(847)382-1000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered | Common Stock | | CTIB | | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the Registrant: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 þ☑ No ¨☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☑ 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,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ | ☐ | Accelerated filer ¨ | ☐ | Non-accelerated filer¨ | ☐ | Smaller Reporting Company þreporting 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 Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ☑ The number of shares outstanding of the Registrant’sregistrant’s common stock as of November 1, 20172019 was 3,525,227.3,835,950 (excluding treasury shares).
QUARTERLY REPORT ON FORM 10-Q/A For the quarterly period ended September 30, 2019 EXPLANATORY NOTE Amendment No. 1 on Form 10-Q/A amends and restates certain items noted below in the Quarterly Report on Form 10-Q of Yunhong CTI Ltd. (formerly CTI Industries Corporation) (the “Company”) for the quarter ended September 30, 2019, as originally filed with the Securities and Exchange Commission on November 19, 2019 (the “Original Filing”). This Form 10-Q/A amends the Original Filing to reflect the following changes. First, the Original Filing was made without the benefit of auditor review, as noted in the filing, and this amendment reflects the inclusion of outside auditor participation. Second, additional information of subsequent events is detailed in this amended filing. We determined that CTI Balloons (UK) and CTI Europe (Germany) were held for sale as of September 30, 2019. Accordingly, the Company has reported the results of these operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. Associated with the determination that these entities were held for sale; impairments were recorded to appropriately value the entities. Additionally, the impairment charges and deferred tax benefits previously reported were adjusted based on additional information. Effective July 1, 2019, we determined that we are no longer the primary beneficiary of certain Variable Interest Entities. Therefore, effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. INDEXAs of January 3, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2019. This Form 10-Q/A is being prepared with the benefit of auditor review and will constitute our amended filing.
This Form 10-Q/A has also been updated to reflect disclosure of subsequent events that have occurred after the balance sheet date, but before the issuance of the associated financial statements. The subsequent events include the Company’s decision to exit a significant product line and a change of capital structure. For the convenience of the reader, this Form 10-Q/A amends and restates only the following financial statements and disclosures that were impacted from the changes: | ● | Item No. 1 – Financial Statements |
| ● | Item No. 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | | ● | Item No. 4 – Controls and Procedures |
Except as described above, no other changes have been made to the Original Filing. INDEX
PART 1 - FINANCIAL INFORMATION | | Item 1. Financial Statements | | CTI Industries Corporation and Subsidiaries | Condensed Consolidated Balance Sheets |
| | September 30, 2017 | | | December 31, 2016 | | | | (unaudited) | | | | | ASSETS | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents (VIE $3,000 and $51,000, respectively) | | $ | 324,712 | | | $ | 563,043 | | Accounts receivable, (less allowance for doubtful accounts of $127,000 and $137,000, respectively) (VIE $29,000 and $6,000, respectively) | | | 9,481,084 | | | | 14,838,978 | | Inventories, net (VIE $611,000 and $719,000, respectively) | | | 19,348,108 | | | | 18,348,011 | | Prepaid expenses (VIE $39,000 and $18,000, respectively) | | | 665,437 | | | | 678,689 | | Other current assets (VIE $200 and $0, respectively) | | | 675,821 | | | | 530,669 | | | | | | | | | | | Total current assets | | | 30,495,162 | | | | 34,959,390 | | | | | | | | | | | Property, plant and equipment: | | | | | | | | | Machinery and equipment (VIE $0 and $0, respectively) | | | 26,892,832 | | | | 26,348,443 | | Building | | | 3,387,323 | | | | 3,379,636 | | Office furniture and equipment (VIE $260,000 and $154,000, respectively) | | | 3,277,226 | | | | 3,597,158 | | Intellectual property | | | 752,044 | | | | 482,088 | | Land | | | 250,000 | | | | 250,000 | | Leasehold improvements | | | 415,549 | | | | 395,603 | | Fixtures and equipment at customer locations | | | 3,302,868 | | | | 3,302,868 | | Projects under construction | | | 102,477 | | | | 493,859 | | | | | 38,380,319 | | | | 38,249,655 | | Less : accumulated depreciation and amortization (VIE $35,000 and $29,000, respectively) | | | (33,416,436 | ) | | | (32,938,267 | ) | | | | | | | | | | Total property, plant and equipment, net | | | 4,963,883 | | | | 5,311,388 | | | | | | | | | | | Other assets: | | | | | | | | | Goodwill (VIE $440,000 and $440,000, respectively) | | | 1,473,176 | | | | 1,473,176 | | Net deferred income tax asset | | | 2,023,781 | | | | 1,696,690 | | Other assets (due from related party $50,000 and $47,000, respectively) | | | 408,428 | | | | 473,095 | | | | | | | | | | | Total other assets | | | 3,905,385 | | | | 3,642,961 | | | | | | | | | | | TOTAL ASSETS | | $ | 39,364,430 | | | $ | 43,913,739 | | | | | | | | | | | LIABILITIES AND EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | Checks written in excess of bank balance | | $ | 518,076 | | | $ | 1,688,675 | | Trade payables (VIE $156,000 and $92,000, respectively) | | | 6,101,567 | | | | 5,861,932 | | Line of credit (VIE $356,000 and $408,000, respectively) | | | 8,567,174 | | | | 11,263,531 | | Notes payable - current portion (net discount of $0 and $113,000, respectively) (VIE $0 and $0, respectively) | | | 7,445,091 | | | | 1,709,220 | | Notes payable officers - current portion | | | - | | | | 180,000 | | Notes payable affiliates - current portion | | | 10,109 | | | | 8,141 | | Capital Lease - current portion | | | 14,283 | | | | 40,660 | | Accrued liabilities (VIE $147,000 and $140,000, respectively) | | | 2,934,652 | | | | 3,127,425 | | | | | | | | | | | Total current liabilities | | | 25,590,952 | | | | 23,879,584 | | | | | | | | | | | Long-term liabilities: | | | | | | | | | Notes payable - affiliates | | | 213,669 | | | | 218,858 | | Notes payable, net of current portion (net discount of $0 and $0, respectively) (VIE $196,000 and $301,000, respectively) | | | 195,722 | | | | 5,301,491 | | Notes payable - officers, subordinated | | | 1,490,332 | | | | 1,416,138 | | Capital Lease | | | - | | | | 4,690 | | Deferred gain (non current) | | | 251,372 | | | | 297,521 | | | | | | | | | | | Total long-term debt, net of current portion | | | 2,151,095 | | | | 7,238,698 | | | | | | | | | | | Warrants Payable | | | - | | | | 817,880 | | | | | | | | | | | Total long-term liabilities | | | 2,151,095 | | | | 8,056,578 | | | | | | | | | | | Equity: | | | | | | | | | CTI Industries Corporation stockholders' equity: | | | | | | | | | Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding | | | | | | | - | | Common stock - no par value, 15,000,000 shares authorized, 3,568,885 shares issued and 3,525,227 shares outstanding | | | 13,898,494 | | | | 13,898,494 | | Paid-in-capital | | | 2,230,145 | | | | 2,250,235 | | Accumulated earnings | | | 1,580,967 | | | | 2,323,326 | | Accumulated other comprehensive loss | | | (5,100,978 | ) | | | (5,593,878 | ) | Less: Treasury stock, 43,658 shares | | | (160,784 | ) | | | (160,784 | ) | | | | | | | | | | Total CTI Industries Corporation stockholders' equity | | | 12,447,844 | | | | 12,717,393 | | | | | | | | | | | Non controlling interest | | | (825,461 | ) | | | (739,816 | ) | | | | | | | | | | Total Equity | | | 11,622,383 | | | | 11,977,577 | | | | | | | | | | | TOTAL LIABILITIES AND EQUITY | | $ | 39,364,430 | | | $ | 43,913,739 | |
See accompanying notes to condensed consolidated unaudited financial statements
Item 1. Financial Statements Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Condensed Consolidated Balance Sheets |
| | September 30, 2019 | | | December 31, 2018 | | | | Restated/Unaudited | | | Restated/Unaudited | | ASSETS | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 59,205 | | | $ | 258,238 | | Accounts receivable, net | | | 6,914,584 | | | | 10,245,728 | | Inventories, net | | | 16,286,452 | | | | 17,388,634 | | Prepaid expenses | | | 452,125 | | | | 834,690 | | Other current assets | | | 1,145,545 | | | | 784,125 | | Receivable from related party | | | 1,392,666 | | | | | | Current assets of discontinued operations | | | 1,304,305 | | | | 3,499,319 | | | | | | | | | | | Total current assets | | | 27,554,882 | | | | 33,010,734 | | | | | | | | | | | Property, plant and equipment: | | | | | | | | | Machinery and equipment | | | 23,747,842 | | | | 23,668,082 | | Building | | | 3,374,334 | | | | 3,367,082 | | Office furniture and equipment | | | 2,285,345 | | | | 2,573,095 | | Intellectual property | | | 783,179 | | | | 783,179 | | Land | | | 250,000 | | | | 250,000 | | Leasehold improvements | | | 409,347 | | | | 409,188 | | Fixtures and equipment at customer locations | | | 518,450 | | | | 518,450 | | Projects under construction | | | 96,696 | | | | 150,272 | | | | | 31,465,193 | | | | 31,719,348 | | Less : accumulated depreciation and amortization | | | (28,600,235 | ) | | | (27,998,437 | ) | | | | | | | | | | Total property, plant and equipment, net | | | 2,864,958 | | | | 3,720,912 | | | | | | | | | | | Other assets: | | | | | | | | | Goodwill | | | | | | | 1,473,176 | | Net deferred income tax asset | | | 135,094 | | | | 135,094 | | Operating lease right-of-use | | | 1,295,745 | | | | | | Other assets | | | 123,160 | | | | 248,120 | | | | | | | | | | | Total other assets | | | 1,554,000 | | | | 1,856,390 | | | | | | | | | | | Other non-current assets of discontinued operations | | | - | | | | 172,798 | | | | | | | | | | | TOTAL ASSETS | | | 31,973,840 | | | | 38,760,834 | | | | | | | | | | | LIABILITIES AND EQUITY | | | | | | | | | Current liabilities: | | | | | | | | | Checks written in excess of bank balance | | $ | 244,201 | | | $ | 636,142 | | Trade payables | | | 8,032,613 | | | | 5,951,929 | | Line of credit | | | 12,560,206 | | | | 16,582,963 | | Notes payable - current portion | | | 3,787,533 | | | | 4,432,320 | | Notes payable affiliates - current portion | | | 11,789 | | | | 10,821 | | Operating Lease Liabilities | | | 839,836 | | | | 0 | | Accrued liabilities | | | 1,062,601 | | | | 1,786,761 | | Current liabilities of discontinued operations | | | 1,071,617 | | | | 807,776 | | | | | | | | | | | Total current liabilities | | | 27,610,396 | | | | 30,208,712 | | | | | | | | | | | Long-term liabilities: | | | | | | | | | Notes payable - affiliates | | | 19,347 | | | | 167,248 | | Notes payable, net of current portion | | | 839,207 | | | | 399,912 | | Operating Lease Liabilities | | | 455,909 | | | | | | Notes payable - officers, subordinated | | | 1,042,766 | | | | 1,597,019 | | Deferred gain (non-current) | | | 214,074 | | | | 100,340 | | Other long-term liabilities of discontinued operations | | | - | | | | 31,874 | | | | | | | | | | | Total long-term liabilities | | | 2,571,303 | | | | 2,296,393 | | | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES | | | 30,181,699 | | | | 32,505,105 | | | | | | | | | | | Equity: | | | | | | | | | Yunhong CTI, LTD stockholders' equity: | | | | | | | | | Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding | | | | | | | | | Common stock - no par value, 15,000,000 shares authorized, 3,879,608 shares issued and 3,835,950 shares outstanding | | | 13,898,494 | | | | 13,898,494 | | Paid-in-capital | | | 3,481,838 | | | | 2,506,437 | | Accumulated earnings | | | (8,545,637 | ) | | | (2,865,486 | ) | Accumulated other comprehensive loss | | | (6,034,745 | ) | | | (6,050,347 | ) | Less: Treasury stock, 43,658 shares | | | (160,784 | ) | | | (160,784 | ) | Total Yunhong CTI, LTD stockholders' equity | | | 2,639,166 | | | | 7,328,314 | | Noncontrolling interest | | | (847,025 | ) | | | (1,072,585 | ) | Total Equity | | | 1,792,141 | | | | 6,255,729 | | TOTAL LIABILITIES AND EQUITY | | $ | 31,973,840 | | | $ | 38,760,834 | |
See accompanying notes to condensed consolidated unaudited financial statements |
Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | Restated | | | Restated | | | Restated | | | Restated | | Net Sales | | $ | 8,329,043 | | | $ | 10,128,436 | | | $ | 30,297,835 | | | $ | 36,508,220 | | | | | - | | | | - | | | | | | | | - | | Cost of Sales | | | 7,706,748 | | | | 8,295,669 | | | | 25,651,678 | | | | 28,776,700 | | | | | - | | | | - | | | | | | | | - | | Gross profit | | | 622,295 | | | | 1,832,767 | | | | 4,646,157 | | | | 7,731,520 | | | | | - | | | | - | | | | | | | | - | | Operating expenses: | | | - | | | | - | | | | | | | | - | | General and administrative | | | 1,148,482 | | | | 1,277,503 | | | | 3,939,289 | | | | 4,307,784 | | Selling | | | 233,506 | | | | 629,706 | | | | 842,546 | | | | 2,208,925 | | Advertising and marketing | | | 134,040 | | | | 302,985 | | | | 485,096 | | | | 931,475 | | Impairment on long-lived assets | | | | | | | - | | | | 1,472,382 | | | | | | Gain on loss of control of VIEs | | | (218,527 | ) | | | - | | | | (218,527 | ) | | | | | Gain on sale of assets | | | (23,054 | ) | | | (24,061 | ) | | | (70,263 | ) | | | (71,474 | ) | Total operating expenses | | | 1,274,447 | | | | 2,186,133 | | | | 6,450,524 | | | | 7,376,710 | | | | | - | | | | - | | | | | | | | - | | Loss from operations | | | (652,152 | ) | | | (353,366 | ) | | | (1,804,367 | ) | | | 354,810 | | | | | - | | | | - | | | | | | | | - | | Other (expense) income: | | | - | | | | - | | | | | | | | - | | Interest expense | | | (464,546 | ) | | | (462,855 | ) | | | (1,493,264 | ) | | | (1,560,130 | ) | Interest income | | | | | | | (27 | ) | | | | | | | (356 | ) | Other Income/(expense) | | | (82,873) | | | | (57 | ) | | | (485,742 | ) | | | 1,601 | | Foreign currency loss | | | (25,747 | ) | | | 24,584 | | | | (27,458 | ) | | | 8,336 | | | | | | | | | - | | | | | | | | - | | Total other expense, net | | | (573,166 | ) | | | (438,355 | ) | | | (2,006,464 | ) | | | (1,550,549 | ) | | | | - | | | | - | | | | | | | | - | | Loss from continuing operations before taxes | | | (1,225,318 | ) | | | (791,721 | ) | | | (3,810,831 | ) | | | (1,195,739 | ) | | | | - | | | | - | | | | | | | | - | | Income tax benefit | | | | | | | (221,803 | ) | | | - | | | | (347,318 | ) | | | | | | | | - | | | | | | | | - | | | | | | | | | - | | | | | | | | - | | Loss from continuing operations | | | (1,225,318 | ) | | | (569,918 | ) | | | (3,810,831 | ) | | | (848,422 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income (Loss) from discontinued operations (including loss on HFS of $0.6M), net of tax | | | (999,251 | ) | | | 23,693 | | | | (2,730,796 | ) | | | 37,354 | | | | | | | | | - | | | | | | | | | | Net loss | | $ | (2,224,569 | ) | | $ | (546,225 | ) | | $ | (6,541,627 | ) | | $ | (811,068 | ) | | | | | | | | | | | | | | | | | | Less: Net (loss) income attributable to noncontrolling interest | | | (282,985 | ) | | | 13,072 | | | | (861,475 | ) | | | (38,968 | ) | | | | | | | | | | | | | | | | | | Net loss attributable to Yunhong CTI, LTD | | $ | (1,941,584 | ) | | $ | (559,297 | ) | | $ | (5,680,152 | ) | | $ | (772,100 | ) | | | | | | | | | | | | | | | | | | Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | Foreign currency adjustment | | | (281,817 | ) | | | 231,827 | | | | 15,603 | | | | (110,605 | ) | Comprehensive loss | | $ | (2,223,401 | ) | | $ | (327,470 | ) | | $ | (5,664,549 | ) | | $ | (882,705 | ) | | | | | | | | | | | | | | | | | | Basic loss per common share | | | | | | | | | | | | | | | | | Continuing operations | | | (0.25 | ) | | $ | (0.16 | ) | | | (0.77 | ) | | $ | (0.23 | ) | Discontinued operations | | | (0.26) | | | | 0.00 | | | | (0.71 | ) | | | 0.01 | | Basic loss per common share | | $ | (0.51) | | | $ | (0.16 | ) | | $ | (1.48 | ) | | $ | (0.22 | ) | | | | | | | | | | | | | | | | | | Diluted loss per common share | | | | | | | | | | | | | | | | | Continuing operations | | $ | (0.25 | ) | | $ | (0.16 | ) | | $ | (0.77 | ) | | $ | (0.23 | ) | Discontinued operations | | | (0.26) | | | | 0.00 | | | | (0.71 | ) | | | (0.01 | ) | Diluted loss per common share | | $ | (0.51) | | | $ | (0.16 | ) | | $ | (1.48 | ) | | $ | (0.22 | ) | | | | | | | | | | | | | | | | | | Weighted average number of shares and equivalent shares of common stock outstanding: | | | | | | | | | | | | | | | | | Basic | | | 3,835,950 | | | | 3,530,227 | | | | 3,835,950 | | | | 3,530,227 | | | | | | | | | | | | | | | | | | | Diluted | | | 3,835,950 | | | | 3,530,227 | | | | 3,835,950 | | | | 3,530,227 | |
See accompanying notes to condensed consolidated unaudited financial statements |
Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Condensed Consolidated Statements of Cash Flows (Unaudited) |
| | For the Nine Months Ended September 30, | | | | 2019 | | | 2018 | | | | Restated | | | | | | Cash flows from operating activities: | | | | | | | | | Net loss | | $ | (6,541,627 | ) | | $ | (811,068 | ) | Depreciation and amortization | | | 835,302 | | | | 981,449 | | Amortization of deferred gain on sale/leaseback | | | (82,422) | | | | (83,394 | ) | Other | | | 248,974 | | | | | | Provision for losses on accounts receivable | | | 399,463 | | | | (40,924 | ) | Provision for losses on inventories | | | 1,249,519 | | | | 14,250 | | Impairment of long-lived assets | | | 1,252,283 | | | | | | Stock Based Compensation | | | 72,401 | | | | 139,450 | | Impairment of Prepaids, Current Assets, and Other Non-Current Assets | | | 168,931 | | | | | | Gain on deconsolidation of Clever | | | (218,534 | ) | | | | | Impairment of assets held for sale | | | 604,483 | | | | | | Deferred income taxes | | | - | | | | (347,725 | ) | Loss on disposition of asset | | | 17,480 | | | | | | Change in assets and liabilities: | | | | | | | | | Accounts receivable | | | 2,776,396 | | | | 1,717,018 | | Inventories | | | 1,435,411 | | | | (819,293 | ) | Prepaid expenses and other assets | | | 228,389 | | | | (776,294 | ) | Trade payables | | | 1,892,671 | | | | 385,715 | | Accrued liabilities | | | (166,823 | ) | | | (267,938 | ) | | | | | | | | | | Net cash provided by operating activities | | | 4,172,297 | | | | 91,246 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Purchases of property, plant and equipment | | | (144,222 | ) | | | (323,785 | ) | | | | | | | | | | Net cash provided by (used in) investing activities | | | (144,222 | ) | | | (323,785 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Change in checks written in excess of bank balance | | | (391,313 | ) | | | 149,447 | | Net change in revolving line of credit | | | (3,808,012 | ) | | | 821,390 | | Repayment of long-term debt | | | (913,855 | ) | | | (697,040 | ) | Cash paid for deferred financing fees | | | (82,763 | ) | | | (32,805 | ) | Proceeds from issuance of long-term debt | | | 650,000 | | | | | | | | | | | | | | | Net cash provided by (used in) financing activities | | | (4,545,943 | ) | | | 240,992 | | | | | | | | | | | Effect of exchange rate changes on cash | | | 205,692 | | | | 84,360 | | | | | | | | | | | Net increase/(decrease) in cash and cash equivalents | | | (312,176 | ) | | | 92,813 | | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 428,150 | | | | 181,026 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 115,974 | | | $ | 273,839 | | | | | | | | | | | The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations in amount of $57,000.” | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Cash payments for interest | | $ | 1,558,817 | | | $ | 1,381,149 | | Common stock issued for accounts payable | | $ | 303,000 | | | | | | Common stock issued for notes payable | | $ | 600,000 | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated unaudited financial statements |
Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Consolidated Statements of Stockholders' Equity (Restated) |
| | Yunhong CTI, LTD | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other | | | Less | | | | | | | | | | | | Common Stock | | | Paid-in | | | Accumulated | | | Comprehensive | | | Treasury Stock | | | Noncontrolling | | | | | | | | Shares | | | Amount | | | Capital | | | (Deficit) Earnings | | | Loss | | | Shares | | | Amount | | | Interest | | | TOTAL | | Balance December 31, 2018 | | | 3,578,885 | | | $ | 13,898,494 | | | $ | 2,506,437 | | | $ | (2,865,486 | ) | | $ | (6,050,347 | ) | | | (43,658 | ) | | $ | (160,784 | ) | | $ | (1,072,585 | ) | | | 6,255,729 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | Note conversion - Schwan | | | 180,723 | | | | | | | | 600,000 | | | | | | | | | | | | | | | | | | | | | | | | 600,000 | | Less deconsolidation of VIE | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,087,035 | | | | 1,087,035 | | Stock Issued | | | 120,000 | | | | | | | | 303,000 | | | | | | | | | | | | | | | | | | | | | | | | 303,000 | | Stock Option Expense | | | | | | | | | | | 72,401 | | | | | | | | | | | | | | | | | | | | | | | | 72,401 | | Net Income | | | | | | | | | | | | | | | (5,680,152 | ) | | | | | | | | | | | | | | | (861,475 | ) | | | (6,541,627 | ) | Other comprehensive income, net of taxes | | | | | | | | | | | | | | | | | | | 15,603 | | | | | | | | | | | | | | | | 15,603 | | Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | Balance September 30, 2019, restated | | | 3,879,608 | | | $ | 13,898,494 | | | $ | 3,481,838 | | | $ | (8,545,638 | ) | | $ | (6,034,744 | ) | | | (43,658 | ) | | $ | (160,784 | ) | | $ | (847,025 | ) | | $ | 1,792,141 | |
See accompanying notes to consolidated financial statements |
Yunhong CTI Ltd. (formerly CTI Industries Corporation and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Net Sales | | $ | 13,225,954 | | | $ | 13,476,157 | | | $ | 41,397,288 | | | $ | 42,831,655 | | | | | | | | | | | | | | | | | | | Cost of Sales | | | 10,039,044 | | | | 10,064,066 | | | | 31,475,520 | | | | 31,661,039 | | | | | | | | | | | | | | | | | | | Gross profit | | | 3,186,910 | | | | 3,412,091 | | | | 9,921,768 | | | | 11,170,616 | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | General and administrative | | | 1,923,315 | | | | 1,808,299 | | | | 5,691,186 | | | | 5,470,523 | | Selling | | | 861,856 | | | | 977,928 | | | | 2,771,150 | | | | 3,162,083 | | Advertising and marketing | | | 454,927 | | | | 581,143 | | | | 1,548,709 | | | | 1,643,852 | | Gain on sale of assets | | | (27,426 | ) | | | (27,700 | ) | | | (119,127 | ) | | | (27,700 | ) | Other operating income | | | - | | | | - | | | | (1,416 | ) | | | - | | | | | | | | | | | | | | | | | | | Total operating expenses | | | 3,212,672 | | | | 3,339,670 | | | | 9,890,502 | | | | 10,248,758 | | | | | | | | | | | | | | | | | | | (Loss) Income from operations | | | (25,762 | ) | | | 72,421 | | | | 31,266 | | | | 921,858 | | | | | | | | | | | | | | | | | | | Other (expense) income: | | | | | | | | | | | | | | | | | Interest expense | | | (367,391 | ) | | | (358,643 | ) | | | (1,100,038 | ) | | | (1,074,295 | ) | Change in fair value of warrants | | | (3,809 | ) | | | 47,617 | | | | 19,999 | | | | (179,261 | ) | Foreign currency loss | | | (11,430 | ) | | | 9,663 | | | | (92,382 | ) | | | 77,341 | | | | | | | | | | | | | | | | | | | Total other expense, net | | | (382,630 | ) | | | (301,363 | ) | | | (1,172,421 | ) | | | (1,176,215 | ) | | | | | | | | | | | | | | | | | | Net (loss) before taxes | | | (408,392 | ) | | | (228,942 | ) | | | (1,141,155 | ) | | | (254,357 | ) | | | | | | | | | | | | | | | | | | Income tax expense | | | (125,678 | ) | | | (28,655 | ) | | | (313,151 | ) | | | (16,804 | ) | | | | | | | | | | | | | | | | | | Net (loss) | | | (282,714 | ) | | | (200,287 | ) | | | (828,004 | ) | | | (237,553 | ) | | | | | | | | | | | | | | | | | | Less: Net (loss) income attributable to noncontrolling interest | | | (8,014 | ) | | | (19,812 | ) | | | (85,645 | ) | | | 19,089 | | | | | | | | | | | | | | | | | | | Net loss attributable to CTI Industries Corporation | | $ | (274,700 | ) | | $ | (180,475 | ) | | $ | (742,359 | ) | | $ | (256,642 | ) | | | | | | | | | | | | | | | | | | Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | Foreign currency adjustment | | | (260,469 | ) | | | (236,133 | ) | | | 492,900 | | | | (840,144 | ) | Comprehensive Income (Loss) | | $ | (535,169 | ) | | $ | (416,608 | ) | | $ | (249,459 | ) | | $ | (1,096,786 | ) | | | | | | | | | | | | | | | | | | Basic loss per common share | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | (0.20 | ) | | $ | (0.07 | ) | | | | | | | | | | | | | | | | | | Diluted loss per common share | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | (0.20 | ) | | $ | (0.07 | ) | | | | | | | | | | | | | | | | | | Weighted average number of shares and equivalent shares of common stock outstanding: | | | | | | | | | | | | | | | | | Basic | | | 3,641,439 | | | | 3,541,582 | | | | 3,641,439 | | | | 3,541,582 | | | | | | | | | | | | | | | | | | | Diluted | | | 3,641,439 | | | | 3,714,239 | | | | 3,789,081 | | | | 3,703,732 | |
See accompanying notes to condensed consolidated unaudited financial statements
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
| | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | | | | | | | | Cash flows from operating activities: | | | | | | | | | Net (loss) income | | $ | (828,004 | ) | | $ | (237,553 | ) | Adjustment to reconcile net income to cash provided by operating activities: | | | | | | | | | Depreciation and amortization | | | 1,163,736 | | | | 1,153,688 | | Amortization of debt discount | | | 112,622 | | | | 125,689 | | Change in fair value of warrants | | | (19,999 | ) | | | 179,261 | | Stock based compensation | | | - | | | | 28,719 | | Amortization of deferred gain on sale/leaseback | | | (84,759 | ) | | | -27700 | | Provision for losses on accounts receivable | | | (20,882 | ) | | | 28,685 | | Provision for losses on inventories | | | 94,518 | | | | (31,259 | ) | Deferred income taxes | | | (409,621 | ) | | | (170,653 | ) | Change in assets and liabilities: | | | | | | | | | Accounts receivable | | | 5,864,010 | | | | 807,687 | | Inventories | | | (324,813 | ) | | | (5,597,774 | ) | Prepaid expenses and other assets | | | 16,362 | | | | (77,839 | ) | Trade payables | | | (60,770 | ) | | | 3,461,400 | | Accrued liabilities | | | (272,183 | ) | | | 102,981 | | | | | | | | | | | Net cash provided by (used in) operating activities | | $ | 5,230,217 | | | $ | (254,668 | ) | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Proceeds from equipment sale-leaseback | | | - | | | | 783,134 | | Cash used in investment in subsidiary | | | - | | | | (87,500 | ) | Purchases of property, plant and equipment | | | (735,567 | ) | | | (555,961 | ) | | | | | | | | | | Net cash (used in) provided by investing activities | | $ | (735,567 | ) | | $ | 139,673 | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Change in checks written in excess of bank balance | | | (1,170,599 | ) | | | 31,560 | | Net change in revolving line of credit | | | (2,758,809 | ) | | | (590,594 | ) | Proceeds from issuance of long-term debt | | | - | | | | 1,180,000 | | Repayment of long-term debt (related parties $0 and $0) | | | (466,638 | ) | | | (652,903 | ) | Proceeds from issuance of stock | | | - | | | | 638,324 | | Cash paid for deferred financing fees | | | (20,298 | ) | | | - | | Contributions received by Variable Interest Entity | | | - | | | | 288,750 | | Redemption of Variable Interest Entity members | | | - | | | | (455,000 | ) | | | | | | | | | | Net cash (used in) provided by financing activities | | $ | (4,416,344 | ) | | $ | 440,137 | | | | | | | | | | | Effect of exchange rate changes on cash | | | (316,637 | ) | | | (47,666 | ) | | | | | | | | | | Net decrease in cash and cash equivalents | | | (238,331 | ) | | | 277,476 | | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 563,043 | | | | 346,404 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 324,712 | | | $ | 623,880 | | | | | | | | | | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | Cash payments for interest | | | 934,057 | | | | 910,414 | | Cash payments for taxes | | | 300,000 | | | | - | | | | | | | | | | | | | | | | | | | | Supplemental Disclosure of non-cash investing and financing activity | | | | | | | | | Exchange of Note Payable for Warrants | | $ | 797,881 | | | $ | - | | Property, Plant & Equipment acquisitions funded by liabilities | | $ | 19,580 | | | $ | 35,012 | | Contributed Capital to Clever Container | | | | | | | | | Stock | | | - | | | $ | 122,500 | | Debt | | | - | | | $ | 43,750 | | Accounts Receivable | | | - | | | $ | 183,750 | |
See accompanying notes to condensed consolidated unaudited financial statements
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Earnings per Share (unaudited)
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Basic | | | | | | | | | | | | | | | | | Average shares outstanding: | | | | | | | | | | | | | | | | | Weighted average number of common shares outstanding | | | 3,641,439 | | | | 3,541,582 | | | | 3,641,439 | | | | 3,541,582 | | | | | | | | | | | | | | | | | | | Net loss: | | | | | | | | | | | | | | | | | Net loss attributable to CTI Industries Corporation | | $ | (274,700 | ) | | $ | (180,475 | ) | | $ | (742,359 | ) | | $ | (256,642 | ) | | | | | | | | | | | | | | | | | | Per share amount | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | (0.20 | ) | | $ | (0.07 | ) | | | | | | | | | | | | | | | | | | Diluted | | | | | | | | | | | | | | | | | Average shares outstanding: | | | | | | | | | | | | | | | | | Weighted average number of common shares outstanding | | | 3,641,439 | | | | 3,541,582 | | | | 3,641,439 | | | | 3,541,582 | | | | | | | | | | | | | | | | | | | Effect of dilutive shares | | | - | | | | 172,657 | | | | 147,642 | | | | 162,150 | | | | | | | | | | | | | | | | | | | Weighted average number of shares and equivalent shares of common stock outstanding | | | 3,641,439 | | | | 3,714,239 | | | | 3,789,081 | | | | 3,703,732 | | | | | | | | | | | | | | | | | | | Net loss: | | | | | | | | | | | | | | | | | Net loss attributable to CTI Industries Corporation | | $ | (274,700 | ) | | $ | (180,475 | ) | | $ | (742,359 | ) | | $ | (256,642 | ) | | | | | | | | | | | | | | | | | | Per share amount | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | (0.20 | ) | | $ | (0.07 | ) |
See accompanying notes to condensed consolidated unaudited financial statements
CTI Industries CorporationCorporation) and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying condensed (a) consolidated balance sheet as of December 31, 2016,2018, which has been derived from audited consolidated financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 20172019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2019. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2016.2018. Principles of consolidation and nature of operations: The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd. (formerly CTI Industries CorporationCorporation) and its wholly-owned subsidiaries, CTI Balloons Limited (CTI Balloons) and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. (Flexo) and CTI Europe gmbH,GmbH (CTI Europe), as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C (VLM). As discussed in Note 2 Discontinued Operations, effective in the third quarter, the Company determined that it is exiting CTI Balloons and Clever Container Company, L.L.C. (the “Company”). The last threeCTI Europe. Accordingly, the operations of these entities have been consolidatedare classified as variable interest entities. All significant intercompany transactions and accounts have been eliminateddiscontinued operations in consolidation. these financial statements. The Company (i) designs, manufactures and distributes balloon and related novelty (candy and party related) products, throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States. Variable Interest Entities (“VIE’s”): The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. There are three entities that have been consolidated as variable interest entities.
The Company has variable interests in Venture Leasing L.L.C (VL) and Clever Container Company, L.L.C. (Clever). Through June 30, 2019, the Company had determined that it was the primary beneficiary of these entities and included them in our consolidated results. In the third quarter, we determined that operationally material changes in our involvement with Clever and VL resulted in us having no power over the decisions which impact their financial performance. Therefore, we are no longer the primary beneficiary of these entities. Effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. Upon deconsolidation of these entities, we recognized a gain of $219,000. In accordance with ASC 810-10 because the carrying value of the noncontrolling interest of Clever which was eliminated exceeded the net carrying value of the assets and liabilities of Clever. The Company determined that there was no fair value associated with its remaining noncontrolling interest in Clever based on an income approach. Use of estimates: In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill. Earnings per share: Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period. As of September 30, 20172019, and 2016,2018, shares to be issued upon the exercise of options and warrants aggregated 205,144471,000 and 288,048,471,000, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis)basis for the three months ended September 30, 20172019 and 20162018 were 281,81925,000 and 0,25,000, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) forFor the nine months ended September 30, 20172019 and 2016 were 178,3502018, the same share disclosure was 25,000 and 0,25,000, respectively. Significant Accounting Policies: The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2016.2018. There were no significant changes to these accounting policies during the three or nine months ended September 30, 2019, except for the adoption of Accounting Standards Codification (ASC) Topic 842, Leases.
On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods. On January 1, 2018, we adopted ASC 606 (Revenue From Contracts With Customers) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price. Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606. The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales. Auditor Replacement Process: During April 2019, our independent registered accounting firm, Plante & Moran PLLC, declined to stand for reappointment as auditor. As of January 3, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2019. Previously, the quarterly report on Form 10-Q was prepared without the benefit of auditor review. This Form 10-Q/A is filed with review from RBSM. Note 2 – Discontinued Operations In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of CTI Balloons and CTI Europe. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and expects to divest CTI Europe (Germany) in the first half of 2020. In connection with management’s intentions to simplify these operations and organizational structure, we identified write-offs of $88,000 and $1.7 million for the three and nine months ended September 30, 2017.2019, respectively, related to CTI Balloons and CTI Europe. The charges for the three months ended September 30, 2019 were comprised of the following: $78,000 inventory and other assets and $10,000 allowance for doubtful accounts. The charges for the nine months ended September 30, 2019 were comprised of the following: $1.3M inventory, $76,000 allowance for doubtful accounts; and $280,000 for other assets. Additionally, it recognized an impairment charge of $1.0 million, including $167,000 of previously unrecognized currency translation adjustment losses because the Company is completely exiting its operations in Germany and the UK once the divestitures occur. Reclassification:CTI Balloons recorded losses from discontinued operations, net of taxes of ($433,000) and ($996,000) for the three and nine months ended September 30, 2019, respectively (including an estimated loss on sale of $321,000). The losses, net of tax were ($8,000) and ($59,000) for the three and nine months ended September 30, 2018, respectively.
Certain 2016 amounts have been reclassified to conform toCTI Europe recorded losses from discontinued operations, net of taxes of ($566,000) and ($1,735,000) for the 2017 presentation. (See footnote regarding ASU 2015-17.)three and nine months ended September 30, 2019, respectively (including an estimated loss on sale of $283,000). The income, net of taxes were $32,000 and $96,000 for the three and nine months ended September 30, 2018, respectively.
Recent Accounting Pronouncements:
Summarized Discontinued Operations Financial Information The following table summarizes the major line items for the International operations that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three months ending | | 09/30/19 | | | 09/30/18 | | Income Statement | | | | | | | | | Net Sales | | $ | 1,177,953 | | | $ | 1,397,033 | | Cost of Sales | | | 1,163,985 | | | | 1,041,266 | | | | | | | | | | | Gross Margin | | | 13,968 | | | | 355,767 | | | | | | | | | | | Impairment of Long-Lived Assets | | | | | | | | | SG&A | | | 373,625 | | | | 330,898 | | | | | | | | | | | Operating Income | | | (359,657) | | | | 24,869 | | | | | | | | | | | Other Expense (income) | | | 35,111 | | | | (8,038 | ) | | | | | | | | | | pretax loss from discontinued operations | | | (394,768 | ) | | | 32,907 | | | | | | | | | | | Loss from classification to held for sale | | | 604,483 | | | | - | | Income Tax Expense | | | - | | | | 9,214 | | | | | | | | | | | (Loss)Income prior to non-controlling interest | | | (999,251 | ) | | | 23,693 | | | | | | | | | | | Non-controlling Interest share of profit/loss | | | (271,807 | ) | | | 15,411 | | | | | | | | | | | (Loss) Income attributable to CTI shareholders | | $ | (727,444 | ) | | $ | 8,282 | |
In August 2014,
The following table summarizes the FASB issued ASU 2014-15,Presentationmajor line items for the International operations that are included in the income from discontinued operations, net of Financialtax line item in the Consolidated Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance amendedIncome for the existing requirements for disclosing information about an entity’s ability to continue as a going concern, requires management to assess an entity’s ability to continue as a going concern and then to provide related disclosure in certain circumstances. This guidance is effective for annual reporting periodsnine months ending after December 2016 and for annual and interim reporting periods thereafter. See Note 2 for management’s assessment of its ability to continue as a going concern. | | | 09/30/19 | | | | 09/30/18 | | Income Statement | | | | | | | | | Net Sales | | $ | 4,152,390 | | | $ | 4,981,152 | | Cost of Sales | | | 4,881,526 | | | | 3,860,225 | | | | | | | | | | | Gross Margin | | | (729,136 | ) | | | 1,120,927 | | | | | | | | | | | Impairment of Long-Lived Assets | | | (4,173 | ) | | | | | SG&A | | | 1,342,360 | | | | 1,103,266 | | | | | | | | | | | Operating Income | | | (2,067,323 | ) | | | 17,662 | | | | | | | | | | | Other Expense (income) | | | 58,990 | | | | (34,219 | ) | | | | | | | | | | Pretax loss from discontinued operations | | | (2,126,313 | ) | | | 51,880 | | | | | | | | | | | Loss from classification to held for sale | | | 604,483 | | | | - | | Income Tax Expense | | | - | | | | 14,526 | | | | | | | | | | | Income (loss) prior to non-controlling interest | | | (2,730,796 | ) | | | 37,354 | | | | | | | | | | | Non-controlling Interest share of (loss)/income | | | (837,136 | ) | | | 46,067 | | | | | | | | | | | Income (loss) attributable to CTI shareholders | | $ | (1,893,660 | ) | | $ | (8,713 | ) |
In 2014,The following table summarizes the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertaintycarrying amounts of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferralmajor classes of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.
In November 2015, the FASB issued ASU 2015-17,Balance Sheet Classification of Deferred Taxes, to eliminate the current requirements to classify deferred income tax assets and liabilities between current and noncurrent. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effectivediscontinued operations for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities aseach of the beginningperiods presented:
| | 9/30/2019 | | | 12/31/2018 | | Balance Sheet | | | | | | | | | Assets | | | | | | | | | Current Assets | | | | | | | | | Cash on hand and Banks | | $ | 56,769 | | | $ | 169,912 | | Accounts Receivable | | | 687,607 | | | | 584,827 | | Inventory | | | 453,395 | | | | 2,618,854 | | Prepaid & Other | | | - | | | | 125,726 | | | | | | | | | | | TOTAL Current Assets | | | 1,197,771 | | | | 3,499,319 | | | | | | | | | | | NET Property, Plant, and Equipment | | | 105,594 | | | | 94,069 | | | | | | | | | | | Other Assets | | | | | | | | | Operating lease right-of-use | | | 561,120 | | | | - | | Other | | | 44,303 | | | | 78,729 | | TOTAL Other Assets | | | 605,423 | | | | 78,729 | | TOTAL Non-Current Assets | | | 711,017 | | | | 172,798 | | Less Valuation Allowance on Held for Sale classification | | | (604,483) | | | | | | TOTAL Assets | | $ | 1,304,305 | | | $ | 3,672,117 | | | | | | | | | | | Liabilities | | | | | | | | | Current Liabilities | | | | | | | | | Trade Accounts Payable | | $ | 435,785 | | | $ | 727,741 | | Operating Lease Liabilities - Current | | | 382,214 | | | | - | | Other/Accrued Liabilities | | | 43,425 | | | | 80,035 | | TOTAL Current Liabilities | | | 861,424 | | | | 807,776 | | | | | | | | | | | Non-Current Liabilities | | | | | | | | | Operating Lease Liabilities - Non Current | | | 178,906 | | | | - | | Other Non-Current | | | 31,287 | | | | 31,874 | | TOTAL Non-Current Liabilities | | | 210,193 | | | | 31,874 | | | | | - | | | | - | | TOTAL Liabilities | | $ | 1,071,617 | | | $ | 839,650 | |
The Company has adoptedcash flows related to discontinued operations have not been segregated and are included in the standard andConsolidated Statements of Cash Flows. The following table summarizes depreciation from discontinued operations for each of the impact to our consolidated financial statements for the period ending September 30, 2017 is a reclassification of $779,000 in deferred tax assets to noncurrent, and a reclassification of $773,000 in deferred tax assets to noncurrent for the period ending December 31, 2016.periods presented: | | Three Months Ended | | | Nine Months Ended | | | | September 30, | | | September 30, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Depreciation | | | 7,321 | | | | 7,963 | | | | 20,519 | | | | 21,588 | |
In February 2016, the FASB issued ASU 2016-02,Leases(Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. When the standard becomes effective, we expect that our property, plant and equipment will increase significantly due to the addition of assets under lease and the lease liabilities will correspondingly increase. There is not expected to be a significant impact on the income statement.
On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15,Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2018. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.
Note 23 – Liquidity and Going Concern The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the Credit Agreement with BMO Harris. The Company has historically used availability under this revolvingPNC Bank, National Association (“PNC”) (see Note 4). As indicated in Note 4, twice during 2018 we violated covenants in our credit facility and as of March 2019 we entered into a forbearance agreement with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but we remain out of compliance with the terms of our credit facility, as amended, including the covenants as of June 30, 2019 calculated on or about July 31, 2019. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to fund operations.the Company, in which PNC advised that line of credit advances would continue to be available to the Company at PNC’s sole discretion, and subject to its terms and conditions. On October 18, 2019, we entered into a new forbearance agreement with PNC (“Amendment 4”). Identified events of default were waived until January 10, 2020 with respect to Yunhong CTI, LTD, but not its Mexican subsidiary (Flexo), subject to its terms and conditions. On January 13, 2020, we entered into a new forbearance agreement with PNC (“Amendment 5”). PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to Lender under the Loan Agreement for a period ending no later than December 31, 2020. During 2019 we attempted to execute a major capital event with a partner that would infuse money, among other attributes. That effort was unsuccessful as envisioned. We are currently seeking to execute on one or more smaller transactions, as well as pursue other financing options. There is no assurance that any of these efforts will be successful. For the nine months ended September 30, 2017, the Company generated net cash from operating activities in the amount of $5,230,000, although the Company did incur a loss for the quarter ended September 30, 2017 of $275,000 and for the nine months ended September 30, 2017 of $742,000.
Assuming a continuation of the revolving credit under the Credit Agreement, the Company has forecast a profit for the fourth quarter of the year, which is expected to generate sufficient cash flow for the Company to meet its current obligations.
As of September 30, 2017, the Company was in compliance with all of the financial covenants under the Credit Agreement with Harris Bank and the Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“BMO Private Equity”).
As of September 30, 2017, the Company had total borrowings outstanding under the Credit Agreement with BMO Harris of $9,852,000, including $8,211,000 on the revolving credit loan and $1,641,000 on the mortgage facility. In addition the balance of the indebtedness of the Company to BMO Private Equity as of September 30, 2017 was approximately $5,965,000.
The obligations of the Credit Agreement to BMO Harris were to mature on July 17, 2017. The obligations of the Note and Warrant Purchase Agreement among the Company and BMO Equity are to mature on January 18, 2018.
By Amendment to the Credit Agreement dated July 18,above, due to financial performance in 2016, 2017 BMO Harris agreedand 2018, including net income/(losses) attributable to extend the maturity date of the agreement to October 18, 2017. BMO Equity consented to this extension in exchange for a fee and for the right to exercise at any time its put of warrants issued to it under the Note and Warrant Purchase Agreement. The extension provides retention by the Company of $0.7 million, ($1.6 million), and ($3.6 million), respectively, we believe that substantial doubt about our ability to continue as a consultant to advise as to planning, forecasting, cost management and financing.going concern exists at September 30, 2019.
On August 17, 2017, BMO Equity exercised its put on the warrantsAdditionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and the Company issued to BMO Equitylabor costs, along with a Warrant Conversion Notesupply disruption in the amount of $797,881 for the purchase of the warrants. The principal balance of the Warrant Conversion Note, plus accruedhelium market. These changes in cash flows have created very significant strain within our operations and unpaid interest thereon, is payable on January 18, 2018. The principal balance of the Warrant Conversion Note accrues interest at the rate of 11.5% per annum compounded daily.have therefore increased our attempts to obtain additional funding resources.
On October 17, 2017,Finally, four claims have been filed in court by vendors, one current and three former, regarding claims of non-payment pursuant to contractual obligations. The sum of these claims is approximately $0.7 million. The cost of defense and potential ultimate resolution increases the Company and BMO Harris entered into Amendment No. 11 to the Credit Agreement in which (i) the Company acknowledged its indebtedness to the Bank for a Mortgage Loan balance in the amount of $1,664,456 and for a balance of $8,211,467 with respect to the Revolving Loans, (ii) the maturity datestrain on the Mortgage Loan and the Revolving Credit were extended to November 30, 2017, and (iii) the Bank provided a temporary over advance line of $1,000,000 for the period from October 17, 2017 through November 30, 2017. Amendment No. 11 included certain additional covenants including that, on or before October 20, 2017, the Company would deliver to the Bank an executed letter of intent from a third-partyour financial institution providing for refinancing and payment of the Company’s debt obligations to the Bank. Also, on October 17, 2017, the Registrant entered into Amendment No. 6 to the Note and Warrant Agreement among Registrant and BMO Private Equity (U.S.) Inc. (BMO Private Equity). In the Amendment, (i) the Company acknowledged its indebtedness to BMO Private Equity for a subordinated note in the principal amount of $5,000,000 and, for a note issued in connection with the conversion by BMO Private Equity of warrants, in the amount of $815,139, (ii) BMO Private Equity agreed to defer payment of interest due on October 2, 2017 in the amount of $150,139 to December 1, 2017. Amendment No. 6 includes covenants similar to that of Amendment No. 11 with the Bank.
On October 19, 2017, the Company delivered to the Bank and to BMO Equity an executed non-binding Preliminary Memorandum of Terms and Conditions (“Preliminary Term Sheet”) from a financing institution providing for an aggregate of up to $24,000,000 in senior secured financing to (i) refinance existing senior bank and mezzanine debt, (ii) fund certain capital expenditures and (iii) provide for ongoing working capital needs of Registrant. The Preliminary Term Sheet is non-binding and is subject to diligence and to the execution of a definitive agreement.resources.
Management’s Plans.plans include: (1) Pursuing a smaller strategically significant major capital event. (2) Working with our bank to resolve our compliance failure on a long-term basis. (3) Evaluating and potentially executing a transaction of our facility in Lake Barrington, IL. (4) Simplifying our group structure, and (5) Exploring alternative funding sources. Management is engaged in effortsAssessment Considering both quantitative and qualitative information, we believe that our plans to obtain re-financing of its obligationsadditional financing may provide us with an ability to BMO Harrisfinance our operations through 2020 and, BMO Private Equity, is in accordance withif successfully executed, may mitigate the Preliminary Term Sheet and is engaged in a diligence and loan documentation process. While no assurance can be given that the re-financing will be completed, management has a reasonable expectation that both the re-financing will be completed and that the Company willsubstantial doubt about our ability to continue as a going concern. ManagementNote 4 - Debt
During December 2017, we terminated a prior credit arrangement and entered in new financing agreements with PNC Bank, National Association (“PNC”). The “PNC Agreements” include a $6 million term loan and an $18 million revolving credit facility, with a termination date of December 2022. Available credit under the Revolving Credit facility is also engageddetermined by eligible receivables and inventory at Yunhong CTI, LTD (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet two financial covenants as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (the “Amendment 1”) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in effortsinterest rate. During September 2018, we filed a preliminary prospectus on Form S-1 for a planned equity issuance. On October 8, 2018, we entered into Consent and Amendment No. 2 (the “Amendment 2”) to implement costour 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 operational improvements and to fulfill strong order flow in order to achieve profitable operationswaived the calculation of financial ratios for the fourth quarter. period ended September 30, 2018, in exchange for a new covenant committing to raise at least $7.5 million in gross proceeds from our equity issuance by November 15, 2018 and pay an amendment fee. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement. We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures were waived and financial covenants as of March 31, 2019 were not considered, with the next calculation due July 31, 2019 for the period ended June 30, 2019. We received a temporary over-advance of $1.2 million, which declined to zero over a six-week period under the terms of this agreement and paid a fee of $250,000. On August 1, 2019, PNC issued a Notice of Default and Reservation of Rights letter, indicating the end of the forbearance period and continued events of default with our credit agreement, as amended. We remain out of compliance with the terms of our facility and have thus reclassified long-term bank debt to current liabilities on our balance sheet. Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at Yunhong CTI, LTD (U.S.) and Flexo Universal (Mexico). Certain terms of the PNC Agreements include: | ● | Restrictive Covenants: The Credit Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to: |
| o | Pay dividends and make distributions; |
| o | Make certain investments; |
| o | Use assets as security in other transactions; |
| 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 December 31, 2017 | | 4.75 | to | 1.00 | | June 30, 2018 | | 4.50 | to | 1.00 | | June 30, 2018 | | 4.25 | to | 1.00 | | September 30, 2018 | | not applicable | | December 31, 2018 | | 3.50 | to | 1.00 | | March 31, 2019 | | not applicable | | June 30, 2019 | | 3.00 | to | 1.00 | | September 30, 2019 and thereafter | | 2.75 | to | 1.00 | |
| 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 1.1 : 1.0 for any quarterly calculation. |
The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We also entered into a swap agreement with PNC Bank to fix the rate of interest for $3 million of the notes over 3 years at 2.25%. This contract was made at market value upon December 14, 2017 execution and accounted for as a hedge. This contract terminated during 2019 under the terms of the forbearance agreement. Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note 3as well as in Note 2, we remain out of compliance with the terms of this facility. As of December 2017, Mr. Schwan was owed a total of $1,099,000, with additional accrued interest of $400,000, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. During January 2019, Mr. Schwan converted $600,000 of his balance into approximately 181,000 shares of our common stock at the then market rate. No payments were issued to Mr. Schwan during 2018 or the three or nine months ended September 30, 2019, with $15,000 and $45,000, respectively, of interest recorded as an expense. Note 5 - Stock-Based Compensation; Changes in Equity The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values. The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 20172019 and 2016.2018. The expected volatility is based on historical volatility of the Company’s common stock. The Company’s net loss for the three months ended September 30, 20172019 and 2016net loss for the three months ended September 30, 2018 includes approximately $2,000$20,000 and $5,000,$34,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 20172019 and 20162018 includes approximately $12,000$72,000 and $29,000,$139,000 respectively, of compensation costs related to share based payments. As of September 30, 2017,2019, there is $13,000was $118,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $2,000$18,000 of additional stock-based compensation expense to be recognized over the remainder of 2017, $7,000 to be recognized during 2018, $3,000 to be recognized during 2019, and $1,000$56,000 to be recognized during 2020. As of September 30, 2017, the Company had three stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code, as well as for stock grants.
On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizesand subsequent awards categorized as inducement of employment authorized the issuance of up to 250,000510,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorizes the issuance of up to 300,000 shares of our common stock in the form of equity-based awards. Because no registration on Form S-8 was filed for these additional shares within 12 months of approval by our shareholders, those additional shares are not available for issuance in the normal course. As of September 30, 2017,2019, options for 250,000 shares had been granted and options for 143,094471,144 shares remain outstanding. A summary of the Company’s stock option activity, which includes grants of restricted stock, non-qualified stock options, incentive stock options, warrants and related information, is as follows: | | Shares under Option | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | | | Aggregate Intrinsic Value | | Balance at December 31, 2016 | | | 143,094 | | | $ | 5.22 | | | | 2.9 | | | $ | 89,494 | | Granted | | | - | | | | - | | | | - | | | | - | | Cancelled/Expired | | | 14,625 | | | | 5.14 | | | | - | | | | - | | Exercised | | | - | | | | - | | | | - | | | | - | | Outstanding at September 30, 2017 | | | 128,469 | | | $ | 5.23 | | | | 1.3 | | | $ | 0 | | | | | | | | | | | | | | | | | | | Exercisable at September 30, 2017 | | | 100,788 | | | $ | 5.21 | | | | 0.8 | | | $ | 0 | |
On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“BMO Equity”) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. As of September 30, 2017, the Company was in compliance with all of the financial covenants under the Note and Warrant Purchase Agreement.
On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement wherein the investors purchased 152,850 shares of common stock of the Company at a price of $6.00 per share. As additional consideration for the purchases of the shares in the offering, each investor received, with each share of common stock purchased, one-half of a warrant, with one warrant entitling the investor to purchase one share of the Company’s common stock at the price of $7.00. The warrants are exercisable between six months and three years from the investment date. As a result of the completion of the sale under the Purchase Agreement, warrants to purchase 76,675 shares of common stock at $7.00 per share were issued.
In addition to the Purchase Agreement, the Company and each of the investors entered into a Registration Rights Agreement pursuant to which the Company agreed to file a Registration Statement with the SEC to register the common stock sold to the investors.
| | Shares under Option | | | Weighted Average Exercise Price | | Balance at December 31, 2018 | | | 471,144 | | | $ | 3.95 | | Granted | | | - | | | | - | | Cancelled/Expired | | | - | | | | - | | Exercised/Issued | | | - | | | | - | | Outstanding at September 30, 2019 | | | 471,144 | | | $ | 3.95 | | | | | | | | | | | Exercisable at September 30, 2019 | | | 165,264 | | | $ | 4.05 | |
A summary
Table of the Company’s stock warrant activity and related information is as follows: | | Shares under Warrant | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | | | Aggregate Intrinsic Value | | Balance at December 31, 2016 | | | 216,723 | | | $ | 2.48 | | | | 4.49 | | | $ | 817,880 | | Granted | | | - | | | | - | | | | - | | | | - | | Cancelled | | | - | | | | - | | | | - | | | | - | | Exercised | | | 140,048 | | | | 0.01 | | | | - | | | $ | 642,820 | | Outstanding at September 30, 2017 | | | 76,675 | | | $ | 7.00 | | | | 1.8 | | | $ | - | | | | | | | | | | | | | | | | | | | Exercisable at September 30, 2017 | | | 76,675 | | | $ | 7.00 | | | | 1.8 | | | $ | - | |
A summary of the Company’s stock option activity by grant date as of September 30, 2017 is as follows:
| | Options Outstanding | | | Options Vested | | Options by Grant Date | | Shares | | | Weighted Avg. | | | Remain. Life | | | Intrinsic Val | | | Shares | | | Weighted Avg. | | | Remain. Life | | | Intrinsic Val | | Dec 2005 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Dec 2010 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Jan 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Nov 2012 | | | 79,000 | | | $ | 5.17 | | | | 0.2 | | | $ | 0 | | | | 79,000 | | | $ | 5.17 | | | | 0.2 | | | $ | 0 | | Nov 2013 | | | 5,000 | | | $ | 5.75 | | | | 1.1 | | | $ | 0 | | | | 4,000 | | | $ | 5.75 | | | | 1.1 | | | $ | 0 | | Dec 2015 | | | 44,469 | | | $ | 5.29 | | | | 3.3 | | | $ | 0 | | | | 17,788 | | | $ | 5.27 | | | | 3.3 | | | $ | 0 | | TOTAL | | | 128,469 | | | $ | 5.23 | | | | 1.3 | | | $ | 0 | | | | 100,788 | | | $ | 5.21 | | | | 0.8 | | | $ | 0 | |
Contents The instruments above have an aggregate intrinsic value in the tables aboveof $83,000, which represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended September 30, 20172019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on September 30, 2017.2019. Note 46 - Legal Proceedings The Company ismay be party to certain claimslawsuits or actionsclaims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolutionwe do not believe any of these matters is not expected toproceedings will have, individually or in the aggregate, a significantmaterial adverse effect on theupon our financial condition, cash flows or future financial position or results of operationsoperation. 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. During 2019, four claims have been filed against us claiming failure to pay contractually obligated amounts. Three of these claims have been filed by former vendors, and the fourth by a current vendor. The total of these four claims exceeds $0.7 million. All are being actively defended, and the claimed amount is recorded on our balance sheet as of September 30, 2019. Some of the Company.largest with a combined claimed value of approximately $0.6M have subsequently been settled at approximately 50% of the amount claimed. Additional smaller amounts are pending some form of resolution. Note 57 - Other Comprehensive Income In the three and nine months ended September 30, 2017,2019, the Company incurred other comprehensive loss and incomegain of approximately ($260,000) and $493,000, respectively,$16,000, all from foreign currency translation adjustments. The following table sets forth the accumulated balance of other comprehensive income and each component. | | Foreign Currency Items | | | Total Accumulated Other Comprehensive Income | | | | | | | | | | | Beginning balance as of January 1, 2019 | | $ | (6,050,347 | ) | | $ | (6,050,347 | ) | | | | | | | | | | Current period change, net of tax | | | 15,603 | | | | 15,603 | | | | | | | | | | | Ending Balance as of September 30, 2019 | | | (6,034,744 | ) | | | (6,034,744 | ) |
| | Foreign Currency Items | | | Total Accumulated Other Comprehensive Income | | | | | | | | | Beginning balance as of January 1, 2017 | | $ | (5,593,878 | ) | | $ | (5,593,878 | ) | | | | | | | | | | Current period change, net of tax | | | 492,900 | | | | 492,900 | | | | | | | | | | | Ending Balance as of September 30, 2017 | | | (5,100,978 | ) | | | (5,100,978 | ) |
Note 6-Inventories, Net
| | September 30, 2017 | | | December 31, 2016 | | Raw materials | | $ | 3,485,026 | | | $ | 3,310,310 | | Work in process | | | 2,873,071 | | | | 1,942,600 | | Finished goods | | | 13,881,057 | | | | 13,889,328 | | Allowance for excess quantities | | | (891,046 | ) | | | (794,227 | ) | Total inventories | | $ | 19,348,108 | | | $ | 18,348,011 | |
Note 78 - Geographic Segment Data The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's continuing operations by geographic area is as follows: | | Net Sales to Outside Customers | | | Net Sales to Outside Customers | | | | For the Three Months Ended | | | For the Nine Months Ended | | | | September 30, | | | September 30, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | | | | | | | | | | | | | | | | United States | | $ | 5,984,000 | | | $ | 7,732,000 | | | $ | 23,468,000 | | | $ | 29,549,000 | | Mexico | | | 2,345,000 | | | | 2,396,000 | | | | 6,830,000 | | | | 6,959,000 | | | | | | | | | | | | | | | | | | | | | $ | 8,329,000 | | | $ | 10,128,000 | | | $ | 30,298,000 | | | $ | 36,508,000 | |
| | Total Assets at | | | | September 30, | | | December 31, | | | | 2019 | | | 2018 | | | | | | | | | | | United States | | $ | 19,409,000 | | | $ | 25,613,000 | | Mexico | | | 11,260,000 | | | | 9,476,000 | | Assets Held for Sale International Subsidiaries | | | 1,305,000 | | | | 3,672,000 | | | | | | | | | | | | | $ | 31,974,000 | | | $ | 38,761,000 | |
Note 9 - Inventories, Net of Continuing Operations | | Net Sales to Outside Customers | | | Net Sales to Outside Customers | | | | For the Three Months Ended | | | For the Nine Months Ended | | | | September 30, | | | September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | United States | | $ | 9,039,000 | | | $ | 10,392,000 | | | $ | 30,165,000 | | | $ | 33,527,000 | | Europe | | | 1,261,000 | | | | 761,000 | | | | 3,125,000 | | | | 1,927,000 | | Mexico | | | 2,627,000 | | | | 1,723,000 | | | | 6,605,000 | | | | 5,438,000 | | United Kingdom | | | 299,000 | | | | 600,000 | | | | 1,502,000 | | | | 1,940,000 | | | | | | | | | | | | | | | | | | | | | $ | 13,226,000 | | | $ | 13,476,000 | | | $ | 41,397,000 | | | $ | 42,832,000 | |
| | September 30, 2019 | | | December 31, 2018 | | Raw materials | | $ | 1,852,768 | | | $ | 1,994,741 | | Work in process | | | 3,124,781 | | | | 3,052,224 | | Finished goods | | | 11,454,025 | | | | 12,300,010 | | In Transit | | | 148,183 | | | | 480,716 | | Allowance for excess quantities | | | (293,306 | ) | | | (439,057 | ) | Total inventories | | $ | 16,286,452 | | | $ | 17,388,634 | |
| | Total Assets at | | | | September 30, | | | December 31, | | | | 2017 | | | 2016 | | | | | | | | | United States | | $ | 27,689,000 | | | $ | 33,108,000 | | Europe | | | 3,176,000 | | | | 2,418,000 | | Mexico | | | 9,020,000 | | | | 7,064,000 | | United Kingdom | | | 847,000 | | | | 1,324,000 | | | | | | | | | | | | | $ | 40,732,000 | | | $ | 43,914,000 | |
Note 810 - Concentration of Credit Risk Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the three and nine months ended September 30, 20172019 and 2016,2018, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively. Sales to these customers for the three months ended September 30, 20172019 and 20162018 are as follows: | | Three Months Ended | | Three Months Ended | | | Three Months Ended | | | Three Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | | September 30, 2019 | | | September 30, 2018 | | Customer | | Net Sales | | | % of Net Sales | | | Net Sales | | | % of Net Sales | | | Net Sales | | | % of Net Sales | | | Net Sales | | | % of Net Sales | | Customer A | | $ | 3,195,000 | | | | 24.2 | % | | $ | 3,088,000 | | | | 22.9 | % | | $ | 1,799,000 | | | | 22% | | | $ | 2,395,000 | | | | 24% | | Customer B | | $ | 2,283,000 | | | | 17.3 | % | | $ | 3,070,000 | | | | 22.8 | % | | $ | 1,559,000 | | | | 19% | | | $ | 2,686,000 | | | | 27% | |
Sales to these customers for the nine months ended September 30, 2019 and 2018 are as follows: | | Nine Months Ended | | | Nine Months Ended | | | | September 30, 2019 | | | September 30, 2018 | | Customer | | Net Sales | | | % of Net Sales | | | Net Sales | | | % of Net Sales | | Customer A | | $ | 8,136,000 | | | | 27% | | | $ | 9,738,000 | | | | 27% | | Customer B | | $ | 8,424,000 | | | | 28% | | | $ | 10,796,000 | | | | 30% | |
| | Nine Months Ended | | | Nine Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | Customer | | Net Sales | | | % of Net Sales | | | Net Sales | | | % of Net Sales | | Customer A | | $ | 11,489,000 | | | | 27.8 | % | | $ | 11,859,000 | | | | 27.7 | % | Customer B | | $ | 6,457,000 | | | | 15.6 | % | | $ | 7,870,000 | | | | 18.4 | % |
As of September 30, 2017,2019, the total amounts owed to the Company by these customers were approximately $1,491,000$1,777,000 or 19.6%26%, and $1,631,000$996,000 or 21.5%14%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at September 30, 20162018 by these customers were approximately $1,411,000$2,241,000 or 13.9%22%, and $2,653,000$1,702,000 or 26.1%17% of the Company’s consolidated net accounts receivable, respectively. Note 9 11 - Related Party Transactions Stephen M. Merrick, PresidentChief Executive Officer of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which providesused to provide legal services to the Company. Legal fees paid by the Company to this firm for the three months ended September 30, 20172019 and 2016,2018, respectively, were $29,000none and $57,000.none. Legal fees paid by the Company to this firm for the nine months ended September 30, 20172019 and 2016,2018, respectively, were $93,000none and $128,000.$88,000. On July 1, 2019, the Company deconsolidated Clever, and as result the Company has a note receivable of $1.3 million. One of owners of Clever is Mr. Schwan, the Company’s chairman. Note 12-Derivative Instruments; Fair Value Interest payments have been made orThe Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that all derivative instruments be recognized on the balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued to John H. Schwan, Chief Executive Officerliabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-one matching of the Company, for loans madederivative instrument to the Company. During the three months ended September 30, 2017 and 2016, these interest accruals totaled $24,000 and $23,000, respectively. During the nine months ended September 30, 2017 and 2016, these interest accruals totaled $59,000 and $69,000, respectively.
John H. Schwan, Chief Executive Officer of the Company, through an investment entity, and Stephen M. Merrick, President of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). During the three months ended September 30, 2017 and 2016, Clever Container purchased various products from the Company in the amount of $262,000 and $191,000, respectively. During the nine months ended September 30, 2017 and 2016, Clever Container purchased various products from the Company in the amount of $716,000 and $669,000, respectively.our underlying transaction. As of September 30, 2017 and 2016,2019, we had no such instrument. The only derivative instrument, terminated during 2019, was accounted for as a hedge. Changes in fair value for the balancerespective periods were recognized in the consolidated statement of accounts receivable from Clever Container to the Company were $924,000 and $192,000, respectively. The Company owns a 28.5% interest in Clever Container.
Note 10 - Derivative Instruments; Fair Valueoperations.
The following tables represents information aboutinterest rate swap we entered into December 14, 2017 had a three-year term (ending December 14, 2020) and a notional amount of $3 million. The Company purchased a 2.25% fixed rate in exchange for the Company’svariable rate on a portion of the notes payable under the PNC Agreements, which was 1.47% at time of execution. The swap was terminated during 2019 as a result of the first forbearance agreement with the bank. Note 13 - Leases We adopted ASC Topic 842 (Leases) on January 1, 2019. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. Results for periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations. Upon adoption of ASC 842 we recorded a $2.8 million increase in other assets, a $1.1 million increase in current liabilities, measuredand a $1.7 million increase in non-current liabilities. We did not record any cumulative effect adjustments in opening retained earnings, and adoption of ASC 842 had no impact on cash flows from operating, investing, or financing activities. We determine if an arrangement is a lease at fairinception. Most of our operating leases do not provide an implicit rate of interest so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the course of ordinary business including warehouses and manufacturing facilities, as well as vehicles and equipment used in our operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a recurringstraight-line basis over the lease term. The depreciable life of assets and related improvements are limited by the expected lease term, unless there is a reasonably certain expected transfer or title or purchase option. Some lease agreements include renewal options at our sole discretion. Any guaranteed residual value is included in our lease liability. The table below describes our lease position as of September 30, 2017 and December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:2019: Assets | 14 | As of September 30, 2019 | |
| | Amount as ofOperating lease right-of-use assets | | | 2,234,000 | | Accumulated amortization | | | (938,000 | ) | Net lease assets | | | | | Description | | 9/30/2017 | | | Level 1 | | | Level 2 | | | Level 31,296,000 | | | | | | | | | | Liabilities | | | | | Warrant Liability | | $ | -Current | | | | - | Operating | | | $840,000 | - | Noncurrent | | | | - | Operating | | | 456,000 | | Total lease liabilities | | | 1,296,000 | | | | | | | Weighted average remaining term (years) – operating leases (in years) | | 2 | | | | | | | | | | Weighted average discount rate – operating leases | | $ | -11.25 | % |
During the three months ended September 30, 2019, we recorded expenses related to Operating right-of-use lease asset amortization | | | 216,000 | | | | | | - | Total expense during three months ended September 30, 2019 | | | $216,000 | - |
During the nine months ended September 30, 2019, we recorded expenses related to Operating right-of-use lease asset amortization | | | 938,000 | | | | | | - | Total expense during nine months ended September 30, 2019 | | | 938,000 | |
| | Amount as of | | | | | | | | | | | Description | | 12/31/2016 | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | | | | Warrant Liability | | $ | 818,000 | | | | - | | | $ | 818,000 | | | | - | | | | | | | | | | | | | | | | | | | | | $ | 818,000 | | | | | | | $ | 818,000 | | | | | |
Operating lease expense were approximately $216,000 for the three months and $938,000 for the nine months ended September 30, 2019. Operating lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations. The Company does not have any finance leases. Cash paid for amounts included in the measurement of operating lease liabilities were approximately $216,000 for the three months and $938,000 for the nine months ended September 30, 2019. The following table summarizes the maturities of our lease liabilities for all operating leases as of September 30,2019 | | | (in thousands) | 09/30/2019 | 2019 | 192 | 2020 | 752 | 2021 | 425 | 2022 and thereafter | 60 | Total lease payments | 1,429 | less: Imputed interest | (133) | Present value of lease liabilities | 1,296 |
Note 14 - Impairment Upon closing of the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Clever Container. As a result of an impairment test, the Company fully impaired the goodwill related to Clever Container in the first quarter and recorded an impairment charge of $220,000. Upon closing of 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 $1,033,000. Note 11 –15 - Subsequent Events In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. For the three and nine months ended September 30, 2019, we had revenue of $2.0 million and $6.3M, respectively, associated with products which utilized the Ziploc® trademark. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis. However, as we continued to utilize the Ziploc® related assets in 2020, those assets will not be considered abandoned until they cease to be used at the end of the first quarter of 2020. Therefore, our Ziploc® operations cannot be classified as discontinued operations in these financial statements but will be presented as discontinued operations when all of the applicable accounting criteria are met. We have also dramatically changed our capital structure. On November 9, 2017, the Company and S.C. Johnson & Son Inc.January 3, 2020 we entered into a Fourth Amendmentsecurities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, up to 500,000 shares of the Company’s newly created Series A Convertible Preferred Stock (“Series A Preferred”), with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As a result of the LF International Offering, a change of control of the Company may occur. As permitted by the LF Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share to additional investors (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in aggregate gross proceeds of $2,500,000. Pursuant to the Trademark LicenseLF Purchase Agreement, among them dated December, 2011, extendingLF International received the termright to nominate and elect one member to the Company’s board of directors (subject to certain adjustments), effective as of the Trademark Licensefirst closing, as well as a second director by the earlier of (i) the Company’s upcoming 2020 annual meeting of shareholders and (ii) May 15, 2020 and a third director by the Company’s upcoming 2020 annual meeting of shareholders. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 12, 2020, the Company changed its name to Yunhong CTI Ltd. To date, the Company has sold 492,660 shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceeds of $4,926,600. Additionally, on April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. Our business and results of operations may 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 sales of our products. Our customers, suppliers and distributors may experience similar disruption. In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed. Note 16 – Restatement of Financial Statements As of January 3, 2020, the Audit Committee of the Board approved the engagement of RBSM, LLP (“RBSM”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended December 31, 2019. This Form 10-Q/A is being prepared with the benefit of auditor review and will constitute our amended filing. This Form 10-Q/A has also been updated to reflect disclosure of subsequent events that have occurred after the balance sheet date, but before the issuance of the associated financial statements. The subsequent events include the Company’s decision to exit its underperforming international subsidiaries, exit a significant product line, change its capital structure and focus its efforts on its US-based foil balloon and related product offerings. The company had previously included a non-cash charge of $3,000,000 during the second quarter of 2019 in anticipation of the divestiture or liquidation of European Sales entities and Clever Container. This Form 10-Q/A has had this reserve replaced by detailed calculations. Based on this detailed calculation herein we believe the magnitude of the initial charge was appropriate. Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Condensed Consolidated Balance Sheets |
| | September 30, 2019 | | | | As Previously Reported | | | Adjustments | | | As Restated | | ASSETS | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 126,647 | | | $ | (67,442 | ) | | $ | 59,205 | | Accounts receivable | | | 8,134,291 | | | | (1,219,707 | ) | | | 6,914,584 | | Inventories, net | | | 18,345,406 | | | | (2,058,954 | ) | | | 16,286,452 | | Prepaid expenses | | | 556,594 | | | | (104,469 | ) | | | 452,125 | | Other current assets | | | 1,293,899 | | | | (148,354 | ) | | | 1,145,545 | | Receivable from related party | | | | | | | 1,392,666 | | | | 1,392,666 | | Current assets of discontinued operations | | | | | | | 1,304,305 | | | | 1,304,305 | | | | | | | | | | | | | | | Total current assets | | | 28,456,837 | | | | (901,955 | ) | | | 27,554,882 | | | | | | | | | | | | | | | Property, plant and equipment: | | | | | | | | | | | | | Machinery and equipment | | | 23,883,267 | | | | (135,425 | ) | | | 23,747,842 | | Building | | | 3,374,334 | | | | | | | | 3,374,334 | | Office furniture and equipment | | | 2,692,423 | | | | (407,078 | ) | | | 2,285,345 | | Intellectual property | | | 783,179 | | | | | | | | 783,179 | | Land | | | 250,000 | | | | | | | | 250,000 | | Leasehold improvements | | | 409,347 | | | | | | | | 409,347 | | Fixtures and equipment at customer locations | | | 518,450 | | | | | | | | 518,450 | | Projects under construction | | | 189,795 | | | | (93,099 | ) | | | 96,696 | | | | | 32,100,795 | | | | (635,602 | ) | | | 31,465,193 | | Less : accumulated depreciation and amortization | | | (28,865,571 | ) | | | 265,336 | | | | (28,600,235 | ) | | | | | | | | | | | | | | Total property, plant and equipment, net | | | 3,235,224 | | | | (370,266) | | | | 2,864,958 | | | | | | | | | | | | | | | Other assets: | | | | | | | | | | | | | Goodwill | | | 1,473,176 | | | | (1,473,176 | ) | | | | | Net deferred income tax asset | | | 1,051,128 | | | | (916,034 | ) | | | 135,094 | | Operating lease right-of-use | | | 1,711,812 | | | | (416,067 | ) | | | 1,295,745 | | Other non-current assets | | | (3,000,000 | ) | | | 3,000,000 | | | | | | Other assets | | | (31,086 | ) | | | 154,246 | | | | 123,160 | | | | | | | | | | | | | | | Total other assets | | | 1,205,030 | | | | 348,970 | | | | 1,554,000 | | | | | | | | | | | | | | | Other non-current assets of discontinued operations | | | | | | | | | | | - | | | | | | | | | | | | | | | TOTAL ASSETS | | $ | 32,897,091 | | | $ | (923,251 | ) | | | 31,973,840 | | | | | | | | | | | | | | | LIABILITIES AND EQUITY | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Checks written in excess of bank balance | | $ | 244,829 | | | $ | (628 | ) | | $ | 244,201 | | Trade payables | | | 8,522,419 | | | | (489,806 | ) | | | 8,032,613 | | Line of credit | | | 12,774,347 | | | | (214,141 | ) | | | 12,560,206 | | Notes payable - current portion | | | 3,787,533 | | | | | | | | 3,787,533 | | Notes payable affiliates - current portion | | | 11,789 | | | | | | | | 11,789 | | Operating Lease Liabilities | | | 1,268,257 | | | | (428,421 | ) | | | 839,836 | | Accrued liabilities | | | 1,550,238 | | | | (487,637 | ) | | | 1,062,601 | | Current liabilities of discontinued operations | | | | | | | 1,071,617 | | | | 1,071,617 | | | | | | | | | | | | | | | Total current liabilities | | | 28,159,412 | | | | (549,016 | ) | | | 27,610,396 | | | | | | | | | | | | | | | Long-term liabilities: | | | | | | | | | | | | | Notes payable - affiliates | | | 221,362 | | | | (202,015 | ) | | | 19,347 | | Notes payable, net of current portion | | | | | | | 839,207 | | | | 839,207 | | Operating Lease Liabilities | | | 868,707 | | | | (412,798 | ) | | | 455,909 | | Notes payable - officers, subordinated | | | 443,555 | | | | 599,211 | | | | 1,042,766 | | Other long-term liabilities | | | 1,042,766 | | | | (828,692 | ) | | | 214,074 | | Deferred income tax liability | | | 214,074 | | | | (214,074 | ) | | | - | | Other long-term liabilities of discontinued operations | | | - | | | | | | | | - | | Total long-term debt, net of current portion | | | 2,790,464 | | | | (219,161 | ) | | | 2,571,303 | | | | | | | | | | | | | | | Total long-term liabilities | | | 2,790,464 | | | | (219,161 | ) | | | 2,571,303 | | | | | | | | | | | | | | | | | | | | | | | | | | | | TOTAL LIABILITIES | | | 30,949,876 | | | | (768,177 | ) | | | 30,181,699 | | | | | | | | | | | | | | | Equity: | | | | | | | | | | | | | Yunhong CTI, LTD stockholders' equity: | | | | | | | | | | | | | Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding | | | - | | | | | | | | | | Common stock - no par value, 15,000,000 shares authorized, 3,879,608 shares issued and 3,835,950 shares outstanding | | | 13,898,494 | | | | | | | | 13,898,494 | | Paid-in-capital | | | 3,481,838 | | | | | | | | 3,481,838 | | Accumulated earnings | | | (8,007,958 | ) | | | (537,679 | ) | | | (8,545,637 | ) | Accumulated other comprehensive loss | | | (6,034,745 | ) | | | | | | | (6,034,745 | ) | Less: Treasury stock, 43,658 shares | | | (160,784 | ) | | | | | | | (160,784 | ) | Total Yunhong CTI, LTD stockholders' equity | | | 3,176,845 | | | | (537,679) | | | | 2,639,166 | | Noncontrolling interest | | | (1,229,630 | ) | | | 382,605 | | | | (847,025 | ) | Total Equity | | | 1,947,215 | | | | (155,074 | ) | | | 1,792,141 | | TOTAL LIABILITIES AND EQUITY | | $ | 32,897,091 | | | $ | (923,251 | ) | | $ | 31,973,840 | |
Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Condensed Consolidated Statements of Comprehensive Income |
| | For the Three Months Ended September 30, | | | | 2019 | | | | | | | 2019 | | | | As Previously Reported | | | Adjustments | | | As Restated | | Net Sales | | $ | 8,537,475 | | | $ | (208,432 | ) | | $ | 8,329,043 | | | | | | | | | - | | | | - | | Cost of Sales | | | 7,729,851 | | | | (23,103 | ) | | | 7,706,748 | | | | | | | | | - | | | | - | | Gross profit | | | 807,624 | | | | (185,329 | ) | | | 622,295 | | | | | | | | | - | | | | - | | Operating expenses: | | | | | | | - | | | | - | | General and administrative | | | 1,466,830 | | | | (318,348 | ) | | | 1,148,482 | | Selling | | | 377,577 | | | | (144,071 | ) | | | 233,506 | | Advertising and marketing | | | 222,061 | | | | (88,021) | | | | 134,040 | | Impairment on long-lived assets | | | | | | | - | | | | | | Gain on loss of control of VIEs | | | | | | | (218,527 | ) | | | (218,527 | ) | Gain on sale of assets | | | (23,054 | ) | | | - | | | | (23,054 | ) | Total operating expenses | | | 2,043,414 | | | | (768,967 | ) | | | 1,274,447 | | | | | | | | | - | | | | - | | Income/(Loss) from operations | | | (1,235,790 | ) | | | 583,638 | | | | (652,152 | ) | | | | | | | | | | | | | | Other (expense) income: | | | | | | | | | | | | | Interest expense | | | (486,636 | ) | | | 22,090 | | | | (464,546 | ) | Interest income | | | 99 | | | | (99) | | | | | | Other Expense | | | - | | | | (82,873) | | | | (82,873) | | Foreign currency loss | | | (28,420 | ) | | | 2,673 | | | | (25,747 | ) | | | | | | | | | | | | | | Total other expense, net | | | (514,957 | ) | | | (58,209) | | | | (573,166 | ) | | | | | | | | | | | | - | | Income from continuing operations before taxes | | | (1,750,747 | ) | | | 525,429 | | | | (1,225,318 | ) | | | | | | | | | | | | - | | Income tax expense | | | (511,823 | ) | | | 511,823 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | (1,238,924) | | | | 13,606 | | | | (1,225,318 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Income (Loss) from discontinued operations (including loss on HFS of $0.6M), net of tax | | | | | | | (999,251 | ) | | | (999,251 | ) | | | | | | | | | | | | | | Net income (loss) | | $ | (1,238,924 | ) | | $ | (985,645 | ) | | $ | (2,224,569 | ) | | | | | | | | | | | | | | Less: Net (loss) income attributable to noncontrolling interest | | | (71,559 | ) | | | (211,426 | ) | | | (282,985) | | | | | | | | | | | | | | | Net income attributable to Yunhong CTI, LTD | | $ | (1,167,365 | ) | | $ | (774,219 | ) | | $ | (1,941,584 | ) | | | | | | | | | | | | | | Other Comprehensive Income (Loss) | | | | | | | | | | | | | Foreign currency adjustment | | | (281,817 | ) | | | | | | | (281,817 | ) | Comprehensive Income (Loss) | | $ | (1,449,182 | ) | | $ | (774,219 | ) | | $ | (2,223,401 | ) | | | | | | | | | | | | | | Basic income per common share | | | | | | | | | | | | | Continuing operations | | $ | (0.30 | ) | | $ | 0.05 | | | | (0.25 | ) | Discontinued operations | | | | | | | (0.26) | | | | (0.26) | | Basic income per common share | | $ | (0.30 | ) | | $ | (0.21) | | | $ | (0.51) | | | | | | | | | | | | | | | Diluted income per common share | | | | | | | | | | | | | Continuing operations | | $ | (0.30 | ) | | $ | 0.5 | | | $ | (0.25 | ) | Discontinued operations | | | | | | | (0.26) | | | | (0.26) | | Diluted income per common share | | $ | (0.30 | ) | | $ | (0.21) | | | $ | (0.51) | | | | | | | | | | | | | | | Weighted average number of shares and equivalent shares of common stock outstanding: | | | | | | | | | | | | | Basic | | | 3,835,950 | | | | | | | | 3,835,950 | | | | | | | | | | | | | | | Diluted | | | 3,835,950 | | | | | | | | 3,835,950 | |
| | For the Nine Months Ended September 30, | | | | 2019 | | | | | | | 2019 | | | | As Previously Reported | | | Adjustments | | | As Restated | | Net Sales | | $ | 33,480,704 | | | $ | (3,182,869 | ) | | $ | 30,297,835 | | | | | | | | | | | | | | | Cost of Sales | | | 28,139,175 | | | | (2,487,497 | ) | | | 25,651,678 | | | | | | | | | | | | | | | Gross profit | | | 5,341,529 | | | | (695,372 | ) | | | 4,646,157 | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | General and administrative | | | 5,054,028 | | | | (1,114,739 | ) | | | 3,939,289 | | Selling | | | 1,230,181 | | | | (387,635 | ) | | | 842,546 | | Advertising and marketing | | | 766,297 | | | | (281,201 | ) | | | 485,096 | | Impairment on long-lived assets | | | | | | | 1,472,382 | | | | 1,472,382 | | Gain on loss of control of VIEs | | | | | | | (218,527 | ) | | | (218,527 | ) | Gain on sale of assets | | | (70,263 | ) | | | | | | | (70,263 | ) | Total operating expenses | | | 6,980,243 | | | | (529,719 | ) | | | 6,450,524 | | | | | | | | | | | | | | | Income/(Loss) from operations | | | (1,638,714 | ) | | | (165,653 | ) | | | (1,804,367 | ) | | | | | | | | | | | | | | Other (expense) income: | | | | | | | | | | | | | Interest expense | | | (1,549,703 | ) | | | 56,439 | | | | (1,493,264 | ) | Interest income | | | 435 | | | | (435 | ) | | | | | Other Expense | | | (3,000,000 | ) | | | 2,514,258 | | | | (485,742 | ) | Foreign currency loss | | | (27,568 | ) | | | 110 | | | | (27,458 | ) | | | | | | | | | | | | | | Total other expense, net | | | (4,576,836 | ) | | | 2,570,372 | | | | (2,006,464 | ) | | | | | | | | | | | | | | Income from continuing operations before taxes | | | (6,215,550 | ) | | | 2,404,719 | | | | (3,810,831 | ) | | | | | | | | | | | | | | Income tax expense | | | (916,033 | ) | | | 916,033 | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | (5,299,517) | | | | 1,488,686 | | | | (3,810,831 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Income (Loss) from discontinued operations (including loss on HFS of $0.6M), net of tax | | | | | | | (2,730,796 | ) | | | (2,730,796 | ) | | | | | | | | | | | | | | Net income (loss) | | $ | (5,299,517 | ) | | $ | (1,242,110 | ) | | $ | (6,541,627 | ) | | | | | | | | | | | | | | Less: Net (loss) income attributable to noncontrolling interest | | | (157,045 | ) | | | (704,430 | ) | | | (861,475 | ) | | | | | | | | | | | | | | Net income attributable to Yunhong CTI, LTD | | $ | (5,142,472 | ) | | $ | (537,680 | ) | | $ | (5,680,152 | ) | | | | | | | | | | | | | | Other Comprehensive Income (Loss) | | | | | | | | | | | | | Foreign currency adjustment | | | 15,603 | | | | | | | | 15,603 | | Comprehensive Income (Loss) | | $ | (5,126,869 | ) | | $ | (537,680 | ) | | $ | (5,664,549 | ) | | | | | | | | | | | | | | Basic income per common share | | | | | | | | | | | | | Continuing operations | | $ | (1.34 | ) | | $ | 0.57 | | | | (0.77 | ) | Discontinued operations | | | | | | | (0.71 | ) | | | (0.71 | ) | Basic income per common share | | $ | (1.34 | ) | | $ | (0.14 | ) | | $ | (1.48 | ) | | | | | | | | | | | | | | Diluted income per common share | | | | | | | | | | | | | Continuing operations | | $ | (1.34 | ) | | $ | 0.57 | | | $ | (0.77 | ) | Discontinued operations | | | | | | | (0.71 | ) | | | (0.71 | ) | Diluted income per common share | | $ | (1.34 | ) | | $ | (0.14 | ) | | $ | (1.48 | ) | | | | | | | | | | | | | | Weighted average number of shares and equivalent shares of common stock outstanding: | | | | | | | | | | | | | Basic | | | 3,835,950 | | | | | | | | 3,835,950 | | | | | | | | | | | | | | | Diluted | | | 3,835,950 | | | | | | | | 3,835,950 | |
Yunhong CTI, LTD (f/k/a CTI Industries Corporation) | Condensed Consolidated Statements of Cash Flows (Unaudited) |
| | For the Nine Months Ended September 30, | | | | 2019 | | | | | | | 2019 | | | | As Previously Reported | | | Adjustments | | | As Restated | | Cash flows from operating activities: | | | | | | | | | | | | | Net income | | | (5,299,517 | ) | | | (1,242,110 | ) | | | (6,541,627) | | Depreciation and amortization | | | 835,302 | | | | | | | | 835,302 | | Operating Cash Flows from Operating Leases | | | 606,356 | | | | (606,356) | | | | | | Amortization of deferred gain on sale/leaseback | | | 116,277 | | | | (198,699) | | | | (82,422) | | Other | | | | | | | 248,974 | | | | 248,974 | | Provision for losses on accounts receivable | | | 27,362 | | | | 372,101 | | | | 399,463 | | Provision for losses on inventories | | | (157,243 | ) | | | 1,406,762 | | | | 1,249,519 | | Stock based compensation | | | | | | | 72,401 | | | | 72,401 | | Impairment of long-lived assets | | | | | | | 1,252,283 | | | | 1,252,283 | | Impairment of Prepaids, Current Assets, and Other Non-Current Assets | | | | | | | 168,931 | | | | 168,931 | | Gain on deconsolidation of Clever | | | | | | | (218,534 | ) | | | (218,534 | ) | Impairment of assets held for sale | | | 3,000,000 | | | | (2,395,517 | ) | | | 604,483 | | Deferred income taxes | | | (916,033 | ) | | | 916,033 | | | | - | | Loss on disposition of asset | | | 17,480 | | | | | | | | 17,480 | | Change in assets and liabilities: | | | | | | | | | | | | | Accounts receivable | | | 2,626,396 | | | | 150,000 | | | | 2,776,396 | | Inventories | | | 1,685,411 | | | | (250,000) | | | | 1,435,411 | | Prepaid expenses and other assets | | | 228,389 | | | | | | | | 228,389 | | Trade payables | | | 1,846,575 | | | | 46,096 | | | | 1,892,671 | | Accrued liabilities | | | (23,878 | ) | | | (142,945 | ) | | | (166,823 | ) | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | | 4,592,877 | | | | (421,580) | | | | 4,172,297 | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | Purchases of property, plant and equipment | | | (144,222 | ) | | | | | | | (144,222 | ) | | | | | | | | | | | | | | Net cash (used in) investing activities | | | (144,222 | ) | | | | | | | (144,222 | ) | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | Change in checks written in excess of bank balance | | | (391,313 | ) | | | | | | | (391,313 | ) | Net change in revolving line of credit | | | (3,808,012 | ) | | | | | | | (3,808,012 | ) | Repayment of long-term debt | | | (913,855 | ) | | | | | | | (913,855 | ) | Proceeds from issuance of stock | | | 975,401 | | | | (975,401)) | | | | 0 | | Cash paid for deferred financing fees | | | (82,763 | ) | | | | | | | (82,763 | ) | Proceeds from issuance of long-term debt | | | 125,000 | | | | 525,000 | | | | 650,000 | | | | | | | | | | | | | | | Net cash (used in) financing activities | | | (4,095,542 | ) | | | (450,401) | | | | (4,545,943) | | | | | | | | | | | | | | | Effect of exchange rate changes on cash | | | (654,616 | ) | | | 861,308 | | | | 205,692 | | | | | | | | | | | | | | | Net increase/(decrease) in cash and cash equivalents | | | (301,503 | ) | | | (10,673 | ) | | | (312,176 | ) | | | | | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 428,150 | | | | | | | | 428,150 | | | | | | | | | | | | | | | Cash and cash equivalents at end of period | | | 126,647 | | | | (10,673 | ) | | | 115,974 | | | | | | | | | | | | | | | The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations in amount of $57,000.” | | | | | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | | | | | | | Cash payments for interest | | | 1,558,817 | | | | | | | $ | 1,558,817 | | Common stock issued for accounts payable | | | | | | | | | | $ | 303,000 | | Common stock issued for notes payable | | | | | | | | | | $ | 600,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations. Overview We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related latex toy products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and most of our foil balloons at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe. We also market and sell vacuum sealing machines, which we purchase from a supplier and we market and sell home organizing and container products, Candy Blossoms and party goods. As of January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price. Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. We recognize 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. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales. As of January 1, 2019, we adopted ASC Topic 842, Leases (“ASC Topic 842”). Refer to Note 12 for additional information. Our primary leases relate to the facilities we use in Lake Zurich, IL (USA), and Mexico. We also have ancillary leases for items ranging from forklifts to printers. The majority of our leases are classified as operating lease right-of-use (“ROU”) assets and related operating lease liabilities. Finance leases are included in property and equipment and related liabilities. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at the commencement date for leases that exceed 12 months. The expected lease term includes options to renew when it is reasonably certain that we will exercise such option. Operating lease expense is recognized on a straight-line basis over the lease term and is included in the cost of sales or sales, general and administrative expense areas. Finance leases are amortized on a straight-line basis and included in similar areas of expense classification. Variable lease payments, non-lease component payments, and short-term rentals (leases less than 12 months in duration) are expensed as incurred. Summary of Subsequent Events In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. For the three and nine months ended September 30, 2019, we had revenue of $2.0 million and $6.3 million, respectively, associated with products which utilized the Ziploc® trademark. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis. However, as we continued to utilize the Ziploc® related assets in 2020, those assets will not be considered abandoned until they cease to be used at the end of the first quarter of 2020. Therefore, our Ziploc® operations cannot be classified as discontinued operations in these financial statements but will be presented as discontinued operations when all of the applicable accounting criteria are met. We have also dramatically changed our capital structure. On January 3, 2020 we entered into a securities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, up to 500,000 shares of the Company’s newly created Series A Convertible Preferred Stock (“Series A Preferred”), with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As a result of the LF International Offering, a change of control of the Company may occur. As permitted by the LF Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share to additional investors (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company’s board of directors (subject to certain adjustments), effective as of the first closing, as well as a second director by the earlier of (i) the Company’s upcoming 2020 annual meeting of shareholders and (ii) May 15, 2020 and a third director by the Company’s upcoming 2020 annual meeting of shareholders. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 12, 2020, the Company changed its name to Yunhong CTI Ltd. To date, the Company has sold 492,660 shares of Series A Preferred to LF International and other accredited investors for aggregate gross proceeds of $4,926,600. Additionally, on April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. Our business and results of operations may 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 sales of our products. Our customers, suppliers and distributors may experience similar disruption. In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed. Comparability In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest these international subsidiaries. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these International operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and expects to divest its CTI Europe (Germany) subsidiary in the first half of 2020. The Company has variable interests in Venture Leasing L.L.C (VL) and Clever Container Company, L.L.C. (Clever). Through June 30, 2019, the Company had determined that it was the primary beneficiary of these entities and included them in our consolidated results. In the third quarter, we determined that operationally material changes in our involvement with Clever and VL resulted in us having no power over the decisions which impact their financial performance. Therefore, we are no longer the primary beneficiary of these entities. Effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. Upon deconsolidation of these entities, we recognized a gain of $219,000. Results of Operations Net Sales. For the three monthsand nine month periods ended September 30, 2017,2019, net sales from continuing operations were $13,226,000$8,329,000 and $30,298,000, compared to net sales of $13,476,000$10,128,000 and $36,508,000 for the same periodperiods of 2016, a decrease of 1.9%.2018. For the quartersthree month period ended September 30, 20172019 and 2016,2018, net sales from continuing operations by product category were as follows: | | Three Months Ended | | | | September 30, 2019 | | | September 30, 2018 | | | | $ | | | % of | | | $ | | | % of | | Product Category | | (000) Omitted | | | Net Sales | | | (000) Omitted | | | Net Sales | | | | | | | | | | | | | | | | | | | Foil Balloons | | | 3,681 | | | | 44 | % | | | 3,854 | | | | 38 | % | | | | | | | | | | | | | | | | | | Latex Balloons | | | 2,059 | | | | 25 | % | | | 2,217 | | | | 22 | % | | | | | | | | | | | | | | | | | | Vacuum Sealing Products | | | 1,958 | | | | 24 | % | | | 2,517 | | | | 25 | % | | | | | | | | | | | | | | | | | | Film Products | | | 237 | | | | 3 | % | | | 320 | | | | 3 | % | | | | | | | | | | | | | | | | | | Home Organization | | | 0 | | | | 0 | % | | | 900 | | | | 9 | % | | | | | | | | | | | | | | | | | | Other | | | 394 | | | | 4 | % | | | 320 | | | | 3 | % | | | | | | | | | | | | | | | | | | Total | | | 8,329 | | | | 100 | % | | | 10,128 | | | | 100 | % |
26 | | Three Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | | | $ | | | % of | | | $ | | | % of | | Product Category | | (000) Omitted | | | Net Sales | | | (000) Omitted | | | Net Sales | | | | | | | | | | | | | | | Foil Balloons | | | 5,767 | | | | 44 | % | | | 6,178 | | | | 46 | % | | | | | | | | | | | | | | | | | | Latex Balloons | | | 2,620 | | | | 20 | % | | | 1,875 | | | | 14 | % | | | | | | | | | | | | | | | | | | Vacuum Sealing Products | | | 2,397 | | | | 18 | % | | | 2,594 | | | | 19 | % | | | | | | | | | | | | | | | | | | Film Products | | | 658 | | | | 5 | % | | | 1,137 | | | | 8 | % | | | | | | | | | | | | | | | | | | Other Sales | | | 1,784 | | | | 13 | % | | | 1,692 | | | | 13 | % | | | | | | | | | | | | | | | | | | Total | | | 13,226 | | | | 100 | % | | | 13,476 | | | | 100 | % |
For the nine monthsmonth period ended September 30, 2017,2019 and 2018, net sales were $41,397,000 compared to net sales of $42,382,000 for the same period of 2016, a decrease of 3.4%. For the nine months ended September 30, 2017 and 2016, net salescontinuing operations by product category were as follows: | | Nine Months Ended | | | Nine Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | | September 30, 2019 | | | September 30, 2018 | | | | $ | | % of | | $ | | % of | | | $ | | | % of | | | $ | | | % of | | Product Category | | (000) Omitted | | | Net Sales | | | (000) Omitted | | | Net Sales | | | (000) Omitted | | | Net Sales | | | (000) Omitted | | | Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foil Balloons | | | 21,447 | | | | 52 | % | | | 20,540 | | | | 48 | % | | | 13,325 | | | | 44 | % | | | 15,750 | | | | 43 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Latex Balloons | | | 6,969 | | | | 17 | % | | | 6,182 | | | | 14 | % | | | 5,640 | | | | 19 | % | | | 6,220 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Vacuum Sealing Products | | | 5,668 | | | | 14 | % | | | 7,362 | | | | 17 | % | | | 6,022 | | | | 20 | % | | | 5,970 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Film Products | | | 2,194 | | | | 5 | % | | | 3,508 | | | | 8 | % | | | 1,476 | | | | 5 | % | | | 1,367 | | | | 4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other Sales | | | 5,119 | | | | 12 | % | | | 5,240 | | | | 13 | % | | Home Organization | | | | 263 | | | | 0 | % | | | 3,080 | | | | 9 | % | | | | | | | | | | | | | | | | | | | Other | | | | 3,572 | | | | 12 | % | | | 4,121 | | | | 11 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 41,397 | | | | 100 | % | | | 42,832 | | | | 100 | % | | | 30,298 | | | | 100 | % | | | 36,508 | | | | 100 | % |
Foil Balloons. During the three and nine months ended September 30, 2017,2019, revenues from the sale from continuing operations of foil balloons decreased by 6.6%4% and 15%, respectively compared to the prior year period, from $6,178,000$3,854,000 and $15,750,000 during 2018, respectively, to $5,767,000. For$3,681,000 and $13,325,000 during 2019. Sales to our largest balloon customer decreased from $10,796,000 during the first nine months ended September 30, 2017, revenues fromof 2018 to $8,424,000 during the first nine months of 2019. As we and others in the industry have reported, the commercial supply of helium has been limited and pricing has increased, while availability has been reduced. We expect the helium market to improve during the next few months, but it remains a negative factor in the sale of helium-based products such as many foil balloons increased by 4.4% compared to the prior year period, from $20,540,000 to $21,447,000. In that period, foil balloon sales to our largest customer decreased to $11,489,000 from $9,958,000 in the first three quarters of 2016. However, during that nine month period, sales of foil balloons to other customers increased to $10,818,000 from $8,715,000 for the same period last year. These increased sales represent certain new customers but principally increases in sales to significant existing customers in each of the United States, Mexico, the United Kingdom and Europe.balloons. Latex Balloons. During the three months ended September 30, 2017,2019, revenues from the continuing operations sale of latex balloons decreased by 7% compared to the prior year from $2,217,000 during 2018 to $2,059,000 during 2019. During the nine months ended September 30, 2019, revenues from the sale of latex balloons increaseddecreased by 39.8% compared9% to the prior year period, from $1,875,000$6,220,000 during 2018 to $2,620,000. During the nine months ended September 30, 2017, revenues from the sale of latex balloons increased by 12.7% compared to the prior year period from $6,182,000 to $6,969,000. Substantially all of the increases in sales of latex balloons$5,640,000 during the third quarter and the nine month period have been sales by Flexo Universal to existing and new customers principally in Mexico. These include sales to several major chains and to distributors.2019. Vacuum Sealing Products. During the three months ended September 30, 2017,2019, revenues from the continuing operations sale of pouches and vacuum sealing machinesproducts decreased by 7.6%22% compared to the prior year period, from $2,594,000$2,517,000 during 2018 to $2,397,000.$1,958,000 during 2019. During the nine months ended September 30, 2017,2019, revenues from the sale of pouches and vacuum sealing machines decreasedproducts increased by 23.0%1% compared to the prior year period, from $7,362,000$5,970,000 during 2018 to $5,668,000. We believe that sales were affected$6,022,000 during both the first and second quarters by the selloff of excess inventory of vacuum sealing machines held by a principal customer due to a sales promotion the customer implemented during the fourth quarter of 2016 for which a large quantity of machines were purchased.2019. Films. During the three months ended September 30, 2017,2019, revenues from the continuing operations sale of laminated film productscommercial films decreased by 42.2%26% compared to the prior year period, from $1,137,000$320,000 during 2018, respectively, to $658,000.$237,000 during 2019. During the nine months ended September 30, 2017,2019, revenues from the sale of laminated film products decreasedcommercial films increased by 37.4%8% compared to the prior year period, from $3,508,000$1,367,000 during 2018, respectively, to $2,194,000. Virtually all$1,476,000 during 2019. Other Revenues. During the three months ended September 30, 2017,2019, revenues from continuing operations from the sale of various other products increased by 5.4% to $1,784,00023% respectively compared to revenuesthe prior year period, from other products in the same period in 2016 of $1,692,000.$320,000 during 2018 to $394,000 during 2019. During the nine months ended September 30, 2017,2019, revenues from the sale of various other products decreased by 2.3% to $5,119,00013% respectively compared to revenuesthe prior year period, from other products in the same period in 2016 of $5,240,000.$4,121,000 during 2018 to $3,572,000 during 2019. The revenues from the sale of other products during 2017the first nine months of 2019 include (i) sales of a line of “Candy Blossoms” and “Candy Loons”similar products consisting of candy and small inflated balloons sold in small containers in the amount of $2.3 million, (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors and (iv) sales of party goods in Mexico by Flexo Universal.products. Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales from continuing operations of our top three and ten customers for the three and nine months ended September 30, 20172019 and 2016.2018. | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | % of Sales | | | % of Sales | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | | | | | | | | | | | | Top 3 Customers | | | 47.5 | % | | | 53.9 | % | | | 48.5 | % | | | 54.0 | % | | | | | | | | | | | | | | | | | | Top 10 Customers | | | 66.1 | % | | | 70.0 | % | | | 65.4 | % | | | 68.3 | % |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | % of Sales | | | % of Sales | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | | | | | | | | | | | | | | | | Top 3 Customers | | | 48% | | | | 57% | | | | 55% | | | | 61% | | | | | | | | | | | | | | | | | | | Top 10 Customers | | | 65% | | | | 73% | | | | 70% | | | | 82% | |
During the three and nine months ended September 30, 2017,2019, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three months ended September 30, 20172019 were $3,195,000$1,799,000 or 24.2%22%, and $2,283,000$1,559,000 or 17.3%19%, of consolidated net sales, respectively. Sales to these customers for the three months ended September 30, 20162018 were $3,088,000$2,395,000 or 22.9%24%, and $3,070,000$2,686,000 or 22.8%, of consolidated net sales, respectively. Sales to these customers for the nine months ended September 30, 2017 were $11,489,000 or 27.8%, and $6,457,000 or 15.6%, of consolidated net sales, respectively. Sales to these customers for the nine months ended September 30, 2016 were $11,859,000 or 27.7%, and $7,870,000 or 18.4%27%, of consolidated net sales, respectively. The amounts owed at September 30, 20172019 by these customers were $1,491,000$1,777,000 or 19.6%24%, and $1,631,000$996,000 or 21.5%14%, of the Company’s consolidated net accounts receivable, respectively. As of September 30, 2016,2018, the total amounts owed to the Company by these customers were $1,411,000$2,241,000 or 15.7%30%, and $2,653,000$1,702,000 or 29.4%23% of the Company’s consolidated net accounts receivable, respectively. Cost of Sales. During the three and nine months periods ended September 30, 2017,2019, the cost of sales represented 75.9% of net salesfrom continuing operations was $7,707,000 and $25,651,000, respectively, compared to 74.7%$8,296,000 and $28,776,000 for the three monthssame periods ended September 30, 2016. During the nine months ended September 30, 2017, the2018. The reduction in cost of sales represented 76.0%was largely due to lower sales volume, net of net sales compared to 73.9% for the nine months ended September 30, 2016. The decline in gross margin both in the third quarter and for the nine month period is attributable principally to changes in the mix of products sold. Gross margin rates on latex balloon products are lower than certain of our other products so the increase in latex product sales in these periods have affected overall gross margins. Vacuum sealing products generally carry higher gross margins so the decline in sales of that line has tended to reduce the overall gross margin rate. We did not experience significant changes in the cost of raw materials or direct labor during the period.related inefficiencies. General and Administrative. During the three and nine months ended September 30, 2017,2019, general and administrative expenses from continuing operations were $1,923,000 or 14.5% of net sales,$1,148,000 and $3,939,000, respectively, as compared to $1,808,000 or 13.4% of net sales$1,278,000 and $4,308,000 for the same periodperiods in 2016.2018. A one-time fee associated with the forbearance agreement in the amount of $250,000 was included in the first three months of 2019 general and administrative expenses. Selling, Advertising and Marketing. During the three and nine months ended September 30, 2019, selling, advertising and marketing expenses from continuing operations were $368,000 and $1,327,000, respectively, as compared to $933,000 and $3,140,000, respectively for the same periods in 2018. This reduction was primarily due to the full year benefit of cost reduction programs implemented during 2018. Other OperatingExpense. During the nine months ended September 30, 2017, general and administrative expenses were $5,691,000 or 13.7% of net sales, compared2019, we recognized a $1,472,000 impairment charge on our other long term assets during 2019 due to $5,471,000 or 12.8% of net sales forchanges in the same period in 2016. Some elements of general and administrative costs have declined during the third quarter and the nine month period ended September 30, 2017. These include items incorporated in our cost reduction program, in particular salaries (reduced by over $200,000 over the nine months.) However, we incurred additional costsoverall business environment - $220,000 goodwill impairment related to our financing, including consulting fees of $184,000 for the third quarterClever Container, a $1,032,000 goodwill impairment related to Flexo, and $316,000 for the nine months ended September 30, 2017 and legal fees of $54,000 for the third quarter and $138,000 for the nine month period. We have initiated a program in which we expect to achieve overall reductions in general and administrative, selling, marketing and related expenses at the rate of at least $2.4 millionan additional $219,000 impairment on an annualized basis. Some of these expense reductions are reflected in the third quarter and will be reflected in the fourth quarter and throughout 2018.long lived assets.
Selling. During the three months ended September 30, 2017, selling expenses were $862,000 or 6.5% of net sales, compared to $978,000 or 7.3% of net sales for the same period in 2016. During the nine months ended September 30, 2017, selling expenses were $2,771,000 or 6.7% of net sales, compared to $3,162,000 or 7.4% of net sales for the same period in 2016. The reduction in selling expenses reflects a reduction in salary expenses and service fees.
Advertising and Marketing. During the three months ended September 30, 2017, advertising and marketing expenses were $455,000 or 3.4% of net sales for the period, compared to $581,000 or 4.3% of net sales for the same period of 2016. During the nine months ended September 30, 2017, advertising and marketing expenses were $1,549,000 or 3.7% of net sales for the period, compared to $1,644,000 or 3.8% of net sales for the same period of 2016. The reduction reflects principally the elimination of a consulting expense as of June 30, 2017 which totals $133,000 to date.
Other Income (Expense). During the three and nine months ended September 30, 2017,2019, the Company incurred interest expense from continuing operations of $367,000,$465,000 and $1,493,000, respectively, as compared to interest expense during the same periodperiods of 2016 in the amount2018 of $359,000. During the nine months ended September 30, 2017, the Company incurred interest expense of $1,100,000, compared to interest expense during the same period of 2016 in the amount of $1,074,000. In addition to interest expense, there is a variable charge relating to the change in value of our outstanding warrants issued in connection with our mezzanine loan by reason of change in market price of our common stock. The amount of that change was $4,000 in the third quarter of 2017, compared to ($48,000) in the third quarter of 2016.$463,000 and $1,560,000. For the three months ended September 30, 2017,2019, the Company had a foreign currency transaction loss from continuing operations of $26,000 during 2019 and $25,000 gain during same period of 2018. For the nine months ended September 30, 2019, the Company had a foreign currency transaction loss of $11,000 compared to a foreign currency transaction$27,000 during 2019 and $8,000 gain of $10,000 during the same period of 2016. For2018. Discontinued Operations In connection with management’s intentions to simplify these operations and organizational structure, we identified write-offs of $88,000 and $4.6 million for the three and nine months ended September 30, 2019, respectively, related to CTI Balloons and CTI Europe. The charges for the three months ended September 30, 2019 were comprised of the following: $78,000 inventory and other assets and $10,000 allowance for doubtful accounts. The charges for the nine months ended September 30, 2017,2019 were comprised of the following: $1.3M inventory, $76,000 allowance for doubtful accounts; and $280,000 for other assets. Additionally, when the Company had a foreigndetermined that these subsidiaries were held for sale, it recognized an impairment charge of $0.6 million, including $167,000 of previously unrecognized currency transaction loss of $92,000 compared to a foreign currency transaction gain of $77,000 duringtranslation adjustment losses because the same period of 2016.Company is completely exiting its operations in Germany and the UK once the divestitures occur. Income Taxes. For the three months ended September 30, 2017, the Company reported a consolidated income tax benefit of $126,000, compared to a consolidated income tax benefit of $29,000 for the same period of 2016. For the nine months ended September 30, 2017, the Company reported a consolidated income tax benefit of $313,000, compared to a consolidated income tax expense of $4,000 for the same period of 2016. For the nine months ended September 30, 2017, this income tax expense was composed of an income tax benefit in the United States, income tax expense in Mexico of Flexo Universal, our Mexican subsidiary, an income tax benefit in the United Kingdom of CTI Balloons Limited, our United Kingdom subsidiary and income tax expense in Europe of CTI Europe gmbH, our Germany subsidiary.
Net Income. For the three months ended September 30, 2017, the Company had net loss of ($275,000) or ($0.08) per share (basic and diluted,) compared to net loss of ($180,000) for the same period of 2016 or ($0.05) per share (basic and diluted.) For the nine months ended September 30, 2017, the Company had net loss of ($742,000) or ($0.20) per share (basic and diluted,) compared to net loss of ($257,000) for the same period of 2016 or ($0.07) per share (basic and diluted.) For the nine months ended September 30, 2017, the Company had income from operations of $38,000 compared to income from operations during the same period in 2016 of $922,000.
Financial Condition, Liquidity and Capital Resources Cash Flow Items. Operating Activities. During the nine months ended September 30, 2017,2019, net cash provided by operations was $5,230,000,$4,172,000, compared to net cash used inby operations during the nine months ended September 30, 20162018 of $255,000.$91,000. Significant changes in working capital items during the nine months ended September 30, 20172019 included: | ·● | A decrease in accounts receivable of $5,864,000$2,776,000 compared to a decrease in accounts receivable of $808,000$1,717,000 in the same period of 2016.2018. |
| ·● | An increasedecrease in inventory of $325,000$1,435,000 compared to an increase in inventory of $5,598,000$819,000 in 2016.2018. |
| ·● | A decreaseAn increase in trade payables of $61,000$1,893,000 compared to an increase in trade payables of $3,461,000$386,000 in 2016.2018. |
| ·● | A decrease in accrued liabilities of $272,000$167,000 compared to an increasea decrease in accrued liabilities of $107,000$268,000 in 2016.2018. |
Investing Activity. During the nine months ended September 30, 2017,2019, cash used in investing activity was $736,000,$144,000, compared to cash provided byused in investing activity for the same period of 20162018 in the amount of $140,000. Activity consisted principally of investment in equipment and equipment maintenance.$324,000. Financing Activities. During the nine months ended September 30, 2017,2019, cash used in financing activities was $4,416,000$4,546,000 compared to cash provided by financing activities for the same period of 20162018 in the amount of $440,000.$241,000. Financing activity consisted principally of reductionchanges in the balances of revolving and long termlong-term debt. Liquidity and Capital Resources and Going Concern. The Company’s liquidity is dependent significantly on its bank financing and the Company relies on its revolving line of credit to maintain liquidity. On April 29, 2010, the Company entered into a Credit Agreement with BMO Harris Bank N.A. (“BMO Harris”). Under the Credit Agreement, BMO Harris agreed to provide loans and credits to the Company in the aggregate maximum amount of $14,417,000. The arrangement included: | i. | A revolving credit line up to a maximum amount of $9,000,000 based upon a borrowing base of 85% of eligible receivables and 60% of eligible inventory (up to a maximum of $5,000,000); |
| ii. | A mortgage loan in the principal amount of $2,333,350, amortized over 25 years; |
| iii. | A term loan in the principal amount of $583,333 maturing in monthly principal installments of $58,333; and |
| iv. | An equipment loan commitment in the amount of up to $2,500,000 providing for loan advances from time to time until April 29, 2012 based upon 100% of the purchase price of equipment purchased, the loans to be amortized on a five year basis commencing April 29, 2012. |
The Credit Agreement included various representations, warranties and covenants of the Company, including various financial covenants.
The Credit Agreement, as amended, provides that the outstanding balance of all loans under the agreement will bear interest with reference to a base rate or, at the option of the Company, with reference to an adjusted LIBOR. At September 30, 2017,2019, the effective rate onCompany had cash balances of $116,000 compared to cash balances of $274,000 for the outstanding loan balances was 4.5%.same period of 2018.
As of September 30, 2017, the outstanding balances on the loans with BMO Harris were: (i) revolving line of credit, $8,211,000, (ii) mortgage loan, $1,641,000, and (iii) equipment loan, $0. On July 17, 2012,2019, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amountwas not in compliance with its credit facility, operating under a forbearance agreement. For this reason, $2.6 million of the loan commitment on the revolver loan of BMO Harrislong-term debt was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Private Equity (U.S.), Inc. (“BMO Equity”) and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017. The loans subject to the Credit Agreement originally matured on July 17, 2017 and have been extendedreclassified as noted below.
On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. The loan matures on January 17, 2018.
The Note and Warrant Purchase Agreement included provisions for:
(i) a closing fee of $100,000
(ii) payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;
(iii) security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;
(iv) various representations and warranties and covenants of the Company;
(v) financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.
At September 30, 2017, the Company had cash balances of $325,000 compared to cash balances of $624,000 for the same period of 2016.
Also at September 30, 2017, the Company had a working capital balance of $4,904,000 compared to a working capital balance of $11,080,000 on December 31, 2016.
Further,current debt as of September 30, 2017, the Company was in2019. Failure to ultimately regain compliance with allthe terms of the financial covenants under the Credit Agreement and the Note and Warrant Purchase Agreement.
As of September 30, 2017, the Company had total borrowings outstanding under the Credit Agreement with BMO Harris of $9,852,000, including $8,211,000our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to carry on the revolving credit loan and $1,641,000 on the mortgage facility. In addition, the balance of the indebtedness of the Company to BMO Private Equity as of September 30, 2017 was approximately $5,965,000.
The obligations of the Credit Agreement to BMO Harris were to mature on July 17, 2017. The obligations of the Note and Warrant Purchase Agreement among the Company and BMO Equity are to mature on January 18, 2018.
By Amendment to the Credit Agreement dated July 18, 2017, BMO Harris agreed to extend the maturity date of the agreement to October 18, 2017. BMO Equity consented to this extension in exchange for a fee and for the right to exercise at any time its put of warrants issued to it under the Note and Warrant Purchase Agreement. The extension provides retention by the Company of a consultant to advise as to planning, forecasting, cost management and financing.
On August 17, 2017, BMO Equity exercised its put on the warrants and the Company issued to BMO Equity a Warrant Conversion Note in the amount of $797,881 for the purchase of the warrants. The principal balance of the Warrant Conversion Note, plus accrued and unpaid interest thereon, is payable on January 18, 2018. The principal balance of the Warrant Conversion Note accrues interest at the rate of 11.5% per annum compounded daily.
On October 17, 2017, the Company and BMO Harris entered into Amendment No. 11 to the Credit Agreement in which (i) the Company acknowledged its indebtedness to the Bank for a Mortgage Loan balance in the amount of $1,664,456 and for a balance of $8,211,467 with respect to the Revolving Loans, (ii) the maturity date on the Mortgage Loan and the Revolving Credit were extended to November 30, 2017, and (iii) the Bank provided a temporary over advance line of $1,000,000 for the period from October 17, 2017 through November 30, 2017. Amendment No. 11 included certain additional covenants including that, on or before October 20, 2017, the Company would deliver to the Bank an executed letter of intent from a third-party financial institution providing for refinancing and payment of the Company’s debt obligations to the Bank. Also, on October 17, 2017, the Registrant entered into Amendment No. 6 to the Note and Warrant Agreement among Registrant and BMO Private Equity (U.S.) Inc. (BMO Private Equity). In the Amendment, (i) the Company acknowledged its indebtedness to BMO Private Equity for a subordinated note in the principal amount of $5,000,000 and, for the balance under a note issued in connection with the conversion by BMO Private Equity of warrants, in the amount of $797,881, (ii) BMO Private Equity agreed to defer payment of interest due on October 2, 2017 in the amount of $150,139 to December 1, 2017. Amendment No. 6 includes covenants similar to that of Amendment No. 11 with the Bank.
On October 19, 2017, the Company delivered to the Bank and to BMO Equity an executed non-binding Preliminary Memorandum of Terms and Conditions (“Preliminary Term Sheet”) from a financing institution providing for an aggregate ofour business up to $24,000,000 in senior secured financingand including our ability to (i) refinance existing senior bank and mezzanine debt, (ii) fund certain capital expenditures and (iii) provide for ongoing working capital needs of Registrant. The Preliminary Term Sheet is non-binding and is subject to diligence and to the execution of a definitive agreement.
Management’s Plans.
Management is engaged in efforts to obtain re-financing of its obligations to BMO Harris and BMO Private Equity, is in accordance with the Preliminary Term Sheet and is engaged in a diligence and loan documentation process. While no assurance can be given that the re-financing will be completed, management has a reasonable expectation that both the re-financing will be completed and that the Company will continue as a going concern. Additionally, we have encountered difficulties with seasonal cash flow needs, including increased costs associated with recruiting and retaining workers in the Chicago area. The failure to either regain compliance with the terms of our credit facility or properly manage seasonal cash needs could put a strain on the Company, up to and including our ability to continue as a going concern. See Note 2 for additional discussion.
Management is also engaged in efforts to implement cost and operational improvements and to fulfill strong order flow in order to achieve profitable operations for the fourth quarter.
Seasonality In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years. Vacuum sealing product sales are also seasonal; approximately 60% of sales in this product line occur in the period from July through December. Critical Accounting Policies Please see pages 25-2824-27 of our Annual Report on Form 10-K for the year ended December 31, 20162018 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. NoExcept for the adoption of ASC Topic 842 (Leases) as described herein, no material changes to such information have occurred during the three months ended September 30, 2017.2019. Item 3.Quantitative and Qualitative Disclosures Regarding Market Risk Not applicable. Item 4.Controls and Procedures (a) Restatement On May 8, 2020, the Audit Committee of the Board of Directors concluded, based on the recommendation of management, that we would amend and restate our quarterly consolidated financial statements for this interim period ended September 30, 2019, within this Form 10Q/A to correct the following errors: Previously, the Company had no external auditor engaged. As noted in the original filing, these filing are being amended now that the Company has hired RBSM as external independent auditors, with the benefit of auditor review, and To correct the timing of recognition of certain noncash charges with respect to the anticipated liquidation of subsidiaries and resulting classifications as they impact goodwill, deferred tax assets and related tax provisions, and reporting discontinued operations. The following additional adjustments were also included in this restatement: To reclassify certain accrued expenses between liabilities and contra assets, particularly with respect to accruals for uncollectible accounts receivable, and Other miscellaneous adjustments, none of which were material either individually or in the aggregate. (b) 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 by Rule 13a-15(b)to be disclosed in the reports filed or submitted under the Exchange Act, we conductedis 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 PrincipalChief Executive Officer (principal executive officer) and PrincipalChief Financial Officer (principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of September 30, 2019. Based on this evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2017,2019, the end of the period covered by this report. Based uponQuarterly Report on Form 10-Q/A due to the material weaknesses described below. (c) 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 evaluation,controls may become inadequate because of changes in conditions, or that the Principal Executive Officer and Principal Financial Officer concluded thatdegree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of our disclosure controls and procedures were effectiveinternal control over financial reporting as of September 30, 2017, to ensure2019. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the information required toregistrant's annual or interim financial statements will not be disclosed by us inprevented or detected on a timely basis. As a result of our evaluation of our internal control over financial reporting, management identified the reports that we file or submit under Security Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including officers, as appropriate, to allow for timely decisions regarding required disclosure. There were nofollowing material changesweaknesses in our internal control over financial reporting duringreporting: We lacked a sufficient number of accounting professionals with the three monthsnecessary knowledge, experience and training to adequately account for significant, unusual transactions that resulted in misapplications of GAAP, particularly with regard to the timing of recognition of certain non-cash charges, and We are overly dependent upon our Chief Financial Officer and Controller within an environment that is highly manual in nature. These material weaknesses resulted in the restatement of the financial statements described in Item 4(a) and material post-closing adjustments which have been reflected in the financial statements for the interim periods for the year ended September 30, 20172019. Additionally, as a result of the material weaknesses, we have concluded that have materially affected or are reasonably likely to materially affect ourwe did not maintain effective internal controlscontrol over financial reporting.reporting as of September 30, 2019. Part II.OTHER INFORMATION Item 1.Legal Proceedings The Company ismay be party to certain claimslawsuits or actionsclaims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolutionwe do not believe any of these matters is not expected toproceedings will have, individually or in the aggregate, a significantmaterial adverse effect on theupon our financial condition, cash flows or future financial position or results of operations of the Company.operation. Item 1A.Risk Factors Not applicable. Item 2.Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. Item 3.Defaults Upon Senior Securities Not applicable. Item 4.Submission of Matters to a Vote of Security Holders Not applicable. Item 5.Other Information The Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q. Item 6.Exhibits The following are being filed as exhibits to this report: Exhibit
Number | | Description | | | | 3.1 | | Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015). | 3.2 | | Amended and Restated By-Laws of Yunhong CTI, LTD (formerly CTI Industries CorporationCorporation) (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017). | 10.131.1 | | Senior Secured Subordinated Warrant Conversion Note between BMO Private Equity (U.S.) Inc. and the Company dated August 17, 2017. | 10.2 | | Amendment No. 11 to Credit Agreement between BMO Harris Bank, N.A., BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017. | 10.3 | | Amendment No. 6 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017. | 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 | | 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). | 101 | | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q10-Q/A for the quarter ended September 30, 2017,2019, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 14, 201705/29/20 | | Yunhong CTI INDUSTRIES CORPORATIONLtd. (formerly CTI Industries Corporation) |
| | | | | By: | /s/ John H. Schwan /s/ | | | | John H. Schwan | | | | Frank J. Cesario Frank J. Cesario President and Chief Executive Officer | | | | | | | By: | /s/ Stephen M. Merrick | | | | Stephen M. Merrick | | | | President | | | | | | | By: | /s/ Timothy S. Patterson | | | | Timothy S. Patterson | | | | Chief Financial Officer | | | | Senior Vice President Finance |
34 Exhibit Index
Exhibit
Number | | Description | 3.1 | | Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015.) | | | | 3.2 | | Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017) | | | | 10.1 | | Senior Secured Subordinated Warrant Conversion Note between BMO Private Equity (U.S.) Inc. and the Company dated August 17, 2017. | | | | 10.2 | | Amendment No. 11 to Credit Agreement between BMO Harris Bank, N.A., BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017. | | | | 10.3 | | Amendment No. 6 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017. | | | | 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 | | 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). | | | | 101 | | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. |
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