10-Q 1 ctib20200930_10q.htm FORM 10-Q ctib20200930_10q.htm
 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________to_________

 

Commission File Number

000-23115

 

YUNHONG CTI LTD.

(Exact name of registrant as specified in its charter)

 

Illinois

 

36-2848943

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

22160 N. Pepper Road

 

 

Barrington, Illinois

 

60010

(Address of principal executive offices)

 

(Zip Code)

 

(847)382-1000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which

registered

Common Stock

 

CTIB

 

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐     No ☑

 

The number of shares outstanding of the registrant’s common stock as of November 20, 2020 was 5,783,646 (excluding treasury shares).

 

 

 

 

INDEX

 

Part I – Financial Information

 

 

 

 

Item No. 1.  

Financial Statements

 

 

Condensed Consolidated Balance Sheets at September 30, 2020 (unaudited) and December 31, 2019 (audited)

1

 

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2020 and September 30, 2019

2

 

Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and September 30, 2019

3

 

Condensed Consolidated Statements of Shareholders' Equity (unaudited) for the three and nine months ended September 30, 2020 and September 30, 2019

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

Controls and Procedures

23

 

 

 

Part II – Other Information

 

 

 

 

Item No. 1 

Legal Proceedings

24

Item No. 1A

Risk Factors

24

Item No. 2

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item No. 3 

Defaults Upon Senior Securities

24

Item No. 4

Submission of Matters to a Vote of Security Holders

24

Item No. 5

Other Information

24

Item No. 6

Exhibits

25

 

Signatures

25

 

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32

 

 

 

 

 

Yunhong CTI, LTD (f/k/a CTI Industries Corporation)

Condensed Consolidated Balance Sheets

 

   

September 30, 2020

   

December 31, 2019

 
   

(unaudited)

         
ASSETS                

Current assets:

               

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

    1,155,266       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

    19,505,300       27,624,716  
                 

Property, plant and equipment:

               

Machinery and equipment

    21,796,644       23,822,808  

Building

    3,374,334       3,374,334  

Office furniture and equipment

    2,221,195       2,289,444  

Intellectual property

    783,179       783,179  
Land     250,000       250,000  

Leasehold improvements

    390,624       415,737  

Fixtures and equipment at customer locations

    518,450       518,450  

Projects under construction

    68,738       74,929  
      29,403,164       31,528,881  

Less : accumulated depreciation and amortization

    (27,397,950 )     (28,997,809 )
                 

Total property, plant and equipment, net

    2,005,214       2,531,072  
                 

Other assets:

               

Operating lease right-of-use

    359,802       1,046,438  

Other assets

    78,259       118,857  
                 

Total other assets

    438,061       1,165,295  
                 

TOTAL ASSETS

  $ 21,948,575     $ 31,321,083  
                 

LIABILITIES AND EQUITY

               

Current liabilities:

               

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

    2,467,741       3,451,880  
         Advance from investor     1,500,000       -  

Notes payable affiliates - current portion

    9,937       12,684  

Operating Lease Liabilities

    311,678       658,374  

Accrued liabilities

    1,262,139       1,205,027  

Current liabilities of discontinued operations

    273,782       656,753  
                 

Total current liabilities

    17,604,044       27,524,405  
                 

Long-term liabilities:

               

Notes payable - affiliates

    10,632       14,340  

Notes payable, net of current portion

    1,445,683       1,024,441  

Operating Lease Liabilities

    48,123       388,064  

Notes payable - officers, subordinated

    1,107,080       1,058,486  

Deferred gain (non current)

    -       184,840  

Total long-term liabilities

    2,611,518       2,670,171  
                 
                 

TOTAL LIABILITIES

    20,215,562       30,194,576  
                 
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

    4,695,658       3,587,287  

Accumulated earnings

    (13,112,986 )     (9,992,841 )

Accumulated other comprehensive loss

    (6,640,664 )     (5,348,812 )

Less: Treasury stock, 43,658 shares

    (160,784 )     (160,784 )

Total Yunhong CTI, Ltd Stockholders' Equity

    2,451,652       1,983,344  

Noncontrolling interest

    (718,639 )     (856,837 )

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

 

 

 

Yunhong CTI, LTD (f/k/a CTI Industries Corporation)

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net Sales

  $ 5,980,766     $ 6,365,352     $ 18,793,620     $ 24,259,037  
                                 

Cost of Sales

    5,719,824       6,284,645       16,441,524       20,925,512  
                                 

Gross profit

    260,942       80,707       2,352,096       3,333,525  
                                 

Operating expenses:

                               

General and administrative

    1,067,122       1,167,207       3,253,561       3,865,527  

Selling

    31,723       55,907       112,113       285,015  

Advertising and marketing

    69,569       92,061       271,563       428,798  

Impairment of long-lived assets

    -       -       -       1,472,382  

Gain on loss of control of VIEs

    -       (218,527 )     -       (218,527 )

Gain on sale of assets

    -       (23,054 )     (45,700 )     (70,263 )
                                 

Total operating expenses

    1,168,414       1,073,594       3,591,537       5,762,932  
                                 

Loss from operations

    (907,472 )     (992,887 )     (1,239,441 )     (2,429,407 )
                                 

Other (expense) income:

                               

Interest expense

    (255,138 )     (464,546 )     (1,033,240 )     (1,493,264 )

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

    15,100       (25,747 )     (169,357 )     (27,458 )
                                 

Total other expense, net

    (8,105 )     (573,166 )     (542,858 )     (2,006,464 )
                                 

Loss from continuing operations before taxes

    (915,577 )     (1,566,053 )     (1,782,299 )     (4,435,871 )
                                 

Income tax expense

    -       -       -       -  
                                 

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

    (74,692 )     (282,985 )     138,198       (861,475 )
                                 

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

    5,324       (281,817 )     (1,291,852 )     15,603  

Comprehensive Loss

  $ (1,023,308 )   $ (2,506,388 )   $ (4,273,799 )   $ (6,526,023 )
                                 

Deemed Dividends on preferred stock and amortization of beneficial conversion feature

  $ (114,561 )   $ -     $ (2,733,329 )   $ -  
                                 

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

    4,902,131       3,835,950       4,426,420       3,835,950  
                                 

Diluted

    4,902,131       3,835,950       4,426,420       3,835,950  

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

 

Yunhong CTI, LTD (f/k/a CTI Industries Corporation)

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   

For the Nine Months Ended September 30,

 
   

2020

   

2019

 
                 

Cash flows from operating activities:

               

Net loss

  $ (2,981,947 )   $ (6,541,626 )
Adjustments to reconcile net loss to net cash provided by operating activities:                

Depreciation and amortization

    792,104       835,302  

Amortization of deferred gain on sale/leaseback

    (45,700 )     (82,422 )

Gain on forgiveness of PPP Funding

    (1,047,700 )     -  

Provision for losses on accounts receivable

    20,666       399,463  

Provision for losses on inventories

    (40,482 )     1,249,519  

Other

    -       248,974  

Impairment on assets held for sale

    -       604,483  

Gain on deconsolidation of Clever

    -       (218,534 )

Impairment of Related Party Note Receivable

    350,000       -  

Impairment of Prepaid, Current and Non Current Assets

    -       168,931  

Impairment of long-lived assets

    -       1,252,283  

Stock Based Compensation

    -       72,401  

Loss on disposition of Asset

    -       17,480  

Change in assets and liabilities:

               

Accounts receivable

    2,915,506       2,776,396  

Inventories

    2,314,744       1,435,411  

Prepaid expenses and other assets

    (289,820 )     228,389  
       Operating Lease Liability     (470,771 )     -  

Trade payables

    (852,231 )     1,892,670  

Accrued liabilities

    330,695       (166,823 )
                 

Net cash provided by operating activities

    995,064       4,172,297  
                 
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment

    (139,708 )     (144,222 )
                 

Net cash used in investing activities

    (139,708 )     (144,222 )
                 

Cash flows from financing activities:

               

Change in checks written in excess of bank balance

    29,837       (391,313 )

Repayment of debt and revolving line of credit

    (10,158,387 )     (4,721,867 )
    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

    876,791       650,000  
                 

Net cash used in financing activities

    (2,236,884 )     (4,545,943 )
                 

Effect of exchange rate changes on cash

    536,430       205,692  
                 

Net decrease in cash and cash equivalents

    (845,098 )     (312,176 )
                 

Cash and cash equivalents at beginning of period

    845,098       428,150  
                 

Cash and cash equivalents at end of period

  $ -     $ 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

  $ 1,033,350     $ 1,558,817  

Common stock issued for accounts payable

  $ -     $ 303,000  

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

 

 

 

Yunhong CTI, Ltd (f/k/a CTI Industries Corporation)

Consolidated Statements of Stockholders' Equity

 

   

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  

 

   

Nine Months Ended September 30, 2019

 
                                                   

Accumulated

                                 
                                            Accumulated    

Other

   

Less

                 
   

Preferred Stock

   

Common Stock

   

Paid-in

   

(Deficit)

   

Comprehensive

   

Treasury Stock

   

Noncontrolling

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

 Earnings

   

Loss

   

Shares

   

Amount

   

Interest

   

TOTAL

 
                                                                                         

Balance December 31, 2018

    -     $ -       3,578,885     $ 13,898,494     $ 2,506,437     $ (2,865,486 )   $ (6,050,347 )     (43,658 )   $ (160,784 )   $ (1,072,585 )   $ 6,255,729  
                                                                                         

Note Conversion - Schwan

    -       -       180,723       -       600,000       -       -       -       -       -       600,000  

Stock Issued

    -       -       20,000       -       -       -       -       -       -       -       -  

Stock Option Expense

    -       -       -       -       28,967       -       -       -       -       -       28,967  

Net Income

    -       -       -       -       -       (2,494,089 )     -       -       -       (62,388 )     (2,556,477 )

Other comprehensive income, net of taxes

    -       -       -       -       -       -       -       -       -       -       -  

Foreign currency translation

    -       -       -       -       -       -       235,876       -       -       -       235,876  

Balance March 31, 2019

    -     $ -       3,779,608     $ 13,898,494     $ 3,135,404     $ (5,359,575 )   $ (5,814,471 )     (43,658 )   $ (160,784 )   $ (1,134,973 )   $ 4,564,095  
                                                                                         

Note Conversion - Schwan

    -       -       -       -       -       -       -       -       -       -       -  

Stock Issued

    -       -       100,000       -       303,000       -       -       -       -       -       303,000  

Stock Option Expense

    -       -       -       -       23,429       -       -       -       -       -       23,429  

Net Income

    -       -       -       -       -       (1,244,477 )     -       -       -       (516,102 )     (1,760,579 )

Other comprehensive income, net of taxes

    -       -       -       -       -       -       -       -       -       -       -  

Foreign currency translation

    -       -       -       -       -       -       61,333       -       -       -       61,333  

Balance June 30, 2019

    -     $ -       3,879,608     $ 13,898,494     $ 3,461,833     $ (6,604,052 )   $ (5,753,138 )     (43,658 )   $ (160,784 )   $ (1,651,075 )   $ 3,191,278  
                                                                                         

Note conversion - Schwan

    -       -       -       -       -       -       -       -       -       -       -  

Less deconsolidation of VIE

    -       -       -       -       -       -       -       -       -       1,087,035       1,087,035  

Stock Issued

    -       -       -       -       -       -       -       -       -       -       -  

Stock Option Expense

    -       -       -       -       20,005       -       -       -       -       -       20,005  

Net Income

    -       -       -       -       -       (1,941,586 )     -       -       -       (282,985 )     (2,224,571 )

Other comprehensive income, net of taxes

    -       -       -       -       -       -       15,603       -       -       -       15,603  

Foreign currency translation

    -       -       -       -       -       -       (297,209 )     -       -       -       (297,209 )

Balance September 30, 2019

    -     $ -       3,879,608     $ 13,898,494     $ 3,481,838     $ (8,545,638 )   $ (6,034,744 )     (43,658 )   $ (160,784 )   $ (847,025 )   $ 1,792,141  

 

 

See accompanying notes to condensed consolidated unaudited financial statements 

 

 

Yunhong CTI Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Note 1 - Basis of Presentation

 

The accompanying condensed (a) consolidated balance sheet as of September 30, 2020, which has been derived from unaudited 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 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, 2019.

 

Principles of consolidation and nature of operations:

 

Yunhong CTI Ltd. (formerly CTI Industries Corporation), its former 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 Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products. As discussed in Note 2 Discontinued Operations, effective in the third quarter of 2019, the Company determined that it was exiting CTI Balloons Limited (“CTI Balloons”) 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 Company, L.L.C. “Clever”). The last three entities have been consolidated as variable interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation. The treatment of VL and Clever changed during 2019 as described in the next section.

 

Variable Interest Entities (“VIEs”):

 

The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity.

 

The Company has variable interests in VL and Clever. Through June 30, 2019, the Company had determined that it was the primary beneficiary of these entities and included them in our consolidated results. In the third quarter 2019, we determined that operationally material changes in our involvement with Clever and VL resulted in us having no power over the decisions which impact their financial performance. Therefore, we are no longer the primary beneficiary of these entities. Effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. Upon deconsolidation of these entities, we recognized a gain of $219,000. In accordance with ASC 810-10 because the carrying value of the noncontrolling interest of Clever which was eliminated exceeded the net carrying value of the assets and liabilities of Clever. The Company determined that there was no fair value associated with its remaining noncontrolling interest in Clever based on an income approach.

 

Use of estimates:

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts, inventory valuation, deferred tax assets, goodwill and intangible 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 and condition of 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 September 30, 2020 and 2019, shares to be issued upon the exercise of options and warrants aggregated 479,802 and 471,144, respectively. The number of shares included in the determination of earnings on a diluted basis for the three months ended September 30, 2020 and 2019 were none, as doing so would have been anti-dilutive.

 

 

Significant Accounting Policies:

 

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2019. There were no significant changes to these accounting policies during the three or nine months ended September 30, 2020.

 

On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

On January 1, 2018, we adopted ASC 606 (Revenue From Contracts With Customers) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.

 

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.

 

The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

 

 

Prior Period Reclassification

 

Certain amounts in prior periods have been reclassified to conform with current period presentation and had no effect on prior period net loss or stockholders’ equity.

 

 

 

Note 2 – Discontinued Operations

 

In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of CTI Balloons and CTI Europe. These actions are 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 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. 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 therefore, this product line has been presented as discontinued operations.

 

CTI Balloons recorded losses from discontinued operations, net of taxes of ($433,000) and ($996,000) for the three and nine months ended September 30, 2019.

 

CTI Europe recorded a loss from discontinued operations, net of taxes of $(76,000) for the three months ended September 30, 2020, compared to a gain from discontinued operations, net of taxes of $313,000 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 periods 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 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 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 Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company Chairman Mr. Yubao Li, pursuant to which we sold to LF International 500,000 shares of our Series A Convertible Preferred Stock at a purchase price of $10.00 per share and for aggregate proceeds of $5,000,000. Pursuant to the LF Purchase Agreement, we were authorized to sell an additional $2 million shares of Series A to other investors under similar financial terms, approximately $1 million of which has been sold as of September 30, 2020, including to an investor which converted an accounts receivable of $478,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. There 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 subsidiaries, we believe that the result raises substantial doubt about our ability to continue as a going concern one year from the date these financial statements are issued.

 

Additionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs, along with a supply disruption in the helium market during 2019. These changes in cash flows have created very significant strain within our operations and have therefore increased our attempts to obtain additional funding resources.

 

In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed.

  

Finally, claims have been filed in court by certain vendors regarding claims of non-payment pursuant to contractual obligations. While many have been resolved, the sum of the outstanding claims made or threatened exceeds $0.5 million in the aggregate. The cost of defense and potential ultimate resolution increases the strain on our financial resources.

 

Management’s plans include:

 

 

(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 9 - 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  

 

 

 

Note 10 - Concentration of Credit Risk

 

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the 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 September 30, 2020, the total 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 on June 1, 2020, is the brother of Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance services to the Company. The Company made payments to Schwan Incorporated of approximately $2,700 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 of $1.6 million as of December 31, 2018. During January 2019 he converted $0.6 million to equity at the then market price of our stock. Including accrued interest, his balance was $1.1 million as of September 30, 2020. During the first nine months of 2020 and 2019, interest expense on these outstanding loans was $49,000 and $46,000, respectively.

 

Items identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of September 30, 2020 and 2019 include loans by shareholders to Flexo 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 $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 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 September 30, 2020, we had no such instrument.

 

 

 

Note 13 - Leases

 

We adopted ASC Topic 842 (Leases) on January 1, 2019. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. Results for periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations.

 

Upon adoption of ASC 842 we recorded a $2.8 million increase in other assets, a $1.1 million increase in current liabilities, and a $1.7 million increase in non-current liabilities. We did not record any cumulative effect adjustments in opening retained earnings, and adoption of ASC 842 had no impact on cash flows from operating, investing, or financing activities.

 

In July 2020, the Company entered into a lease agreement for a building through June 2021 (with no extension options).   The monthly lease payments are $38,000.  The Company made a policy election to not recognize right of use assets and lease liabilities that arise from leases with an initial term of twelve months or less on the Consolidated Balance Sheets.   However, the Company recognized these lease payments in the Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the expense was incurred.

 

 

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