in the Circuit Court of Cook County, Illinois, Law Division under Case Number 2021 L 7225. CTI was served on July 30 and its deadline to appear and answer or otherwise plead is August 30, 2021. The Company has reached out to Plaintiff to attempt to resolve this matter.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
As previously disclosed on a Current Report on Form 8-K of Yunhong CTI Ltd. (the “Company”), onOn December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association (“Lender”and the other participant lenders thereunder (collectively, “Lender”).
Prior to January 13, 2020, certain events of default under the Loan Agreement had occurred (the "Prior Defaults"). On January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) between Lender and the Company became effective, pursuant to which Lender agreed to, among other things, forebear from exercising the rights and remedies in respect of the Prior Defaults afforded to Lender under the Loan Agreement for a period ending no later than December 31, 2020 (the “Forbearance Period”).
On June 15, 2020, the Lender provided the Company notice (the “Default Notice”) that (i) an additional Event of Default (as defined in the Loan Agreement) had occurred and is continuing as a result of the Company's failure to maintain a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the "March FCCR Default"), (ii) as a result of the occurrence and continuance of the March FCCR Default, the Forbearance Period has ended, and (iii) as a result of the termination of the Forbearance Period, the Lender is entitled to exercise immediately all of its rights and remedies under the Loan Agreement including, without limitation, ceasing to make further advances to the Company and declaring all obligations to be immediately due and payable in accordance with the Loan Agreement.
The Lender has continued
On April 23, 2021, the Company entered into a Purchase and Sale Agreement (“PSA”) with an unaffiliated purchaser (the “Purchaser”) pursuant to make advanceswhich 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 Company (“Discretionary Advances”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”), although it is not required to do so. Concurrently with the closing under the termsPSA, 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 “Lender”). Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement due(the “Existing Defaults”) and were continuing. Pursuant to the Events of Default. On July 17, 2020,Amendment Agreement, the Lender providedconsented 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 noticeagreed that multiple previously disclosed events, which each constitutethe 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 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 Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”). Pursuant to the Amendment Agreement, the 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 $18,000,000 to $9,000,000 |
● | The Termination date of the loan agreement is revised from December 14, 2022 to December 31, 2021 |
● | On or before June 30, 2021 or such later date as the lender agrees in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the revolving line of credit advance under the loan agreement (the Equity Investment) |
● | On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021 |
● | On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash |
● | The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement) shall be increased from $1,025,000 to $2,525,000 |
● | Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates shall no longer be considered eligible receivables |
● | Modifications will be made to the budget, testing and variance provisions of the Loan Agreement. |
In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender a Forbearance Fee of $1,000,000. Provided, however, that, so long as no Event of Default are continuing to occur. Additionally,under the Lender required that the Company obtainLoan Agreement has occurred (including as a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, the Lender advised that it may cease making discretionary advances to the Company. On July 22, 2020, the Company’s boardresult of directors authorizeda failure of the Company to seek such funding. In addition, Mr. Yubao Li,pay down the Company’s Chairman, committed that, inRevolving Loans by $1,500,000 with the eventproceeds of the Purchaser Promissory Note, (i) if the Company does not obtain funding of at least $3,000,000consummates the Equity Investment by August 31, 2020, he would provideJune 30, 2021, the necessary fundingForbearance Fee shall be reduced by $250,000, to ensure$750,000, and (ii) if the Company meets this requirement.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.
Item 4. Mine Safety Disclosures
Not applicable.
The Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.None.
The following are being filed as exhibits to this report:
Exhibit Number | Description
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| Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | Filed herewith |
** | furnished herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | Yunhong CTI Ltd. |
By: Jennifer M. Connerty Chief Financial Officer
By: Yubao Li President and Chief Executive Officer |