10-K 1 ctib20201231_10k.htm FORM 10-K ctib20201231_10k.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-K

 

(Mark One)

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

 

For the fiscal year ended December 31, 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

   

Lake Barrington, Illinois

 

60010

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (847) 382-1000

 

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

 

Title of each class

Ticker symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

CTIB

The NASDAQ Stock Market LLC

 

 

     
     

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐      No ☑     

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ☐       No ☑     

 

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 ☑

 

Based upon the closing price of $2.60 per share of the Registrant’s Common Stock as reported on NASDAQ Capital Market tier of The NASDAQ Stock Market on June 30, 2020, the aggregate market value of the voting common stock held by non-affiliates of the Registrant was then approximately $5,866,000. (The determination of stock ownership by non-affiliates was made solely for the purpose of responding to the requirements of the Form and the Registrant is not bound by this determination for any other purpose.)

 

The number of shares outstanding of the Registrant’s Common Stock as of April 12, 2021 was 5,886,750(excluding treasury shares).

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders (the “2021 Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. The 2021 Proxy Statement, or an amendment to this Form 10-K, will be filed with the SEC within 120 days after December 31, 2020. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.

 

 

 

 

TABLE OF CONTENTS

 

INDEX

 

FORWARD LOOKING STATEMENTS

 

Part I

   
     

Item No. 1

Description of Business

1

Item No. 1B

Unresolved Staff Comments

6

Item No. 2

Properties

7

Item No. 3

Legal Proceedings

7

     

Part II

   
     

Item No. 5

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

7

Item No. 7

Managements Discussion and Analysis of Financial Condition and Results of Operations

8

Item No. 7A

Quantitative and Qualitative Disclosures Regarding Market Risk

13

Item No. 8

Financial Statements and Supplementary Data

13

Item No. 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

13

Item No. 9A

Controls and Procedures

13

Item No. 9B

Other Information

14

     

Part III

   
     

Item No. 10

Directors and Executive Officers of the Registrant

14

Item No. 11

Executive Compensation

18

Item No. 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

20

Item No. 13

Certain Relationships and Related Transactions

22

Item No. 14

Principal Accounting Fees and Services

22

     

Part IV

   
     

Item No. 15

Exhibits and Financial Statement Schedules

22

 

 

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K 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 Annual Report on Form 10-K. We disclaim any intent or obligation to update any forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, our participation in highly competitive markets, potential changes in the cost or availability of raw materials, our dependence on a limited number of suppliers, the possible inability to obtain an adequate supply of raw materials, our reliance on a limited number of key customers, the loss of one or more of our key customers, changing consumer demands, developments or changes in technology, risks of international operations and political environments, dependence on our intellectual property, compliance with federal, state or local regulations, the resolution of litigation or other legal proceedings to which we may become involved, restrictions included in the Company’s credit facility, the availability of funds under the Company’s credit facility, damage to or destruction of one or both of the Company’s principal plants, our ability to service our indebtedness, our ability to invest in needed plant or equipment.

 

 

 

PART I

 

Item No. 1 Business

 

Business Overview

 

We develop, produce, distribute and sell a number of consumer products throughout the United States and in over 30 other countries, and we produce film products for commercial and industrial uses in the United States. Many of our products utilize flexible films and, for a number of years, we have been a leading developer of innovative products which employ flexible films including novelty balloons, pouches and films for commercial packaging applications.

 

Our principal lines of products include:

 

Novelty Products consisting principally of foil and latex balloons and other inflatable toy items; and

 

Flexible Films for food and other commercial and packaging applications.

 

In addition to these principal product lines, for the past several years, we have engaged in (i) the assembly and sale of Candy Blossoms (small gift bouquets of arranged candy items often including ribbons and/or a small foil balloon), and (ii) the distribution of party goods products in Mexico.

 

We leverage our technology to design and develop proprietary products which we develop, market and sell for our customers. We have been engaged in the business of developing flexible film products for over 40 years and have acquired significant technology and know-how in that time. We currently hold several patents related to flexible film products, including specific films, zipper closures, valves and other features of these products.

 

We print, process and convert flexible film into finished products and we produce latex balloons and novelty items. Our principal production processes include:

 

 

Coating and laminating rolls of flexible film. Generally, we adhere polyethylene film to another film such as nylon or polyester;

 

 

Printing film and latex balloons. We print both plastic and latex films, with a variety of graphics, for use as packaging film or for balloons;

 

 

Converting printed film to balloons;

 

 

Converting film to flexible containers;

 

 

Producing latex balloons and other latex novelty items; and

 

 

Assembling and inflating of novelty products and balloons and Candy Blossoms.

 

In 1978, we began manufacturing metalized balloons (often referred to as "foil" balloons), which are balloons made of a base material (usually nylon or polyester) often having vacuum deposited aluminum and polyethylene coatings. These balloons remain buoyant when filled with helium for much longer periods than latex balloons and permit the printing of graphic designs on the surface. In 1985, we began marketing latex balloons and, in 1988, we began manufacturing latex balloons. In 1999, we acquired an extrusion coating and laminating machine and began production of coated and laminated films, which we have produced since that time.

 

For more than 20 years, we have been engaged in the coating, laminating and printing of flexible films for our novelty and container products and for the production of laminated and printed films we supply to others.

 

 

We market and sell our foil and latex balloons and related novelty items throughout the United States, Canada and Mexico and in a number of other countries in Latin America and Europe. We supply directly to retail stores and chains and through distributors, who in turn sell to retail stores and chains. Our balloon and novelty products are sold to consumers through a wide variety of retail outlets including general merchandise, discount and drugstore chains, grocery chains, card and gift shops and party goods stores, as well as through florists and balloon decorators.

 

Most of our foil balloons contain printed characters, designs and social expression messages, such as “Happy Birthday,” “Get Well” and similar items. We may obtain licenses from time to time for well-known characters and print those characters and messages on our balloons.

 

We provide customized laminated films and printed films to customers who utilize the film to produce bags or pouches for the packaging of food, liquids and other items. In 2014, we began assembling and producing Candy Blossoms - containers including candy items and, at times, air-inflated balloons. In 2015, we commenced the distribution of party goods in Mexico.

 

In 2020, our revenues from our product lines, as a percent of total revenues were:

 

 

 ●

  Novelty Products

82% of revenues
 

 ●

  Flexible Film Products

3% of revenues
 

 ●

  Candy Blossoms

12% of revenues
 

 ●

  Other Products

3% of revenues

 

We are an Illinois corporation with our principal offices and plant at 22160 N. Pepper Road, Lake Barrington, Illinois.

 

Business Strategies and Developments

 

Our business strategies, and recent developments related to our business, include:

 

 

Management. During December 2019, Mr. Jeffrey Hyland, retired from his roles as President and Chief Executive Officer with the Company for personal reasons. The then Chief Financial Officer, Mr. Frank Cesario, who joined CTI during 2017, became both President and Chief Executive Officer. During 2020 we changed our name to Yunhong CTI Ltd., as we received a significant investment from LF International Pte, Ltd. Mr. Yubao Li, Chairman of the Yunhong China Group, became a director and then Chairman of Yunhong CTI Ltd. He replaced Mr. Cesario in September 2020 as Chief Executive Officer, at which time Mr. Cesario retired from the Company as an officer. During 2020 Ms. Jana Schwan became our Chief Operating Officer after having served as Vice President of Operations and a number of other roles during her nearly 20 years with the Company, and Ms. Jennifer Connerty became our Chief Financial Officer after having served as Controller since 2018.

 

 

Financing. During 2018 and 2019 we had multiple events of default with our primary lender, resulting in the Company incurring a variety of penalties and fees. In addition, the Company had to enter into several forbearance agreements, pursuant to which the lender agreed to not take action against the Company for its default. During 2020 we entered into several individual securities purchase agreements with certain accredited investors for the purchase of shares of our Series A and B Convertible Preferred Stock. We sold Series C Convertible Preferred Stock during January 2021.

 

 

Strategy. Our management determined to focus on achieving growth and profitability within the current scope of our core product lines – foil balloons and related products – from our United States based business. We reviewed our operations and, during 2019, decided to sell or liquidate our subsidiaries in the UK and Europe, and attempted to sell our subsidiary in Mexico in early 2020 and it was ultimately not successful at the time due to the Covid-19 pandemic.  In an effort to increase profitability, we announced an intention to relocate our warehousing and light assembly facility from Lake Zurich, IL to Laredo, TX during 2020. Due to certain factors including the Covid-19 pandemic, we instead relocated this facility to Elgin, IL during March 2021.

 

 

Focus on our Core Assets and Expertise. We have been engaged in the development, production and sale of film and container products for 40 years and have developed assets, technology and expertise which, we believe, enable us to develop, manufacture, purchase, market and sell innovative products of high quality within our areas of knowledge and expertise. We plan to focus our efforts on these core assets and areas of expertise – film novelty products, specialty film products, laminated films and printed films – to develop new products, to market and sell our products and to build our revenues.

 

 

Develop New Products, Product Improvements and Technologies. We engage in research, design, innovation and development for the purpose of developing and improving products, materials, methods and technologies within our core product categories. We work to develop and identify new products, to improve existing products and to develop new technologies within our core product areas in order to enhance our competitive position and increase our sales. We seek to leverage our technology to develop innovative and proprietary products. In our novelty product lines, our development work includes new designs, new character licenses, new product developments, new materials and improved production methods. We work with customers to develop custom film products which serve the unique needs or requirements of the customer.

 

 

Develop New Channels of Distribution and New Sales Relationships. We seek to organically develop new channels of distribution and new sales relationships, both for existing and new products. Over the past several years, we have developed new distributors and customers for our products in the United States and in Europe, Mexico, Latin America and Australia.

 

 

Product and Line Extensions. We intend to pursue new product lines and product line extensions, through internal developments.

 

 

Products

 

Foil Balloons. We have designed, produced and sold foil balloons since 1979 and, we believe, are approximately the second largest manufacturer of foil balloons in the United States. Currently, we produce several hundred foil balloon designs, in different shapes and sizes.

 

In addition to size and shape, a principal element of our foil balloon products is the printed design or message contained on the balloon. These designs may include figures and licensed characters, but frequently are of our own design. We recognize that consumer trends and preferences, and competing products, are constantly changing. In order to compete effectively in this product line we must constantly innovate and develop new designs, shapes and products.

 

Latex Balloons. Through our subsidiary in Guadalajara, Mexico, Flexo Universal, S. de R.L. de C.V. (“Flexo Universal”), we manufacture latex balloons in a wide variety of sizes and colors. Many of these balloons are marketed under the name Partyloons® and balloons are also marketed on a private label basis. We also manufacture toy balloon products including punch balls, water bombs and "Animal Twisties."

 

Packaging Films and Custom Film Products. A large and increasing number of both consumer and commercial products are packaged in pouches or containers utilizing flexible films. Often such containers include printed labels and designs. We produce and sell films that may be utilized for the packaging of a wide variety of products and liquids. We laminate, extrusion coat and adhesive coat flexible films for these purposes and we provide flexographic printing for the films we produce. We can produce a variety of customized film products, and printing services, to meet the specific packaging needs of a wide variety of customers.

 

Other Products. In 2014, we began assembly and sale of our Candy Blossom product line. We have since supplemented this product line with related products.

 

Markets

 

Foil Balloons

 

The foil balloon came into existence in the late 1970s. During the 1980s, the market for foil balloons grew rapidly. Initially, the product was sold principally to individual vendors, small retail outlets and at fairs, amusement parks, shopping centers and other outdoor facilities and functions. Foil balloons remain buoyant when filled with helium for extended periods of time and they permit the printing and display of graphics and messages. As a result, the product has significant appeal as a novelty and message item. Foil balloons became part of the "social expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, we and other participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of the balloons to retail outlets including grocery, general merchandise, discount and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators. These outlets now represent the principal means for the sale of foil balloons throughout the United States and in a number of other countries, although individual vendors remain a means of distribution in a number of areas.

 

Foil balloons are now sold in virtually every region of the world. The United States, however, remains the largest market for these products.

 

Foil balloons are sold in the United States and foreign countries directly by producers to retail outlets and through distributors and wholesalers. Often the sale of foil balloons by the wholesalers/distributors is accompanied by related products including latex balloons, floral supplies, candy containers, mugs, plush toys, baskets and a variety of party goods.

 

Latex Balloons

 

For a number of years, latex balloons and related novelty/toy latex items have been marketed and sold throughout the United States and in many other countries. Latex balloons are sold as novelty/toy items for decorative purposes, as part of floral designs and as party goods and favors. In addition to standard size and shape balloons, inflatable latex items include punch balls, water bombs, balloons to be twisted into shapes, and other specialty designs. Often, latex balloons include printed messages or designs.

 

Latex balloons are sold principally in retail outlets, including party goods stores, general merchandise stores, discount chains, gift stores and drugstore chains. Latex balloons are also purchased by balloon decorators and floral outlets for use in decorative or floral designs. Printed latex balloons are sold both in retail outlets and for balloon decoration purposes including floral designs.

 

Latex balloons are sold both through distributors and directly to retail outlets by the producers.

 

Printed and Specialty Films

 

The industry and market for printed and specialty films are fragmented and include many participants. There are hundreds of manufacturers of printed and specialty film products in the United States and in other markets. In many cases, companies who provide food and other products in film packages also produce or process the films used for their packages. The market for the Company's film products consists principally of companies who utilize the films for the packaging of their products, including food products and other items, usually by converting the film to a flexible container.

 

 

Marketing, Sales and Distribution

 

Balloon Products

 

We work in collaboration with our customers on designs, promotions, and other elements of marketing and selling. Our customers are typically retailers who sell our products to individual consumers. These relationships generally can be terminated unilaterally by our customers. We must maintain good relationships with our customers if this sales model is to be successful.

 

We market and sell our foil balloon, latex balloon and related novelty products throughout the United States and in a number of other countries. We maintain marketing, sales and support staff and a customer service department in the United States. We sell directly to foreign customers from the United States on a limited basis, and seek to engage distributors in the UK and Europe in the future. Flexo Universal, our subsidiary in Mexico, conducts sales and marketing activities for the sale of balloon products in Mexico, Latin America, and certain other markets.

 

We sell and distribute our balloon products (i) through our sales staff and customer service personnel in the United States, (ii) through a network of distributors and wholesalers, (iii) through several groups of independent sales representatives, and (iv) to retail chains. Our balloon products are generally sold through retail outlets including grocery, general merchandise and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators.

 

We engage in a variety of advertising and promotional activities to promote the sale of our balloon products. We produce a complete catalog of our balloon products, and also prepare various flyers and brochures for special or seasonal products, which we disseminate to thousands of customers, potential customers and others. We participate in several trade shows for the gift, novelty, balloon and other industries and advertise in several trade and other publications. We maintain websites which show images of our products.

 

Printed and Specialty Films

 

We market and sell printed and laminated films directly and through independent sales representatives throughout the United States. We sell laminated and printed films to companies that utilize these films to produce packaging for a variety of products, including food products, in both solid and liquid form, such as cola syrup, coffee, juices and other items. We seek to identify and maintain customer relationships in which we provide added value in the form of technology or systems.

 

Other Products

 

Other products are sold by our internal sales force directly to customers and also by independent sales representatives. These products are generally sold directly to consumers or to retail outlets.

 

Production and Operations

 

We conduct our operations at our facilities including: (i) our 68,000 square feet facility in Lake Barrington, Illinois, incorporating our headquarters office, production and warehouse space, (ii) our 118,000 square foot facility in Lake Zurich, Illinois consisting of warehouse, packaging and office space, which has been relocated to Elgin, Illinois in March of 2021, (iii) a 73,000 square foot facility in Guadalajara, Mexico, consisting of office, warehouse and production space for Flexo Universal.

 

Our production operations include (i) lamination and extrusion coating of films, (ii) slitting of film rolls, (iii) printing on film and on latex balloons, (iv) converting film to completed products including balloons, flexible containers and pouches, (v) producing latex balloon products, (vi) inflating of air-filled balloons, and (vii) assembling Candy blossoms. We perform all of the lamination, extrusion coating and slitting activities in our Lake Barrington, Illinois plant and produce all of our latex balloon products at our Guadalajara, Mexico plant. We print on films in Lake Barrington, Illinois and we print on latex balloons in Guadalajara, Mexico. We complete air-filling and assembly of balloons in all our facilities except Lake Barrington, Illinois. We currently assemble Candy blossoms in our Elgin, Illinois facility.

 

We warehouse raw materials at our plants in Lake Barrington, Illinois and Guadalajara, Mexico and we warehouse finished goods at our facilities in Lake Barrington, Illinois; Elgin, Illinois; Guadalajara, Mexico. We maintain customer service and fulfillment operations at each of our warehouse locations. We conduct sales operations for the United States and for all other markets, except those that are handled by Flexo Universal, at the Lake Barrington, Illinois facility. In addition to warehouse and sales activities at these locations, we engage in some assembly, balloon inflation and related activities.

 

We maintain a graphic arts and development department at our Lake Barrington, Illinois facility which designs our balloon products and graphics. Our creative department operates a networked, computerized graphic arts system for the production of these designs and of printed materials including catalogues, advertisements and other promotional materials. As many of our products are custom designed or created to fulfill promotional schedules, we sometimes have excess inventory that must be sold at a discount or disposed of. Any such disposition will typically negatively impact our profit margin.

 

We conduct administrative and accounting functions at our headquarters in Lake Barrington, Illinois and occasionally, when needed, at our Guadalajara, Mexico, facility.

 

Raw Materials

 

The principal raw materials we use in manufacturing our products are (i) petroleum or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii) latex, and (iv) printing inks. The cost of raw materials represents a significant portion of the total cost of our products, with the result that fluctuations in the cost of raw materials have a material effect on our profitability. During the past several years, we have experienced significant fluctuations in the cost of these raw materials. We do not have any long-term agreements for the supply of raw materials and may experience wide fluctuations in the cost of raw materials in the future. Further, although we have been able to obtain adequate supplies of raw materials in the past, there can be no assurance that we will be able to obtain adequate supplies of one or more of our raw materials in the future.

 

Many of the foil balloons we produce and sell are intended to be filled with helium in order to be buoyant. Over the past several years, the price of helium has fluctuated substantially and the availability of helium has, on occasion, been limited. During 2018 and 2019, the availability of helium declined and the cost of helium increased. The supply of helium has since improved significantly. Any future occurrence of limited availability and/or an increase in the cost of helium could adversely affect our sales of foil balloons.

 

 

Competition

 

The balloon and novelty industry is highly competitive, with numerous competitors. We believe there are presently five principal manufacturers of foil balloons whose products are sold in the United States including Anagram International, Inc., Pioneer Balloon Company, Convertidora International S.A. de C.V., and Betallic, LLC. Several companies market and sell foil balloons designed by them and manufactured by others for them. In addition, there are several additional foil balloon manufacturers in Europe and China who participate in our markets.

 

We compete for the sale of latex balloons in the United States, Canada, Mexico, Latin America, the United Kingdom, Australia and Europe. There are a number of other companies situated in the United States, Mexico, Asia, South America and Europe who manufacture latex balloons and with whom we compete in the markets in which we participate. The markets are highly competitive with respect to price, quality and terms.

 

The market for films, packaging, and custom products is fragmented, and competition in this area is difficult to gauge. However, there are numerous participants in this market and the Company can expect to experience intense quality and price competition.  

 

Many of the companies in these markets offer products and services that are the same or similar to those offered by us and our ability to compete depends on many factors within and outside our control. There are a number of well-established competitors in each of our product lines, several of which possess substantially greater financial, marketing and technical resources and have established extensive, direct and indirect channels of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and services than we can. Competitive pressures include, among other things, price competition, new designs and product development and copyright licensing.

 

Patents, Trademarks and Copyrights

 

We have developed or acquired a number of intellectual property rights which we believe are significant to our business. As of December 31, 2020, we held 6 issued patents in the United States and 7 issued patents in foreign countries. These patents are scheduled to expire at various times during the 2020s. While these intellectual property rights are helpful, their degree of protection is uncertain. Competitors may violate our intellectual property rights, forcing us to decide whether to challenge them. Such rights may or may not withstand challenge. Conversely, entities may charge us with violating their intellectual property rights. Failure to protect our rights, or conflict with the rights of one or more other entities, may negatively impact our financial and competitive position.

 

Proprietary Designs and Copyright Licenses. We design the shapes and graphic designs of most of our foil balloon products.

 

Trademarks. We own five registered trademarks in the United States relating to our balloon products. Some of these trademarks are registered in foreign countries, principally in the European Union.

 

Patent Rights. We own, or have license rights under, or have applied for, patents related to our balloon products, certain film products and certain flexible container products.

 

Research and Development

 

We maintain a product development and research group for the development or identification of new products, product designs, product components and sources of supply. Research and development includes (i) creative product development and design, (ii) creative marketing, and (iii) engineering development. During each of the fiscal years ended December 31, 2020 and 2019, we estimate that the total amount spent on research and development activities was approximately $317,000 and $287,000, respectively.

 

Employees

 

As of December 31, 2020, the Company had 68 full-time employees in the United States, of whom 17 are executive or supervisory, 2 are in sales, 36 are in manufacturing or warehouse functions and 13 are clerical. As of that same date, Flexo Universal, our Mexico subsidiary, had 298 full-time employees, of whom 6 are executive or supervisory, 14 are in the warehouse, 5 are in sales, 259 are in manufacturing and 14 are clerical. The Company is not a party to any collective bargaining agreement in the United States, has not experienced any work stoppages, and believes that its relationship with its employees is satisfactory.

 

Beginning November 2018, the Company experienced severe difficulty in securing adequate seasonal workers in its US operations, forcing it to pay substantially higher costs in the form of overtime and a holiday premium. The Company expects its local labor market in the US (near Chicago) to continue to become more costly over time, which, if not changed, would negatively impact its future profitability.

 

Regulatory Matters

 

Our manufacturing operations in the United States are subject to the U.S. Occupational Safety and Health Act ("OSHA"). We believe we are in material compliance with OSHA. The Company generates liquid, gaseous and solid waste materials in its operations in Lake Barrington, Illinois and the generation, emission or disposal of such waste materials are, or may be, subject to various federal, state and local laws and regulations regarding the generation, emission or disposal of waste materials. We believe we are in material compliance with applicable environmental rules and regulations. Several states have enacted laws limiting or restricting the release of helium filled foil balloons. We do not believe such legislation will have any material effect on our operations.

 

An increasing number of regulations and actions relate to the integrity and security of individually identifiable data. Additionally, we require the effective use of data in running our business. While we are not aware of losses in the past, access of such data by unauthorized persons may expose us to costs, fines, penalties, and loss of customer confidence.

 

 

International Operations

 

We conduct operations in one location outside of the United States:

 

 

Flexo Universal, a 99%-owned subsidiary in Guadalajara, Mexico. Flexo Universal maintains a plant, offices and warehouse in Guadalajara, Mexico where we produce latex and foil balloons and print latex balloons. Flexo Universal conducts sales, warehousing and fulfillment operations, servicing principally the Company and other customers in the United States, Mexico, Latin America and certain customers in Europe. 

 

Our domestic and international sales from continuing operations to outside customers and assets by area over the period 2019-2020 have been as follows:

 

   

Net Sales to Outside Customers

 
   

For the Year Ended

 
   

December 31,

 
   

2020

   

2019

 
                 

United States

  $ 21,192,000     $ 23,754,000  

Mexico

    5,280,000       8,518,000  
                 
    $ 26,473,000     $ 32,272,000  

 

 

   

Total Assets at

 
   

December 31,

   

December 31,

 
   

2020

   

2019

 
                 

United States

  $ 12,459,000     $ 17,450,000  

Mexico

    8,798,000       10,897,000  

Assets Held for Sale

    294,000       2,974,000  
                 
    $ 21,551,000     $ 31,321,000  

 

Available Information

 

We maintain our corporate website at www.ctiindustries.com and we make available, free of charge, through this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with, or furnish to, the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we electronically file that material with, or furnish it to, the SEC. You may also read and copy material filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and you may obtain information on the operation of the Public Reference Room by calling the SEC in the U.S. at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov, which contains reports, proxy and information statements and other information that we file electronically with the SEC. Our website also includes corporate governance information, including our Code of Ethics and our Board Committee Charters. The information contained on our website does not constitute a part of this report.

 

Item No. 1A Risk Factors

 

Our business and results of operations have been and may continue to be negatively impacted by the spread of COVID-19.

 

We sell our products throughout the United States and in many foreign countries and may be impacted by public health crises beyond our control. This could disrupt our operations and negatively impact consumer spending and confidence levels, and supply availability and costs, all of which can affect our financial results, condition, and outlook. Our customers, suppliers and distributors may experience similar disruption. Importantly, the global pandemic resulting from COVID-19 has disrupted global health, economic and market conditions

 

Throughout 2020 and into 2021 the landscape improved, but the issue continues to drive elements of disruption in the ability to travel, attract and retain workers, manage production configurations and protocols, the supply chain and customer base. While we cannot predict the duration or scope of the COVID-19 pandemic, the resurgence of infections in one or more markets, or the impact of vaccines across the globe, the COVID-19 pandemic has negatively impacted our business and is expected to continue to impact our financial results, condition and outlook in a way that may be material.

 

COVID-19 has also delayed certain strategic transactions the Company intended to close during 2020, most notably its potential relocation of certain activities to the Laredo, Texas area, and the Company does not know if and when these transactions will be completed.

 

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Item No. 1B Unresolved Staff Comments

 

As of the filing of this Annual report on Form 10-K, we had no unresolved comments from the staff of the Securities and Exchange Commission.

 

 

Item No. 2 Properties

 

We own our principal plant and offices located in Lake Barrington, Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility includes approximately 68,000 square feet of office, manufacturing and warehouse space.

 

In September 2012, we entered into a lease agreement, expiring on February 28, 2017 to rent approximately 118,000 square feet of warehouse and office space in Lake Zurich, Illinois. Effective March 1, 2017, this lease was renewed for three years, at a remaining basic rental cost of $42,000 per month. We extended this lease due in part to COVID-19 and vacated this facility during March 2021, relocating this operation to Elgin, Illinois.

 

In August 2011, Flexo Universal entered into a 5-year lease agreement, expiring July 31, 2016, for the lease of approximately 73,000 square feet of manufacturing, warehouse and office space in Guadalajara, Mexico. The lease was extended to February 28, 2017. Effective March 1, 2017, Flexo Universal entered into a five-year lease for these premises at a cost of 493,090 Mexican Pesos per month (approximately $20,000 per month).

 

We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our existing facilities provide sufficient production capacity for our present needs and for our presently anticipated needs in the foreseeable future. We also believe that, with respect to leased properties, upon the expiration of our current leases, we will be able to either secure renewal terms or to enter into leases for alternative locations at market terms.

 

Item No. 3 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.

 

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.

 

FedEx Trade Networks Transport and Brokerage Inc. v. CTI Industries Corp., Case No. 20 L 46, was filed on January 27, 2020 in the Circuit Court of the 19th Judicial Circuit, Lake County, Illinois.  The complaint for breach of contract sought $163,964.75 in damages, plus interest and court costs. On October 15, 2020, the case was dismissed with leave to reinstate pursuant to settlement. The settlement calls for the payment of $100,400.00 in monthly installments of $10,000 per month for a period of ten (10) months and with the last payment being in the amount of $10,400. The first payment came due and was made on October 30, 2020, and payments have been made monthly.

 

Airgas USA, LLC v. CTI Industries Corp., Case No. 01-20-0014-7852 was filed with the American Arbitration Association on or about September 8, 2020. The claim seeks $212,000, plus interest, attorneys’ fees and costs for breach of contract. Claimant agreed to give CTI an extension to respond to the claim so the parties could attempt to resolve. On February 10, 2021, Airgas accepted CTI’s offer to pay $125,000 over 10 months. Airgas agreed to the settlement in March of 2021.

 

On October 19, 2020, Jules and Associates, Inc. sent CTI a demand letter related to the lease of certain equipment. The letter demanded $65,846.99 for alleged past due amounts under the lease as well as a return of the equipment. Discussions regarding the return of the equipment are ongoing and no lawsuit has been filed. On April 5, 2020 Jules & Associates, Inc. filed and served on CTI a demand for arbitration with JAMS related to the lease of certain equipment.  The demand requests $98,244.55 for alleged past due amounts under the lease as well as a return of the equipment or its fair market value. The Company accrued the $0.1 million in committed costs under this settlement in its December 31, 2020 financial statements.

 

On October 19, 2020, Redwood Multimodal sent CTI a demand for the withholding of payment in the amount $98,960.88 for loads brokered by Redwood. Settlement discussions are ongoing and no lawsuit has been filed. The Company accrued the $0.1 million in committed costs under this settlement in its December 31, 2020 financial statements.

 

Benchmark Investments, Inc. v. Yunhong CTI Ltd filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on CTI on March 31, 2021.  CTI has through April 21, 2021 to file its response to the complaint.  The complaint seeks damages in excess of $500,000.

 

 

 

Item No. 4. Mine Safety Disclosures

 

Not Applicable. 

 

PART II

 

Item No. 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

The Company's common stock was admitted to trading on the NASDAQ SmallCap Market (now the NASDAQ Capital Market) under the symbol “CTIB” on November 5, 1997.

 

As of December 31, 2020 there were approximately 441 holders of record of the Company’s Common Stock. The Company’s total number of beneficial owners of common stock of the Company was approximately 30.

 

The Company did not pay any cash dividends on its Common Stock during 2020 or 2019 and has no plans to pay dividends in the foreseeable future. Under the terms of the Company’s current loan agreements, the amount of dividends the Company may pay is limited by the terms of the financial covenants.

 

On April 9, 2021, our common stock closed at $2.19 per share.

 

 

Equity Compensation Plan Information

 

 

There were no stock option incentive plans outstanding as of December 31, 2020.

 

Item No. 6 Selected Financial Data

 

We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.

 

Item No. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Company produces film products for novelty, packaging container and custom film product applications. These products include foil balloons, latex balloons and related products, films for packaging applications, and custom film products. We produce all of our film products for packaging and container applications at our facilities 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 applications and flexible containers for packaging and storage are sold to customers in the United States. We market and sell our novelty items – principally foil balloons and latex balloons – in the United States, Mexico, and a number of additional countries. In addition, the Company assembles and sells Candy Blossoms (containers of arranged candy items) in the United States.

 

As determined by the Board of Directors in the third quarter 2019, we have been exiting our European operations in order to focus on our North America operations, particularly on foil balloons and related products. The sales entity in the UK, CTI Balloons, was liquidated in 2019. The sales and distribution entity in Germany is currently closing and is expected to be fully closed during 2021. Additionally, we stopped selling our vacuum sealing products as of March 30, 2020, after allowing the related license agreement to expire. These operations have been presented as discontinued operations in this Annual Report on Form 10-K (see Note 23).

 

We have also changed our capital structure. 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 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 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 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, 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. 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 issued approximately 600,000 shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceeds of approximately $5.6 million.

 

Additionally, in November 2020, we issued 170,000 shares of Series B Preferred for an aggregate purchase price of $1,500,000. As the Series B Preferred may be redeemed at the option of the holder, but is not mandatorily redeemable, the Series B Preferred has been classified as mezzanine equity and initially recognized at fair value of $1.5 million.

 

Our revenues from continuing operations from each of our product categories in each of the past two years have been as follows:

 

   

Twelve Months Ended

 
   

December 31, 2020

   

December 31, 2019

 
   

$

   

% of

   

$

   

% of

 

Product Category

 

(000) Omitted

   

Net Sales

   

(000) Omitted

   

Net Sales

 
                                 

Foil Balloons

    17,061       64 %     17,630       55 %
                                 

Latex Balloons

    4,718       18 %     7,409       23 %
                                 

Film Products

    804       3 %     1,883       6 %
                                 

Other

    3,890       15 %     5,350       17 %
                                 

Total

    26,473       100 %     32,272       100 %

 

 

Our primary expenses include the cost of products sold and selling, general and administrative expenses.

 

Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead expenses such as supervisory labor, depreciation, utilities expense and facilities expense directly associated with production of our products, warehousing and fulfillment expenses and shipping costs relating to the shipment of products to customers. Cost of products sold is impacted by the cost of the raw materials used in our products, the cost of shipping, along with our efficiency in managing the production of our products.

 

Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation of equipment and facilities utilized in administration, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits, the cost of regulatory compliance and other administrative costs.

 

Purchases by a limited number of customers represent a significant portion of our total revenues. During 2020 and 2019, respectively, sales to our top 10 customers represented 85% and 75%, respectively, of net revenues for each year. During 2020 and 2019, there were two customers to whom our sales represented more than 10% of net revenues.

 

Our principal customer sales for 2020 and 2019 were:

 

Customer

 

Product

 

2020 Sales

   

% of 2020

Revenues

   

2019 Sales

   

% of 2019

Revenues

 

Wal-Mart

 

Balloons; Candy Blossoms

  $ 3,745,000       14

%

  $ 3,935,000       12

%

Dollar Tree Stores

 

Balloons

  $ 12,536,000       47

%

  $ 11,332,000       35

%

 

The loss of one or both of these principal customers, or a significant reduction in purchases by one or both of them, could have a material adverse effect on our business.

 

We generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum amount of product from us.

 

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

 

Net Sales

 

For the fiscal year ended December 31, 2020, consolidated net sales from continuing operations of the sale of all products were $26,473,000 compared to consolidated net sales of $32,272,000 for the year ended December 31, 2019, a decrease of 18% as more fully described below.

 

Sales of foil balloons from continuing operations were $17,061,000 in 2020 and $17,653,000 in 2019, a decrease of 3%. Our largest customer for foil balloons was Dollar Tree Stores. The remaining sales were made to hundreds of customers including distributors and retail stores or chains in the United States, Canada, Mexico, the United Kingdom, Europe and Latin America.

 

Sales of latex balloons from continuing operations were $4,718,000 in 2020 and $7,409,000 in 2019, a decrease of 36%. The decrease resulted principally from the COVID-19 pandemic which negatively impacted operations in our Mexico facility.

 

Sales of film products from continuing operations were $804,000 in 2020 and $1,883,000 in 2019, a decrease of 57%.

 

Sales of other products from continuing operations decreased to $3,890,000 in 2020 from $5,350,000 in 2019, a decrease of 27%. This category includes (i) sales of helium and accessory items for our balloon products, (ii) sales of Candy Blossoms, (iii) sales of party goods in Mexico by Flexo Universal.

 

Cost of Sales

 

Cost of sales from continuing operations decreased to $22,921,000 in 2020 from $27,896,000 in 2019. The decrease in cost of sales was primarily attributable to the decrease in sales – cost of sales as a percentage of sales was 86.6% in 2020 and 86.4% in 2019. Additionally, the reduction in sales volume negatively impacted our ability to absorb fixed overhead costs. 

 

General and Administrative Expenses

 

General and administrative expenses from continuing operations decreased to $4,512,000 in 2020 from $5,358,000 in 2019. Many of the cost reductions realized during 2020 were in the administrative and marketing areas, including personnel costs, consulting and outside services.

 

Selling and Marketing

 

Selling expenses from continuing operations decreased to $145,000 in 2020 from $425,000 in 2019. Marketing and advertising expenses decreased to $350,000 in 2020, from $546,000 in 2019. The primary savings from selling, marketing and advertising was the net reduction of outside consulting services and a decrease of commission expense due to the reduction in sales volume.

 

 

Other Income or Expense

 

During 2020, we incurred net interest expense from continuing operations of $1,269,000 compared to net interest expense of $2,028,000 during 2019. The decrease in interest expense was primarily attributable to the lower average outstanding balance of debt in 2020 as compared to 2019. Additionally, in 2020, we recorded a $1,047,700 gain on the forgiveness of our Payroll Protection Plan loan.  A $1,276,000 reserve against our related party note receivable was entered into other expense during 2020.

 

Deemed Dividends on Preferred Stock and Amortization of Beneficial Conversion Feature

In 2020 the Company issued Series A Preferred Stock and Series B Preferred Stock. In connection with these preferred stock issuances, and the related beneficial conversion features, the Company had deemed dividends of $4.4 million in 2020. Although these deemed dividends do not impact Net loss attributable to Yunhong CTI, Ltd., they do impact Net loss attributable to Yunhong CTI Ltd. Common Shareholders and EPS.

 

Financial Condition, Liquidity and Capital Resources

 

Cash Provided By Operating Activities 

 

During fiscal 2020, cash provided by operating activities amounted to $1,752,000, compared to cash provided by operating activities during fiscal 2019 of $3,667,000. Significant changes in working capital items affecting cash flow used in operating activities were:

 

 

Depreciation and amortization of $964,000 compared to depreciation and amortization for 2019 of $1,150,000;

 

A decrease in inventories of $2,730,000 compared to a decrease of inventories of $4,507,000 in 2019;

 

A decrease in accounts receivable of $4,158,000 compared to a decrease in accounts receivable of $475,000 in 2019;

 

An increase in prepaid expenses and other assets of $269,000 compared to a decrease in prepaid expenses and other assets of $28,000 in 2019; and

 

A decrease in trade payables of $1,302,000 compared to an increase in trade payables of $1,177,000 in 2019.

 

Cash Used In Investing Activities 

 

During fiscal 2020, cash used in investing activities amounted to $202,000 compared to cash used in investing activities during fiscal 2019 of $80,000.

 

Cash Provided By Financing Activities 

 

During fiscal 2020, cash used in financing activities amounted to $1,593,000, compared to cash used by financing activities of $3,587,000 during fiscal 2019.  The Company had proceeds from PPP of $1,048,000 and repayment of debt and revolving line of credit of  $10,995,000.

 

As discussed in Note 3, in the Series A Offering, the Company sold 500,000 shares of Series A Preferred and 400,000 shares of common stock for aggregate gross proceeds of $5,000,000.

 

In November 2020, we issued 170,000 shares of Series B Preferred for an aggregate purchase price of $1,500,000.

 

In October 2020, we received an advance of $1,500,000 from an investor. In January 2021, we finalized the transaction with the investor and issued 170,000 shares of newly authorized Series C Preferred Stock.

 

Going Concern, Liquidity and Financial Condition

 

The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a cumulative net loss from inception to December 31, 2020 of over $14 million.. The accompanying financial statements for the year ended December 31, 2020 have been prepared assuming the Company will continue as a going concern. The Company’s cash resources will likely be insufficient to meet its anticipated needs during the next twelve months. The Company will require additional financing to fund its future planned operations.

 

The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Until December 2017, we had in place a series of credit facility and related agreements with BMO Harris Bank, N.A. and BMO Private Equity (U.S.), (collectively, “BMO”), in the aggregate amount of approximately $17 million. During December 2017, we terminated those agreements and fully repaid all amounts owed to BMO under those agreements, including associated fees and costs related to termination, as we entered in new financing agreements with PNC Bank, National Association (“PNC”). The financing agreements with PNC (the “PNC Agreements”) included a $6 million term loan and an $18 million revolving credit facility (the “Revolving Credit Facility”), with a credit facility termination date of December 2022.

 

We notified PNC of our failure to meet two financial covenants under the Revolving Credit Facility as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (“Amendment 1”) to our PNC Agreements. Amendment 1 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 (“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 an 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, and as of March 2019, entered into a forbearance agreement that ended during July 2019. We then entered a new forbearance agreement in October 2019 that terminated in January 2020 and, in connection with a new equity financing arrangement, was replaced on January 13, 2020, with a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “2020 Forbearance Agreement”) between PNC and the Company. Pursuant to the 2020 Forbearance Agreement, PNC agreed to (i) waive the PNC Agreements’ requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the PNC Agreements), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the PNC Agreements) and in connection therewith the Revolving Commitment Amount (as defined in the PNC Agreements) 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 (as defined in the Loan Agreement) afforded to PNC under the PNC Agreements for a period ending no later than December 31, 2020. As forbearance is a temporary condition, we have reclassified long-term bank debt to current liabilities on our balance sheet. See Note 3 for a related discussion of the impact of this event.

 

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 are 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. The highest values for this ratio allowed by the PNC Agreements are:

 

Fiscal Quarter Ratio

         
           

March 31, 2019

 

not applicable

 

June 30, 2019

  3.00 to 1.00  

September 30, 2019

  2.75 to 1.00  

January, 2020 and thereafter

 

not applicable

 

 

 

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. This ratio must not exceed the following for any quarterly calculation:

 

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 also entered into a swap agreement with PNC Bank to fix the interest for $3 million over 3 years. This swap was terminated during 2019 with our first forbearance agreement.

 

Failure to comply with these covenants has caused us to pay a higher rate of interest (by a cumulative 4% 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 in Notes 3 and 9, we believe that we were not in compliance with this credit facility as of December 31, 2020 and 2019.

 

Additionally, we have encountered difficulties with seasonal cash flow needs, including increasing costs associated with obtaining seasonal workers in the Chicago area. The failure to properly manage seasonal cash needs could put strain on the Company, up to and including our ability to continue as a going concern (see Note 3 for additional discussion). 

 

In October 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series C Redeemable Convertible Preferred Stock.   As of December 31, 2020, the Company was in the process of negotiating and finalizing the terms of the arrangement.  As the agreement was not finalized as of December 31, 2020, the $1.5 million advance is classified as Advance from Investor within liabilities on the accompanying balance sheet.

 

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. Approximately half of these sales are considered “everyday” in nature while the other half tend to be event driven (certain holidays, graduation season, and other events). The COVID-19 pandemic changed the shape of graduation season for 2020, resulting in a lower demand for balloons during the second quarter 2020, but then a surge of demand related to at-home parties and events. This increase in demand continued into 2021.

 

Critical Accounting Policies

 

The financial statements of the Company are based on the selection and application of significant accounting policies which require management to make various estimates and assumptions. The following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operation.

 

 

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.

 

The Company adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. 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.

 

Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment and write-off histories. Our credit risks are continually reviewed, and management believes that adequate provisions have been made for doubtful accounts. However, unexpected changes in the financial condition of customers or changes in the state of the economy could result in write-offs which exceed estimates and negatively impact our financial results.

 

Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted at the time of introduction of a new product or design, periodically and at year-end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As of December 31, 2020, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of $311,000. As of December 31, 2019, the amount of the reserve was $352,000. In addition, on a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, charges reserve for the value of such inventory. We record freight income as a component of net sales and record freight costs as a component of cost of goods sold.

 

Valuation of Long-Lived Assets. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property and equipment and goodwill) may be impaired or not recoverable. Significant factors which may trigger an impairment review include: changes in business strategy, market conditions, the manner of use of an asset, underperformance relative to historical or expected future operating results, and negative industry or economic trends. We apply the provisions of generally accepted accounting principles in the United States of America (“U.S. GAAP”) U.S. GAAP, under which goodwill is evaluated at least annually for impairment.

 

The Company identified an impairment indicator related to the goodwill associated with Clever Container, a VIE that was consolidated through June 30, 2019. As a result of an impairment test, the Company fully impaired the goodwill related to Clever in the first quarter of 2019 and recorded an impairment charge of $220,000. In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Flexo. As a result of an impairment test, the Company fully impaired the goodwill related to Flexo in the first quarter of 2019 and recorded an impairment charge of approximately $1 million. We performed a quantitative assessment for the year ended December 31, 2019 in which we considered the assets and liabilities of the Company as one operating segment, both recognized and unrecognized, as well as the cash flows necessary to operate the business relating to the assets and liabilities.

 

Foreign Currency Translation. All balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts are translated using the average exchange rates for the year-to-date periods. The gains and losses resulting from the changes in exchange rates during the period have been reported in other comprehensive income or loss, except that, on November 30, 2012, the Company determined that it does have an expectation of receiving payment with respect to indebtedness of Flexo Universal to the Company, and accordingly, as of and after that date foreign currency gains and losses with respect to such indebtedness will be reported in the statement of operations.

 

Stock-Based Compensation. We follow U.S. GAAP which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values.

 

We use the Black-Scholes option pricing model to determine the fair value of stock options which requires us to estimate certain key assumptions. In accordance with the application of U.S. GAAP, we incurred employee stock-based compensation cost of $178,000 for the year ended December 31, 2019. At December 31, 2019, we had no unrecognized compensation cost relating to stock options.

 

Income Taxes and Deferred Tax Assets. Income taxes are accounted for as prescribed in U.S. GAAP. Under the asset and liability method of U.S. GAAP, the Company recognizes the amount of income taxes currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years these temporary differences are expected to be recovered or settled.

 

We evaluate all available positive and negative evidence in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before what we have estimated in our current forecasts, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period.

 

 

Because we have been out of compliance with the terms of our credit facility and operating under a forbearance agreement, and had related going concern disclosure, we established a valuation allowance reserve for substantially all of our deferred tax assets.  In light of this, as of December 31, 2019 and December 31, 2020, the amount of the net deferred tax asset was $0.  Each quarter and year-end, management makes a judgment to determine the extent to which the deferred tax asset will be recovered from future taxable income.  This value was reduced, in large part, due to changes in US tax law effective 2018 which will impact the value of future deductions. 

 

Fair Value Measurements. U.S. GAAP defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. U.S. GAAP clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. U.S. GAAP also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available. In February 2008, the FASB issued guidance now codified in U.S. GAAP which provides for delayed application of certain guidance related to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

 

Variable Interest Entities

 

Primarily due to Clever and VLU having the attribution of related party beneficial ownership and certain financial and operational support, these entities are considered to be variable interest entities, or VIEs, under current accounting guidance. A company with interests in a VIE must consolidate the entity if the company is deemed to be the primary beneficiary of the VIE; that is, if it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Such a determination requires management to evaluate circumstances and relationships that may be difficult to understand and to make a significant judgment, and to repeat the evaluation at each subsequent reporting date. Prior to July 1, 2019, we had determined that the Company was the primary beneficiary of Clever and VLU (despite not having a majority ownership interest). As discussed in Note 2 to the accompanying consolidated financial statements, events that occurred during the start of the third quarter of 2019, caused us to reconsider the primary beneficiary determination for Clever and VLU. As a result, the consolidated financial statements as of December 31, 2019 and 2020 excluded the assets, liabilities and operating results of Clever and VLU. We also recognized a gain in the amount of $219,000 in connection with the deconsolidation of this VIE.

 

Item No. 7A Qualitative and Quantitative Disclosures Regarding Market Risk

 

Not applicable.

 

Item No. 8 Financial Statements and Supplementary Data

 

Reference is made to the Consolidated Financial Statements contained in Part IV hereof.

 

Item No. 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item No. 9A Controls and Procedures

 

(a) Evaluation of 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 December 31, 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 December 31, 2020, the end of the period covered by this Annual Report on Form 10-K, due to the material weaknesses described below.

 

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

 

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

 

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

 

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal ControlIntegrated 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 within an environment that is highly manual in nature.

 

Management concluded that there is a reasonable possibility that a material misstatement could occur in the consolidated financial statements if the control deficiencies were not remediated. Accordingly, management concluded that the matters described above are material weaknesses in the Company’s internal control over financial reporting and that the Company did not maintain effective internal control over financial reporting as of December 31, 2020.

 

 

Plan for Remediation of Material Weakness

 

Management has enhanced its available resource base and adjusted its processes with respect to the areas listed above.  Additional procedures are in the process of being established and will be evaluated for effectiveness in the future. 

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company to provide only management’s report in this annual report.

 

(c) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item No. 9B Other Information

 

None

 

PART III

 

Item No. 10 – Directors, Executive Officers and Corporate Governance of the Registrant

 

The members of our Board of Directors (the “Board”), and our executive officers, together with their respective ages and certain biographical information are set forth below. Directors hold office until the next annual meeting of our stockholders and until their successors have been duly elected and qualified. Our executive officers are elected by and serve at the designation and appointment of the Board.

 

The following is a brief account of the business experience of each of our directors and executive officers during the past five years or more.

 

Name

 

Age

 

Position

Yubao Li

 

39

 

Chairman of the Board of Directors, President, Chief Executive Officer

Jana M. Schwan

 

44

 

Chief Operating Officer

Jennifer M. Connerty

 

40

 

Chief Financial Officer

John M. Klimek

 

62

 

Director

Frank J. Cesario

 

51

 

Director

Yaping Zhang

 

31

 

Director

Wan Zhang

 

33

 

Director

 

 

Yubao Li, age 39, Director. Mr Li has served as a Director of the Company since January 13, 2020 and was elected as Chairman of the Board on June 1, 2020. Mr. Li has been serving as the Chairman of Yunhong International since its inception in January 2019 and served as its Chief Executive Officer from January 2019 to September 2019. Mr. Li has been serving as the president of Hubei Academy of Science and Technology since July 2018, one of the key multi-disciplinary universities in the province of Hubei. Since June 2018, Mr. Li has been serving as the Director of Photoproteins Research Centre at China’s Academy of Management Science, a research institute situated in Beijing where he supports innovation by defining the research focus of the group. Mr. Li also serves as a director and/or officer of several other entities, including as the Executive Director and General Manager of Hubei Teruiga Energy Co., Ltd, a new energy technology company, since November 2017, the Executive Director of Hubei Yuntong Energy Co., Ltd., a solar power and agriculture company, since April 2016, the Executive Director and General Manager of Hubei Yun Hong photovoltaic Co., Ltd., a solar power and agriculture company, since May 2016, the President of Hubei Yunhong Deren Tourism Co., Ltd., a tourism project developer, since May 2016 and the President of Yunhong Group Holdings Co., Ltd., a company engaged in the business of solar power construction and solar photovoltaic power generation, since 2013. In addition, in 2013, Mr. Li founded China Hubei Yunhong Energy Group Co., Ltd., a Chinese nutrition company operating in China and abroad, and he currently serves as the Chairman of its board of directors. Mr. Li received his EMBA in Investment, Financing and Capital Strategy from Peking University.

 

Yaping Zhang, age 31, Director. Yaping Zhang has served as a Director of the Company since May 2020. Yaping Zhang has served as Board Secretary of Yunhong Group Holdings Co. Ltd. Since 2017, after previously serving for two years as Assistant Chairman of Hubei Yunhong Energy Group Holdings Co. Ltd. Yaping Zhang has a Master’s Degree in Literature from Wuhan University and serves as Honorary Vice President of the Sichuan Disabled persons' Federation since 2019.

 

Wan Zhang age 33, Ms. Wan Zhang is currently a senior manager at Taikang Bybo Dental Group, where she is responsible for the group’s strategic planning and operations supervision. Prior to that, Ms. Zhang served as a senior manager at PKU Healthcare Group in Beijing, China. From 2014 to 2018, Ms. Zhang was a manager of the strategic investment department and board secretary at Capital Healthcare Group, a healthcare investment holding conglomerate in Beijing, China (“Capital Healthcare”). She also worked as the board secretary and assistant to the director of operations at Capital Healthcare’s subsidiary, Aiyuhua Women’s and Children’s Hospital in Beijing, China. Ms. Zhang previously served as an assistant board secretary at Tsit Wing Group, a food and beverages services provider in Hong Kong. Ms. Zhang began her career with Albert YK Lau & Co (Certified Public Accountants), Hong Kong, as an auditor and board secretary. Ms. Zhang graduated from Wuhan University with a Bachelor of Science degree in Biology and Lingnan University with a Master’s degree in International Banking and Finance.

 

John M. Klimek, age 62, Director. Mr. Klimek has been a member of the Board of Directors since 2013.  Mr. Klimek has been a practicing attorney in Illinois since 1984 specializing in corporate and securities law. From August 2004 to July 2018, Mr. Klimek was employed by HFR Asset Management, LLC, Chicago, Illinois, a hedge fund management company, most recently as President. Mr. Klimek brings strong financial, business and market acumen as well as compliance expertise and negotiating skills to the CTI Board. He holds a Juris Doctor and a BS Degree in Accountancy, both from the University of Illinois, Champaign-Urbana. He is also a director of  Reliv International, Inc. (NASDAQ – RELV).

 

Frank Cesario, age 51, Director. Mr. Cesario joined the Company in November 2017 as Chief Financial Officer. In December 2019 he was name President and Chief Executive Officer. He resigned as Chief Financial officer in June 2020 and President and Chief Executive Officer in September 2020. He brings nearly 20 years of CFO and controller experience at manufacturing entities. Prior to joining CTI, Mr. Cesario served in similar roles with Nanophase Technologies Corporation and ISCO International, Inc., publicly traded global suppliers of advanced materials and telecommunications equipment, respectively, as well as Turf Ventures LLC, a privately held chemicals distributor. He began his career with KPMG Peat Marwick and then served in progressively responsible finance positions within Material Sciences Corporation and Outokumpu Copper, Inc. Mr. Cesario holds an MBA (Finance) from DePaul University and a B.S. (Accountancy) from the University of Illinois, and is a registered CPA in the State of Illinois.

 

Executive Officers Other Than Nominees

 

Jana Schwan.  Ms. Schwan has been employed by the Company in various operational, purchasing, and product development capacities since September 2002. Ms. Schwan was named Vice President of Operations in 2017 and Chief Operating Officer in 2020.

Jana Schwan is the daughter of John Schwan.

 

Jennifer Connerty.  Ms. Connerty joined the Company in November 2016 as an Assistant Controller and was promoted to Controller in April 2018. Connerty received her MBA in Accounting from the Keller Graduate School of Management at DeVry University. Ms. Connerty was named Chief Financial Officer in 2020.

 

Except as disclosed in this Item 10 or Item 13 (Certain Relationships and Related Transactions, and Director Independence), there are no arrangements or understandings with major stockholders, customers, suppliers or others pursuant to which any of our directors or members of senior management were selected as such. In addition, there are no family relationships among our executive officers and directors.

 

 

Our future success depends, in significant part, on the continued service of certain key execute officers, managers, and others in various aspects of our business. We may not be able to find an appropriate replacement for any of our key personnel. Any loss or interruption of our key personnel’s service to the Company could adversely affect our ability to implement our business plan.

 

Corporate Governance

 

The business and affairs of the Company are managed under the direction of the Board of Directors in accordance with the Illinois Business Corporation Act and the Articles of Incorporation and By-laws of the Company, as amended. Members of the Board of Directors are kept informed of the Company’s business through discussions with the Chairman of the Board of Directors, the Chief Executive Officer, the President and other officers, by reviewing materials provided to them and by participating in meetings of the Board of Directors and its committees.

 

During 2020, the Board of Directors had five members. The Board has determined that each of John M. Klimek, Yaping Zhang and Wan Zhang presently directors of the Company, are independent based upon the application of the rules and standards of the NASDAQ Stock Market.

 

The Board of Directors met fifteen times during 2020. Each of the Directors was present for at least 75% of such meetings.

 

Board Leadership Structure

 

Yubao Li is Chairman of the Board of Directors, Chief Executive Officer and President. Jana M. Schwan, Chief Operating Officer and Jennifer M. Connerty, Chief Financial Officer are responsible for senior management functions. Both Ms. Schwan and Ms. Connerty report into the Board of Directors. The Board of Directors believes that this combination and allocation of roles between the two principal executive officers of the Company provides the most efficient and effective leadership model for the Company, providing perspective and direction with regard to business strategies and plans to both the Board and management. The Company has no bylaw or policy in place that mandates that an officer serve as Chairman of the Board. The Board of Directors periodically evaluates its leadership structure.

 

John Klimek has been designated as the lead independent director. Mr. Klimek is responsible for (i) communicating regularly with the Chief Executive Officer and other officers of the Company on behalf of the Board of Directors, and particularly the independent members of the Board of Directors, and (ii) calling separate meetings of the independent directors of the Company. At such meetings, only independent directors are present and the independent directors are free to discuss any aspect of the Company’s business and risk management without the influence of interested directors or management.

 

All members of the Company’s Audit, Compensation and Nominating and Governance Committees have been determined to be independent based on application of the rules and standards of the NASDAQ Stock Market.

 

Board Role in Risk Oversight

 

The Board of Directors plays an active role, as a whole and at the committee level, in overseeing management of the Company’s risks. The Board regularly reviews information regarding our credit, liquidity and operations, as well as the risks associated with each. The Audit Committee oversees management of financial risks through regular meetings with the Company’s independent registered public accounting firm and the Company’s Chief Executive Officer, President and Chief Financial Officer. The Company’s Compensation Committee evaluates and addresses risks relating to executive compensation, our incentive compensation plans and other compensatory arrangements. The Nominating and Governance Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of those risks, the entire Board of Directors is regularly informed through management and committee reports to the full Board about these and other operational risks.

 

Committees of the Board of Directors

 

The Board of Directors has standing Audit, Compensation and Nominating and Governance Committees.

 

 

Audit Committee

 

Since 2000, the Company has had a standing Audit Committee, which is presently composed of Ms. Wan Zhang(Chairman), Mr. Cesario and Mr. Klimek. Each of the members of the Audit Committee is independent based on the application of the rules and standards of the NASDAQ Stock Market and Rule 10a-3(b) under the Securities Exchange Act of 1934. Mr. Cesario has been designated as, and is, the Company’s “Audit Committee Financial Expert” in accordance with Item 407(d)(5) of Regulation S-K and meets the requirements for an audit committee expert as set forth in that item. The Audit Committee has primary responsibility meetings with management and independent auditors to discuss the Company’s financial statements. The Company’s Board of Directors has adopted a written charter, as amended, for the Company’s Audit Committee, a copy of which has been posted and can be viewed on the Company’s Internet website at http://www.ctiindustries.com under the section entitled “Investor Relations.” In addition, the Audit Committee has adopted a complaint monitoring procedure to enable confidential and anonymous reporting to the Audit Committee of concerns regarding, among other things, questionable accounting or auditing matters. The Audit Committee has primary responsibility for:

 

Appointing, compensating, and retaining our registered independent public accounting firm;

 

Overseeing the work performed by any outside accounting firm;

 

Assisting the Board of Directors in fulfilling its responsibility by reviewing the financial reports provided by us to the SEC, our stockholders, or to the general public, as well as the Company’s internal financial and accounting controls; and

 

Recommending, establishing, and monitoring procedures designed to improve the quality and reliability of the disclosure of our financial condition and results of operations.

 

The Audit Committee met four times during 2020.

 

Compensation Committee

 

The Compensation Committee is composed of Ms. Yaping Zhang (Chairman), Ms. Wan Zhang and John M. Klimek. The Board has determined that each of the members of the Compensation Committee is independent as defined in the listing standards for the NASDAQ Stock Market. The Compensation Committee reviews and acts on the Company’s executive compensation and employee benefit and retirement plans, including their establishment, modification and administration. It also recommends to the Board of Directors the compensation of the Chief Executive Officer and certain other executive officers. The Compensation Committee has a charter which has been posted and can be viewed on the Company’s Internet website at http://www.ctiindustries.com under the section entitled “Investor Relations.” The Compensation Committee did not meet in 2020.

 

Nominating and Governance Committee

 

In 2005, the Company established a Nominating and Governance Committee. The Nominating and Governance Committee consists of Ms. Yaping Zhang (Chairman), Ms. Wan Zhang and John M. Klimek. The Nominating and Governance Committee does not have a charter. The Board of Directors has determined that each of the members of the Nominating and Governance Committee is independent as defined in the listing standards for the NASDAQ Stock Market.

 

The Nominating and Governance Committee has not adopted a formal policy with regard to consideration of director candidates recommended by security holders. The Company believes that continuing service of qualified incumbent members of the Board of Directors promotes stability and continuity at the Board level, contributes to the Board’s ability to work as a collective body and provides the benefit of familiarity and insight into the Company’s affairs. Accordingly, the process of the Nominating and Governance Committee for identifying nominees reflects the Company’s practice of re-nominating incumbent directors who continue to satisfy the criteria for membership on the Board. For vacancies that are anticipated on the Board of Directors, the Nominating and Governance Committee intends to seek out and evaluate potential candidates from a variety of sources that may include recommendations by security holders, members of management, the Board of Directors, consultants and others. The minimum qualifications for potential candidates for the Board of Directors include demonstrated business experience, decision-making abilities, personal integrity and a good reputation.

 

While diversity is not a leading factor in the Nominating Committee’s evaluation of potential candidates and there is no formal policy for considering diversity when nominating a potential director, it is a consideration that is evaluated along with other qualifications of potential candidates. In light of the foregoing, it is believed that a formal policy and procedure with regard to consideration of director candidates recommended by security holders is not necessary in order for the Nominating and Governance Committee to perform its duties.

 

The Nominating Committee did not meet in 2020. All of the independent directors of the Board of Directors participated in the nominating process and, in separate session, voted in favor of recommending to the Board of Directors the nomination of each of the nominees for election as directors.

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the NASDAQ Stock Market. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on a review of such forms furnished to the Company, the Company believes that during calendar year 2020, all Section 16(a) filing requirements applicable to the officers, directors and ten-percent beneficial shareholders were satisfied.

 

Code of Ethics

 

The Company has adopted a code of ethics that applies to its senior executive and financial officers. The Company’s Code of Ethics seeks to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure of information to the Commission, (iii) compliance with applicable governmental laws, rules and regulations, (iv) prompt internal reporting of violations of the Code to predesignated persons, and (v) accountability for adherence to the Code. A copy of the Code of Ethics has been posted and may be viewed on the Company’s Internet website at http://www.ctiindustries.com under the heading “Investor Relations.” The Company will provide to any person without charge upon request a copy of the Code of Ethics. You may make such request by sending a written request to the Corporate Secretary at 22160 N. Pepper Road, Lake Barrington, Illinois 60010 and providing a return address

 

Item No. 11 Executive Compensation

 

The following table sets forth summary compensation information with respect to the Principal Executive Officer and each of the two other most highly compensated executive officers. These individuals, including the Principal Executive Officer, are collectively referred to in this annual report as the Named Executive Officers.

 

                           

Non-Equity

                 
                   

Option

   

Incentive Plan

   

All other

         

Name/Title

 

Year

   

Salary

   

Awards

   

Compensation

   

compensation

   

Total

 
                   

(1)

   

(2)

   

(3)

         
                                                 

Yubao Li

 

2020

    $ -     $ -     $ -     $ -     $ -  

Chief Executive Officer, President (4)

                                               
                                                 

Jennifer M. Connerty

 

2020

    $ 145,039     $ -     $ -     $ -     $ 145,039  

Chief Financial Officer (6)

 

2019

    $ 111,615     $ -     $ -     $ -     $ 111,615  
                                                 

Jana M. Schwan

 

2020

    $ 154,671     $ -     $ -     $ 8,707     $ 163,378  

Chief Operating Officer (5)

 

2019

    $ 120,769     $ -     $ -     $ 6,134     $ 126,903  

 

 

SUMMARY COMPENSATION TABLE

 

 

(1)

Reflects the compensation expense recognized in 2019 and 2020 for stock option awards under ASC Topic 718 as reported in the Company's audited financial statements.

(2)

Amounts determined under the Company's incentive compensation program.

(3)

Amounts for include matching 401(k) contributions and insurance premiums

(4)

Mr. Li joined the Company in 2020 as Chairman of the Board, Chief Executive Officer and President

(5)

Ms. Schwan became Chief Operating Officer in 2020. 

(6)

Ms. Connerty became Chief Financial Officer in 2020.

 

 

Narrative Disclosure for Summary Compensation Table

 

Employment Agreements with Our Named Executive Officers

 

No employment agreements exist.

 

Information Relating to Cash Incentives

 

The Board of Directors has adopted an Incentive Compensation Plan providing for annual incentive compensation to be paid to executive and managerial employees of the Company. Under the Plan, designated Named Executive Officers and several other executive officers and managers may receive incentive compensation payments, determined on a quarterly and annual basis, based upon the income of the Company before provision for income tax or for incentive compensation if the net income exceeds a threshold amount of profit for any quarter of $100,000 and, for the year, of $250,000. The benefits under the Plan are divided into two Pools of compensation. Pool I (representing the largest pool of incentive compensation) covers senior executive officers and managers who participate in the pool of incentive compensation based upon a percentage allocation recommended by the Compensation Committee and determined by the Board of Directors each year. Pool II covers other executives and managers who are selected to participate in proportions determined by management. Under the Plan, the award to each participant in Pool I represents a percent of income and the Pool II award, in the aggregate, represents a percent of income. The Compensation Committee recommends the amount of the incentive compensation awards which, in the aggregate, may not exceed sixteen percent of the net income of the Company (before provision for income tax or incentive compensation under the Plan). Further, the amount of incentive compensation to any participant may not exceed the annual base compensation of the participant. The Compensation Committee believes such incentive compensation motivates participants to achieve strong profitability which is viewed as the most significant element of corporate performance, provides rewards for strong corporate performance and aligns the incentive with the interests of the shareholders. Incentive compensation participation levels are generally determined during the first quarter of each fiscal year.

 

In determining the executives who participate in the incentive compensation awards in Pool I each year, and the relative amount of the award to each participant, the Compensation Committee considers and takes into account (i) the position of the executive, (ii) the level of responsibility and authority of the executive, (iii) the performance of the executive, and (iv) the extent to which the executive is in a position to affect the financial results and profitability of the Company.

 

Long-Term Equity Incentives

 

From time to time, upon the recommendation and action of the Compensation Committee and Board of Directors, stock options or grants under the 2009 Incentive Stock Plan have been awarded to officers, directors, or management personnel of the Company. At the Company’s Annual Meeting of Shareholders held in May 2009, the Company’s 2009 Incentive Stock Plan was approved by the shareholders.

 

The Board of Directors adopted and approved a new incentive option plan in April 2018 which was submitted to, and approved by, our stockholders at the annual meeting of stockholders on June 8, 2018 (the “Plan”). Under the Plan, the Compensation Committee of the Board of Directors is authorized to issue incentive options, non-statutory options, restricted stock awards and stock grants to officers, directors, management personnel and consultants of the Company. The Board of Directors determined that no further options would be granted under the 2009 Incentive Stock Plan.

 

Stock and option grants under the Plan will be determined from time to time by the Compensation Committee in consultation with management. The actual grant for each executive is determined by taking into consideration (i) individual performance, (ii) corporate performance and (iii) prior grants to, or stock ownership of the Company by, the executive or director. Generally, stock options are granted with an exercise price equal to or greater than the closing price of the Company’s common stock on the NASDAQ Stock Market on the date of the grant.

 

No stock options or grants were awarded or issued during 2020.

 

Retirement Benefits

 

The Company maintains a 401(k) employee savings plan in which all salaried employees are eligible to participate. The plan is a tax qualified retirement plan.

 

Under the 401(k) Plan, employees may contribute up to 15% of their eligible compensation to the Plan and the Company will contribute a matching amount to the Plan each year. Participating employees may direct the investment of individual and company contributions into one or more of the investment options offered by the Plan. Under the terms of the Plan, the Company has made a matching contribution equal to 100% of employee contributions that do not exceed 1% of eligible compensation plus 50% of employee contributions between 1% and 5% of eligible compensation. During 2017, the Board of Directors determined to cease matching contributions under the 401(k) Plan for the balance of the year.

 

Outstanding Equity Awards

 

There are no outstanding equity awards as of December 31, 2020

 

 

Payments Upon Termination or Change of Control

 

None

 

 

Director Compensation

 

The following table sets forth the compensation of directors of the Company during the year ended December 31, 2020:

 

DIRECTOR COMPENSATION

 

   

Director's

   

Option

   

All other

         

Name

 

Fees

   

Awards (1)

   

compensation

   

Total

 

Wan Zhang

  $ -     $ -     $ -  (2)   $ -  
                                 

Yaping Zhang

  $ -     $ -     $ -     $ -  
                                 

Yubao Li

  $ -     $ -     $ -     $ -  
                                 

John M. Klimek

  $ -     $ -     $ -     $ -  
                                 

Art Gisonni

  $ -     $ -     $ -     $ -  
                                 

Bret Tayne

  $ -     $ -     $ -     $ -  

 

 

(1)

Reflects the compensation expense recognized in 2020 for stock option awards under ASC Topic 718 as reported in the Company's audited financial statements.

 

 

(2)

Reflects consulting fees paid for services in connection with investor relations activities.

 

 

Narrative Description of Director Compensation

 

Non-management members of the Board of Directors receive a monthly fee of $1,250 plus $500 for each meeting of the Board of Directors or any Committee of the Board attended.  Amount was reduced and deferred during 2018 and suspended during 2019.  

 

Agreements Between Third Parties and Directors

 

There are no agreements or arrangements by which any directors or nominees are to receive compensation or other payments from third parties in return for serving on the Board of Directors.

 

 

Item No. 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The Board of Directors knows of no other matters to be presented for shareholder action at the Annual Meeting. On matters which may be raised at the Annual Meeting that are not covered by this annual report the persons named in the proxy will have full discretionary authority to vote.

 

 

BENEFICIAL OWNERSHIP OF SHARES BY MANAGEMENT

AND SIGNIFICANT SHAREHOLDERS

 

The following table provides information concerning the beneficial ownership of the Company’s Common Stock by each director and nominee for director, certain executive officers, and by all directors and officers of the Company as a group as of December 31, 2020. In addition, the table provides information concerning the current beneficial owners, if any, known to the Company to hold more than 5 percent of the outstanding Common Stock of the Company.

 

The amounts and percentage of stock beneficially owned are reported based on regulations of the Securities and Exchange Commission (“SEC”) governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after December 31, 2020. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities in which he has no economic interest. The percentage of Common Stock beneficially owned is based on 5,886,750 shares of Common Stock outstanding as of April 12, 2021.

 

   

Shares of

 

Shares of

 

Percent of

 

Name and Address

 

Common Stock

 

Preferred Stock

 

Common

 

of Beneficial Owner 

 

Beneficially Owned

 

Beneficially Owned

 

Stock

 

Yubao Li

    5,400,000  

(1)

    500,000  

(2)(3)

    49.6 %

Wan Zhang

    -         -         *  

Yaping Zhang

    -         -         *  

Frank J. Cesario

    2,000         -         *  

Jana Schwan

    5,725         -         *  

John M. Klimek

    1,457         -         *  

Jennifer Connerty

    -         -         *  

All Current Directors and Executive Officers as a group (7 persons)

    409,182         500,000         49.7 %

5% Holders

                           

John Schwan

    1,009,164         -         17.1 %
Stephen M. Merrick     826,800         -         14.0 %

 

 

*Less than one percent

 

 

1.

Represents 400,000 shares of common stock and 5,000,000 shares of common stock issuable upon conversion of 500,000 shares of Series A Preferred by LF International Pte. Ltd., a Singapore private limited company, which is beneficially owned by Mr. Yubao Li. 

 

  2.

Represents approximately 85% of the outstanding shares of the Company’s Series A Preferred.

 

 

3.

These shares are held by LF Investments Pte. Ltd., a Singapore private limited company controlled by Mr. Li.

 

 

4.

Pursuant to the Series A Certificate of Designation (as defined below), no holder of Series A Preferred may convert any portion of the Series A Preferred which would result in the holder beneficially owning more than 4.99% of the outstanding common stock of the Company. This limitation may be waived upon sixty-one (61) days’ prior notice from the holder to the Company.   

 

 

Item No. 13 Certain Relationships and Related Transactions

 

As of December 2017, Mr. John H. Schwan was owed a total of $1.1 million, with additional accrued interest of $0.4 million, 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 and the Company agreed to an exchange of $0.6 million of his debt for approximately 181,000 shares of CTI common stock at the then market rate of $3.32 per share. As of December 31, 2019, the balance of Mr. Schwan’s note was approximately $1.1 million, including accrued interest. Mr. Schwan is the father of Jana Schwan.

 

Relationships and transactions in which the Company and its directors and executive officers or their immediate family members are participants or have conflicts of interest are reviewed and approved by the Audit Committee. While the Audit Committee has not adopted a written policy for the review and approval of related party transactions, in determining whether to approve or ratify any such transaction, the Audit Committee considers, in addition to such other factors it may deem appropriate in the circumstances, whether (i) the transaction is fair and reasonable to the Company, (ii) under all of the circumstances, the transaction is in, or not inconsistent with, the Company’s best interests, and (iii) the transaction will be on terms no less favorable to the Company than could have been obtained in an arms’ length transaction with an unrelated third party. The Audit Committee, in its discretion, may request information from any party to facilitate its consideration of matter. The Audit Committee does not allow a director to participate in any review, approval or ratification of any transaction if he or she, or his or her immediate family member, has a direct or indirect material interest in the transaction.

 

 

Item No. 14 Principal Accountant Fees and Services

 

The following table sets forth the amount of fees billed by RBSM LLP, our independent registered public accounting firm and Plante Moran PLLC, our former independent registered public accounting firm, for professional services during the years ended December 31, 2020 and 2019:

 

   

Dec. 31, 2020

   

Dec. 31, 2019

 

Audit Fees (1)

  $ 242,094     $ 265,000  

Other Audit Related Fees (2)

    3,500       -  

All Other Fees (3)

    25,000       10,000  

Total Fees

  $ 270,594     $ 275,000  

 

 

(1)

Includes the annual financial statement audit and limited quarterly reviews and expenses.

 

(2)

Includes fees and expenses for other audit related activity provided by Plante & Moran PLLC and RBSM LLP.

 

(3)

Primarily represents tax services, which include preparation of tax returns and other tax consulting services.

 

All audits, tax and other services to be performed by RBSM LLP for the Company must be pre-approved by the Audit Committee. The Audit Committee reviews the description of services and an estimate of the anticipated costs to perform those services. Services not previously approved cannot commence until such approval has been granted. Pre-approval is granted usually at regularly scheduled meetings. If unanticipated items arise between meetings of the Audit Committee, the Audit Committee has delegated approval authority to the Chairman of the Audit Committee, in which case the Chairman communicates such pre-approvals to the full Committee at its next meeting.

 

The Audit Committee of the Board of Directors reviews all relationships with its independent auditors, including the provision of non-audit services, which may relate to the independent registered public accounting firm’s independence. 

 

 

PART IV

 

Item No. 15 Exhibits and Financial Statement Schedules

 

(a)(1) The following documents are filed under pages F-2 through F-5 and are included as part of this Form 10-K:

 

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

F-1

CONSOLIDATED BALANCE SHEETS

F-2

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

F-3

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY 

F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS

F-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-6

 

(a)(2) All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements, except for Schedule II – Valuation and qualifying accounts.

 

(a)(3) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed on the attached Exhibit Index.

 

 

Exhibit

Number 

Document

   

3.1

Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrants Schedule 14A Definitive Proxy Statement filed April 29, 2015).

3.2

Amended and Restated By-Laws of Yunhong CTI, LTD Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrants Form 8-K filed on March 17, 2017).

3.3

Certificate of Designation of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1, contained in Registrant's Form 8-K filed on January 3, 2020). 

3.4

Amended and Restated Certificate of Designation of Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1, contained in the Registrant's form 8-K filed on February 19, 2020). 

3.5

Articles of Amendment to the Registrants Articles of Incorporation (Incorporated by reference to Exhibit 3.1, contained in the Registrants form 8-K filed on March 16, 2020).

3.6

Certificate of Designations, Preferences and Rights of Series B Redeemable Convertible Preferred Stock, No Par Value (Incorporated by reference to Exhibit 3.1 contained in Registrant’s Form 8-K filed on November 25, 2020).

   

3.7

Certificate of Designations of Series C Convertible Preferred Stock (Incorporated by reference to Exhibit 3.1 contained in Registrant’s Form 8-K filed on January 15, 2021).

4.1

Form of Yunhong CTI, LTD common stock certificate (Incorporated by reference to Exhibit 4.1 contained in Registrants Report on Form 10-K dated March 31, 2017).

10.1

Yunhong CTI, LTD 2009 Stock Incentive Plan (Incorporated by reference to Schedule A contained in Registrants Schedule 14A Definitive Proxy Statement, as filed with the Commission on April 30, 2009).

10.2

Yunhong CTI, LTD 2018 Stock Incentive Plan (Incorporated by Reference to Schedule A contained in Registrants 14A Definitive Proxy Statement, as filed with the Commission on April 30, 2018)

10.3

Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012 (Incorporated by reference to Exhibit 10.8 contained in Registrants Report on Form 10-Q dated November 14, 2012).

10.4

Stock Purchase Warrant to Purchase Common Stock of Yunhong CTI, LTD (Incorporated by reference to Exhibit 10.5 contained in Registrants Report on Form 10-Q dated August 22, 2016).

10.5

Registration Rights Agreement between [Purchaser] and the Company (Incorporated by reference to Exhibit 10.6 contained in Registrants Report on Form 10-Q dated August 22, 2016).

10.6

Employment Agreement between Jeffrey S. Hyland and the Company dated December 1, 2017 (Incorporated by reference to Exhibit 10.38 contained in Registrants Report on Form 10-K filed on April 2, 2018).

10.7

Revolving Credit, Term Loan, and Security Agreement dated December 14, 2017 (Incorporated by reference to Exhibit 10.1, contained in Registrants Form 8-K filed on December 19, 2017).

10.8

Revolving Credit Note dated December 14, 2017 (Incorporated by reference to Exhibit 10.2, contained in Registrants Form 8-K filed on December 19, 2017).

10.9

Term Note dated December 14, 2017 (Incorporated by reference to Exhibit 10.3, contained in Registrants Form 8-K filed on December 19, 2017).

10.10

Promissory Note dated December 14, 2017 (Incorporated by reference to Exhibit 10.4, contained in Registrants Form 8-K filed on December 19, 2017).

10.11

Real Property Mortgage dated December 14, 2017 (Incorporated by reference to Exhibit 10.5, contained in Registrants Form 8-K filed on December 19, 2017).

10.12

Subordination Agreement dated December 14, 2017 (Incorporated by reference to Exhibit 10.6, contained in Registrants Form 8-K filed on December 19, 2017).

10.13

Waiver and Amendment No. 1 to Revolving Credit, Term Loan and Security Agreement dated June 12, 2018 (Incorporated by reference to Exhibit 10.1, contained in Registrants Form 8-K filed on June 12, 2018)

10.14

Consent and Amendment No. 2 to Revolving Credit, Term Loan and Security Agreement dated October 18, 2018 (Incorporated by reference to Exhibit 10.1, contained in Registrants form 8-K filed on October 18, 2018)

10.4

Stock Purchase Warrant to Purchase Common Stock of Yunhong CTI, LTD (Incorporated by reference to Exhibit 10.5 contained in Registrants Report on Form 10-Q dated August 22, 2016).

10.5

Registration Rights Agreement between [Purchaser] and the Company (Incorporated by reference to Exhibit 10.6 contained in Registrants Report on Form 10-Q dated August 22, 2016).

 

 

10.15

Subscription Agreement among Registrant and John H. Schwan dated December 21, 2018 (Incorporated by reference to Exhibit 10.1, contained in Registrants form 8-K filed on January 17, 2019).

10.16

Settlement Agreement and Release dated January 21, 2019 (Incorporated by reference to Exhibit 10.18, contained in Registrants form 10-K filed on April 16, 2019).

10.17

Amendment No.1 to Agreement among CTI, GLG, Page and H One dated January 21, 2019 (Incorporated by reference to Exhibit 10.19, contained in Registrants form 10-K filed on April 16, 2019).

10.18

Amendment No. 3 and Forbearance Agreement to Revolving Credit, Term Loan and Security Agreement dated March 4, 2019 (Incorporated by reference to Exhibit 10.1, contained in Registrants form 8-K filed on March 8, 2019).

10.19

Amendment No. 4 and Forbearance Agreement dated October 18, 2019 (Incorporated by reference to Exhibit 10.1, contained in Registrants form 8-K filed on October 24, 2019).

10.20

Stock Purchase Agreement, dated as of January 3, 2020 (Incorporated by reference to Exhibit 10.1, contain in Registrants form 8-K filed on January 3, 2020).

10.21

Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (Incorporated by reference to Exhibit 10.1, contained in the Registrant's form 8-K filed on January 16, 2020). 

10.22

Amendment No. 1 to Securities Purchase Agreement, dated as of February 24, 2020 (Incorporated by reference to Exhibit 10.1, contained in the Registrants form 8-K filed on February 26, 2020).

10.24

Amendment No.2 to Securities Purchase Agreement dated as of April 13, 2020 (Incorporated by reference to Exhibit 10.1, contained in Registrants form 8-K filed on April 17, 2020

10.25

Stock Purchase Agreement (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Form 8-K filed on November 25, 2020).

   

10.26

Stock Purchase Agreement (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Form 8-K filed on November 25, 2020).

14.1

Code of Ethics (Incorporated by reference to Exhibit 14 contained in the Registrants Form 10-K/A Amendment No. 2, as filed with the Commission on October 13, 2004).

16.1

Letter from Plante & Moran, PLLC dated April 19, 2019 (Incorporated by reference to Exhibit 16.1, contained in Registrants form 8-K filed on April 22, 2019).

21.1

Subsidiaries (description incorporated in Form 10-K under Item No. 1).

23.1

Consent of Independent Registered Public Accounting Firm, RBSM LLP.

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

99.1

Audited financial statements of the Company’s subsidiary, Flexo Universal, S. de R.L. de C.V. for the year ended December 31, 2020.

101

Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

 

 

(a)

The Exhibits listed in subparagraph (a)(3) of this Item 15 are attached hereto unless incorporated by reference to a previous filing.

 

(b)

The Schedule listed in subparagraph (a)(2) of this Item 15 is attached hereto.

 

Item No. 16 Summary

 

None.

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized on April 15, 2021.

 

 

Yunhong CTI, LTD 

     
 

By:    

/s/ Yubao Li

   

Yubao Li, President, Chief Executive

Officer, Chairman of the Board of Directors

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

Signatures

Title

Date

     

/s/ Yubao Li

Yubao Li

President, Chief Executive

Officer 

April 15, 2021

 

     

/s/ Jennifer Connerty

Chief Financial Officer

April 15, 2021

Jennifer Connerty

   
     

/s/ Yubao Li

Yubao Li

Chairman of the Board of

Directors

April 15, 2021
     

/s/ Frank Cesario

Frank Cesario

Director

April 15, 2021
     

/s/ John Klimek

John Klimek

Director

April 15, 2021
     

/s/ Wan Zhang

Wan Zhang

Director

April 15, 2021

 

/s/ Yaping Zhang

Yaping Zhang

Director

April 15, 2021

 

 

Yunhong CTI, LTD and Subsidiaries

 

Consolidated Financial Statements

 

Years ended December 31, 2020 and 2019

 

 

Contents

 

Consolidated Financial Statements:

 

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets as of December 31, 2020 and 2019

F-2

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019

F-3

Consolidated Statements of Stockholders’ Equity as of December 31, 2020 and 2019

F-4

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

F-5

Notes to Consolidated Financial Statements for the years ended December 31, 2020 and 2019

F-6

 

Financial Statement Schedule:

All other schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Stockholders and the Board of Directors of

 

Yunhong CTI Ltd. and Subsidiaries

 

 

 

Opinion on the Financial Statements

 

 

 

We have audited the accompanying consolidated balance sheets of Yunhong CTI Ltd. and Subsidiaries and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the two year period ended December 31, 2020, and the related notes (collectively referred to as the financial statement). We did not audit the December 31, 2020 and 2019 financial statements of Flexo Universal S. de R.L. de C.V., a 99.82 percent owned subsidiary, whose statements reflect total assets of approximately 41 percent in 2020 and 35 percent in 2019 and revenue constituting approximately 25 percent in 2020 and 26 percent in 2019, respectively, of the related consolidated totals as of and for the years ended December 31, 2020 and 2019, respectively. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Flexo Universal S. de R.L. de C.V., is based solely on the report of the other auditors. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flow for each of the years in the two year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

The Company's Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and will require additional capital to continue as a going concern.  In addition as discussed in Note 9, the Company is in violation of certain covenants agreed to with PNC Bank which if not resolved could result in PNC Bank initiating liquidation proceedings.  This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

Basis for Opinion

 

 

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

 

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

 

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Inventories Valuation

 

Critical Audit Matter Description

 

The Company's inventories, net of reserves totaled approximately $10,970,000 as of December 31, 2020. As described in Note 2 and Note 8 to the consolidated financial statements, inventories are valued at the lower of cost and net realizable value. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis, to reflect the actual cost of production of inventories.

 

On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As of December 31, 2020, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of $318,000. In addition, on a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, charges reserve for the value of such inventory.

 

Auditing management's estimates of the net realizable value of its inventory and reserves for excess and obsolete inventory, involved especially subjective auditor judgment as such estimates are based on various factors that are affected by market and economic conditions. In particular, the net realizable value, obsolete and excess inventory reserve calculations are sensitive to certain significant assumptions, including expected sales demand, manufacturing schedules, pricing strategies, and the effect of the possible discontinuation of product designs.

 

How the Critical Audit Matter Was Addressed in the Audit

 

The primary procedures we performed to address this critical audit matter included the following:

 

We obtained an understanding, over the Company's inventory reserve process, including management's review controls over the determination of the significant assumptions and the data underlying the calculations of the net realizable value of inventory and the excess and obsolete inventory reserves.

 

Our procedures included, among others, evaluating the significant assumptions identified above, and testing the accuracy and completeness of the underlying data used in management's inventory reserve calculation. We recalculated the reserve using management’s methodology and evaluated the methodology and the significant assumptions for reasonableness.

 

We also evaluated activity on specific raw materials and finished goods to evaluate whether changes to these assumptions may result in material changes in the calculated inventory reserves.

 

Financing Agreements with PNC in Notes Payable

 

Critical Audit Matter Description

 

As discussed in Note 9, during December 2017, the Company entered into new financing agreements with PNC. As of December 31, 2020, the PNC Agreements include term loans and a revolver, with a termination date of December 2022. The Term Loans are payable in monthly installments and the balance is due December 2022. The Term Loan is collateralized by the Company’s inventories and related equipment. The Revolver provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time.  Due to the Company’s failure to meet its covenants the Company entered into a forbearance agreement with PNC.

 

As discussed in Note 3 – Liquidity and Going Concern, the Company again violated certain covenants remains noncompliant with the terms of its facility, including various amendments, and have thus reclassified the Term Loan in current liabilities on its consolidated balance sheet.

 

The PNC liability is identified as a critical audit matter as it relates to accounts and disclosures that are significant to the consolidated financial statements and auditing management's plans and disclosure involved especially challenging and subjective judgments.

 

How the Critical Audit Matter Was Addressed in the Audit

 

We evaluated management’s disclosures of PNC activity and with regards to liquidity and going concern in the financial statement footnotes; we independently confirmed all the outstanding balances owed by the Company to PNC at December 31, 2020; and we have reviewed and evaluated minutes of meetings of the Board of Directors of the Company and have made inquiries to management and directors of the Company in order to assess the likelihood of PNC proceeding with liquidation proceedings.

 

Receivable from Related Party

 

Critical Audit Matter Description

 

As describe in Note 13, on July 1, 2019, the Company deconsolidated Clever, and as result the Company has a note receivable of approximately $1.387 million, net of previously recorded reserve.  As of December 31, 2020, the Company decided to record an additional reserve in excess of $.900 million on top of the previously recorded reserve of which is reflected in Other Expenses.

 

The amount of the reserve against the related party receivable as of December 31, 2020 required especially subjective judgements.

 

How the Critical Audit Matter Was Addressed in the Audit

 

We evaluated management’s disclosures related to the related party receivable asset; we independently verified that the outstanding balances are in agreement with the related party; and had discussions with the President of Clever in order to assess its wherewithal to pay the amount for the purposes of determining collectability.

 

 

 

/s/ RBSM LLP

 
   

We have served as the Company’s auditor since 2019.

 
   

New York, NY

 

 

April 15, 2021

 

 

 

Yunhong CTI, Ltd and Subsidiaries

Consolidated Balance Sheets

 

   

December 31,

2020

   

December 31,

2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 429,457     $ 845,098  

Accounts receivable

    5,013,195       6,793,532  

Inventories, net

    10,969,711       13,536,707  

Prepaid expenses

    589,149       353,183  

Other current assets

    1,352,419       1,312,205  
Income Tax Receivable     403,074       -  

Receivable from related party, net of allowance for reserve

    100,000       1,387,131  

Current assets of discontinued operations

    294,219       3,396,860  
                 

Total current assets

    19,151,224       27,624,716  
                 

Property, plant and equipment:

               

Machinery and equipment

    19,833,903       23,822,808  

Building

    3,321,016       3,374,334  

Office furniture and equipment

    2,231,458       2,289,444  

Intellectual property

    783,179       783,179  

Land

    250,000       250,000  

Leasehold improvements

    407,476       415,737  

Fixtures and equipment at customer locations

    518,450       518,450  

Projects under construction

    71,206       74,929  
      27,416,688       31,528,881  

Less : accumulated depreciation and amortization

    (25,466,213

)

    (28,997,809

)

                 

Total property, plant and equipment, net

    1,950,475       2,531,072  
                 

Other assets:

               

Operating lease right-of-use

    361,720       1,046,438  

Other assets

    87,552       118,857  
                 

Total other assets

    449,272       1,165,295  
                 

TOTAL ASSETS

  $ 21,550,971     $ 31,321,083  
                 

LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               
                 

Trade payables

  $ 5,504,442     $ 7,021,580  

Line of credit

    5,363,340       14,518,107  

Notes payable - current portion

    3,913,666       3,451,880  

Advance from Investor

    1,500,000       -  

Notes payable affiliates - current portion

    8,045       12,684  

Notes payable - officers, subordinated

    1,123,769       -  

Operating lease liabilities

    317,591       658,374  

Accrued liabilities

    871,761       1,205,027  

Current liabilities of discontinued operations

    184,577       656,753  
                 

Total current liabilities

    18,787,191       27,524,405  
                 

Long-term liabilities:

               

Notes payable - affiliates

    -       14,340  

Notes payable, net of current portion

    -       1,024,441  

Operating lease liabilities

    44,129       388,064  

Notes payable - officers, subordinated

    -       1,058,486  

Deferred gain (non current)

    -       184,840  
                 

Total long-term liabilities

    44,129       2,670,171  
                 
                 

TOTAL LIABILITIES

    18,831,320       30,194,576  
                 

Mezzanine equity:

               

Series B Preferred stock -- no par value, 170,000 share authorized 170,000 shares issued and outstanding at December 31, 2020 and nil at December 31, 2019 (liquidation preference - $5.0 million as of December 31, 2020)

    1,532,164       -  
                 

Equity:

               

Yunhong CTI, Ltd stockholders' equity:

               

Series A Preferred Stock -- no par value, 3,000,000 shares authorized, 500,000 shares issued and outstanding at December 31, 2020 and nil at December 31, 2019 respectively (liquidation preference - $5.0 million as of December 31, 2020)

    2,754,583       -  

Common stock - no par value, 50,000,000 and 15,000,000 shares authorized, 5,827,304 and 3,879,608 shares issued and 5,783,646 and 3,835,930 shares outstanding at December 31, 2020 and December 31, 2019 respectively

    14,537,828       13,898,494  

Paid-in-capital

    5,041,511       3,587,287  

Accumulated deficit

    (14,382,327

)

    (9,992,841

)

Accumulated other comprehensive loss

    (5,885,112

)

    (5,348,812

)

Less: Treasury stock, 43,658 shares

    (160,784

)

    (160,784

)

                 

Total Yunhong CTI, Ltd Stockholders' Equity

    1,905,699       1,983,344  
                 

Noncontrolling interest

    (718,212

)

    (856,837

)

                 

Total Shareholders' Equity

    1,187,487       1,126,507  
                 

TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY

  $ 21,550,971     $ 31,321,083  

 

See accompanying notes to consolidated financial statements

 

 

 

Yunhong CTI, Ltd and Subsidiaries

Consolidated Statements of Comprehensive Loss

 

   

For the Twelve Months Ended December 31,

 
   

2020

   

2019

 
                 

Net Sales

  $ 26,472,568     $ 32,271,647  
                 

Cost of Sales

    22,920,875       27,895,798  
                 

Gross profit

    3,551,693       4,375,849  
                 

Operating expenses:

               

General and administrative

    4,512,388       5,357,861  

Selling

    145,389       425,233  

Advertising and marketing

    349,714       546,091  

Impairment of long-lived assets

    -       1,476,380  

Gain on loss of control of VIEs

    -       (218,527

)

Gain on sale of assets

    (45,700

)

    (93,862

)

                 

Total operating expenses

    4,961,791       7,493,176  
                 

Loss from operations

    (1,410,098

)

    (3,117,327

)

                 

Other (expense) income:

               

Interest expense

    (1,269,347

)

    (2,028,014

)

Gain on forgiveness of Payroll Protection Program funding

    1,047,700       -  

Other expense

    (1,180,301

)

    (679,932

)

Foreign currency loss

    (98,707

)

    (11,996

)

                 

Total other expense, net

    (1,500,655

)

    (2,719,942

)

                 

Loss from continuing operations before taxes

    (2,910,753

)

    (5,837,269

)

                 

Income tax benefit (expense)

    403,074       (135,094

)

                 
                 

Loss from continuing operations

    (2,507,679

)

    (5,972,363

)

                 
                 

Loss from discontinued operations , net of tax

    (1,743,182

)

    (2,102,084

)

                 

Net Loss

  $ (4,250,861

)

  $ (8,074,447

)

                 

Less: Net (loss) income attributable to noncontrolling interest

    138,625       (947,093

)

                 

Net loss attributable to Yunhong CTI, Ltd

  $ (4,389,486

)

  $ (7,127,354

)

                 

Other Comprehensive Income (Loss)

               

Foreign currency adjustment

    (536,300

)

    310,160  

Comprehensive loss

  $ (4,787,161

)

  $ (7,764,287

)

                 

Deemed dividends on preferred stock and amortization of beneficial conversion feature

  $ (4,380,292

)

  $ -  
                 

Net Loss Attributable to Yunhong CTI Ltd Common Shareholders

  $ (8,769,778

)

  $ (7,127,354

)

                 

Basic income (loss) per common share

               

Continuing operations

  $ (1.46

)

  $ (1.31

)

Discontinued operations

    (0.40

)

    (0.55

)

Basic income (loss) per common share

  $ (1.86

)

  $ (1.86

)

                 

Diluted income (loss) per common share

               

Continuing operations

  $ (1.46

)

  $ (1.31

)

Discontinued operations

    (0.40

)

    (0.55

)

Diluted income (loss) per common share

  $ (1.86

)

  $ (1.86

)

                 

Weighted average number of shares and equivalent shares of common stock outstanding:

               

Basic

    4,705,741       3,835,950  
                 

Diluted

    4,705,741       3,835,950  

 

See accompanying notes to consolidated financial statements

 

 

 

Yunhong CTI, Ltd and Subsidiaries

Consolidated Statements of Stockholders' Equity

 

                   

Yunhong CTI, Ltd

                 
                                                   

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  

Deconsolidation of VIE - VLU

    -       -       -       -       -       -       -       -       -       75,806       75,806  

Deconsolidation of VIE - CLC

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

Deconsolidation of VIE - UK

    -       -       -       -       -       -       391,375       -       -       -       391,375  

Stock Issued

    -       -       120,000       -       303,000       -       -       -       -       -       303,000  

Stock Option Expense

    -       -       -       -       177,850       -       -       -       -       -       177,850  

Net Loss

    -       -       -       -       -       (7,127,355 )     -       -       -       (947,093 )     (8,074,448 )

Foreign currency translation

    -       -       -       -       -       -       310,160       -       -       -       310,160  

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

    542,660       5,093,267       400,000       333,334       -       -       -       -       -       -       5,426,601  

Convertible Preferred Stock Issuance - conversion of accounts payable

    48,200       478,017       -       -       -       -       -       -       -       -       478,017  

Preferred Stock converted

    (90,860 )     (946,938 )     941,388       -       946,938       -       -       -       -       -       -  

Common stock issued for placement agent fees

    -       (306,000 )     200,000       306,000       -       -       -       -       -       -       -  

Warrants issued to placement agent and other issuance costs

    -       (919,105 )     -       -       919,105       -       -       -       -       -       -  

Common stock issued for warrants exercised - cashless

    -       -       391,308       -       -       -       -       -       -       -       -  

Common stock issued - Stock based compensation

    -       -       15,000       -       -       -       -       -       -       -       -  

Placement agent fees and issuance costs

    -       (1,024,313 )     -       -       -       -       -       -       -       -       (1,024,313 )

Beneficial Conversion feature (BCF) on Series A Preferred Stock

    -       (2,468,473 )     -       -       2,468,473       -       -       -       -       -       -  

Deemed Dividend on BCF of Series A Preferred Stock

    -       2,468,473       -       -       (2,468,473 )     -       -       -       -       -       -  

BCF on Series B Preferred Stock

    -       -       -       -       1,500,000       -       -       -       -       -       1,500,000  

Deemed Dividend on BCF of Series B Preferred Stock

    -       -       -       -       (1,500,000 )     -       -       -       -       -       (1,500,000 )

Accrued Deemed Dividend - Series A Preferred Stock

    -       379,655       -       -       (379,655 )     -       -       -       -       -       -  

Accrued Deemed Dividend - Series B Preferred Stock

    -       -       -       -       (13,600 )     -       -       -       -       -       (13,600 )

Accretion of Series B Preferred Stock

    -       -       -       -       (18,564 )     -       -       -       -       -       (18,564 )

Net Loss

    -       -       -       -       -       (4,389,486 )     -       -       -       138,625       (4,250,861 )

Foreign Currency Translation

    -       -       -       -       -       -       (536,300 )     -       -       -       (536,300 )

Balance December 31, 2020

    500,000     $ 2,754,583       5,827,304     $ 14,537,828     $ 5,041,511     $ (14,382,327 )   $ (5,885,112 )     (43,658 )   $ (160,784 )   $ (718,212 )   $ 1,187,487  

 

See accompanying notes to consolidated financial statements

 

 

 

Yunhong CTI, Ltd and Subsidiaries

Consolidated Statements of Cash Flows

 

   

For the Year Ended December 31,

 
   

2020

   

2019

 
                 

Cash flows from operating activities:

               

Net loss

  $ (4,250,861 )   $ (8,074,448 )
Adjustments to reconcile net loss to net cash provided by operating activities                

Depreciation and amortization

    472,337       1,149,896  

Amortization of deferred gain on sale/leaseback

    45,700       78,477  
     Amortization of ROU Asset     649,615       1,129,878  

Gain on forgiveness of PPP Funding

    (1,047,700 )     -  

Provision for losses on accounts receivable

    (11,110 )     304,180  

Provision for losses on inventories

    -       1,247,581  

Impairment on assets held for sale

    -       604,483  

Gain on deconsolidation of Clever

    -       (218,534 )

Impairment of Note Receivable

    1,276,813       -  

Impairment of prepaid, current & non current assets

    -       168,931  

Impairment of long-lived assets

    -       1,686,929  

Stock based compensation

    -       177,850  
Income Tax Receivable     (403,074 )     -  

Deferred income taxes

    -       135,094  

Loss on disposition of asset

    -       17,480  

Change in assets and liabilities:

               

Accounts receivable

    4,157,800       475,061  

Inventories

    2,730,049       4,507,221  

Prepaid expenses and other assets

    (268,207 )     28,232  

Trade payables

    (1,302,201 )     1,177,003  
         Change in ROU Liability     (649,615 )     (1,129,878 )

Accrued liabilities

    352,883       201,417  
                 

Net cash provided by operating activities

    1,752,429       3,666,853  
                 
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment

    (202,203 )     (80,472 )
                 

Net cash used in investing activities

    (202,203 )     (80,472 )
                 

Cash flows from financing activities:

               

Change in checks written in excess of bank balance

    -       (636,142 )

Repayment of debt and revolving line of credit

    (10,995,083 )     (3,454,494 )

Proceeds from advance from investor

    1,500,000       -  

Proceeds from issuance of Series A preferred stock

    5,093,267       -  

Proceeds from issuance of Series B preferred stock

    1,500,000       -  

Proceeds from issuance of common stock

    333,334       -  

Cash paid for stock issuance costs

    (1,024,313 )     -  

Cash paid for deferred financing fees

    (83,424 )     (146,102 )

Proceeds from PPP

    1,047,700       -  

Proceeds from issuance of long-term debt

    1,243,684       650,000  
                 

Net cash used in financing activities

    (1,384,835 )     (3,586,738 )
                 

Effect of exchange rate changes on cash

    (389,842 )     421,611  
                 

Net decrease in cash and cash equivalents

    (224,451 )     421,254  
                 

Cash and cash equivalents at beginning of year

    849,404       428,150  
                 

Cash and cash equivalents at end of year

  $ 624,953     $ 849,404  

The cash flows related to discontinued operations of $195,496 and $4,307 as of December 31, 2020 and 2019, respectively, 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

  $ 1,269,000     $ 2,097,682  
Non cash financing and investing activities                

Common stock issued for accounts payable

  $ -     $ 303,000  

Conversion of accounts payable debt to Series A Preferred

  $ 478,000     $ -  

Accrued dividend and accretion on preferred stock

  $ 412,000     $ -  

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 and Series B Preferred stock

  $ 3,968,000     $ -  

Common stock issued for notes payable

  $ -     $ 600,000  

 

See accompanying notes to consolidated financial statements

 

 

Yunhong CTI, Ltd and Subsidiaries

Notes to Consolidated Financial Statements Years Ended
December 31, 2020 and 2019

 

 

 

1. Nature of Business

 

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 23 Discontinued Operations, effective in 2019, the Company determined that it was exiting CTI Balloons Limited and CTI Europe. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements. 

 

 

 

2. Summary of Significant Accounting Policies 

 

Principles of Consolidation

 

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. All significant intercompany accounts and transactions have been eliminated upon consolidation. As discussed in Note 23 Discontinued Operations, effective in 2019, the Company determined that it was exiting CTI Balloons Limited and CTI Europe. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements. 

 

Variable Interest Entities

 

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.

 

Foreign Currency Translation

 

The financial statements of foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical exchange rate for stockholders’ equity, and a weighted average exchange rate for each period for revenues and expenses. Translation adjustments are recorded in accumulated other comprehensive income (loss) as the local currencies of the subsidiaries are the functional currencies. Foreign currency transaction gains and losses are recognized in the period incurred and are included in the consolidated statements of operations.

 

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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less.

 

Accounts Receivable

 

Trade receivables are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts, evaluating the individual customer receivables through consideration of the customer’s financial condition, credit history and current economic conditions and use of historical experience applied to an aging of accounts. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for a period over the customer’s normal terms. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis, to reflect the actual cost of production of inventories.

 

Production costs of work in process and finished goods include material, labor and overhead. Inventory is not recorded in excess of net realizable value.

 

 

Property, Plant and Equipment

 

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line method over the lesser of the estimated useful life or the lease term. The estimated useful lives range as follows:

 

   

(in years)

 

Building

  25 - 30  

Machinery and equipment

  3 - 15  

Projects that prolong the life and increase efficiency of machinery

  3 - 5  

Light Machinery

  5 - 10  

Heavy Machinery

  10 - 15  

Office furniture and equipment

  5 - 8  

Intellectual Property

  9 - 15  

Leasehold improvements

  5 - 8  

Furniture and equipment at customer locations

  1 - 3  

 

Light machinery consists of forklifts, scissor lifts, and other warehouse machinery. Heavy machinery consists of production equipment including laminating, printing and converting equipment. Projects in process represent those costs capitalized in connection with construction of new assets and/or improvements to existing assets including a factor for interest on funds committed to projects in process of nil and $12,000 for the years ended December 31, 2020 and 2019, respectively. Upon completion, these costs are reclassified to the appropriate asset class.

 

 

Stock-Based Compensation

 

The Company has stock-based incentive plans which may grant stock option, restricted stock and unrestricted stock awards.  The Company recognizes stock-based compensation expense based on the grant date fair value of the award and the related vesting terms.  The fair value of stock-based awards is determined using the Black-Scholes model, which incorporates assumptions regarding the risk-free interest rate, expected volatility, expected option life, and dividend yield.  See Note 18 for additional information.

 

Fair Value Measurements

 

Current professional accounting guidance applies to all assets and liabilities that are being measured and reported on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The requirements prescribe a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. A Level 1 input includes a quoted market price in an active market or the price of an identical asset or liability. Level 2 inputs are market data other than Level 1 inputs that are observable either directly or indirectly including quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.

 

The carrying value amounts of the Company’s cash and cash equivalents, accounts and notes receivable, accounts payable and other current liabilities are reasonable estimates of their fair values due to the short-term nature of these instruments. The fair value of business segments (as needed for purposes of determining indications of impairment to the carrying value of goodwill) is determined using an average of valuations based on market multiples and discounted cash flows, and consideration of our market capitalization. See Note 5 for further discussion

 

Goodwill

 

The Company applies the provisions of U.S. GAAP, under which goodwill is tested at least annually for impairment. It is the Company’s policy to perform impairment testing annually as of December 31, or as circumstances change. An impairment of $1.4 million was recognized for the year ended December 31, 2019. As of December 31, 2020 and 2019, the Company had no remaining goodwill (see Note 15).

 

Valuation of Long Lived Assets

 

The Company evaluates whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property, plant and equipment) may be impaired or not recoverable. The significant factors that are considered that could trigger an impairment review include: changes in business strategy, market conditions, or the manner of use of an asset; underperformance relative to historical or expected future operating results; and negative industry or economic trends. In evaluating an asset for possible impairment, management estimates that asset’s future undiscounted cash flows and appraised values to measure whether the asset is recoverable. The Company measures the impairment based on the projected discounted cash flows of the asset over its remaining life.

 

Deferred Financing Costs

 

Deferred financing costs are amortized over the term of the loan. Upon a refinancing, existing unamortized deferred financing costs are expensed.

 

 

Income Taxes

 

The Company accounts for income taxes using the liability method. As such, deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

 

Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation allowance when management cannot determine, in its opinion, that it is more likely than not that the Company will recover that recorded value of the deferred tax asset. The Company is subject to U.S. Federal, state and local taxes as well as foreign taxes in Mexico. U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested.

 

Unrecognized tax benefits are accounted for as required by U.S. GAAP which prescribes a more likely than not threshold for financial statement presentation and measurement of a tax position taken or expected to be taken in a tax return.  See Note 11 for further discussion.

 

Revenue Recognition

 

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

 

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. 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. In most cases, the Company has a single product delivery performance obligation. Accrued product returns are estimated based on historical data and evaluation of current information.

 

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.

 

A disaggregation of product net sales is presented in Note 20.

 

Research and Development

 

The Company conducts product development and research activities which include (i) creative product development and (ii) engineering. During the years ended December 31, 2020 and 2019, research and development activities totaled $317,000 and $287,000, respectively.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expenses amounted to $11,000 and $80,000 for the years ended December 31, 2020 and 2019, respectively.