UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to___________________to__________
Commission File Number
000-23115
YUNHONG CTI INDUSTRIES CORPORATIONLTD.
(Exact name of Registrantregistrant as specified in its charter)
| Illinois | 36-2848943 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 22160 N. Pepper Road | ||
| Barrington, Illinois | 60010 | |
| (Address of principal executive offices) | (Zip Code) |
(847)382-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, no par value per share | CTIB | The Nasdaq Stock Market LLC | ||
| ( |
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. Yesþ ☒ 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). Yesþ ☒ 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 | ☒ | |||
| 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 ¨☐ Noþ ☒
The number of shares outstanding of the Registrant’sregistrant’s common stock, no par value per share, as of November 1, 2017May 10, 2023 was 3,525,227. (excluding treasury shares).
INDEX
| Table of Contents |
| 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 | ||||
Yunhong CTI, LTD
Condensed Consolidated Balance Sheets
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 130,000 | $ | 146,000 | ||||
| Accounts receivable, net | 3,344,000 | 1,618,000 | ||||||
| Inventories | 7,944,000 | 8,325,000 | ||||||
| Prepaid expenses | 489,000 | 389,000 | ||||||
| Total current assets | 11,907,000 | 10,478,000 | ||||||
| Property, plant and equipment: | ||||||||
| Machinery and equipment | 17,723,000 | 17,723,000 | ||||||
| Office furniture and equipment | 2,084,000 | 2,084,000 | ||||||
| Intellectual property | 783,000 | 783,000 | ||||||
| Leasehold improvements | 39,000 | 39,000 | ||||||
| Fixtures and equipment at customer locations | 519,000 | 519,000 | ||||||
| Projects under construction | 164,000 | 108,000 | ||||||
| Property, plant and equipment, gross | 21,312,000 | 21,256,000 | ||||||
| Less : accumulated depreciation and amortization | (20,414,000 | ) | (20,334,000 | ) | ||||
| Total property, plant and equipment, net | 898,000 | 922,000 | ||||||
| Other assets: | ||||||||
| Operating lease right-of-use | 3,757,000 | 3,882,000 | ||||||
| Total other assets | 3,757,000 | 3,882,000 | ||||||
| TOTAL ASSETS | $ | 16,562,000 | $ | 15,282,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade payables | $ | 1,278,000 | $ | 1,313,000 | ||||
| Line of credit | 4,284,000 | 2,878,000 | ||||||
| Notes payable - current portion | 540,000 | 289,000 | ||||||
| Notes payable - officers, subordinated | 1,286,000 | - | ||||||
| Notes payable | 1,286,000 | - | ||||||
| Operating Lease Liabilities | 518,000 | 518,000 | ||||||
| Accrued liabilities | 1,382,000 | 2,480,000 | ||||||
| Total current liabilities | 9,288,000 | 7,478,000 | ||||||
| Long-term liabilities: | ||||||||
| Notes payable - noncurrent | - | 427,000 | ||||||
| Notes payable - officers, subordinated | - | 1,267,000 | ||||||
| Notes payable | - | 1,267,000 | ||||||
| Operating Lease Liabilities | 3,239,000 | 3,364,000 | ||||||
| Total long-term liabilities | 3,239,000 | 5,058,000 | ||||||
| TOTAL LIABILITIES | 12,527,000 | 12,536,000 | ||||||
| Shareholders’ Equity: | ||||||||
| Yunhong CTI, Ltd shareholders’ equity: | ||||||||
| Series B Preferred Stock — no par value, shares authorized, and issued and outstanding at March 31, 2023 and December 31, 2022, respectively | - | 1,851,000 | ||||||
| Common Stock – no par value, shares authorized, and shares issued and and shares outstanding at March 31, 2023 and December 31, 2022, respectively | 21,283,000 | 21,283,000 | ||||||
| Paid-in-capital | 6,637,000 | 3,895,000 | ||||||
| Accumulated deficit | (23,724,000 | ) | (24,122,000 | ) | ||||
| Less: Treasury stock, shares | (161,000 | ) | (161,000 | ) | ||||
| Total Shareholders’ Equity | 4,035,000 | 2,746,000 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 16,562,000 | $ | 15,282,000 | ||||
See accompanying notes to condensed consolidated unaudited financial statementsstatements.
| 1 |
Yunhong CTI, Industries Corporation and SubsidiariesLTD
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 | ||||||||||||
| 2023 | 2022 | |||||||
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net Sales | $ | 5,051,000 | $ | 5,797,000 | ||||
| Cost of Sales | 3,924,000 | 4,758,000 | ||||||
| Gross profit | 1,127,000 | 1,039,000 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 961,000 | 837,000 | ||||||
| Selling | 32,000 | 38,000 | ||||||
| Advertising and marketing | 122,000 | 183,000 | ||||||
| Total operating expenses | 1,115,000 | 1,058,000 | ||||||
| Income / (Loss) from operations | 12,000 | (19,000 | ) | |||||
| Other (expense) / income: | ||||||||
| Interest expense | (142,000 | ) | (96,000 | ) | ||||
| Other (expense) / income | 526,000 | 94,000 | ||||||
| Total other (expense) / income, net | 384,000 | (2,000 | ) | |||||
| Income / (Loss) from continuing operations before taxes | 396,000 | (21,000 | ) | |||||
| Income tax expense | - | - | ||||||
| Net Income / (Loss) | $ | 396,000 | $ | (21,000 | ) | |||
| Net Loss attributable to noncontrolling interest | - | - | ||||||
| Net Loss attributable to Yunhong CTI Ltd. | 396,000 | (21,000 | ) | |||||
| Other Comprehensive Income (Loss) | ||||||||
| Foreign Currency adjustment | - | |||||||
| Comprehensive Loss | 396,000 | (21,000 | ) | |||||
| Deemed Dividends on preferred stock and amortization of beneficial conversion feature | $ | (11,000 | ) | $ | (202,000 | ) | ||
| Net Loss attributable to Yunhong CTI Ltd Common Shareholders | $ | 385,000 | $ | (223,000 | ) | |||
| Basic income (loss) per common share | $ | 0.02 | $ | (0.04 | ) | |||
| Diluted income (loss) per common share | $ | 0.02 | $ | (0.04 | ) | |||
| Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||
| Basic | 17,689,552 | 5,900,639 | ||||||
| Diluted | 17,689,552 | 5,900,639 | ||||||
See accompanying notes to condensed consolidated unaudited financial statementsstatements.
| 2 |
Yunhong CTI, Industries Corporation and SubsidiariesLTD
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 | |||||
| 2023 | 2022 | |||||||
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income/loss from continuing operations | $ | 396,000 | $ | (21,000 | ) | |||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||
| Depreciation and amortization | 80,000 | 98,000 | ||||||
| Equity compensation expense | 7,000 | 31,000 | ||||||
| Provision for losses on accounts receivable | - | - | ||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | (1,726,000 | ) | 125,000 | |||||
| Inventories | 381,000 | (620,000 | ) | |||||
| Prepaid expenses and other assets | (100,000 | ) | 339,000 | |||||
| Trade payables | (35,000 | ) | 215,000 | |||||
| Accrued liabilities | (372,000 | ) | (167,000 | ) | ||||
| Net cash (used in) provided by operating activities | (1,369,000 | ) | 2,000 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | (56,000 | ) | (15,000 | ) | ||||
| Net cash used in investing activities | (56,000 | ) | (15,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of long-term debt and revolving line of credit | 1,409,000 | 155,000 | ||||||
| Net cash provided by financing activities | 1,409,000 | 155,000 | ||||||
| Net (decrease) / increase in cash and cash equivalents | (16,000 | ) | 142,000 | |||||
| Cash and cash equivalents at beginning of period | 146,000 | 66,000 | ||||||
| Cash and cash equivalents at end of period | $ | 130,000 | $ | 208,000 | ||||
| Supplemental disclosure of cash flow information and noncash investing and financing activities: | ||||||||
| Cash payments for interest | $ | 118,000 | $ | 78,000 | ||||
| Accrued Divided and Accretion on preferred stock | $ | 11,000 | $ | 202,000 | ||||
| Lease right-of-use assets and lease liability | $ | - | $ | 747,000 | ||||
| Conversion of notes and deposits into common stock | $ | 885,000 | $ | - | ||||
See accompanying notes to condensed consolidated unaudited financial statementsstatements.
| 3 |
Yunhong CTI, Industries Corporation and SubsidiariesLtd
Condensed Consolidated Earnings per Share (unaudited)Statements of Stockholders’ Equity
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Shares | Amount | TOTAL | ||||||||||||||||||||||||||||||||||||||||||||||
| Yunhong CTI, Ltd | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Series B Preferred Stock | Series C Preferred Stock | Series D Preferred Stock | Common Stock | Paid-in | Accumulated (Deficit) | Less Treasury Stock | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings | Shares | Amount | TOTAL | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | 500,000 | $ | 3,155,000 | 170,000 | $ | 1,715,000 | 170,000 | $ | 1,630,000 | 170,000 | $ | 1,512,000 | 5,930,408 | $ | 14,538,000 | $ | 4,317,000 | $ | (22,655,000 | ) | - | (44,000 | ) | $ | (161,000 | ) | 4,051,000 | |||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series A Preferred Stock | 100,000 | (100,000 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series B Preferred Stock | 34,000 | (34,000 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series C Preferred Stock | 34,000 | (34,000 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series D Preferred Stock | 34,000 | (34,000 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Issuance | 25,000 | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Compensation Charge | 31,000 | 31,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | - | (21,000 | ) | - | - | - | (21,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | 500,000 | $ | 3,255,000 | 170,000 | $ | 1,749,000 | 170,000 | $ | 1,664,000 | 170,000 | $ | 1,546,000 | 5,955,408 | $ | 14,538,000 | $ | 4,146,000 | $ | (22,676,000 | ) | - | (44,000 | ) | $ | (161,000 | ) | 4,061,000 | |||||||||||||||||||||||||||||||||
Yunhong CTI, Ltd
Consolidated Statements of Stockholders’ Equity
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | TOTAL | |||||||||||||||||||||||||||||||
| Yunhong CTI, Ltd | ||||||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Series B Preferred Stock | Common Stock | Paid-in | Accumulated (Deficit) | Other Comprehensive | Less Treasury Stock | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Earnings | Loss | Shares | Amount | TOTAL | |||||||||||||||||||||||||||||||
| Balance December 31, 2022 | 170,000 | $ | 1,851,000 | 16,102,749 | $ | 21,283,000 | $ | 3,895,000 | $ | (24,122,000 | ) | $ | - | (44,000 | ) | $ | (161,000 | ) | 2,746,000 | |||||||||||||||||||||
| Series B Convertible Preferred Stock Issuance | (170,000 | ) | (1,862,000 | ) | 1,888,078 | 1,862,000 | - | |||||||||||||||||||||||||||||||||
| Common stock issued for notes payable and investor deposit | 1,908,336 | 884,000 | 884,000 | |||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series B Preferred Stock | 11,000 | (11,000 | ) | - | ||||||||||||||||||||||||||||||||||||
| Equity compensation | 116,250 | 7,000 | 9,000 | |||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | 396,000 | 396,000 | ||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| Balance March 31, 2023 | - | $ | - | 20,015,413 | $ | 21,283,000 | $ | 6,637,000 | $ | (23,724,000 | ) | $ | - | (44,000 | ) | $ | (161,000 | ) | 4,035,000 | |||||||||||||||||||||
| 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 unaudited condensed consolidated unaudited financial statements
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Yunhong CTI Industries CorporationLtd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed (a) consolidated balance sheet as of DecemberMarch 31, 2016, which has been derived from audited consolidated financial statements,2023 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 months ended September 30, 2017March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2023. 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'sCompany’s annual report on Form 10-K for the fiscal year ended December 31, 2016.2022, filed on April 12, 2023, which can be found on the Company’s website (www.ctiindustries.com) or www.sec.gov.
Principles of consolidation and nature of operations:operations:
The condensed consolidated financial statements include the accounts ofYunhong CTI Industries CorporationLtd and its wholly-owned subsidiaries, CTI Balloons Limited andinactive subsidiary CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. (collectively, the “Company”) (i) design, manufacture and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributesdistribute metalized balloon products throughout the world, (ii) operatesdistribute purchased latex balloons products, and (iii) operate systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization productsproducts. As discussed in Note 2 Discontinued Operations, effective in the United States.third quarter of 2019, the Company determined that it was exiting the business formerly conducted by CTI Europe GmbH (“CTI Europe”). In addition, during October 2021, the Company sold its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), a manufacturer of latex balloons. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements.
Variable Interest Entities (“VIE’s”):The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd., and CTI Supply, Inc. See Note 2.
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
Reclassification:
Certain amounts in the Company’s condensed consolidated financial statements for prior periods have been consolidated as variable interest entities.reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.
Use of estimates:estimates:
In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenuerevenues and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reservesvaluation allowances for doubtful accounts reserves forand inventory valuation, preferred stock dividends and beneficial conversion features, and assumptions used as inputs in the lowerBlack-Scholes option-pricing model.
Segments:
The Company operates as a single segment, both in terms of cost or marketgeography and operations, particularly in light of inventory, reserves for deferred tax assets and recovery valuethe October 2021 sale of goodwill.its Flexo Universal subsidiary. After that date, all manufacturing occurs in the United States.
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Basic earnings(loss) per share is computed by dividing net incomeloss by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings(loss) per share is computed by dividing the net incomeloss 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, 2017March 31, 2023 and 2016,2022, shares to be issued upon the exercise of options and warrants aggregated 205,144 and 288,048,, 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, 2017March 31, 2023 and 20162022 were 281,819 and 0, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the nine months ended September 30, 2017 and 2016 were 178,350 and 0, respectively.none, as doing so would have been anti-dilutive.
Significant Accounting Policies: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, 2016.2022. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2017.March 31, 2023.
Reclassification:
Certain 2016 amounts have been reclassifiedNet 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 conformreceive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the 2017 presentation. (See footnote regarding ASU 2015-17.)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.
Recent Accounting Pronouncements: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 3s described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
In August 2014, the FASB issued ASU 2014-15,Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance amended 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 periods 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.
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In 2014, 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 uncertainty 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 deferral 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 effective 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 as of the beginning of an interim or annual reporting period. The Company has adopted the standard and 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.
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 2 – Liquidity and Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a cumulative net loss from inception to March 31, 2023 of approximately $23 million. The accompanying financial statements for the three months ended March 31, 2023 have been prepared assuming the Company will continue as a going concern. The Company’s cash resources from operations may be insufficient to meet its anticipated needs during the next twelve months. If the Company does not execute its plan, it may require additional financing to fund its future planned operations.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing, continuing to focus our Company on the most profitable elements, and exploring alternative funding sources on an as needed basis. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic, supply chain challenges, and inflationary pressures have impacted the Company’s business operations to some extent and is expected to continue to do so and, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern may be dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s primary sources of liquidity arehave traditionally been comprised of cash and cash equivalents as well as availability under the Credit Agreement in place at the time (see Note 4). We endured compliance failures with BMO Harris. Thecovenants until September 2021 when we refinanced our credit facility. We believe we have been in compliance with our new credit facility since that time. This credit facility concludes on September 30, 2023. While we expect to obtain a new facility on acceptable terms, there can be no assurance this will occur, particularly in light of increasingly conservative financial markets.
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Note 3 - Debt
On September 30, 2021 (the “Closing Date”), the Company has historically used availability under thisentered into a loan and security agreement (the “Agreement”) with Line Financial (the “Lender”), which provides for a senior secured financing consisting of a revolving credit facility (the “Revolving Credit Facility) in an aggregate principal amount of up to fund operations.$6 million (the “Maximum Revolver Amount”) and term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $0.7 million (“Term Loan Amount” and, together with the Revolving Credit Facility, the “Senior Facilities”). Proceeds of loans borrowed under the Senior Facilities were used to repay all amounts outstanding under the Company’s previous lending agreements and for the Company’s working capital. The Senior Facilities are secured by substantially all assets of the Company.
ForInterest on the nine months ended September 30, 2017,Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (8% as of March 31, 2023), plus 1.95% per annum, accruing daily and payable monthly. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The Term Loan Facility shall be repaid by the Company generated net cash from operating activitiesto Lender in 48 equal monthly installments of principal and interest, each in the amount of $5,230,000, although$15,000, commencing on November 1, 2021, and continuing on the first day of each month thereafter until the Term Loan Maturity Date (as defined in the Agreement). Also, the Company didpaid the Lender collateral monitoring fees of 4.62% of the eligible accounts receivable, inventory, and equipment supporting the Revolving Credit Facility and the Term Loan. In addition, the Company paid the Lender a loan fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon the execution of the Agreement. During August 2022 the terms were modified to reduce the collateral monitoring fee to 2.77% and added a provision that barred the Company from repaying the facility prior to September 2023.
The Senior Facilities mature on September 30, 2023 and shall automatically be extended for successive periods of one year each, unless the Company or the Lender gives the other party written notice of termination not less than 90 days prior to the end of such term or renewal term, as applicable. If the Senior Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the anniversary of the Closing Date. The Company has the option to prepay the Term Loan Facility (together with all accrued but unpaid interest and a Term Loan Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not less than 60 days prior written notice to the Lender.
The Senior Facilities require that the Company shall, commencing December 31, 2021, maintain Tangible Net Worth of at least $4,000,000 or greater (“Minimum Tangible Net Worth”). Minimum Tangible Net Worth may be adjusted downward by the Lender, from time to time, in its sole and absolute discretion, based on the effect of non-cash charges and other factors on the calculation of Tangible Net Worth. Other debt subordinated to Lender is not considered as a reduction of this calculation. The Company believes it was in compliance with this covenant as of March 31, 2023 and December 31, 2022, respectively.
The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, and acquisitions, pay dividends and make other restricted payments, or make capital expenditures exceeding $1,000,000 in the aggregate in any fiscal year.
As of March 31, 2023, the term loan balance amounted to $0.5 million, which consisted of the principal and interest payable balance of $0.6 million and deferred financing costs of $0.1 million. The balance of the Revolving Line of Credit as of March 31, 2023 and December 31, 2022 amounted to $4,284,000 and $2,878,000, respectively.
As of January 1, 2019, the Company had a lossnote payable to John H. Schwan, Director and former Chairman of the Board, for $ million, including accrued interest. This loan accrues interest, is due December 31, 2023, and is subordinate to the Senior Facilities. During January 2019, Mr. Schwan converted $600,000 of the note into approximately shares of our common stock at the then market rate of $ per share. As a result of the conversion, the loan balance decreased to $1 million. The loan and interest payable to Mr. Schwan amounted to $1.3 million as of March 31, 2023 and December 31, 2022, respectively. No payments were made to Mr. Schwan during 2023 or 2022. Interest expense related to this loan amounted to $ and $ for the quarter ended September 30, 2017 of $275,000 and for the ninethree months ended September 30, 2017March 31, 2023 and 2022, respectively.
As of $742,000.December 31, 2022, the Company had a note payable to Alex Feng for $0.2 million. This loan accrued interest at a rate of 3% and is subordinated to the Senior Facilities. In accordance with the subordination agreement, payments may be made beginning April 2022 subject to availability under the revolving line of credit, and the maturity date for this loan is March 2024. Along with certain deposits received during 2022, this note was converted into common stock during February 2023.
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Note 4 - Shareholders’ Equity
Series A Convertible Preferred Stock
AssumingOn January 3, 2020, the Company entered into a continuationstock purchase agreement (as amended on February 24, 2020 and April 13, 2020 (the “LF Purchase Agreement”)), pursuant to which the Company agreed to issue and sell, and LF International Pte. Ltd., a Singapore private limited company (“LF International”), which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr. Yubao Li, agreed to purchase, up to shares of the revolving credit underCompany’s newly created shares of Series A Preferred Stock (“Series A Preferred”), with each share of Series A Preferred initially convertible into ten shares of the CreditCompany’s common stock, at a purchase price of $ per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As permitted by the Purchase Agreement, the Company may, in its discretion issue up to an additional shares of Series A Preferred for a purchase price of $ per share (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). Approximately $1 million of Series A Preferred has forecastbeen sold, including to an investor which converted an account receivable of $478,000 owed to the investor by the Company in exchange for shares of Series A Preferred. The Company completed several closings with LF International from January 2020 through June 2020. The majority of the funds received reduced our bank debt. We issued a profittotal of shares of common stock to LF International and, pursuant to the LF Purchase Agreement, changed our name from CTI Industries Corporation to Yunhong CTI Ltd. LF International has the right to name three directors to serve on our Board. They were Mr. Yubao Li, Ms. Wan Zhang and Ms. Yaping Zhang. Ms. Wan Zhang and Ms. Yaping Zhang retired from the Board in January 2022.
The issuance of the Series A Preferred generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series A Preferred was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the closing dates by approximately $2.5 million as of the closing dates. We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series A Preferred. As the Series A Preferred is immediately convertible, the Company accreted the discount on the date of issuance. The accretion was recognized as dividend equivalents. Holders of the Series A Preferred were entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($ per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. In the three months ended March 31, 2023 and 2022 the Company accrued none and $100,000 of these dividends in each period, respectively, as the investor converted Series A Convertible Preferred Stock into common stock on September 1, 2022. This conversation resulted in the issuance of million shares of common stock plus an additional approximately million shares of common stock representing the accrued dividends.
Series B Convertible Preferred Stock
In November 2020, we issued shares of Series B Preferred for an aggregate purchase price of $1,500,000. The Series B Preferred have an initial stated value of $ per share and liquidation preference over common stock. The Series B Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series B Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock. Initially, the Series B Preferred, in whole or part, was redeemable at the option of the holder (but not mandatorily redeemable) at any time on or after November 30, 2021 for the fourth quarterstated value, plus any accrued and unpaid dividends and thus was classified as mezzanine equity and initially recognized at fair value of $1.5 million (the proceeds on the date of issuance). The carrying value as of March 31, 2023 and December 31, 2022 amounted to none and $1,851,000, respectively. On February 1, 2023, the investor converted Series B Preferred into approximately million shares of common stock, including accrued dividends.
Series C Convertible Preferred Stock
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by Company director and Chairman, Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued shares of Series C Preferred for an aggregate purchase price of $1,500,000. The Series C Preferred have an initial stated value of $ per share and liquidation preference over common stock. The Series C Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the year,stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series C Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock. The issuance of the Series C Preferred generated a beneficial conversion feature (BCF), which arises when a debt or equity security is expectedissued with an embedded conversion option that is beneficial to generate sufficient cash flow forthe investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series C Preferred was convertible exceeded the allocated purchase price of the Series C Preferred at the closing dates by greater than the allocated purchase price. Therefore, the BCF was the purchase price of the Series C Preferred ($1.5 million) and was allocated to Additional Paid-in Capital, resulting in a discount on the Series C Preferred Stock. As the Series C Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance. The accretion to meet its current obligations.the carrying value of the Series C Preferred is treated as a deemed dividend, recorded as a charge to Additional Paid in Capital and deducted in computing earnings per share. On September 1, 2022, the investor converted Series C Preferred into approximately million shares of common stock, including accrued dividends.
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Series D Convertible Preferred Stock
In June 2021, the Company received $ million from an unrelated third party as an advance on a proposed sale of Series D Redeemable Convertible Preferred Stock. As of September 30, 2017,2021, the Company was in compliance with allthe process of negotiating and finalizing the terms of the financial covenants underarrangement. As 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 Equityagreement was not finalized as of September 30, 20172021, the $1.5 million advance was classified as Advance from Investor within liabilities on the balance sheet at that time. As of December 31, 2021, the terms had been finalized, the investment was classified as equity, similar to the prior Convertible Preferred issuances, above. The issuance of the Series D Preferred generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series D Preferred was convertible exceeded the allocated purchase price fair value of the Series D Preferred Stock at the closing dates by approximately $0.3 million as of the closing dates. We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series D Preferred. As the Series D Preferred is immediately convertible, the Company accreted the discount on the date of issuance. The accretion was recognized as dividend equivalents. Holders of the Series D Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($ per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. In addition, 128,000 warrants to purchase the Company’s common stock were issued with respect to this transaction. These warrants are exercisable until December 1, 2024, at the lower of $1.75 per share or 85% of the variable price based on the ten day volume weighted average price (“VWAP”) of the Company’s common stock. The value of these warrants was determined to be $230,000 and recorded as an allocation of paid in capital associated with this transaction. On September 1, 2022, the investor converted Series D Preferred into approximately million shares of common stock including accrued dividends.
Deposits and Note Conversion to Common Stock
In connection with the 2021 sale and leaseback transaction of the Company’s primary facility in Lake Barrington, IL, the landlord advanced rent payments in the form of a note. The balance of that note on December 31, 2022 was approximately $5,965,000.$172,000. The note paid 3% interest and was due March 2024. In addition, the same entity made investment deposits during 2022 that were recorded as short term deposit liabilities. On February 1, 2023, our Board of Directors approved the conversion of these liabilities into common stock at a rate of approximately 84% of the volume weighted average price (VWAP) of the Company’s common stock during the period these deposits were received. In total, approximately $0.9 million of liabilities were converted into approximately million shares of our common stock. Upon conversion, both the note and deposit liabilities were fully eliminated.
Warrants
The obligations ofIn connection with 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 extensionSeries A Offering, 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 and2020 the Company issued warrants to BMO Equity a Warrant Conversion Note in the amount of $797,881 for the purchase792,660 shares of the warrants. The principal balanceCompany’s common stock for $1 per share. During 2020, warrants to acquire shares of common stock were exercised in cash-less exchange for shares of the Warrant Conversion Note, plus accruedCompany’s common stock. In January and unpaid interest thereon, is payable on January 18, 2018. The principal balanceFebruary 2021, the remaining warrants to acquire 195,160 shares of common stock were exercised in a cash-less exchange for shares of the Warrant Conversion Note accrues interest at the rateCompany’s common stock. Additional warrants to acquire 128,000 shares 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 $8,211,467common stock were issued with respect to the Revolving Loans, (ii)Series D transaction above. These warrants can be exercised for the maturity dateCompany’s common stock for $1.75 per share, or based 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 paymentten day volume weighted average price (VWAP) 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.common stock.
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.
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.
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.
Note 3 - 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.awards. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock.the Company’s 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 2017 and 2016. The expected volatility is based on historical volatility of the Company’s common stock.Common Stock.
The valuation assumptions we have applied to determine the value of warrants granted in 2021 and 2020 were as follows:
| - | Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility which was a range from % - %. | |
| - | Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities with a similar maturity in effect at the time of the grant, which was a range from .% - %. | |
| - | Expected life: The expected life of the warrants represents the period of time warrants were expected to be outstanding. The Company used an expected life of years. | |
| - | Dividend yield: The estimate for dividend yield is %, as the Company did not issue dividends during 2021 or 2020 and does not expect to do so in the foreseeable future. | |
| - | Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements. |
The Company’s net loss for the three months ended September 30, 2017 and 2016 includes approximately $2,000 and $5,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 2017 and 2016 includes approximately $12,000 and $29,000, respectively, of compensation costs related to share based payments. As of September 30, 2017, there is $13,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $2,000 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 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.
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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 authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the
Company (including cancelled shares reissued under the plan.) As of September 30, 2017, options for 250,000 shares had been granted and options for 143,094 shares remain outstanding.
A summary of the Company’s stock option activity 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.
A summary of the Company’s stock warrant activity and related information is as follows:
Schedule of Company’s Stock Warrant Activity
| 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 | $ | - | ||||||||||
| Shares under Option | Weighted Average Exercise Price | |||||||
| Balance at December 31, 2022 | 128,000 | $ | 1.75 | |||||
| Granted | - | - | ||||||
| Cancelled/Expired | - | - | ||||||
| Exercised/Issued | - | - | ||||||
| Outstanding at March 31, 2023 | 128,000 | 1.75 | ||||||
| Exercisable at March 31, 2023 | 128,000 | $ | 1.75 | |||||
A summary
Schedule of Reserved Shares of Exercise Warrants
| 2021 Warrants | ||||
| Shares reserved as of March 31, 2023 |
Effective January 2022, and in accordance with the Employment Agreement of Chief Executive Officer Frank Cesario, a grant of restricted stock was made in the amount of shares. shares vested immediately, while the remaining are subject to performance conditions as further detailed in the share grant. Specifically, the restrictions on the remaining shares will lapse based on satisfaction of the following performance goals and objectives and continued employment through the date of meeting such targets:
● The restrictions on shares of the award will lapse and the award will vest when the Company’s stock option activity by grant date astrailing-twelve-month EBITDA equals or exceeds $1 million at any time on or after January 1, 2022.
● The restrictions on shares 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 | ||||||||||||||||||||
The aggregate intrinsic valuethe award will lapse and the award will vest in the tables above represents the total pre-tax intrinsic value (the difference between the closing price ofevent the Company’s common stockshares trade at or above $5/share for ten or more consecutive trading days.
● The restrictions on shares of the award will lapse and the award will vest when the Company’s operating cash flow, calculated cumulatively from the date of employment, equals or exceeds $1.5 million. On January 30, 2023, the Compensation Committee determined this condition had been satisfied.
● The restrictions on shares of the award will lapse and the award will vest in the event the Company is able to refinance its current lender with a traditional lender on terms and conditions customary for such financing. On August 23, 2022, the Compensation Committee determined this condition had been satisfied with an amended agreement with the Company’s lender.
During 2022 the Compensation Committee awarded the Chief Operating Officer a grant of shares of restricted stock. of these shares vested over a 12 month period while the remaining shares vest each based on the last trading day ofperformance conditions above.
The Audit Committee (as defined in the quarter ended September 30, 2017 andPlan) shall be responsible for determining when the exercise price, multiplied by the number of in-the-money options) that wouldconditions above have been received bysatisfied. The Company records compensation expense with each vesting, and records a likelihood of vesting weighted analysis to the option holders had all the holders exercised their options on September 30, 2017.extent it has visibility to do so. Without such visibility, it considers such probability as de minimis until additional information is available.
Note 45 - 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.
Note 5 - Other Comprehensive Income
In the three and nine months ended September 30, 2017, the Company incurred other comprehensive loss and income of approximately ($260,000) and $493,000, respectively, 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, 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 7 - Geographic Segment Data
The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows:
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| 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 | |||||||||
| 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 6 - Inventories
Schedule of Inventories
| March 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | 1,374,000 | $ | 1,457,000 | ||||
| Work in process | 2,631,000 | 2,513,000 | ||||||
| Finished goods | 3,939,000 | 4,355,000 | ||||||
| Total inventories | $ | 7,944,000 | $ | 8,325,000 | ||||
Note 87 - 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'sCompany’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'smanagement’s expectations. During the three and nine months ended September 30, 2017March 31, 2023 and 2016,2022, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively.sales. Sales to these customers for the three months ended September 30, 2017March 31, 2023 and 20162022 are as follows:
Schedule of Concentration Risk
| Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
| September 30, 2017 | September 30, 2016 | March 31, 2023 | March 31, 2022 | |||||||||||||||||||||||||||||
| 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 | % | $ | 2,563,000 | 50 | % | $ | 2,502,000 | 43 | % | ||||||||||||||||
| Customer B | $ | 2,283,000 | 17.3 | % | $ | 3,070,000 | 22.8 | % | 1,652,000 | 32 | 1,347,000 | 23 | ||||||||||||||||||||
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| 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,March 31, 2023, the total amounts owed to the Company by these customers werewas approximately $1,491,000$962,000 and $2,245,000, or 19.6%,29% and $1,631,000 or 21.5%,67% of the Company’s consolidated net accounts receivable, respectively. The amounts owed at September 30, 2016March 31, 2022 by these customers were approximately $1,411,000$2,426,000 and $1,554,000, or 13.9%51% and 33%, and $2,653,000 or 26.1%respectively, of the Company’s consolidated net accounts receivable, respectively.receivable.
Note 98 - Related Party Transactions
Stephen M. Merrick, PresidentJohn H. Schwan, who resigned as Chairman of the Company, is of counselBoard on June 1, 2020, has made loans to the law firmCompany which had outstanding balances of Vanasco Genelly$ million as of March 31, 2023 and Miller PC which provides legal servicesDecember 31, 2022, respectively. No payments were made to the Company. Legal fees paid by the CompanyMr. Schwan since 2019. Interest expense related to this firmloan amounted to $ and $ for the three months ended September 30, 2017end March 31, 2023 and 2016, respectively, were $29,000 and $57,000. Legal fees paid by2022, respectively. Mr. Schwan is the father of Jana Schwan, the Company’s Chief Operating Officer.
Note 9 - Leases
We adopted ASC Topic 842 (Leases) on January 1, 2019. In July 2020, the Company entered into a lease agreement for a building through June 2021 (with no extension options). The monthly lease payments were $38,000. The Company made a policy election to this firm fornot recognize right of use assets and lease liabilities that arise from leases with an initial term of twelve months or less on the nine months ended September 30, 2017 and 2016, respectively, were $93,000 and $128,000.
Interest payments have been made or accrued to John H. Schwan, Chief Executive Officer ofConsolidated Balance Sheets. However, the Company for loans made torecognized these lease payments in the Company. DuringConsolidated Statement of Operations on a straight-line basis over the three months ended September 30, 2017lease term and 2016, these interest accruals totaled $24,000variable lease payments in the period in which the expense was incurred. This lease terminated during 2021 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 ofwas replaced with a new lease. In March 2021, the Company entered into a lease agreement for a building through an investment entity, and Stephen M. Merrick, President of the Company, alsoSeptember 2022. This lease was subsequently extended during March 2022 to extend through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”)December 31, 2025. 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. As of September 30, 2017 and 2016, the balance of accounts receivable from Clever Container to the Company were $924,000 and $192,000, respectively.The monthly lease payments are $35,000. The Company owns a 28.5% interest in Clever Container.uses the incremental borrowing rate of 11%.
Note 10 - Derivative Instruments; Fair Value
When this lease was extended during March 2022, the ROU (right of use) asset increased to $4,277,000, from $3,530,000 at December 31, 2021. The following tables represents information about the Company’s assetsROU liabilities also increased to $500,000 (current) and liabilities measured at fair value on a recurring basis$3,777,000 (noncurrent), from $648,000 and $2,860,000, respectively, 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:2021.
| Amount as of | ||||||||||||||||
| Description | 12/31/2016 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Warrant Liability | $ | 818,000 | - | $ | 818,000 | - | ||||||||||
| $ | 818,000 | $ | 818,000 | |||||||||||||
Note 11 – 10 - Subsequent Events
On November 9, 2017,The Company evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission.
During April 2023, the Company and S.C. Johnson & Son Inc. entered into a Fourth AmendmentGarden State Securities reached an agreement with respect to tail compensation associated with the Preferred Stock C investment and the 2019 agreement between the parties. The Company issued shares of restricted stock to Garden State Securities. These are additional shares issued with no change in proceeds from that investment, and no impact on the investor or related conversion. With this transaction both parties have agreed to the Trademark License Agreement among them dated December, 2011, extending the termconclusion of the Trademark License Agreement to December 31, 2019.their agreement.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly reportQuarterly Report on Form 10-Q includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly reportQuarterly Report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly reportQuarterly Report on Form 10-Q to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Risk Factors.”
Overview
We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related 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 used to produce all of our latex balloons and latex products at oura majority-owned facility in Guadalajara, Mexico.Mexico (Flexo Universal, or Flexo). This facility was sold during October 2021. Now the Company purchases latex balloons from an unrelated vendor and distributes in the United States, particularly to those customers that prefer a combined solution for foil and latex balloons.. 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, Candy Blossoms (balloons and candy arranged to look like a flower bouquet for gifting) and flexible containers for consumer use primarily 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.States.
Summary of Significant Events
September 30, 2021 financing
On September 30, 2021 (the “Closing Date”), the Company entered into a loan and security agreement (the “Agreement”) with Line Financial (the “Lender”), which provides for a senior secured financing consisting of a revolving credit facility (the “Revolving Credit Facility) in an aggregate principal amount of up to $6 million (the “Maximum Revolver Amount”) and term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $731,250 (“Term Loan Amount” and, together with the Revolving Credit Facility, the “Senior Facilities”). Proceeds of loans borrowed under the Senior Facilities were used to repay all amounts outstanding under the Company’s prior Agreements and for the Company’s working capital. The Senior Facilities are secured by substantially all assets of the Company.
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Interest on the Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (8% as of March 31, 2023), plus 1.95% per annum, accruing daily and payable monthly. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The Term Loan Facility shall be repaid by the Company to Lender in 48 equal monthly installments of principal and interest, each in the amount of $15,234, commencing on November 1, 2021, and continuing on the first day of each month thereafter until the Term Loan Maturity Date (as defined in the Agreement). Also, the Company will pay the Lender collateral monitoring fees of 4.62% of the eligible accounts receivable, inventory, and equipment supporting the Revolving Credit Facility and the Term Loan. In addition, the Company paid the Lender a loan fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon the execution of the Agreement. During August 2022 the terms were modified to reduce the collateral monitoring fee to 2.77% and added a provision that barred the Company from repaying the facility prior to September 2023.
The Senior Facilities mature on September 30, 2023 and shall automatically be extended for successive periods of one year each, unless the Company or the Lender gives the other party written notice of termination not less than 90 days prior to the end of such term or renewal term, as applicable. If the Senior Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the anniversary of the Closing Date. The Company has the option to prepay the Term Loan Facility (together with all accrued but unpaid interest and a Term Loan Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not less than 60 days prior written notice to the Lender.
The Senior Facilities require that the Company shall, commencing December 31, 2021, maintain Tangible Net Worth of at least $4,000,000 or greater (“Minimum Tangible Net Worth”). Minimum Tangible Net Worth may be adjusted downward by the Lender, from time to time, in its sole and absolute discretion, based on the effect of non-cash charges and other factors on the calculation of Tangible Net Worth. Other debt subordinated to Lender is not considered as a reduction of this calculation. The Company believes it was in compliance with this covenant during every relevant month, including as of December 31, 2022 and March 31, 2023.
The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, and acquisitions, pay dividends and make other restricted payments, or make capital expenditures exceeding $1 million in the aggregate in any fiscal year.
As of March 31, 2023 and December 31, 2022, the term loan balance amounted to $0.5 million, which consisted of the principal and interest payable balance of $0.6 million and deferred financing costs of $0.1 million. The balance of the Revolving Line of Credit as of March 31, 2023 and December 31, 2022 amounted to $4.3 and $2.9 million, respectively.
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Results of Operations
Net Sales. For the three monthsmonth periods ended September 30, 2017,March 31, 2023 and 2022, net sales were $13,226,000 compared to net sales of $13,476,000 for the same period of 2016, a decrease of 1.9%. $5,051,000 and $5,797,000, respectively.
For the quartersthree-month period ended September 30, 2017March 31, 2023 and 2016,2022, net sales by product category were as follows:
| Three Months Ended | ||||||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | |||||||||||||||||||||||
| $ | % of | $ | % of | |||||||||||||||||||||
| (000) | Net | (000) | Net | % | ||||||||||||||||||||
| Product Category | Omitted | Sales | Omitted | Sales | Variance | change | ||||||||||||||||||
| Foil Balloons | $ | 3,474 | 69 | % | $ | 3,832 | 66 | % | $ | (358 | ) | (9 | )% | |||||||||||
| Film Products | 89 | 2 | % | 828 | 14 | % | (739 | ) | (89 | )% | ||||||||||||||
| Other | $ | 1,488 | 29 | % | $ | 1,112 | 19 | % | $ | 376 | 34 | % | ||||||||||||
| Total | $ | 5,051 | 100 | % | $ | 5,797 | 100 | % | $ | (746 | ) | (13 | )% | |||||||||||
| 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 months ended September 30, 2017, 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 sales by product category were as follows:
| Nine Months Ended | ||||||||||||||||
| September 30, 2017 | September 30, 2016 | |||||||||||||||
| $ | % of | $ | % of | |||||||||||||
| Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
| Foil Balloons | 21,447 | 52 | % | 20,540 | 48 | % | ||||||||||
| Latex Balloons | 6,969 | 17 | % | 6,182 | 14 | % | ||||||||||
| Vacuum Sealing Products | 5,668 | 14 | % | 7,362 | 17 | % | ||||||||||
| Film Products | 2,194 | 5 | % | 3,508 | 8 | % | ||||||||||
| Other Sales | 5,119 | 12 | % | 5,240 | 13 | % | ||||||||||
| Total | 41,397 | 100 | % | 42,832 | 100 | % | ||||||||||
Foil Balloons. During the three months ended September 30, 2017, revenuesRevenues from the sale of foil balloons decreased by 6.6%during the three-month period from $3,832,000 ending March 31, 2022 compared to $3,474,000 during the prior yearthree month period of 2023. While the price of helium has reduced from $6,178,000 to $5,767,000. Forits 2022 peak, it remains elevated from the nine months ended September 30, 2017, revenuesbeginning of 2022, which negatively impacts the demand for balloons primarily filled with helium.
Films. Revenues from the sale of foil balloons increased by 4.4%commercial films decreased, from $828,000 during the three-month period ended March 31, 2022, 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,$89,000 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. Theseof 2023. The Company’s largest customer increased sales represent certain new customers but principally increasesits demand for the line that the Company supplies in sales to significant existing customers in each of2022 and finished the United States, Mexico, the United Kingdom and Europe.year with inventory, negatively impacting early 2023 orders.
Latex Balloons. During the three months ended September 30, 2017, revenuesOther Revenues. Revenues from the sale of latex balloons increased by 39.8%other products were $1,112,000 during the three-month period ended March 31, 2022, compared to the prior year period, from $1,875,000 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$1,488,000 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.
Vacuum Sealing Products. During the three months ended September 30, 2017, revenues from the sale of pouches and vacuum sealing machines decreased by 7.6% compared to the prior year, from $2,594,000 to $2,397,000. During the nine months ended September 30, 2017, revenues from the sale of pouches and vacuum sealing machines decreased by 23.0% compared to the prior year from $7,362,000 to $5,668,000. We believe that sales were affected 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.
Films. During the three months ended September 30, 2017, revenues from the sale of laminated film products decreased by 42.2% compared to the prior year period from $1,137,000 to $658,000. During the nine months ended September 30, 2017, revenues from the sale of laminated film products decreased by 37.4% compared to the prior year period from $3,508,000 to $2,194,000. Virtually all of the sales of this product line were to a single long-term customer. Sales to the customer have declined due to the elimination of one product previously purchased. However, we continue to maintain a long term relationship with the customer with respect to other products.
Other Revenues. During the three months ended September 30, 2017, revenues from the sale of various other products increased by 5.4% to $1,784,000 compared to revenues from other products in the same period in 2016 of $1,692,000. During the nine months ended September 30, 2017, revenues from the sale of various other products decreased by 2.3% to $5,119,000 compared to revenues from other products in the same period in 2016 of $5,240,000.2023. The revenues from the sale of other products during 2017these periods 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 and (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors 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 of our top three and ten customers for the three month periods ended March 31, 2023 and nine months ended September 30, 2017 and 2016.2022.
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| % of Sales | % of Sales | % of Sales | ||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2023 | 2022 | |||||||||||||||||||
| Top 3 Customers | 47.5 | % | 53.9 | % | 48.5 | % | 54.0 | % | 86 | % | 80 | % | ||||||||||||
| Top 10 Customers | 66.1 | % | 70.0 | % | 65.4 | % | 68.3 | % | 91 | % | 90 | % | ||||||||||||
| 16 |
During the three and nine monthsthree-month period ended September 30, 2017,March 31, 2023, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three monthsmonth period ended September 30, 2017March 31, 2023 were $3,195,000$2,563,000 and $1,652,000, or 24.2%50% and 32%, and $2,283,000 or 17.3%,respectively, of consolidated net sales, respectively.sales. Sales to these customers for the three months ended September 30, 2016March 31, 2022 were $3,088,000$2,502,000 and $1,347,000, or 22.9%43% and 23%, and $3,070,000 or 22.8%,respectively 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%, of consolidated net sales, respectively. The amounts owed at September 30, 2017 by these customers were $1,491,000 or 19.6%, and $1,631,000 or 21.5%, of the Company’s consolidated net accounts receivable, respectively.sales. As of September 30, 2016,March 31, 2023, the total amountsamount owed to the Company by these customers were $1,411,000was approximately $962,000 and $2,245,000, or 15.7%29% and 67%, and $2,653,000 or 29.4%respectively of the Company’s consolidated net accounts receivable, respectively.receivable. The amount owed at March 31, 2022 by these customers was approximately $696,000 and $1,669,000, or 20% and 48%, respectively, of the Company’s consolidated net accounts receivable.
Cost of Sales. During the three month period ended March 31, 2023, the cost of sales was $3,924,000, compared to $4,758,000 for the same period of 2022 due to lower sales volume and increased cost and mix efficiencies during 2023.
General and Administrative. During the three month period ended March 31, 2023, general and administrative expenses were $961,000 as compared to $837,000 for the same period in 2022. The Company incurred start up expenses with a new audit firm partner during 2023 as well as transition cost inefficiencies.
Selling, Advertising and Marketing. During the three month period ended March 31, 2023, selling, advertising and marketing expenses were $154,000 as compared to $221,000 for the same period in 2022. The Company made small investments during 2022 that were not repeated during 2023.
Other Income (Expense). During the three month period ended March 31, 2023, the Company incurred interest expense of $142,000 as compared to interest expense of $96,000 during the same period of 2022. The dramatic increase in interest rates during 2022 flowed through to the Company’s Prime interest rate based borrowing structure.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the three months ended September 30, 2017, the cost of sales represented 75.9% ofMarch 31, 2023, net salescash used by operations was $1,369,000, compared to 74.7% for the three months ended September 30, 2016. During the nine months ended September 30, 2017, the cost of sales represented 76.0% 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.
General and Administrative. During the three months ended September 30, 2017, general and administrative expenses were $1,923,000 or 14.5% of net sales, compared to $1,808,000 or 13.4% of net sales for the same period in 2016. During the nine months ended September 30, 2017, general and administrative expenses were $5,691,000 or 13.7% of net sales, compared to $5,471,000 or 12.8% of net sales for 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 costs related to our financing, including consulting fees of $184,000 for the third quarter 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 million 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.
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 months ended September 30, 2017, the Company incurred interest expense of $367,000, compared to interest expense during the same period of 2016 in the amount 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.
For the three months ended September 30, 2017, the Company had a foreign currency transaction loss of $11,000 compared to a foreign currency transaction gain of $10,000 during the same period of 2016. For the nine months ended September 30, 2017, the Company had a foreign currency transaction loss of $92,000 compared to a foreign currency transaction gain of $77,000 during the same period of 2016.
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, net cash provided by operations was $5,230,000, compared to net cash used in operations during the ninethree months ended September 30, 2016March 31, 2022 of $255,000.$2,000.
Significant changes in working capital items during the ninethree months ended September 30, 2017March 31, 2023 included:
| ● | An |
| ● | An increase in trade payables of |
| ● | An increase in prepaid expenses and other assets of $100,000 compared to a decrease of $339,000 in 2022. | |
| ● | A decrease in accrued liabilities of |
Investing Activity.Activity. During the ninethree months ended September 30, 2017,March 31, 2023, cash used in investing activity was $736,000,$56,000, compared to cash provided byused in investing activity for the same period of 20162022 in the amount of $140,000. Activity consisted principally of investment in equipment and equipment maintenance.$15,000.
Financing Activities. During the ninethree months ended September 30, 2017,March 31, 2023, cash used inprovided by financing activities was $4,416,000$1,409,000 compared to cash provided by financing activities for the same period of 20162022 in the amount of $440,000.$155,000. Financing activity during 2023 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:
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, the effective rate on the outstanding loan balances was 4.5%.
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, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris 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 extended 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,March 31, 2023, the Company had cash balances of $325,000$130,000 compared to cash balances of $624,000$208,000 for the same period of 2016.2022.
| 17 |
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, as of September 30, 2017, the Company was in compliance with all 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 $8,211,000 on the revolving credit loan and $1,641,000 on the mortgage facility. In addition, the balance of the indebtedness
The ability of the Company to BMO Private Equitycontinue as of September 30, 2017 was approximately $5,965,000.
The obligations of the Credit Agreement to BMO Harris were to maturea going concern is dependent on July 17, 2017. The obligations of the Note and Warrant Purchase Agreement among the Company executing its business plan and, BMO Equity areif unable to maturedo so, in obtaining adequate capital on January 18, 2018.
By Amendmentacceptable terms to the Credit Agreement dated July 18, 2017, BMO Harris agreedfund any operating losses. Management’s plans to extend the maturity date of the agreementcontinue as a going concern include executing its business plan, continuing 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 thefocus our 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 warrantsmost profitable elements, 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 payableexploring alternative funding sources 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 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)as needed basis. However, management cannot 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 andany assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic, supply chain constraints, inflationary pressures, and the cost and commercial availability of helium have impacted the Company’s business operations to some extent and is expected to continue to do so and, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern is dependent upon its ability to successfully generate or otherwise secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
ManagementThe Company’s primary sources of liquidity have traditionally been comprised of cash and cash equivalents as well as availability under the Credit Agreement. We believe that we have been in compliance with covenants since refinancing with Line Financial in September 2021. That Credit Agreement expires per its terms on September 30, 2023, unless it is also engaged in effortsextended by the parties or replaced. While the Company expects to implement costfind an acceptable credit facility, there can be no assurance of success, and operational improvements andas such, might negatively impact the Company’s ability to fulfill strong order flow in order to achieve profitable operations for the fourth quarter.continue as a going concern.
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 25-2811-20 of our Annual Report on Form 10-K for the year ended December 31, 20162022 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three months ended September 30, 2017.March 31, 2023.
Item 3.Quantitative and Qualitative Disclosures Regarding Market Risk
Not applicable.
Item 4.Controls and Procedures
As(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required 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 PrincipalActing Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of March 31, 2021. Based on this evaluation, the Chief Executive Officer (principal executive officer) and Acting Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were not effective as of September 30, 2017,March 31, 2023, the end of the period covered by this report. Based uponQuarterly Report on Form 10-Q due to the material weaknesses described below.
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(b) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that 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 ensureMarch 31, 2023. 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 necessary knowledge, experience and training to adequately account for significant, unusual transactions that resulted in misapplications of GAAP, particularly with regard to the timing of recognition of certain non-cash charges, and | |
| ● | We are overly dependent upon our Acting Chief Financial Officer, who at present is our Chief Executive Officer, within an environment that is highly manual in nature. |
As a result of the three months ended September 30, 2017material 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 March 31, 2023.
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.
Not applicable.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3.Defaults Upon Senior Securities
The Company believes that it has been in compliance with the terms of the Line Capital financing since inception on September 30, 2021.
Item 4. Mine Safety Disclosures
Not applicable.
Item 4.Submission of Matters to a Vote of Security Holders
Not applicable.
The Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.None.
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The following are being filed as exhibits to this report:
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Yunhong CTI | ||||
By: | /s/ | |||
| Chief Executive Officer | ||||
| By: | /s/ | |||
| Acting Chief Financial Officer | ||||
Exhibit Index
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