CTIB Yunhong CTI Ltd

 

 

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 June 30, 2023

 

OR

 

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

 

For the transition period from _________to_________

 

Commission File Number

000-23115

 

YUNHONG CTI LTD.

(Exact name of registrant as specified in its charter)

 

Illinois		36-2848943
(State or other jurisdiction of		(I.R.S. Employer
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 (The Nasdaq Capital Market)

 

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

 

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

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock, no par value per share, as of August 1, 2023 was 20,096,755 (excluding treasury shares).

 

 

 

INDEX

 

PART I – FINANCIAL INFORMATION
Item No. 1.	Financial Statements
	Condensed Consolidated Balance Sheets at June 30, 2023 (unaudited) and December 31, 2022	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended June 30, 2023 and June 30, 2022	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2023 and June 30, 2022	3
	Condensed Consolidated Statements of Shareholders’ Equity (unaudited) for the three and six months ended June 30, 2023 and June 30, 2022	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item No. 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item No. 3	Quantitative and Qualitative Disclosures Regarding Market Risk	17
Item No. 4	Controls and Procedures	17
PART II – OTHER INFORMATION
Item No. 1	Legal Proceedings	18
Item No. 1A	Risk Factors	18
Item No. 2	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item No. 3	Defaults Upon Senior Securities	19
Item No. 4	Mine Safety Disclosures	19
Item No. 5	Other Information	19
Item No. 6	Exhibits	19
	Signatures	20
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

 

 

Yunhong CTI, LTD

Condensed Consolidated Balance Sheets

 

		June 30, 2023				December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents		$	100,000			$	146,000
Accounts receivable, net			2,959,000				1,618,000
Inventories, net			7,639,000				8,325,000
Prepaid expenses			436,000				389,000
Total current assets			11,134,000				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			202,000				108,000
Property, plant and equipment, gross			21,350,000				21,256,000
Less : accumulated depreciation and amortization			(20,485,000	)			(20,334,000	)
Total property, plant and equipment, net			865,000				922,000
Other assets:
Operating lease right-of-use			3,628,000				3,882,000
Total other assets			3,628,000				3,882,000
TOTAL ASSETS		$	15,627,000			$	15,282,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade payables		$	982,000			$	1,313,000
Line of credit			4,288,000				2,878,000
Notes payable - current portion			521,000				289,000
Notes payable – related party, subordinated			1,305,000				-
Notes payable			1,305,000				-
Operating Lease Liabilities			519,000				518,000
Accrued liabilities			1,014,000				2,480,000
Total current liabilities			8,629,000				7,478,000
Long-term liabilities:
Notes payable - noncurrent			-				427,000
Notes payable – related party, subordinated			-				1,267,000
Notes payable			-				1,267,000
Operating Lease Liabilities – noncurrent			3,109,000				3,364,000
Total long-term liabilities			3,109,000				5,058,000
TOTAL LIABILITIES			11,738,000				12,536,000
Equity:
Yunhong CTI, Ltd stockholders’ equity:
Series B Preferred Stock — no par value, 170,000 shares authorized, none and 170,000 issued and outstanding at June 30, 2023 and December 31, 2022, respectively			-				1,851,000
Common Stock – no par value, 50,000,000 shares authorized, 20,140,413 and 16,102,749 shares issued and 20,096,755 and 16,059,991 shares outstanding at June 30, 2023 and December 31, 2022, respectively			21,283,000				21,283,000
Paid-in-capital			6,642,000				3,895,000
Accumulated deficit			(23,875,000	)			(24,122,000	)
Less: Treasury stock, 43,658 shares			(161,000	)			(161,000	)
Total Yunhong CTI, Ltd Stockholders’ Equity			3,889,000				2,746,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	15,627,000			$	15,282,000

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

Yunhong CTI, LTD

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

		2023				2022				2023				2022
		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2023				2022				2023				2022
Net Sales		$	4,059,000			$	4,418,000			$	9,110,000			$	10,215,000
Cost of Sales			3,545,000				3,615,000				7,469,000				8,373,000
Gross profit			514,000				803,000				1,641,000				1,842,000
Operating expenses:
General and administrative			656,000				998,000				1,617,000				1,835,000
Selling			33,000				34,000				65,000				72,000
Advertising and marketing			115,000				77,000				237,000				260,000
Total operating (income) expenses			804,000				1,109,000				1,919,000				2,167,000
Loss from operations			(290,000	)			(306,000	)			(278,000	)			(325,000	)
Other (expense) income:
Interest expense			(155,000	)			(109,000	)			(297,000	)			(205,000	)
Other income/(expense)			296,000				16,000	)			822,000				110,000	)
Total other expense, net			141,000				(93,000	)			525,000				(95,000	)
(Loss) /income from continuing operations before taxes			(149,000	)			(399,000	)			247,000				(420,000	)
Income tax expense			-				-				-				-
Income (Loss) from continuing operations			(149,000	)			(399,000	)			247,000				(420,000	)
Less: Net income attributable to noncontrolling interest			-				-				-				-
Net (loss) / income attributable to Yunhong CTI, Ltd		$	(149,000	)		$	(399,000			$	247,000			$	(420,000
Other Comprehensive Income (Loss)
Foreign currency adjustment			-				-				-				-
Comprehensive (loss) / income		$	(149,000	)		$	(399,000			$	247,000			$	(420,000
Deemed Dividends on preferred stock and amortization of beneficial conversion feature		$	-			$	(202,000	)		$	(11,000	)		$	(404,000	)
Net (Loss) / income attributable to Yunhong CTI Ltd common Shareholders		$	(149,000	)		$	(601,000	)		$	236,000			$	(824,000	)
Basic (loss) / income per common share
Continuing operations		$	(0.01	)		$	(0.10	)		$	0.01			$	(0.14	)
Discontinued operations			-				-				-				-
Basic (loss) / income per common share		$	(0.01	)		$	(0.10	)		$	0.01			$	(0.14	)
Diluted (loss) / income per common share
Continuing operations		$	(0.01	)		$	(0.10	)		$	0.01			$	(0.14	)
Discontinued operations			-				-				-				-
Diluted (loss) / income per common share		$	(0.01	)		$	(0.10	)		$	0.01			$	(0.14	)
Weighted average number of shares and equivalent shares of common stock outstanding:
Basic			20,034,941				5,911,750				18,822,352				5,906,225
Diluted			20,034,941				5,911,750				18,822,352				5,906,225

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

Yunhong CTI, LTD

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

		2023				2022
		For the Six Months Ended June 30,
		2023				2022
Cash flows from operating activities:
Net income / (loss) from continuing operations		$	247,000			$	(420,000	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization			151,000				195,000
Equity compensation expense			11,000				92,000
Change in assets and liabilities:
Accounts receivable			(1,341,000	)			707,000
Inventories			686,000				(405,000	)
Prepaid expenses and other assets			(47,000	)			333,000
Trade payables			(331,000	)			(112,000	)
Accrued liabilities			(737,000	)			(87,000	)
Net cash provided by (used in) operating activities			(1,361,000	)			303,000
Cash flows from investing activities:
Purchases of property, plant and equipment			(94,000	)			(94,000	)
Net cash (used in) provided by investing activities			(94,000	)			(94,000	)
Cash flows from financing activities:
Proceeds from issuance/(Repayment) of long-term debt and revolving line of credit			1,409,000				(221,000	)
Net cash used in financing activities			1,409,000				(221,000	)
Net (decrease) / increase in cash and cash equivalents			(46,000	)			(12,000	)
Cash and cash equivalents at beginning of period			146,000				66,000
Cash and cash equivalents at end of period		$	100,000			$	54,000
Supplemental disclosure of cash flow information:
Cash payments for interest		$	259,000			$	169,000
Accrued Divided and Accretion on preferred stock		$	11,000			$	404,000
Lease right-of-use assets and lease liability		$	-			$	747,000
Conversion of notes and deposits into common stock		$	885,000			$	-
Conversion of Series B preferred stock into common stock		$	1,500,000			$	-

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

Yunhong CTI, Ltd

Consolidated 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							200,000																																				(200,000	)							-				-				-
Accrued Deemed Dividend - Series B Preferred Stock															68,000																												(68,000	)															-
Accrued Deemed Dividend - Series C Preferred Stock																							68,000																				(68,000	)															-
Accrued Deemed Dividend - Series D Preferred Stock																															68,000												(68,000	)															-
Stock Issuance																																			25,000																								-
Equity Compensation Charge							-																																				92,000								-				-				92,000
Net Income (Loss)																																															(420,000	)	-										(420,000	)
Balance June 30, 2022			500,000			$	3,355,000				170,000			$	1,783,000				170,000			$	1,698,000				170,000			$	1,580,000				5,955,408			$	14,538,000			$	4,005,000			$	(23,075,000	)	-		(44,000	)		$	(161,000	)			3,723,000

 

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								12,000																				12,000
Broker issuance											125,000
Net Income (Loss)																							247,000																247,000
Foreign Currency Translation																											-				-				-				-
Balance June 30, 2023			-			$	-				20,140,413			$	21,283,000			$	6,642,000			$	(23,875,000	)		$	-				(44,000	)		$	(161,000	)			3,889,000

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

Yunhong CTI Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 - Basis of Presentation

 

The accompanying condensed (a) consolidated balance sheet as of June 30, 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 and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 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’s annual report on Form 10-K for the fiscal year ended December 31, 2022, filed on April 15, 2023, which can be found on the Company’s website (www.ctiindustries.com) or www.sec.gov.

 

Principles of consolidation and nature of operations:

 

Yunhong CTI Ltd and CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized balloon products throughout the world, including balloon-inspired gift items, (ii) distribute 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.

 

The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd., and CTI Supply, Inc.

 

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.

 

Reclassification:

 

Certain amounts in the Company’s condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.

 

Use of estimates:

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts and inventory valuation, preferred stock dividends and beneficial conversion features, and assumptions used as inputs in the Black-Scholes option-pricing model.

 

Segments:

 

The Company operates as a single segment, both in terms of geography and operations, particularly in light of the October 2021 sale of its Flexo Universal subsidiary (Mexico). After that date, all manufacturing occurs in the United States.

 

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Earnings per share:

 

Basic income (loss) per share is computed by dividing net income (loss) attributable to Yunhong CTI Ltd shareholders by the weighted average number of shares of common stock outstanding during each period.

 

Diluted income (loss) per share is computed by dividing the net income (loss) attributable to Yunhong CTI Ltd shareholders by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.

 

As of June 30, 2023 and 2022, shares to be issued upon the exercise of options and warrants aggregated 128,000 and none, respectively.

 

Significant Accounting Policies:

 

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2022. There were no significant changes to these accounting policies during the three and six months ended June 30, 2023.

 

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

 

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

 

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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 June 30, 2023 of approximately $23 million. The accompanying financial statements for the three and six months ended June 30, 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 (including cost and 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 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 have traditionally been comprised of cash and cash equivalents as well as availability under the Credit Agreement in place at the time (see Note 3). We endured compliance failures with covenants 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 replacement 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 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 $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.

 

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 $15,000, 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 paid 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 Company is currently working on having a facility in place upon the expiration of the current facility.

 

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 for all relevant months, including as of June 30, 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 June 30, 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 less than $0.1 million. The balance of the Revolving Line of Credit as of June 30, 2023 and December 31, 2022 amounted to $4,288,000 and $2,878,000, respectively.

 

As of January 1, 2019, the Company had a note payable to John H. Schwan, former Director and former Chairman of the Board, for $1.6 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 181,000 shares of our common stock at the then market rate of $3.32 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 June 30, 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 $18,000 and $17,000 for the three months ended June 30, 2023 and 2022, respectively.

 

As of 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 was 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

 

On January 3, 2020, the Company entered into a stock purchase agreement (as amended on February 24, 2020 and April 13, 2020 (the “LF Purchase Agreement”)), pursuant to which the Company agreed to issue and sell, and LF International Pte. Ltd., a Singapore private limited company (“LF International”), which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr. Yubao Li, agreed to purchase, up to 500,000 shares of the Company’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 Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As permitted by the Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). Approximately $1 million of Series A Preferred has been sold, including to an investor which converted an account receivable of $478,000 owed to the investor by the Company in exchange for 48,200 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 total of 400,000 shares of common stock to LF International and, pursuant to the LF Purchase Agreement, changed our name from CTI Industries Corporation to Yunhong CTI Ltd. LF International had 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 ($10 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 June 30, 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 5 million shares of common stock plus an additional approximately 1.3 million shares of common stock representing the accrued dividends.

 

Series B Convertible Preferred Stock

 

In November 2020, we issued 170,000 shares of Series B Preferred for an aggregate purchase price of $1,500,000. The Series B Preferred have an initial stated value of $10.00 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 stated 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 June 30, 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 1.9 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 170,000 shares of Series C Preferred for an aggregate purchase price of $1,500,000. The Series C Preferred have an initial stated value of $10.00 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 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 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 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 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 2 million shares of common stock, including accrued dividends.

 

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Series D Convertible Preferred Stock

 

In June 2021, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series D Redeemable Convertible Preferred Stock. As of September 30, 2021, the Company was in the process of negotiating and finalizing the terms of the arrangement. As the agreement was not finalized as of September 30, 2021, 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 ($10 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 1.8 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 $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 1.8 million shares of our common stock. Upon conversion, both the note and deposit liabilities were fully eliminated.

 

Investment Banking Fee

 

The Company had an agreement with Garden State Securities beginning December 2019 and ending during 2020, wherein Garden State Securities sought equity and debt investment opportunities and was due a fee related to successful investment. That agreement had a tail provision wherein Garden State Securities would be entitled to compensation related to investments from identified parties during a fixed period of time following the termination of the agreement, which has now expired. Pursuant to negotiation between the parties during April 2023, it was agreed that a total presentation of 125,000 restricted shares of common stock would result in the final resolution of compensation due Garden State Securities, including that related to Series C Preferred Stock, subsequently converted to common stock, and that the agreement and all related potential claims were concluded. The proceeds from this investment were not impacted by this resolution.

 

Warrants

 

In connection with the Series A Offering, in 2020 the Company issued 792,660 warrants to purchase 792,660 shares of the Company’s common stock for $1 per share. During 2020, warrants to acquire 597,500 shares of common stock were exercised in cash-less exchange for 391,308 shares of the Company’s common stock. In January and February 2021, the remaining warrants to acquire 195,160 shares of common stock were exercised in a cash-less exchange for 103,104 shares of the Company’s common stock. Additional warrants to acquire 128,000 shares of common stock were issued with respect to the Series D transaction above. These warrants can be exercised for the Company’s common stock for $1.75 per share, or based on the ten day volume weighted average price (VWAP) of the Company’s common stock.

 

The Company has applied the Black-Scholes model to value stock-based 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 the Company’s Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company’s 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 68% - 167%.
	-	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 .42% - 1.65%.
	-	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 5 years.
	-	Dividend yield: The estimate for dividend yield is 0%, 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.

 

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A summary of the Company’s stock warrant activity is as follows:

 

Schedule of Company’s Stock Warrant Activity

		Shares under Option				Weighted Average Exercise Price
Balance at December 31, 2022			128,000			$	1.75
Granted			-				-
Cancelled/Expired			-				-
Exercised/Issued			-				-
Outstanding at June 30, 2023			128,000				1.75
Exercisable at June 30, 2023			128,000			$	1.75

 

As of June 30, 2023 the Company reserved the following shares of its common stock for the exercise of warrants, and preferred stock:

 

Schedule of Reserved Shares of Exercise Warrants

2021 Warrants			128,000
Shares reserved as of June 30, 2023			128,000

 

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 250,000 shares. 25,000 shares vested immediately, while the remaining 225,000 are subject to performance conditions as further detailed in the share grant. Specifically, the restrictions on the remaining 225,000 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 56,250 shares of the award will lapse and the award will vest when the Company’s trailing-twelve-month EBITDA equals or exceeds $1 million at any time on or after January 1, 2022.

● The restrictions on 56,250 shares of the award will lapse and the award will vest in the event the Company’s common shares trade at or above $5/share for ten or more consecutive trading days.

● The restrictions on 56,250 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 56,250 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 100,000 shares of restricted stock. 20,000 of these shares vested over a 12 month period while the remaining shares vest 20,000 each based on the performance conditions above.

 

The Audit Committee (as defined in the Plan) is responsible for determining when the conditions above have been satisfied. The Company records compensation expense with each vesting, and records a likelihood of vesting weighted analysis to the extent it has visibility to do so. Without such visibility, it considers such probability as de minimis until additional information is available.

 

Note 5 - Legal Proceedings

 

The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.

 

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Note 6 - Inventories

 

Schedule of Inventories

		June 30, 2023				December 31, 2022
Raw materials		$	1,209,000			$	1,457,000
Work in process			2,548,000				2,513,000
Finished goods			3,882,000				4,355,000
Total inventories		$	7,639,000			$	8,325,000

 

Note 7 - Concentration of Credit Risk

 

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company’s customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management’s expectations. During the three and six months ended June 30, 2023 and 2022, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three and six months ended June 30, 2023 and 2022 are as follows:

 

Schedule of Concentration Risk

		Three Months Ended								Three Months Ended
		June 30, 2023								June 30, 2022
Customer		Net Sales				% of Net Sales				Net Sales				% of Net Sales
Customer A		$	2,347,000				56	%		$	1,829,000				41	%
Customer B		$	668,000				16	%		$	1,323,000				30	%

 

		Six Months Ended								Six Months Ended
		June 30, 2023								June 30, 2022
Customer		Net Sales				% of Net Sales				Net Sales				% of Net Sales
Customer A		$	4,910,000				54	%		$	4,331,000				42	%
Customer B		$	2,320,000				25	%		$	2,670,000				26	%

 

As of June 30, 2023, the total amounts owed to the Company by these customers were approximately $2,455,000 or 83% of the Company’s consolidated net accounts receivable. The amounts owed at June 30, 2022 by these customers were approximately $2,008,000 or 73% of the Company’s consolidated net accounts receivable.

 

Note 8 - Related Party Transactions

 

John H. Schwan, who resigned as Chairman of the Board on June 1, 2020, has made loans to the Company which had outstanding balances of $1.3 million as of June 30, 2023 and December 31, 2022, respectively. No payments were made to Mr. Schwan since 2019. Interest expense related to this loan amounted to $18,000 and $17,000 for the three months end June 30, 2023 and 2022, 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 not recognize right of use assets and lease liabilities that arise from leases with an initial term of twelve months or less on the Consolidated Balance Sheets. However, the Company recognized these lease payments in the Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the expense was incurred. This lease terminated during 2021 and was replaced with a new lease. In March 2021, the Company entered into a lease agreement for a building through September 2022. This lease was subsequently extended during March 2022 to extend through December 31, 2025. The monthly lease payments are $35,000. The Company uses the incremental borrowing rate of 11%.

 

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 ROU liabilities also increased to $500,000 (current) and $3,777,000 (noncurrent), from $648,000 and $2,860,000, respectively, as of December 31, 2021.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This Quarterly 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 Report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this Quarterly 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 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 our latex balloons and latex products at a majority-owned facility in Guadalajara, 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, including balloon-inspired gift items (e.g., balloons and candy arranged to look like a flower bouquet for gifting) and flexible containers for consumer use primarily in the United States.

 

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.

 

 

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 June 30, 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. We are currently working on having a facility in place when the current facility expires on September 30, 2023.

 

As of June 30, 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 less than $0.1 million. The balance of the Revolving Line of Credit as of June 30, 2023 and December 31, 2022 amounted to $4.3 and $2.9 million, respectiv