UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(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 | ||
| (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.
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).
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 | ☐ |
| ☒ | 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 ☐
The number of shares outstanding of the registrant’s common stock, no par value per share, as of May 10, 2023 was (excluding treasury shares).
INDEX
Yunhong CTI, LTD
Condensed Consolidated Balance Sheets
| March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment: | ||||||||
| Machinery and equipment | ||||||||
| Office furniture and equipment | ||||||||
| Intellectual property | ||||||||
| Leasehold improvements | ||||||||
| Fixtures and equipment at customer locations | ||||||||
| Projects under construction | ||||||||
| Less : accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Total property, plant and equipment, net | ||||||||
| Other assets: | ||||||||
| Operating lease right-of-use | ||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade payables | $ | $ | ||||||
| Line of credit | ||||||||
| Notes payable - current portion | ||||||||
| Notes payable - officers, subordinated | ||||||||
| Operating Lease Liabilities | ||||||||
| Accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Notes payable - noncurrent | ||||||||
| Notes payable - officers, subordinated | ||||||||
| Operating Lease Liabilities | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Shareholders’ Equity: | ||||||||
| Yunhong CTI, Ltd shareholders’ equity: | ||||||||
| Series B Preferred Stock — | ||||||||
| Common Stock – | ||||||||
| Paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Less: Treasury stock, shares | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated unaudited financial statements.
| 1 |
Yunhong CTI, LTD
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net Sales | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| General and administrative | ||||||||
| Selling | ||||||||
| Advertising and marketing | ||||||||
| Total operating expenses | ||||||||
| Income / (Loss) from operations | ( | ) | ||||||
| Other (expense) / income: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Other (expense) / income | ||||||||
| Total other (expense) / income, net | ( | ) | ||||||
| Income / (Loss) from continuing operations before taxes | ( | ) | ||||||
| Income tax expense | ||||||||
| Net Income / (Loss) | $ | $ | ( | ) | ||||
| Net Loss attributable to noncontrolling interest | ||||||||
| Net Loss attributable to Yunhong CTI Ltd. | ( | ) | ||||||
| Other Comprehensive Income (Loss) | ||||||||
| Foreign Currency adjustment | ||||||||
| Comprehensive Loss | ( | ) | ||||||
| Deemed Dividends on preferred stock and amortization of beneficial conversion feature | $ | ( | ) | $ | ( | ) | ||
| Net Loss attributable to Yunhong CTI Ltd Common Shareholders | $ | $ | ( | ) | ||||
| Basic income (loss) per common share | $ | $ | ( | ) | ||||
| Diluted income (loss) per common share | $ | $ | ( | ) | ||||
| Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to condensed consolidated unaudited financial statements.
| 2 |
Yunhong CTI, LTD
Condensed Consolidated Statements of Cash Flows (Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income/loss from continuing operations | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Equity compensation expense | ||||||||
| Provision for losses on accounts receivable | ||||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Trade payables | ( | ) | ||||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of long-term debt and revolving line of credit | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) / increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information and noncash investing and financing activities: | ||||||||
| Cash payments for interest | $ | $ | ||||||
| Accrued Divided and Accretion on preferred stock | $ | $ | ||||||
| Lease right-of-use assets and lease liability | $ | $ | ||||||
| Conversion of notes and deposits into common stock | $ | $ | ||||||
See accompanying notes to condensed consolidated unaudited financial statements.
| 3 |
Yunhong CTI, Ltd
Consolidated Statements of Stockholders’ Equity
| 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 | $ | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series A Preferred Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series B Preferred Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series C Preferred Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series D Preferred Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Issuance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity Compensation Charge | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Yunhong CTI, Ltd
Consolidated Statements of Stockholders’ Equity
| 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Series B Convertible Preferred Stock Issuance | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for notes payable and investor deposit | ||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series B Preferred Stock | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Equity compensation | ||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) | ||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation | ||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements
| 4 |
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 March 31, 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 March 31, 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 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:
Yunhong CTI Ltd and its inactive subsidiary CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized balloon products throughout the world, (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. As discussed in Note 2 Discontinued Operations, effective in the 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.
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.
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. After that date, all manufacturing occurs in the United States.
| 5 |
Basic (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period.
Diluted (loss) per share is computed by dividing the net loss by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
As of March 31, 2023 and 2022, shares to be issued upon the exercise of options and warrants aggregated and , respectively. The number of shares included in the determination of earnings on a diluted basis for the three months ended March 31, 2023 and 2022 were none, as doing so would have been anti-dilutive.
Significant Accounting Policies:
The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2022. There were no significant changes to these accounting policies during the three months ended March 31, 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 3s described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
| 6 |
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 $
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 have 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 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 new facility on acceptable terms, there can be no assurance this will occur, particularly in light of increasingly conservative financial markets.
| 7 |
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 $
Interest
on the Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (
The
Senior Facilities mature on September 30, 2023 and shall automatically be extended for successive periods of
The
Senior Facilities require that the Company shall, commencing December 31, 2021, maintain Tangible Net Worth of at least $
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 $
As
of March 31, 2023, the term loan balance amounted to $
As
of January 1, 2019, the Company had a note 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 $
As
of December 31, 2022, the Company had a note payable to Alex Feng for $
| 8 |
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 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 $ per share, for aggregate gross proceeds of $
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 $
Series B Convertible Preferred Stock
In
November 2020, we issued shares of Series B Preferred for an aggregate purchase price of $
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 $
| 9 |
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, 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 $
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 $
Warrants
In
connection with the Series A Offering, in 2020 the Company issued warrants to purchase
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 % - %. | |
| - | 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. |
| 10 |
A summary of the Company’s stock warrant activity is as follows:
| Shares under Option | Weighted Average Exercise Price | |||||||
| Balance at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Cancelled/Expired | ||||||||
| Exercised/Issued | ||||||||
| Outstanding at March 31, 2023 | ||||||||
| Exercisable at March 31, 2023 | $ | |||||||
| 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 trailing-twelve-month EBITDA equals or exceeds $1 million at any time on or after January 1, 2022.
● The restrictions on 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 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 $
● 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 performance conditions above.
The Audit Committee (as defined in the Plan) shall be 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.
| 11 |
Note 6 - Inventories
| March 31, 2023 | December 31, 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
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 months ended March 31, 2023 and 2022, there were
| Three Months Ended | Three Months Ended | |||||||||||||||
| March 31, 2023 | March 31, 2022 | |||||||||||||||
| Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
| Customer A | $ | % | $ | % | ||||||||||||
| Customer B | ||||||||||||||||
| 12 |
As
of March 31, 2023, the total amounts owed to the Company by these customers was approximately $
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 $
million as of March 31, 2023 and December 31, 2022, respectively.
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 $
When
this lease was extended during March 2022, the ROU (right of use) asset increased to $
Note 10 - Subsequent Events
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 Garden 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 conclusion of their agreement.
| 13 |
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, 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.
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 month periods ended March 31, 2023 and 2022, net sales were $5,051,000 and $5,797,000, respectively.
For the three-month period ended March 31, 2023 and 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 | )% | |||||||||||
Foil Balloons. Revenues from the sale of foil balloons decreased during the three-month period from $3,832,000 ending March 31, 2022 compared to $3,474,000 during the three month period of 2023. While the price of helium has reduced from its 2022 peak, it remains elevated from the beginning of 2022, which negatively impacts the demand for balloons primarily filled with helium.
Films. Revenues from the sale of commercial films decreased, from $828,000 during the three-month period ended March 31, 2022, compared to $89,000 during the same period of 2023. The Company’s largest customer increased its demand for the line that the Company supplies in 2022 and finished the year with inventory, negatively impacting early 2023 orders.
Other Revenues. Revenues from the sale of other products were $1,112,000 during the three-month period ended March 31, 2022, compared to $1,488,000 during the same period of 2023. The revenues from the sale of other products during these periods include (i) sales of a line of “Candy Blossoms” and 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.
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 2022.
| Three Months Ended March 31, | ||||||||
| % of Sales | ||||||||
| 2023 | 2022 | |||||||
| Top 3 Customers | 86 | % | 80 | % | ||||
| Top 10 Customers | 91 | % | 90 | % | ||||
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During the three-month period ended 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 month period ended March 31, 2023 were $2,563,000 and $1,652,000, or 50% and 32%, respectively, of consolidated net sales. Sales to these customers for the three months ended March 31, 2022 were $2,502,000 and $1,347,000, or 43% and 23%, respectively of consolidated net sales. As of March 31, 2023, the total amount owed to the Company by these customers was approximately $962,000 and $2,245,000, or 29% and 67%, respectively of the Company’s consolidated net accounts 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 March 31, 2023, net cash used by operations was $1,369,000, compared to net cash provided by operations during the three months ended March 31, 2022 of $2,000.
Significant changes in working capital items during the three months ended March 31, 2023 included:
| ● | An increase in accounts receivable of $1,726,000 compared to a decrease in accounts receivable of $125,000 in the same period of 2022. | |
| ● | An decrease in inventory of $381,000 compared to an increase in inventory of $620,000 in 2022. | |
| ● | An increase in trade payables of $35,000 compared to an increase in trade payables of $215,000 in 2022. | |
| ● | 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 $372,000 compared to a decrease in accrued liabilities of $165,000 in 2022. |
Investing Activity. During the three months ended March 31, 2023, cash used in investing activity was $56,000, compared to cash used in investing activity for the same period of 2022 in the amount of $15,000.
Financing Activities. During the three months ended March 31, 2023, cash provided by financing activities was $1,409,000 compared to cash provided by financing activities for the same period of 2022 in the amount of $155,000. Financing activity during 2023 consisted principally of changes in the balances of revolving and long-term debt.
Liquidity and Capital Resources.
At March 31, 2023, the Company had cash balances of $130,000 compared to cash balances of $208,000 for the same period of 2022.
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The ability of the Company to continue as a going concern is dependent on the Company executing its business plan and, if unable to do so, in obtaining adequate capital on acceptable terms to fund any operating losses. Management’s plans to continue as a going concern include executing its business plan, 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 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.
The 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 extended by the parties or replaced. While the Company expects to find an acceptable credit facility, there can be no assurance of success, and as such, might negatively impact the Company’s ability to 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.
Please see pages 11-20 of our Annual Report on Form 10-K for the year ended December 31, 2022 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 March 31, 2023.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Not applicable.
Item 4. Controls and Procedures
(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 to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission’s rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Acting 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 March 31, 2023, the end of the period covered by this Quarterly 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 controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of March 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 registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of our evaluation of our internal control over financial reporting, management identified the following material weaknesses in our internal control over financial reporting:
| ● | We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for significant, unusual transactions that resulted in misapplications of GAAP, particularly with regard to the timing of recognition of certain non-cash charges, and | |
| ● | We are overly dependent upon our 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 material weaknesses, we have concluded that we did not maintain effective internal control over financial reporting as of March 31, 2023.
Part II. OTHER INFORMATION
Item 1. 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.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
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 5. Other Information
None.
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Item 6. Exhibits
The following are being filed as exhibits to this report:
Exhibit Number |
Description | |
| 31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith). | |
| 31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith). | |
| 32** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
| 101* | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |
| * | Filed herewith | |
| ** | furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 15, 2023 | Yunhong CTI Ltd. | |
By:
|
/s/ Frank J. Cesario | |
| Frank J. Cesario | ||
| Chief Executive Officer | ||
| By: | /s/ Frank J. Cesario | |
| Frank J. Cesario | ||
| Acting Chief Financial Officer | ||
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