UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q/A
AMENDMENT NO. 1 TO 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 | |
| |
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) |
|
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22160 N. Pepper Road |
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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 | 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 registrantRegistrant 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 and post 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 as of August 1, 2019November 20, 2020 was 3,835,9505,783,646 (excluding treasury shares).
QUARTERLY REPORT ON FORM 10-Q/A
For the quarterly period ended June 30, 2019
EXPLANATORY NOTE
Amendment No. 1 on Form 10-Q/A amends and restates certain items noted below in the Quarterly Report on Form 10-Q of Yunhong CTI Ltd. (formerly CTI Industries Corporation) (the “Company”) for the quarter ended June 30, 2019, as originally filed with the Securities and Exchange Commission on August 19, 2019 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to reflect the following changes. First, the Original Filing was made without the benefit of auditor review, as noted in the Original Filing, and this amendment reflects the inclusion of outside auditor participation. Second, additional information of subsequent events is detailed in this amended filing. Third, we adjusted the financial statement line items on which the $3 million impairment charge was recorded and added footnote disclosure to further describe the impairment charge. Finally, we adjusted our lease accounting entry on the balance sheet.
As of January 3, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2019. This Form 10-Q/A is being prepared with the benefit of auditor review and will constitute our amended filing.
This Form 10-Q/A has also been updated to reflect disclosure of subsequent events that have occurred after the balance sheet date, but before the issuance of the associated financial statements. The subsequent events included the Company’s decision to exit its underperforming international subsidiaries, exit a significant product line, change its capital structure and focus its efforts on its US-based foil balloon and related product offerings.
For the convenience of the reader, this Form 10-Q/A amends and restates only the following financial statements and disclosures that were impacted from the changes:
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| |
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Except as described above, no other changes have been made to the Original Filing.
Item No. 1. | ||
1 | ||
2 | ||
3 | ||
4 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | |
Item No. 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
Item No. 3 | Quantitative and Qualitative Disclosures Regarding Market Risk | 23 |
Item No. 4 | 23 | |
Item No. 1 | 24 | |
Item No. 1A | 24 | |
Item No. 2 | 24 | |
Item No. 3 | 24 | |
Item No. 4 | 24 | |
Item No. 5 | 24 | |
Item No. 6 | 25 | |
25 | ||
Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 32 |
Condensed Consolidated Balance Sheets |
June 30, 2019 | December 31, 2018 | September 30, 2020 | December 31, 2019 | |||||||||||||
| Restated, Unaudited | Audited | (unaudited) | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents (VIE $2,000 and $57,000, respectively) | $ | 178,298 | $ | 428,150 | ||||||||||||
Accounts receivable, (less allowance for doubtful accounts of $515,000 and $85,000, respectively) | 8,398,010 | 10,830,555 | ||||||||||||||
Inventories, net (VIE $242,000 and $340,000, respectively) | 19,266,094 | 20,007,488 | ||||||||||||||
Prepaid expenses (VIE $106,000 and $127,000, respectively) | 385,399 | 858,158 | ||||||||||||||
Cash and cash equivalents | $ | - | $ | 845,098 | ||||||||||||
Accounts receivable | 5,297,701 | 9,011,569 | ||||||||||||||
Inventories, net | 10,643,911 | 13,959,499 | ||||||||||||||
Prepaid expenses | 633,223 | 353,183 | ||||||||||||||
Other current assets | 1,191,924 | 886,383 | 1,155,266 | 1,312,205 | ||||||||||||
Receivable from related party | 1,026,813 | 1,387,131 | ||||||||||||||
Current assets of discontinued operations | 748,386 | 756,031 | ||||||||||||||
Total current assets | 29,419,724 | 33,010,734 | 19,505,300 | 27,624,716 | ||||||||||||
Property, plant and equipment: | ||||||||||||||||
Machinery and equipment | 23,880,732 | 23,807,985 | 21,796,644 | 23,822,808 | ||||||||||||
Building | 3,374,334 | 3,367,082 | 3,374,334 | 3,374,334 | ||||||||||||
Office furniture and equipment (VIE $303,000 and $303,000, respectively) | 2,685,450 | 2,649,280 | ||||||||||||||
Office furniture and equipment | 2,221,195 | 2,289,444 | ||||||||||||||
Intellectual property | 783,179 | 783,179 | 783,179 | 783,179 | ||||||||||||
Land | 250,000 | 250,000 | 250,000 | 250,000 | ||||||||||||
Leasehold improvements | 413,053 | 409,188 | 390,624 | 415,737 | ||||||||||||
Fixtures and equipment at customer locations | 518,450 | 518,450 | 518,450 | 518,450 | ||||||||||||
Projects under construction | 87,857 | 150,272 | 68,738 | 74,929 | ||||||||||||
31,993,055 | 31,935,436 | 29,403,164 | 31,528,881 | |||||||||||||
Less : accumulated depreciation and amortization (VIE $107,000 and $104,000, respectively) | (28,623,748 | ) | (28,120,455 | ) | ||||||||||||
Less : accumulated depreciation and amortization | (27,397,950 | ) | (28,997,809 | ) | ||||||||||||
Total property, plant and equipment, net | 3,369,307 | 3,814,981 | 2,005,214 | 2,531,072 | ||||||||||||
Other assets: | ||||||||||||||||
Goodwill (VIE $0 and $440,000, respectively) | 0 | 1,473,176 | ||||||||||||||
Net deferred income tax asset | 135,094 | 135,094 | ||||||||||||||
Operating lease right-of-use | 2,127,636 | 359,802 | 1,046,438 | |||||||||||||
Other assets | 174,935 | 326,849 | 78,259 | 118,857 | ||||||||||||
Total other assets | 2,437,665 | 1,935,119 | 438,061 | 1,165,295 | ||||||||||||
TOTAL ASSETS | $ | 35,226,695 | $ | 38,760,834 | $ | 21,948,575 | $ | 31,321,083 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Checks written in excess of bank balance (VIE $2,000 and $7,000, respectively) | $ | 1,030,369 | $ | 636,142 | ||||||||||||
Trade payables (VIE $77,000 and $62,000, respectively) | 8,678,165 | 6,679,670 | ||||||||||||||
Line of credit (VIE $232,000 and $267,000, respectively) | 12,429,643 | 16,582,963 | ||||||||||||||
Bank overdraft | $ | 29,837 | $ | - | ||||||||||||
Trade payables | 6,135,867 | 7,021,580 | ||||||||||||||
Line of credit | 5,613,063 | 14,518,107 | ||||||||||||||
Notes payable - current portion | 4,222,104 | 4,432,320 | 2,467,741 | 3,451,880 | ||||||||||||
Advance from investor | 1,500,000 | - | ||||||||||||||
Notes payable affiliates - current portion | 11,727 | 10,821 | 9,937 | 12,684 | ||||||||||||
Operating Lease Liabilities | 1,154,853 | 0 | 311,678 | 658,374 | ||||||||||||
Accrued liabilities (VIE $35,000 and $89,000, respectively) | 1,285,064 | 1,866,796 | ||||||||||||||
Accrued liabilities | 1,262,139 | 1,205,027 | ||||||||||||||
Current liabilities of discontinued operations | 273,782 | 656,753 | ||||||||||||||
Total current liabilities | 28,811,925 | 30,208,712 | 17,604,044 | 27,524,405 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Notes payable - affiliates | 222,408 | 199,122 | 10,632 | 14,340 | ||||||||||||
Notes payable, net of current portion (VIE $30,000 and $27,000, respectively) | 743,675 | 399,912 | ||||||||||||||
Notes payable, net of current portion | 1,445,683 | 1,024,441 | ||||||||||||||
Operating Lease Liabilities | 972,782 | 48,123 | 388,064 | |||||||||||||
Notes payable - officers, subordinated | 1,027,280 | 1,597,019 | 1,107,080 | 1,058,486 | ||||||||||||
Deferred gain (non current) | 257,348 | 100,340 | - | 184,840 | ||||||||||||
Total long-term liabilities | 2,611,518 | 2,670,171 | ||||||||||||||
Total long-term debt, net of current portion | 3,223,493 | 2,296,393 | ||||||||||||||
Total liabilities | 32,035,418 | 32,505,105 | ||||||||||||||
TOTAL LIABILITIES | 20,215,562 | 30,194,576 | ||||||||||||||
Equity: | ||||||||||||||||
Yunhong CTI, LTD stockholders' equity: | ||||||||||||||||
Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding | - | - | ||||||||||||||
Common stock - no par value, 15,000,000 shares authorized, 3,879,608 shares issued and 3,835,950 shares outstanding | 13,898,494 | 13,898,494 | ||||||||||||||
Stockholders' 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 | ||||||||||||||
Paid-in-capital | 3,461,832 | 2,506,437 | 4,695,658 | 3,587,287 | ||||||||||||
Accumulated earnings | (6,604,052 | ) | (2,865,486 | ) | (13,112,986 | ) | (9,992,841 | ) | ||||||||
Accumulated other comprehensive loss | (5,753,138 | ) | (6,050,347 | ) | (6,640,664 | ) | (5,348,812 | ) | ||||||||
Less: Treasury stock, 43,658 shares | (160,784 | ) | (160,784 | ) | (160,784 | ) | (160,784 | ) | ||||||||
Total CYunhong CTI, LTD stockholders' equity | 4,842,352 | 7,328,314 | ||||||||||||||
Total Yunhong CTI, Ltd Stockholders' Equity | 2,451,652 | 1,983,344 | ||||||||||||||
Noncontrolling interest | (1,651,075 | ) | (1,072,585 | ) | (718,639 | ) | (856,837 | ) | ||||||||
Total Equity | 3,191,277 | 6,255,729 | ||||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 35,226,695 | $ | 38,760,834 | ||||||||||||
Total Stockholders' Equity | 1,733,013 | 1,126,507 | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 21,948,575 | $ | 31,321,083 |
See accompanying notes to condensed consolidated unaudited financial statements |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Restated | Restated | |||||||||||||||||||||||||||||||
Net Sales | $ | 12,406,840 | $ | 15,984,726 | $ | 24,943,229 | $ | 29,963,903 | $ | 5,980,766 | $ | 6,365,352 | $ | 18,793,620 | $ | 24,259,037 | ||||||||||||||||
Cost of Sales | 11,122,253 | 12,189,204 | 21,662,471 | 23,299,990 | 5,719,824 | 6,284,645 | 16,441,524 | 20,925,512 | ||||||||||||||||||||||||
Gross profit | 1,284,587 | 3,795,522 | 3,280,758 | 6,663,913 | 260,942 | 80,707 | 2,352,096 | 3,333,525 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
General and administrative | 1,624,548 | 1,680,490 | 3,472,446 | 3,564,536 | 1,067,122 | 1,167,207 | 3,253,561 | 3,865,527 | ||||||||||||||||||||||||
Selling | 415,038 | 958,796 | 852,603 | 1,817,333 | 31,723 | 55,907 | 112,113 | 285,015 | ||||||||||||||||||||||||
Advertising and marketing | 178,479 | 331,609 | 351,056 | 628,489 | 69,569 | 92,061 | 271,563 | 428,798 | ||||||||||||||||||||||||
Impairment on long-lived assets | 258,566 | 1,511,742 | ||||||||||||||||||||||||||||||
Impairment of long-lived assets | - | - | - | 1,472,382 | ||||||||||||||||||||||||||||
Gain on loss of control of VIEs | - | (218,527 | ) | - | (218,527 | ) | ||||||||||||||||||||||||||
Gain on sale of assets | (23,662 | ) | (22,998 | ) | (47,209 | ) | (47,413 | ) | - | (23,054 | ) | (45,700 | ) | (70,263 | ) | |||||||||||||||||
Total operating expenses | 2,452,969 | 2,947,897 | 6,140,638 | 5,962,945 | 1,168,414 | 1,073,594 | 3,591,537 | 5,762,932 | ||||||||||||||||||||||||
Income (loss) from operations | (1,168,382 | ) | 847,625 | (2,859,880 | ) | 700,968 | ||||||||||||||||||||||||||
Loss from operations | (907,472 | ) | (992,887 | ) | (1,239,441 | ) | (2,429,407 | ) | ||||||||||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||||||||||
Interest expense | (516,161 | ) | (550,780 | ) | (1,063,067 | ) | (1,114,840 | ) | (255,138 | ) | (464,546 | ) | (1,033,240 | ) | (1,493,264 | ) | ||||||||||||||||
Interest income | 11,389 | 11,043 | ||||||||||||||||||||||||||||||
Other (expense) income | (85,481) | - | (394,958) | - | ||||||||||||||||||||||||||||
Gain on forgiveness of Payroll Protection Program Funding | 247,554 | - | 1,047,700 | - | ||||||||||||||||||||||||||||
Other Expense | (15,621 | ) | (82,873 | ) | (387,961 | ) | (485,742 | ) | ||||||||||||||||||||||||
Foreign currency loss | 9,444 | (13,246 | ) | 849 | 17,783 | 15,100 | (25,747 | ) | (169,357 | ) | (27,458 | ) | ||||||||||||||||||||
Total other expense, net | (592,198 | ) | (552,637 | ) | (1,457,176 | ) | (1,086,014 | ) | (8,105 | ) | (573,166 | ) | (542,858 | ) | (2,006,464 | ) | ||||||||||||||||
Net income (loss) before taxes | (1,760,580 | ) | 294,988 | (4,317,056 | ) | (385,046 | ) | |||||||||||||||||||||||||
Loss from continuing operations before taxes | (915,577 | ) | (1,566,053 | ) | (1,782,299 | ) | (4,435,871 | ) | ||||||||||||||||||||||||
Income tax expense (benefit) | 89,281 | (120,202 | ) | |||||||||||||||||||||||||||||
Income tax expense | - | - | - | - | ||||||||||||||||||||||||||||
Net income (loss) | (1,760,580 | ) | 205,707 | (4,317,056 | ) | (264,844 | ) | |||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||||
Net Loss | $ | (1,028,632 | ) | $ | (2,224,571 | ) | $ | (2,981,947 | ) | $ | (6,541,626 | ) | ||||||||||||||||||||
Less: Net (loss) income attributable to noncontrolling interest | (516,102 | ) | (44,497 | ) | (578,490 | ) | (52,040 | ) | (74,692 | ) | (282,985 | ) | 138,198 | (861,475 | ) | |||||||||||||||||
Net income attributable toYunhong CTI, LTD | $ | (1,244,478 | ) | $ | 250,204 | $ | (3,738,566 | ) | $ | (212,804 | ) | |||||||||||||||||||||
Net loss before foreign currency adjustment and Preferred Share Dividends | $ | (953,940 | ) | $ | (1,941,586 | ) | $ | (3,120,145 | ) | $ | (5,680,151 | ) | ||||||||||||||||||||
Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
Foreign currency adjustment | 61,333 | (775,497 | ) | 297,209 | (342,432 | ) | 5,324 | (281,817 | ) | (1,291,852 | ) | 15,603 | ||||||||||||||||||||
Comprehensive Loss | $ | (1,183,145 | ) | $ | (525,293 | ) | $ | (3,441,357 | ) | $ | (555,236 | ) | $ | (1,023,308 | ) | $ | (2,506,388 | ) | $ | (4,273,799 | ) | $ | (6,526,023 | ) | ||||||||
Basic income (loss) per common share | $ | (0.32 | ) | $ | 0.07 | $ | (0.97 | ) | $ | (0.06 | ) | |||||||||||||||||||||
Deemed Dividends on preferred stock and amortization of beneficial conversion feature | $ | (114,561 | ) | $ | - | $ | (2,733,329 | ) | $ | - | ||||||||||||||||||||||
Diluted income (loss) per common share | $ | (0.32 | ) | $ | 0.07 | $ | (0.97 | ) | $ | (0.06 | ) | |||||||||||||||||||||
Net Loss attributable to Yunhong CTI Ltd Shareholders | $ | (1,068,501 | ) | $ | (1,941,586 | ) | $ | (5,853,474 | ) | $ | (5,680,151 | ) | ||||||||||||||||||||
Basic loss per common share | ||||||||||||||||||||||||||||||||
Continuing operations | $ | (0.19 | ) | $ | (0.34 | ) | $ | (1.05 | ) | $ | (0.93 | ) | ||||||||||||||||||||
Discontinued operations | (0.02 | ) | (0.17 | ) | (0.27 | ) | (0.55 | ) | ||||||||||||||||||||||||
Basic loss per common share | $ | (0.21 | ) | $ | (0.51 | ) | $ | (1.32 | ) | $ | (1.48 | ) | ||||||||||||||||||||
Diluted loss per common share | ||||||||||||||||||||||||||||||||
Continuing operations | $ | (0.19 | ) | $ | (0.34 | ) | $ | (1.05 | ) | $ | (0.93 | ) | ||||||||||||||||||||
Discontinued operations | (0.02 | ) | (0.17 | ) | (0.27 | ) | (0.55 | ) | ||||||||||||||||||||||||
Diluted loss per common share | $ | (0.21 | ) | $ | (0.51 | ) | $ | (1.32 | ) | $ | (1.48 | ) | ||||||||||||||||||||
Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||||||||||||||||||||||||||
Basic | 3,835,950 | 3,530,227 | 3,835,950 | 3,530,227 | 4,902,131 | 3,835,950 | 4,426,420 | 3,835,950 | ||||||||||||||||||||||||
Diluted | 3,835,950 | 3,567,315 | 3,835,950 | 3,530,227 | 4,902,131 | 3,835,950 | 4,426,420 | 3,835,950 |
See accompanying notes to condensed consolidated unaudited financial statements |
Condensed Consolidated Statements of Cash Flows (Unaudited) |
For the Six Months Ended June 30, | For the Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Restated | ||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (4,317,056 | ) | $ | (264,844 | ) | $ | (2,981,947 | ) | $ | (6,541,626 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 522,670 | 701,839 | 792,104 | 835,302 | ||||||||||||
Amortization of deferred gain on sale/leaseback | (54,948) | - | (45,700 | ) | (82,422 | ) | ||||||||||
Other | 261,075 | |||||||||||||||
Gain on forgiveness of PPP Funding | (1,047,700 | ) | - | |||||||||||||
Provision for losses on accounts receivable | 393,938 | (55,320 | ) | 20,666 | 399,463 | |||||||||||
Provision for losses on inventories | 1,278,561 | (10,471 | ) | (40,482 | ) | 1,249,519 | ||||||||||
Impairments of Prepaids, Current & Non Current Assets | 168,931 | |||||||||||||||
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 | (29,386 | ) | - | 1,252,283 | |||||||||||
Stock based compensation | 52,396 | 105,745 | ||||||||||||||
Deferred income taxes | (90,206 | ) | ||||||||||||||
Loss on disposition of asset | 17,480 | |||||||||||||||
Stock Based Compensation | - | 72,401 | ||||||||||||||
Loss on disposition of Asset | - | 17,480 | ||||||||||||||
Change in assets and liabilities: | ||||||||||||||||
Accounts receivable | 2,162,480 | (671,380 | ) | 2,915,506 | 2,776,396 | |||||||||||
Inventories | (474,804 | ) | (483,573 | ) | 2,314,744 | 1,435,411 | ||||||||||
Prepaid expenses and other assets | 530,172 | 115,988 | (289,820 | ) | 228,389 | |||||||||||
Operating Lease Liability | (470,771 | ) | - | |||||||||||||
Trade payables | 1,998,495 | 800,813 | (852,231 | ) | 1,892,670 | |||||||||||
Accrued liabilities | (593,960 | ) | (285,976 | ) | 330,695 | (166,823 | ) | |||||||||
Net cash provided by (used in) operating activities | 3,197,713 | (166,771 | ||||||||||||||
Net cash provided by operating activities | 995,064 | 4,172,297 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property, plant and equipment | (72,662 | ) | (18,193 | ) | (139,708 | ) | (144,222 | ) | ||||||||
Net cash (used in) investing activities | (72,662 | ) | (18,193 | ) | ||||||||||||
Net cash used in investing activities | (139,708 | ) | (144,222 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Change in checks written in excess of bank balance | 394,227 | (445,854 | ) | 29,837 | (391,313 | ) | ||||||||||
Net change in revolving line of credit | (4,160,724 | ) | 1,699,201 | |||||||||||||
Repayment of long-term debt | (554,768 | ) | (768,003 | ) | ||||||||||||
Cash paid for deferred financing fees | (55,170) | (59,530 | ) | |||||||||||||
Repayment of debt and revolving line of credit | (10,158,387 | ) | (4,721,867 | ) | ||||||||||||
Advance from investor | 1,500,000 | |||||||||||||||
Proceeds from issuance of stock | 5,426,601 | - | ||||||||||||||
Cash paid for stock issuance costs | (1,024,313 | ) | - | |||||||||||||
Amortization of deferred financing fees | 64,887 | (82,763 | ) | |||||||||||||
Proceeds from PPP | 1,047,700 | - | ||||||||||||||
Proceeds from issuance of long-term debt | 650,000 | 876,791 | 650,000 | |||||||||||||
Net cash provided by (used in) financing activities | (3,726,435 | ) | 425,814 | |||||||||||||
Net cash used in financing activities | (2,236,884 | ) | (4,545,943 | ) | ||||||||||||
Effect of exchange rate changes on cash | 351,532 | 30,950 | 536,430 | 205,692 | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | (249,852 | ) | 271,800 | |||||||||||||
Net decrease in cash and cash equivalents | (845,098 | ) | (312,176 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | 428,150 | 181,026 | 845,098 | 428,150 | ||||||||||||
Cash and cash equivalents at end of period | $ | 178,298 | $ | 452,826 | $ | - | $ | 115,974 | ||||||||
$ | - | $ | - | |||||||||||||
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 | $ | 1,045,943 | $ | 934,231 | $ | 1,033,350 | $ | 1,558,817 | ||||||||
Cash payments for taxes | $ | 300,000 | ||||||||||||||
Common stock issued for accounts payable | $ | 303,000 | $ | - | $ | - | $ | 303,000 | ||||||||
Common stock issued for notes payable | $ | 600,000 | $ | - | ||||||||||||
Conversion of debt to Series A Preferred | $ | 478,000 | $ | - | ||||||||||||
Accrued Dividend on preferred stock | $ | 255,000 | $ | - | ||||||||||||
Issuance of Placement agent warrants in connection with Series A Preferred offering | $ | 919,000 | $ | - | ||||||||||||
Issuance of Common stock to placement agent | $ | 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 |
See accompanying notes to condensed consolidated unaudited financial statements |
Consolidated Statements of Stockholders' Equity |
Yunhong CTI, LTD | ||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Other | Less | |||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Treasury Stock | Noncontrolling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | (Deficit) 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 | 120,000 | 303,000 | 303,000 | |||||||||||||||||||||||||||||||||
Stock Option Expense | 52,396 | 52,396 | ||||||||||||||||||||||||||||||||||
Net Income | (3,738,566 | ) | (578,490 | ) | (4,317,056 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | - | |||||||||||||||||||||||||||||||||||
Foreign currency translation | 297,209 | 297,209 | ||||||||||||||||||||||||||||||||||
Balance June 30, 2019, restated | 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 |
Yunhong CTI, Ltd | ||||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
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, 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 | ||||||||||||||||||||
Convertible Preferred Stock Issuance - cash | 362,660 | 3,509,933 | 140,000 | 116,667 | - | - | - | - | - | - | 3,626,600 | |||||||||||||||||||||||||||||||||
Convertible Preferred Stock Issuance - conversion of debt | 48,200 | 478,017 | - | - | - | - | - | - | - | - | 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 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
Placement agent fees and issuance costs | - | (820,160 | ) | - | - | - | - | - | - | - | - | (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 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||
Net Loss | - | - | - | - | - | (638,696 | ) | - | - | - | 144,577 | (494,119 | ) | |||||||||||||||||||||||||||||||
Foreign Currency Translation | - | - | - | - | - | - | (1,363,503 | ) | - | - | - | (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 | ||||||||||||||||||||
Convertible Preferred Stock Issuance - cash | 180,000 | 1,583,334 | 260,000 | 216,667 | - | - | - | - | - | - | 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 | ) | |||||||||||||||||||||||||||||||
Foreign Currency Translation | - | - | - | - | - | - | 66,327 | - | - | - | 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 | |||||||||||||||||||||
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 |
See accompanying notes to condensed consolidated unaudited financial statements |
Yunhong CTI Ltd. (formerly CTI Industries Corporation) and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed (a) consolidated balance sheet as of December 31, 2018,September 30, 2020, which has been derived from auditedunaudited consolidated financial statements, 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-Q and Article 8 of Regulation 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 sixnine months ended JuneSeptember 30, 20192020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.2020. 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-K for the fiscal year ended December 31, 2018.2019.
Principles of consolidation and nature of operations:
The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd. (formerly CTI Industries Corporation) and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexoformer United Kingdom subsidiary (CTI Balloons Limited), its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), its German subsidiary (CTI Europe GmbH) and CTI Europe gmbH, as well asSupply, Inc. (collectively, the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C“Company”) (i) design, manufacture and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactionsdistribute metalized and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributeslatex balloon and related novelty (candy and party related) products throughout the world and (ii) operatesoperate 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, and (iii) distributes vacuum sealing products and home organization productsproducts. As discussed in Note 2 Discontinued Operations, effective in the United States. We have announced our intention to divest our interestthird quarter of 2019, the Company determined that it was exiting CTI Balloons Limited (“CTI Balloons”) and CTI Europe GmbH (“CTI Europe”). CTI Balloons has been fully liquidated as of the fourth quarter 2019.Accordingly, the operations of these entities are classified as discontinued operations in these financial statements.
The 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 and deconsolidate that entity from our group. As we are still the entity most closely associated with Clever Container in our related party group as of June 30, 2019, it remainsCompany, L.L.C. “Clever”). The last three entities have been consolidated as a variable interest entity.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. There are three entities that have been consolidated as variable interest entities.
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 condensed consolidated 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 amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenuerevenues and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reservesvaluation allowances for doubtful accounts, reserves for the lower of cost or market of inventory reserves forvaluation, deferred tax assets, goodwill and intangible asset 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 valueand condition of goodwill.the broader market after COVID-19 related shutdowns and limitations.
Earnings per share:
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
As of JuneSeptember 30, 20192020 and 2018,2019, shares to be issued upon the exercise of options and warrants aggregated 479,802 and 471,144, for each period.respectively. The number of shares included in the determination of earnings on a diluted basis for the three months ended JuneSeptember 30, 20192020 and 20182019 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, 2018.2019. There were no significant changes to these accounting policies during the three or sixnine months ended JuneSeptember 30, 2019, except for the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.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.
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.
Auditor Replacement Process:
During April 2019, our independent registered accounting firm, Plante & Moran PLLC, declined to stand for reappointment as auditor. As of January 3rd, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31st, 2019. Previously, the quarterly report on Form 10-Q was prepared without the benefit of auditor review. This Form 10-Q/A is filed with review from RBSM.
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.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02 Leases (Topic 842), also referred to as “ASC 842” or “New Lease Standard”, which supersedes ASC 840 Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance through the issuance of additional ASUs. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less may be accounted for similar to existing guidance for operating leases. ASC 842 was effective for the Company for the year ending December 31, 2019. We reported our financial information for fiscal years ending before December 31, 2018 under the Topic 840 lease accounting standard. The Company applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019 as the date of initial application. The Company recognized the cumulative effect of the transition adjustment as of the effective date and will not provide any new lease disclosures for periods before the effective date. The Company elected the package of practical expedients and did not elect the use of the hindsight practical expedient. As a result, the Company will, in effect, continue to account for existing leases as classified in accordance with ASC 840, throughout the entire lease term, including periods after the effective date, with the exception that the Company will apply the new balance sheet recognition guidance for operating leases and apply ASC 842 for remeasurements and modifications after the transition date.
Other key practical expedients elected by the Company (as a lessee) relate to maintaining leases with an initial term of 12 months or less off the balance sheet; not separating lease and non-lease components and the use of the portfolio approach to determine the incremental borrowing rate. For transition purposes, the Company used the incremental borrowing rate based on the total lease term and total minimum rental payments. The Company completed its identification of leases which comprised two building leases and two equipment leases. Further, the Company analyzed service contracts and parts assembly arrangements from suppliers and did not identify any material leases of production equipment. On the date of initial application, the Company recognized right-of-use ("ROU") assets and leasing liabilities on its condensed consolidated balance sheets of approximately $2.8 million. The adoption had no significant impact on the Company's condensed consolidated statement of operations.
Note 2 – Liquidity and Going Concern
The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the Credit Agreement with PNC Bank, National Association (“PNC”) (see Note 3). As indicated in Note 3, twice during 2018 we violated covenants in our credit facility and as of March 2019 we entered into a forbearance agreement with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but we remain 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. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to 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.
In addition to the above, due to financial performance in 2016, 2017 and 2018, including net income/(losses) attributable to the Company of $0.7 million, ($1.6 million), and ($3.6 million), respectively, we believe that substantial doubt about our ability to continue as a going concern exists at June 30, 2019.
Additionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs. These changes in cash flows have created strain within our operations and have therefore increased our desire to incorporate additional funding resources.
Management’s plans include:
(1) Pursuing a strategically significant major capital event.
(2) Working with our bank to resolve our compliance failure on a long-term basis.
(3) Evaluating and potentially executing a sale/leaseback transaction of our facility in Lake Barrington, IL.
(4) Continuing to monitor the equity market for the potential to complete the transaction attempted during 2018, and
(5) Exploring alternative funding sources.
Management Assessment
Considering both quantitative and qualitative information, we continue to believe that our plans to obtain additional financing will provide us with an ability to finance our operations through 2019 and, if adequately executed, will mitigate the substantial doubt about our ability to continue as a going concern.
Note 3 - Debt
During December 2017, we terminated a prior credit arrangement and entered in new financing 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 Yunhong CTI, LTD (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 remain out of compliance 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 Yunhong CTI, LTD (U.S.) and Flexo Universal (Mexico).
Certain terms of the PNC Agreements include:
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Fiscal Quarter Ratio
December 31, 2017 | 4.75 | to | 1.00 | ||
June 30, 2018 | 4.50 | to | 1.00 | ||
June 30, 2018 | 4.25 | to | 1.00 | ||
September 30, 2018 | not applicable | ||||
December 31, 2018 | 3.50 | to | 1.00 | ||
March 31, 2019 | not applicable | ||||
June 30, 2019 | 3.00 | to | 1.00 | ||
September 30, 2019 and thereafter | 2.75 | to | 1.00 |
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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 also entered into a swap agreement with PNC Bank to fix the rate of interest for $3 million of the notes over 3 years at 2.25%. This contract was made at market value upon December 14, 2017 execution and accounted for as a hedge. This contract terminated during 2019 under the terms of the forbearance agreement.
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 2, 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 2018 or the three or six months ended June 30, 2019, with $15,000 and $30,000, respectively, of interest recorded as an expense.
Note 4 - 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 to be applied, the estimated dividend yield and expected volatility 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 2019 and 2018. The expected volatility is based on historical volatility of the Company’s common stock.
The Company’s net loss for the three and six months ended June 30, 2019 and 2018 includes approximately $23,000 and $44,000, respectively, in 2019 and $52,000 and $172,000, respectively, of compensation costs related to share based payments. As of June 30, 2019, there was $140,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $40,000 of additional stock-based compensation expense to be recognized over the remainder of 2019, and $56,000 to be recognized during 2020.
On April 10, 2009, the Board of Directors 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 authorizes 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 June 30, 2019, options for 471,144 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, 2018 | 471,144 | $ | 3.95 | |||||
Granted | - | - | ||||||
Cancelled/Expired | - | - | ||||||
Exercised/Issued | - | - | ||||||
Outstanding at June 30, 2019 | 471,144 | $ | 3.95 | |||||
Exercisable at June 30, 2019 | 165,264 | $ | 4.05 |
The instruments above have an aggregate intrinsic value of $80,000, which represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended June 30, 2019 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 June 30, 2019.
As described in Note 5, we issued 20,000 shares of common stock to Gary Page in a legal settlement during January 2019. The value of those shares on the date of issuance was approximately $67,000. We issued 100,000 shares of common stock to a longtime sales representative during May 2019, which, at then market value, was in lieu of approximately $303,000 of earned cash compensation.
On January 11, 2019, the Company and its Chairman, Mr. John Schwan, completed an exchange debt for equity upon receipt of consent for the transaction from the Company’s lender. Mr. Schwan surrendered $600,000 in notes from the Company in exchange for 180,723 shares of the Company’s common stock. The value was set at the $3.32 per share closing price of the Company’s common stock on the NASDAQ stock market on December 20, 2018.
Note 5 - 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.2 – Discontinued Operations
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 Company accrued the $0.3 million in committed costs under this settlement in its December 31, 2018 financial statements.
Note 6 - Other Comprehensive Income
In the three and six months ended June 30, 2019, the Company incurred other comprehensive income of approximately $297,000, all from foreign currency translation adjustments.
The following table sets forth the accumulated balance of other comprehensive income and each component.
Foreign Currency Items | Total Accumulated Other Comprehensive Income | |||||||
Beginning balance as of January 1, 2019 | $ | (6,050,347 | ) | $ | (6,050,347 | ) | ||
Current period change, net of tax | 297,209 | 297,209 | ||||||
Ending Balance as of June 30, 2019 | (5,753,138 | ) | (5,753,138 | ) |
Note 7 - Inventories, Net
June 30, 2019 | December 31, 2018 | |||||||
Raw materials | $ | 2,085,908 | $ | 1,994,741 | ||||
Work in process | 3,057,682 | 3,052,224 | ||||||
Finished goods | 15,508,804 | 14,934,581 | ||||||
In Transit | 293,136 | 480,716 | ||||||
Allowance for excess quantities | (1,679,438 | ) | (454,774 | ) | ||||
Total inventories | $ | 19,266,094 | $ | 20,007,488 |
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 operations by geographic area is as follows:
Net Sales to Outside Customers | Net Sales to Outside Customers | |||||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
United States | $ | 9,095,000 | $ | 12,075,000 | $ | 17,855,000 | $ | 21,813,000 | ||||||||
Europe | $ | 1,083,000 | 1,275,000 | $ | 2,358,000 | 2,637,000 | ||||||||||
Mexico | $ | 2,022,000 | 2,378,000 | $ | 4,103,000 | 4,564,000 | ||||||||||
United Kingdom | $ | 207,000 | 257,000 | $ | 627,000 | 950,000 | ||||||||||
$ | 12,407,000 | $ | 15,985,000 | $ | 24,943,000 | $ | 29,964,000 |
Total Assets at | ||||||||
June 30, December 31, | ||||||||
2019 | 2018 | |||||||
United States | $ | 20,839,000 | $ | 25,354,000 | ||||
Europe | $ | 2,118,000 | 3,052,000 | |||||
Mexico | $ | 11,490,000 | 9,476,000 | |||||
United Kingdom | $ | 780,000 | 879,000 | |||||
$ | 35,227,000 | $ | 38,761,000 |
Note 9 - 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 three and six months ended June 30, 2019 and 2018, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively. Sales to these customers for the three ended June 30, 2019 and 2018 are as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 4,179,000 | 34 | % | $ | 4,871,000 | 30 | % | ||||||||
Customer B | $ | 2,769,000 | 22 | % | $ | 3,660,000 | 23 | % |
Sales to these customers for the six months ended June 30, 2019 and 2018 are as follows:
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 6,337,000 | 25 | % | $ | 7,343,000 | 24 | % | ||||||||
Customer B | $ | 6,630,000 | 27 | % | $ | 8,110,000 | 27 | % |
As of June 30, 2019, the total amounts owed to the Company by these customers were approximately $2,488,000 or 30%, and $1,044,000 or 12%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at June 30, 2018 by these customers were approximately $4,808,000 or 57%, and $1,524,000 or 18% of the Company’s consolidated net accounts receivable, respectively.
Note 10 - Related Party Transactions
Stephen M. Merrick, Chief Executive Officer of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which used to provide legal services to the Company. Legal fees paid by the Company to this firm for the three months ended June 30, 2019 and 2018, respectively, were none and $16,000. Legal fees paid by the Company to this firm for the six months ended June 30, 2019 and 2018, respectively, were none and $88,000.
John H. Schwan, through an investment entity, and Stephen M. Merrick, Chief Executive Officer of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). During the three months ended June 30, 2019 and 2018, Clever Container purchased various products from the Company in the amount of $1,000 and $259,000, respectively. During the six months ended June 30, 2019 and 2018, Clever Container purchased various products from the Company in the amount of $63,000 and $442,000, respectively. As of June 30, 2019 and 2018, the balance of accounts receivable from Clever Container to the Company were $1,379,000 and $1,199,000, respectively. The Company owns a 28.5% interest in Clever Container, though has announced the intention to divest its interest in Clever Container.
Note 11-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-one matching of the derivative instrument to our underlying transaction. As of June 30, 2019 and December 31, 2018, we had one derivative instrument accounted for as a hedge, with the same instrument accounted for as a hedge as of June 30, 2018. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in the consolidated statement of operations. We have no such derivative financial instruments as of December 31, 2018. Changes in fair value for the respective periods were recognized in the consolidated statement of operations.
The interest rate swap we entered into December 14, 2017 had a three year term (ending December 14, 2020) and a notional amount of $3 million. The Company purchased a 2.25% fixed rate in exchange for the variable rate on a portion of the notes payable under the PNC Agreements, which was 1.47% at time of execution. The fair value of the swap was insignificant as of June 30, 2018 and December 31, 2018 and June 30, 2019. This instrument was terminated during 2019 as a result of the forbearance agreement entered into during March 2019.
Note 12-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.
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 amortizable lives of operating and financing leased assets are limited by the expected lease term. The Company's leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating and financing lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralize basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for leases that commenced prior to that date.
The table below describes our lease position as of June 30, 2019:
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Operating lease expense were approximately $379,000 for the three months and $758,000 for the six months ended June 30, 2019. 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 $361,000 for the three months and $722,000 for the six months ended June 30, 2019.
The following table summarizes the maturities of our lease liabilities for all operating leases as of June 30, 2019 | |
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(in thousands) | 06/30/2019 |
2019 | 829 |
2020 | 724 |
2021 | 757 |
2022 and thereafter | 167 |
Total lease payments | 2,477 |
less: Imputed interest | -349 |
Present value of lease liabilities | 2,128 |
Note 13 - Summary of Subsequent Events
In July of 2019 management and the Board engaged in a review of the Company’s international subsidiariesCTI 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 Boardboard authorized management to divest of all international subsidiaries. The Company divested its United Kingdom subsidiary in the fourth quarter 2019CTI Balloons and expects to divest its European (German) and Mexican subsidiaries in the first half of 2020. The operations of these entities will be presented as discontinued operations in the third quarter 2019, the period in which they met the accounting criteria for discontinued operations.CTI Europe. These actions are being 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 United States. 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.
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. For the three months ended March 31, 2019, we had revenue of $2.2 million associated with products which utilized the Ziploc® trademark. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis. However, as we continued to utilize the Ziploc® related assets in 2020, those assets will not be considered abandoned until they cease to be used at the end of the first quarter of 2020. Therefore, our Ziploc® operations cannot be classified as discontinued operations in these financial statements but will bebasis therefore, this product line has been presented as discontinued operations.
CTI Balloons recorded losses from discontinued operations, when allnet 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 for the nine months ended September 30, 2020. The net losses, net of taxes, were ($566,000) and ($1,735,000) for the three and nine month periods ended September 30, 2019, respectively.
Our Ziploc product line recorded a loss from discontinued operations, net of taxes of ($37,000) for the three months ended September 30, 2020, compared to a 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 for the three months ended September 30, 2019 compared to a gain from discontinued operations, net of taxes of $625,000 for the nine-month period ended September 30, 2019, 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 Consolidated Statements of 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 |
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 Consolidated Statements of Income for the nine 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 | ) |
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the applicable accounting criteriaperiods presented:
Yunhong CTI Ltd. |
Consolidated Balance Sheet |
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 met.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 primary sources of liquidity are cash and cash equivalents as well as availability under the credit agreement with PNC Bank, National Association (“PNC”) (the “Credit Agreement”) (see Note 4). As indicated in Note 4, twice during 2018 we violated covenants in our credit facility and during March 2019 we entered into a forbearance agreement with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but we remained 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. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to 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 forbearance agreement with PNC (“Amendment 4”). Identified events of default were waived until January 10, 2020 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 Defaults afforded to PNC under the Loan Agreement for a period ending no later than December 31, 2020.
During 2019, we attempted to execute a major capital event with a partner that would infuse money, among other attributes. That effort was unsuccessful as envisioned. We have also dramatically changed our capital structure.were subsequently successful in obtaining new financing during 2020. On January 3, 2020 we entered into a securities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte.Pte Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company directorChairman Mr. Yubao Li, pursuant to which the Company agreedwe sold to issue and sell, and LF International agreed to purchase, up to 500,000 shares of the Company’s newly createdour 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 (the “LF International Offering”). As a result of the LF International Offering, a change of control of the Company may occur. As permitted by the LF 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 to additional investors (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 aggregate gross proceeds of $2,500,000.$5,000,000. Pursuant to the LF Purchase Agreement, LF International received the rightwe were authorized to nominate and elect one member to the Company’s board of directors (subject to certain adjustments), effective as of the first closing, as well as a second director by the earlier of (i) the Company’s upcoming 2020 annual meeting of shareholders and (ii) May 15, 2020 and a third director by the Company’s upcoming 2020 annual meeting of shareholders. 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. To date, the Company has sold 492,660sell an additional $2 million shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceedsunder similar financial terms, approximately $1 million of $4,926,600. Additionally, on April 1,which has been sold as of September 30, 2020, including to an investor which converted an accounts receivable of $482,000$478,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. OurThere were 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 had 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 operations may be negatively impactedsubsidiaries, 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 spread of COVID-19. We sell our products throughout the United States andhelium market during 2019. These changes in many foreign countries and may be impacted by public health crises beyond our control. This could disruptcash flows have created very significant strain within our operations and negatively impact sales ofhave therefore increased our products. Our customers, suppliers and distributors may experience similar disruption. 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:
(1) | Working with our new investor group to expand our business in profitable ways. |
(2) | Working with our bank to resolve our compliance failure on a long-term basis. |
(3) | Relocating our existing operation in Lake Zurich, IL to a lower cost environment in Laredo, TX and Nuevo Laredo, Mexico. |
(4) | Evaluating and potentially executing a transaction of our facility in Lake Barrington, IL. |
(5) | Simplifying our group structure, focusing on the most profitable products and markets, and |
(6) | Exploring alternative funding sources. |
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:
● | Restrictive Covenants: The Credit Agreement includes several restrictive 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: The Credit Agreement includes a series of financial covenants we are required to meet including: |
o | We were required to maintain a "Leverage Ratio", which is defined as the ratio of (a) Funded Debt (other than the Shareholder Subordinated Loan) as of such date of determination to (b) EBITDA (as defined in the PNC Agreements) for the applicable period then ended. This requirement was removed during the January 2020 Amendment 5. |
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
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. 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 nine months ending September 30, 2020 the Company accrued $255,341 of these dividends.
During the three months ended September 30, 2020, 332,000 shares of the Company’s common stock were issued upon the exercise of 500,000 warrants. During 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 satisfaction of the accrued dividend on the preferred shares.
In 2020, the Company issued 15,000 shares to its former president in satisfaction of his stock compensation plan which accelerated upon his resignation.
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.
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.
During 2019 and 2020, claims have been filed against us claiming failure to pay contractually obligated amounts. Approximately $760,000 in aggregate claims are outstanding as of September 30, 2020. These claims are being disputed, the ultimate outcome of which is unknown.
FedEx Trade Networks Transport sought $163,965 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 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.
Note 7 - Other Comprehensive Income
In the nine months ended September 30, 2020, the Company incurred other comprehensive loss of approximately $1,292,000 from foreign currency translation adjustments. The main contributing factor was a sudden approximate 25% decline in the valuation of the Mexican peso related to the COVID-19 pandemic discussed above and 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 | ||||||||
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2020 | 2019 | |||||||
United States | $ | 14,718,000 | $ | 17,911,000 | ||||
Mexico | 4,076,000 | 6,348,000 | ||||||
$ | 18,794,000 | $ | 24,259,000 |
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 149 -Impairment – Inventories, Net of Continuing Operations
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 |
In connection with management’s intentions to simplify our operations and organizational structure, we identified impairments of $2.9 million related to our two European sales subsidiaries and Clever Container. In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Flexo. The impairment charge was comprised of the following: $1.25 inventory write-off, $66,000 allowance for doubtful accounts; $1.3M impairment of goodwill; and $280,000 impairment of additional long-lived assets.
Note 15 – Restatement10 - Concentration of Financial StatementsCredit 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 nine months ended September 30, 2020 and 2019, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to this customer for the nine months ended September 30, 2020 and 2019 are as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2020 | September 30, 2019 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 3,737,000 | 63 | % | $ | 1,559,000 | 25 | % |
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2020 | September 30, 2019 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 9,412,000 | 50 | % | $ | 8,890,000 | 37 | % |
As of January 3,September 30, 2020, the Audit Committeetotal amounts owed to the Company by this customer were approximately $1,724,000 or 33% of the Company’s consolidated net accounts receivable. The amounts owed at September 30, 2019 by this customer was approximately $831,000 or 16% of the Company’s consolidated net accounts receivable.
Note 11 - Related Party Transactions
John H. Schwan, who resigned as Chairman of the Board approvedon June 1, 2020, is the engagementbrother of RBSM, LLP (“RBSM”) asGary Schwan, one of the Company’s independent registered public accounting firmowners of Schwan Incorporated, which provides building maintenance services to the Company. The Company made payments to Schwan Incorporated of approximately $2,700 and $12,000 during the nine months ended September 30, 2020 and 2019, respectively. 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, for the Company’s fiscal year endedCompany of $1.6 million as of December 31, 2019. This Form 10-Q/A is being prepared with2018. During January 2019 he converted $0.6 million to equity at the benefitthen market price of auditor reviewour stock. Including accrued interest, his balance was $1.1 million as of September 30, 2020. During the first nine months of 2020 and will constitute our amended filing.2019, interest expense on these outstanding loans was $49,000 and $46,000, respectively.
This Form 10-Q/A has also been updatedItems identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of September 30, 2020 and 2019 include loans by shareholders to reflect disclosureFlexo Universal totaling $20,000 and $12,000, respectively.
On July 1, 2019, the Company deconsolidated Clever which resulted in a note receivable at that time of subsequent events$1.387 million. During the nine months ended September 30, 2020 the Company recorded a reserve of $350,000. One of owners of Clever is Mr. Schwan, above. The balance as of September 30, 2020 amounted to $1,026,813.
Note 12-Derivative Instruments; Fair Value
The Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that have occurred afterall derivative instruments be recognized on the balance sheet date, but beforeat fair value. We may enter into interest rate swaps to fix the issuanceinterest 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-one matching of the associated financial statements. The subsequent events include the Company’s decisionderivative instrument to exit its underperforming international subsidiaries, exit a significant product line, change its capital structure and focus its efforts on its US-based foil balloon and related product offerings. our underlying transaction. As of September 30, 2020, we had no such instrument.
The company had previously included a non-cash charge
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 $3,000,000 during the second quarterpractical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of 2019 in anticipationwhether contracts are (or contain) leases, as well as lease classification tests and treatment of the divestiture or liquidation of European Sales entitiesinitial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and Clever Container. This Form 10-Q/A has had this reserve replaced by detailed calculations. Based on this detailed calculation herein we believe the magnitude of the initial charge was appropriate. The changeexclude variable lease payments in the statement in equity was related to themeasurement of right-of-use assets and lease obligations.
Upon adoption of ASC 842 we recorded a $2.8 million increase in net gainother 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 $237,000ASC 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 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 corresponding decreaseConsolidated Balance Sheets. However, the Company recognized these lease payments in stockholders’ equity atthe Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period end.in which the expense was incurred.
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.
|
|
June 30, 2019 | ||||||||||||
| As Previously Reported | Adjustments | As Restated | |||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents (VIE $2,000 and $57,000, respectively) | $ | 178,298 | $ | - | $ | 178,298 | ||||||
Accounts receivable, (less allowance for doubtful accounts of $515,000 and $85,000, respectively) | 8,884,291 | (486,281 | ) | 8,398,010 | ||||||||
Inventories, net (VIE $242,000 and $340,000, respectively) | 20,519,240 | (1,253,146 | ) | 19,266,094 | ||||||||
Prepaid expenses (VIE $106,000 and $127,000, respectively) | 394,797 | (9,398 | ) | 385,399 | ||||||||
Other current assets | 1,342,896 | (150,972 | ) | 1,191,924 | ||||||||
Total current assets | 31,319,522 | (1,899,798 | ) | 29,419,724 | ||||||||
Property, plant and equipment: | ||||||||||||
Machinery and equipment | 23,880,732 | 23,880,732 | ||||||||||
Building | 3,374,334 | 3,374,334 | ||||||||||
Office furniture and equipment (VIE $303,000 and $303,000, respectively) | 2,685,450 | 2,685,450 | ||||||||||
Intellectual property | 783,179 | 783,179 | ||||||||||
Land | 250,000 | 250,000 | ||||||||||
Leasehold improvements | 413,053 | 413,053 | ||||||||||
Fixtures and equipment at customer locations | 518,450 | 518,450 | ||||||||||
Projects under construction | 180,955 | (93,098 | ) | 87,857 | ||||||||
32,086,153 | (93,098 | ) | 31,993,055 | |||||||||
Less : accumulated depreciation and amortization (VIE $107,000 and $104,000, respectively) | (28,657,592 | ) | 33,844 | (28,623,748 | ) | |||||||
- | ||||||||||||
Total property, plant and equipment, net | 3,428,561 | (59,254 | ) | 3,369,307 | ||||||||
Other assets: | ||||||||||||
Goodwill (VIE $0 and $440,000, respectively) | 1,473,176 | (1,473,176 | ) | |||||||||
Net deferred income tax asset | 539,305 | (404,211 | ) | 135,094 | ||||||||
Operating lease right-of-use | 1,872,470 | 255,165 | 2,127,636 | |||||||||
Other non-current assets | (3,000,000 | ) | 3,000,000 | |||||||||
Other assets | 15,274 | 159,661 | 174,935 | |||||||||
- | ||||||||||||
Total other assets | 900,225 | 1,537,439 | 2,437,665 | |||||||||
- | ||||||||||||
TOTAL ASSETS | $ | 35,648,308 | $ | (421,613 | ) | $ | 35,226,695 | |||||
LIABILITIES AND EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Checks written in excess of bank balance (VIE $2,000 and $7,000, respectively) | $ | 1,030,369 | $ | 1,030,369 | ||||||||
Trade payables (VIE $77,000 and $62,000, respectively) | 8,678,165 | 8,678,165 | ||||||||||
Line of credit (VIE $232,000 and $267,000, respectively) | 12,429,643 | 12,429,643 | ||||||||||
Notes payable - current portion | 4,522,104 | (300,000 | ) | 4,222,104 | ||||||||
Notes payable affiliates - current portion | 11,727 | 11,727 | ||||||||||
Operating Lease Liabilities | 1,005,650 | 149,203 | 1,154,853 | |||||||||
Accrued liabilities (VIE $35,000 and $89,000, respectively) | 1,705,380 | (420,316 | ) | 1,285,064 | ||||||||
- | ||||||||||||
Total current liabilities | 29,383,038 | (571,113 | ) | 28,811,925 | ||||||||
Long-term liabilities: | ||||||||||||
Notes payable - affiliates | 222,408 | 222,408 | ||||||||||
Notes payable, net of current portion (VIE $30,000 and $27,000, respectively) | 443,675 | 300,000 | 743,675 | |||||||||
Operating Lease Liabilities | 866,820 | 105,962 | 972,782 | |||||||||
Notes payable - officers, subordinated | 1,027,280 | - | 1,027,280 | |||||||||
Deferred gain (non current) | 257,348 | - | 257,348 | |||||||||
Total long-term debt, net of current portion | 2,817,531 | 405,962 | 3,223,493 | |||||||||
- | ||||||||||||
Total liabilities | 32,200,569 | (165,151) | 32,035,418 | |||||||||
Equity: | ||||||||||||
Yunhong CTI, LTD stockholders' equity: | ||||||||||||
Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding | ||||||||||||
Common stock - no par value, 15,000,000 shares authorized, 3,879,608 shares issued and 3,835,950 shares outstanding | 13,898,494 | 13,898,494 | ||||||||||
Paid-in-capital | 3,461,832 | 3,461,832 | ||||||||||
Accumulated earnings | (6,840,594 | ) | 236,542 | (6,604,052 | ) | |||||||
Accumulated other comprehensive loss | (5,753,138 | ) | (5,753,138 | ) | ||||||||
Less: Treasury stock, 43,658 shares | (160,784 | ) | (160,784 | ) | ||||||||
Total Yunhong CTI, LTD stockholders' equity | 4,605,810 | 236,542 | 4,842,352 | |||||||||
Noncontrolling interest | (1,158,071 | ) | (493,004 | ) | (1,651,075 | ) | ||||||
Total Equity | 3,447,739 | (256,462 | ) | 3,191,277 | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 35,648,308 | $ | (421,613 | ) | $ | 35,226,695 |
|
|
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||
2019 | 2019 | 2019 | 2019 | |||||||||||||||||||||
As Previously Reported | Adjustments | As Restated | As Previously Reported | Adjustments | As Restated | |||||||||||||||||||
Net Sales | $ | 12,406,840 | $ | - | $ | 12,406,840 | $ | 24,943,229 | $ | - | $ | 24,943,229 | ||||||||||||
- | - | |||||||||||||||||||||||
Cost of Sales | 9,869,107 | 1,253,146 | 11,122,253 | 20,409,325 | 1,253,146 | 21,662,471 | ||||||||||||||||||
- | - | |||||||||||||||||||||||
Gross profit | 2,537,733 | (1,253,146 | ) | 1,284,587 | 4,533,904 | (1,253,146 | ) | 3,280,758 | ||||||||||||||||
- | ||||||||||||||||||||||||
Operating expenses: | - | |||||||||||||||||||||||
General and administrative | 1,531,125 | 93,423 | 1,624,548 | 3,587,197 | (114,751) | 3,472,446 | ||||||||||||||||||
Selling | 415,038 | - | 415,038 | 852,603 | - | 852,603 | ||||||||||||||||||
Advertising and marketing | 270,355 | (91,876) | 178,479 | 544,235 | (193,179) | 351,056 | ||||||||||||||||||
Impairment on long-lived assets | 258,566 | 258,566 | 1,511,742 | 1,511,742 | ||||||||||||||||||||
Gain on sale of assets | (23,662 | ) | - | (23,662 | ) | (47,209 | ) | - | (47,209 | ) | ||||||||||||||
Total operating expenses | 2,192,856 | 260,113 | 2,452,969 | 4,936,826 | 1,203,812 | 6,140,638 | ||||||||||||||||||
- | ||||||||||||||||||||||||
Income from operations | 344,877 | (1,513,259 | ) | (1,168,382 | ) | (402,922 | ) | (2,456,958 | ) | (2,859,880 | ) | |||||||||||||
- | - | |||||||||||||||||||||||
Other (expense) income: | - | - | ||||||||||||||||||||||
Interest expense | (516,161 | ) | - | (516,161 | ) | (1,063,067 | ) | - | (1,063,067 | ) | ||||||||||||||
Interest income | 335 | (335) | 336 | (336) | ||||||||||||||||||||
Other Expense | (3,000,000 | ) | 2,914,519 | (85,481) | (3,000,000 | ) | 2,605,042 | (394,958) | ||||||||||||||||
Foreign currency loss | 9,444 | - | 9,444 | 849 | - | 849 | ||||||||||||||||||
- | - | |||||||||||||||||||||||
Total other expense, net | (3,506,382 | ) | 2,914,184 | (592,198 | ) | (4,061,882 | ) | 2,604,706 | (1,457,176 | ) | ||||||||||||||
- | ||||||||||||||||||||||||
Net income before taxes | (3,161,505 | ) | 1,400,925 | (1,760,580 | ) | (4,464,804 | ) | 147,748 | (4,317,056 | ) | ||||||||||||||
- | - | |||||||||||||||||||||||
Income tax expense | (43,719 | ) | 43,719 | (404,210 | ) | 404,210 | ||||||||||||||||||
- | ||||||||||||||||||||||||
Net income | (3,117,786 | ) | 1,357,206 | (1,760,580 | ) | (4,060,594 | ) | (256,462 | ) | (4,317,056 | ) | |||||||||||||
- | ||||||||||||||||||||||||
Less: Net (loss) income attributable to noncontrolling interest | (23,098 | ) | (493,004 | ) | (516,102 | ) | (85,486 | ) | (493,004 | ) | (578,490 | ) | ||||||||||||
- | ||||||||||||||||||||||||
Net income attributable to Yunhong CTI, LTD | $ | (3,094,687 | ) | $ | 1,850,210 | $ | (1,244,478 | ) | $ | (3,975,108 | ) | $ | 236,542 | $ | (3,738,566 | ) | ||||||||
Other Comprehensive Income (Loss) | ||||||||||||||||||||||||
Foreign currency adjustment | 61,333 | - | 61,333 | 297,209 | - | 297,209 | ||||||||||||||||||
Comprehensive Income (Loss) | $ | (3,033,355 | ) | $ | 1,850,210 | $ | (1,183,145 | ) | $ | (3,677,899 | ) | $ | 236,542 | $ | (3,441,357 | ) | ||||||||
Basic income per common share | $ | (0.81 | ) | $ | 0.48 | $ | (0.32 | ) | $ | (1.04 | ) | $ | 0.06 | $ | (0.97 | ) | ||||||||
Diluted income per common share | $ | (0.81 | ) | $ | 0.48 | $ | (0.32 | ) | $ | (1.04 | ) | $ | 0.06 | $ | (0.97 | ) | ||||||||
Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||||||||||||||||||
Basic | 3,835,950 | - | 3,835,950 | 3,835,950 | - | 3,835,950 | ||||||||||||||||||
- | - | |||||||||||||||||||||||
Diluted | 3,835,950 | - | 3,835,950 | 3,835,950 | - | 3,835,950 |
|
|
For the Six Months Ended June 30, | ||||||||||||
2019 | 2019 | |||||||||||
As Previously Reported | Adjustments | As Restated | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (4,060,594 | ) | $ | (256,462 | ) | $ | (4,317,056 | ) | |||
Depreciation and amortization | 522,670 | 522,670 | ||||||||||
Operating cash flows from operating leases | 487,239 | (487,239) | ||||||||||
Amortization of deferred gain on sale/leaseback | 155,433 | (210,381) | (54,948) | |||||||||
Other | 261,075 | 261,075 | ||||||||||
Provision for losses on accounts receivable | 7,657 | 386,281 | 393,938 | |||||||||
Provision for losses on inventories | 25,415 | 1,253,146 | 1,278,561 | |||||||||
Impairment of Prepaids, Current & Non Current Assets | 168,931 | 168,931 | ||||||||||
Impairment of long-lived assets | 1,252,283 | 1,252,283 | ||||||||||
Stock Based Compensation | 52,396 | 52,396 | ||||||||||
Deferred income taxes | (404,210 | ) | 404,210 | |||||||||
Loss on disposition of asset | 17,480 | - | 17,480 | |||||||||
Change in assets and liabilities: | - | |||||||||||
Accounts receivable | 2,001,248 | 161,232 | 2,162,480 | |||||||||
Other non-current assets | 3,000,000 | (3,000,000 | ) | |||||||||
Inventories | (474,804 | ) | - | (474,804 | ) | |||||||
Prepaid expenses and other assets | (140,125 | ) | 670,297 | 530,172 | ||||||||
Trade payables | 1,921,337 | 77,158 | 1,998,495 | |||||||||
Accrued liabilities | (476,644 | ) | (117,316 | ) | (593,960 | ) | ||||||
Net cash provided by (used in) operating activities | 2,582,102 | 615,611 | 3,197,713 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property, plant and equipment | (72,662 | ) | (72,662 | ) | ||||||||
Net cash provided by (used in) investing activities | (72,662 | ) | (72,662 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Change in checks written in excess of bank balance | 394,227 | 394,227 | ||||||||||
Net change in revolving line of credit | (4,160,724 | ) | (4,160,724 | ) | ||||||||
Repayment of long-term debt | (554,768 | ) | (554,768 | ) | ||||||||
Proceeds from issuance of stock | 955,396 | (955,396) | 0 | |||||||||
Cash paid for deferred financing fees | 31,388 | (86,558) | (55,170) | |||||||||
Proceeds from issuance of long-term debt | 650,000 | 650,000 | ||||||||||
Net cash provided by (used in) financing activities | (2,684,481 | ) | (1,041,954) | (3,726,435 | ) | |||||||
Effect of exchange rate changes on cash | (74,811) | 426,343 | 351,532 | |||||||||
Net increase/(decrease) in cash and cash equivalents | (249,852 | ) | (249,852 | ) | ||||||||
Cash and cash equivalents at beginning of period | 428,150 | 428,150 | ||||||||||
Cash and cash equivalents at end of period | $ | 178,298 | $ | - | $ | 178,298 | ||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash payments for interest | $ | 1,045,943 | $ | 1,045,943 | ||||||||
Common stock issued for accounts payable | $ | 303,000 | $ | 303,000 | ||||||||
Common stock issued for notes payable | $ | 600,000 | $ | 600,000 | ||||||||
(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 report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.
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, Latin America, and Europe. We also market and sell vacuum sealing machines, home organizing and container products, 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 we expectthe 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. We recognizeThe 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 1213 for additional information. Our primary leases relate to the facilities we use in Lake Zurich, IL (USA), Mexico, Germany and the UK.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 of Yunhong CTI Ltd., on December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association (“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 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 of 2019, management and the Board engaged in a review of the Company’s international subsidiariesCTI 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 boardBoard authorized management to divest of allthese international subsidiaries. The Company divested its United Kingdom subsidiary in the fourth quarter 2019 and expects to divest its European (German) subsidiary in the first half of 2020. The operations of these entities will be presented as discontinued operations in the third quarter 2019, the period in which they met the accounting criteria for discontinued operations. These actions are beingwere taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in the United States. In October 2019, weNorth America. The Company 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 manufacturethese entities met the held-for-sale and sell a linediscontinued operations accounting criteria. Accordingly, the Company has reported the results 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. For the three months ended March 31, 2019, we had revenue of $2.2 million associated with products which utilized the Ziploc® trademark. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on ourthese International operations and financial results on a go forward basis. However, as we continued to utilize the Ziploc® related assets in 2020, those assets will not be considered abandoned until they cease to be used at the end of the first quarter of 2020. Therefore, our Ziploc® operations cannot be classified as discontinued operations in these financial statements but will bethe Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as discontinued operations whenheld-for-sale in the Consolidated Balance Sheets. These changes have been applied for all ofperiods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the applicable accounting criteria are met. We have also dramatically changed our capital structure. On January 3, 2020 we entered into a securities purchase agreement, as amended on February 24, 2020fourth quarter 2019 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, pursuant to which the Company agreed to issuedivesting its CTI Europe (Germany) subsidiary and sell, and LF International agreed to purchase, up to 500,000 shares of the Company’s newly created 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, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As a result of the LF International Offering, a change of control of the Company may occur. As permitted by the LF Purchase Agreement, the Company may,Ziploc product line in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share to additional investors (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 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 (subject to certain adjustments), effective as of the first closing, as well as a second director by the earlier of (i) the Company’s upcoming 2020 annual meeting of shareholders and (ii) May 15, 2020 and a third director by the Company’s upcoming 2020 annual meeting of shareholders. 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. To date, the Company has sold 492,660 shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceeds of $4,926,600. Additionally, 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.2020.
Results of Operations
Net Sales. For the three and sixnine month periods ended JuneSeptember 30, 2019,2020, net sales were $12,407,000$5,981,000 and $24,943,000,$18,794,000, compared to net sales of $15,985,000$6,365,000 and $29,964,000$24,259,000 for the same periods of 2018. 2019, respectively.
For the three month period ended JuneSeptember 30, 20192020 and 2018,2019, net sales by product category were as follows:
Three Months Ended | ||||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||
% of | % of | |||||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
Foil Balloons | 4,927 | 40% | 6,508 | 41% | ||||||||||||
Latex Balloons | 1,983 | 16% | 2,333 | 14% | ||||||||||||
Vacuum Sealing Products | 1,912 | 15% | 1,865 | 12% | ||||||||||||
Film Products | 478 | 4% | 609 | 4% | ||||||||||||
Other Sales | 3,107 | 25% | 4,670 | 29% | ||||||||||||
Total | 12,407 | 100% | 15,985 | 100% |
For the six month period ended June 30, 2019 and 2018, net sales by product category were as follows:
Six Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
June 30, 2019 | June 30, 2018 | September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||||||
% of | % of | $ | % of | $ | % of | |||||||||||||||||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||||||||||||||
Metalized Balloons | 11,408 | 45% | 14,274 | 48% | ||||||||||||||||||||||||||||
Foil Balloons | 4,516 | 76 | % | 3,681 | 62 | % | ||||||||||||||||||||||||||
Latex Balloons | 3,970 | 16% | 4,482 | 15% | 1,014 | 17 | % | 2,059 | 34 | % | ||||||||||||||||||||||
Vacuum Sealing Products | 4,064 | 16% | 3,453 | 11% | ||||||||||||||||||||||||||||
Film Products | 1,239 | 5% | 1,047 | 3% | 78 | 1 | % | 236 | 4 | % | ||||||||||||||||||||||
Other | 4,262 | 18% | 6,708 | 23% | 374 | 6 | % | 9 | 0 | % | ||||||||||||||||||||||
Total | 24,943 | 100% | 29,964 | 100% | 5,981 | 100 | % | 5,985 | 100 | % |
For the nine month period ended September 30, 2020 and 2019 net sales by product category were as follows:
Nine Months Ended | ||||||||||||||||
September 30, 2020 | September 30, 2019 | |||||||||||||||
$ | % of | $ | % of | |||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
Foil Balloons | 12,380 | 66 | % | 13,325 | 56 | % | ||||||||||
Latex Balloons | 3,712 | 20 | % | 5,640 | 23 | % | ||||||||||
Film Products | 664 | 4 | % | 1,475 | 6 | % | ||||||||||
Other | 2,038 | 11 | % | 3,571 | 15 | % | ||||||||||
Total | 18,794 | 100 | % | 24,011 | 100 | % |
Foil Balloons. DuringRevenues from the sale of foil balloons increased during the three and six months ended Juneperiod from $3,681,000 ending September 30, 2019 revenuescompared to $4,516,000 during the three month period of 2020. Revenues from the sale of foil balloons decreased by 24% and 20%, respectivelyduring the nine month period from $13,325,000 ending September 30, 2019 compared to the prior year period, from $6,508,000 and $14,274,000 during 2018, respectively, to $4,927,000 and $11,408,000 during 2019. Sales to our largest balloon customer decreased from $8,110,000$12,380,000 during the first six monthsnine month period of 20182020 mainly due to $6,630,000 during the first six months of 2019. As we and othersdecreased foil sales in the industry have reported, the commercial supply of helium has been limited and pricing has increased, while availability has been reduced. We expect the helium market to improve during the next few months, but it remains a negative factor in the sale of helium-based products such as many foil balloons.our Mexican subsidiary.
Latex Balloons. During the three and six months ended June 30, 2019, revenuesRevenues from the sale of latex balloons decreased by 15%were $1,014,000 and 11%, respectively compared to the prior year period, from $2,333,000 and $4,482,000$3,712,000 during 2018, respectively, to $1.983,000 and $3,970,000 during 2019.
Vacuum Sealing Products. During the three and six monthsnine month periods ended JuneSeptember 30, 2019, revenues from the sale of vacuum sealing products increased by 2% and 18%, respectively2020, compared to $2,059,000 and $5,640,000 during the prior year period, from $1,865,000 and $3,453,000 during 2018, respectively, to $1,912,000 and $4,064,000 duringsame periods of 2019. The new, smaller format machine introduced late during 2018 has sold well, and customers have largely acceptedLatex balloons encountered a COVID-19 constraint, as production activities were severely limited by the cost pass-throughs related to tariffs.Mexican government.
Films. During the three and six months ended June 30, 2019, revenuesRevenues from the sale of commercial films decreased by 22%were $78,000 and increased 18%, respectively,$664,000 during the three and nine month periods ended September 30, 2020, compared to $236,000 and $1,475,000 during the prior year period, from $609,000same periods of 2019. Our main customer had restructured their program in the first quarter both related to COVID-19 disruption and $1,047,000 during 2018, respectively, to $478,000 and $1,239,000 during 2019.also the integration of a merger partner.
Other Revenues. During the three and six months ended June 30, 2019, revenuesRevenues from the sale of other products decreased by 33%were $374,000 and 36%, respectively$2,038,000 during the three and nine month periods ended September 30, 2020, compared to $9,000 and $3,571,000 during the prior year period, from $4,670,000 and $6,708,000 during 2018, respectively, to $3,107,000 and $4,262,000 duringsame periods of 2019. Revenues in 2019 include a discontinued line of organizing solutions that was fully deconsolidated in 2019. The revenues from the sale of other products during the first sixnine months of 20192020 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers in the amount of $2,217,000,and (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors in the amount of $263,000 and (iv) sales of party goods in Mexico by Flexo Universal in the amount of $718,000. Clever Container changed its business model to one of both lower costs and revenues compared to its prior business model, reducing the revenues shown in Other Revenues.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 threenine month periods ended September 30, 2020 and six months ended June 30, 2019 and 2018.2019.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | ||||||||||||||||||||||
% of Sales | % of Sales | % of Sales | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Top 3 Customers | 61.3% | 57.5% | 57.3% | 55.1% | 77 | % | 43 | % | ||||||||||||||||
Top 10 Customers | 76.9% | 72.5% | 75.0% | 69.1% | 88 | % | 58 | % |
Nine Months Ended September 30, | ||||||||
% of Sales | ||||||||
2020 | 2019 | |||||||
Top 3 Customers | 71 | % | 53 | % | ||||
Top 10 Customers | 82 | % | 71 | % |
During the three and six monthsnine month period ended JuneSeptember 30, 2019,2020, there were two customerswas one customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customersthis customer for the three monthsnine month period ended JuneSeptember 30, 2019 were $4,179,0002020 was $9,412,000 or 34%, and $2,769,000 or 22%,50% of consolidated net sales, respectively.sales. Sales to these customersthis customer for the threenine months ended JuneSeptember 30, 2018 were $4,871,0002019 was $8,190,000, or 30%, and $3,660,000 or 23%,34% of consolidated net sales, respectively. The amountssales. As of September 30, 2020, the total amount owed at June 30, 2019to the Company by these customers were $2,488,000this customer was approximately $1,725,000, or 30%, and $1,044,000 or 12%,33% of the Company’s consolidated net accounts receivable, respectively. As of Junereceivable. The amount owed at September 30, 2018, the total amounts owed to the Company2019 by these customers were $4.808,000this customer was approximately $831,000, or 57%, and $1,524,000 or 18%16% of the Company’s consolidated net accounts receivable, respectively.receivable.
Cost of Sales. During the three and sixnine month periods ended JuneSeptember 30, 2019,2020, the cost of sales was $11,122,000$5,720,000 and $21,662,000, respectively,$16,442,000, compared to $12,189,000$6,285,000 and $23,300,000$20,926,000, respectively, for the same periods ended June 30, 2018.of 2019. The reduction in cost of sales was largely due to lower sales volume, netthe termination of the vacuum sealing product line, reduced presence in the form of discontinued subsidiaries, and a temporary reduction in orders related inefficiencies.to COVID-19.
General and Administrative. During the three and six monthsnine month periods ended JuneSeptember 30, 2019,2020, general and administrative expenses were $1,625,000$1,067,000 and $3,472,000, respectively,$3,254,000 as compared to $1,680,000$1,167,000 and $3,565,000$3,866,000 respectively, for the same periods in 2018. A one-time fee associated with the forbearance agreement in the amount of $250,000 was included in the first three months of 2019 general and administrative expenses.2019. Decrease is due mainly to headcount reductions.
Selling,, Advertising and Marketing. During the three and six monthsnine month periods ended JuneSeptember 30, 2019,2020, selling, advertising and marketing expenses were $593,000$101,000 and $1,204,000, respectively,$384,000 as compared to $1,290,000$148,000 and $2,446,000,$714,000, respectively, for the same periods in 2018. This reduction was primarily2019. Decrease is due mainly to the full year benefit of cost reduction programs implemented during 2018.
Other OperatingExpense. During the three and six months ending June 2019, we recognized a $258,000 and $1,512,000, respectively, impairment charge on our long-lived assets in anticipation of deconsolidating Clever Container and future liquidation of our two European sales companies during 2019.headcount reductions.
Other Income (Expense). During the three and six monthsnine month periods ended JuneSeptember 30, 2019,2020, the Company incurred interest expense of $516,000$255,000 and $1,063,000, respectively,$1,033,000 as compared to interest expense of $465,000 and $1,493,000 during the same periods of 20182019. During the three months ended September 30, 2020 the Company recorded $248,000 of $551,000other income for the Payroll Protection Program, PPP, anticipated grant related to payroll, utility and $1,115,000.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.
For the three month and six monthsnine month periods ended JuneSeptember 30, 2019,2020, the Company had a foreign currency transaction gainsgain/(loss) of $61,000$15,000 and $297,000, respectively,$(169,000) as compared to foreign currency transaction lossesa gain/(loss) of $775,000$(26,000) and $342,000$(27,000) during the same periods of 2018.2019.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the sixnine months ended JuneSeptember 30, 2019,2020, net cash provided by operations was $3,198,000,$995,000, compared to net cash usedprovided by operations during the sixnine months ended JuneSeptember 30, 20182019 of $167,000.$4,172,000.
Significant changes in working capital items during the sixnine months ended JuneSeptember 30, 20192020 included:
● | A decrease in accounts receivable of |
● |
|
● | An increase in trade payables of |
● | A decrease 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. During the sixnine months ended JuneSeptember 30, 2019,2020, cash used in investing activity was $73,000,$140,000, compared to cash used in investing activity for the same period of 20182019 in the amount of $18,000.$144,000.
Financing Activities. During the sixnine months ended JuneSeptember 30, 2019,2020, cash used in financing activities was $3,726,000$2,237,000 compared to cash provided byused in financing activities for the same period of 20182019 in the amount of $426,000.$4,546,000. 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 JuneSeptember 30, 2019,2020, the Company had cash balances of $178,000none compared to cash balances of $453,000$115,000 for the same period of 2018.2019.
Also, at June 30, 2019, the Company had a working capital balance
As of JuneSeptember 30, 2019,2020, the Company was not in compliance with its credit facility, operating under a forbearance agreement. For this reason, $3$1.4 million of long-term debt was reclassified as current debt as of JuneSeptember 30, 2019.2020. 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 23 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. Vacuum sealing product sales are also seasonal; approximately 60% of sales in this product line occur in the period from July through December.
Critical Accounting Policies
Please see pages 24-2725-28 of our Annual Report on Form 10-K for the year ended December 31, 20182019 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. Except for the adoption of ASC Topic 842 (Leases) as described herein, noNo material changes to such information have occurred during the three and nine months ended JuneSeptember 30, 2019.2020.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Not applicable.
Item 4. Controls and Procedures
(a) Restatement
On May 8, 2020, the Audit Committee of the Board of Directors concluded, based on the recommendation of management, that we would amend and restate our quarterly consolidated financial statements for this interim period ended June 30, 2019, within this Form 10Q/A to correct the following errors:
Previously, the Company had no external auditor engaged. As noted in the original filing, these filing are being amended now that the Company has hired RBSM as external independent auditors, with the benefit of auditor review, and
To correct the timing of recognition of certain noncash charges with respect to the anticipated liquidation of subsidiaries and resulting classifications as they impact goodwill, deferred tax assets and related tax provisions, and reporting discontinued operations.
The following additional adjustments were also included in this restatement:
To reclassify certain accrued expenses between liabilities and contra assets, particularly with respect to accruals for uncollectible accounts receivable, and
Other miscellaneous adjustments, none of which were material either individually or in the aggregate.
(b)(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 JuneSeptember 30, 2019.2020. 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 JuneSeptember 30, 2019,2020, the end of the period covered by this Quarterly Report on Form 10-Q/A10-Q due to the material weaknesses described below.
(c)(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 JuneSeptember 30, 2019.2020. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").
A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. As a result of our evaluation of our internal control over financial reporting, management identified the following material weaknesses in our internal control over financial reporting:
We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for significant, unusual transactions that resulted in misapplications of GAAP, particularly with regard to the timing of recognition of certain non-cash charges, and
We are overly dependent upon our Chief Financial Officer and Controller within an environment that is highly manual in nature.
These material weaknesses resulted in the restatement of the financial statements described in Item 4(a) and material post closing adjustments which have been reflected in the financial statements for the interim periods for the year ended June 30, 2019. Additionally, asAs a result of the material weaknesses, we have concluded that we did not maintain effective internal control over financial reporting as of JuneSeptember 30, 2019.2020.
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.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.As previously disclosed on a Current Report on Form 8-K of Yunhong CTI Ltd. (the “Company”), on December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association (“Lender”).
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 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. In addition, Mr. Yubao Li, the Company’s Chairman, committed that, in the event the Company does not obtain funding of at least $3,000,000 by August 31, 2020, he would provide the necessary funding to ensure the Company meets this requirement.
Item 4. Submission of Matters to a Vote of Security HoldersMine 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.
The following are being filed as exhibits to this report:
Exhibit Number |
Description |
| |
| |
31.1 | |
31.2 | |
32 | |
101 | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form |
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.
| Yunhong CTI Ltd. |
|
| By: |
| Jennifer M. Connerty Chief Financial Officer
|
|
|
| Yubao Li |
President, | |||