Yunhong Green Cti Ltd 10-K for FY2021
Yunhong Green Cti Ltd. (YHGJ)
About this 10-K
Yunhong Green Cti Ltd filed this 10-K on April 15, 2022, covering the fiscal year ended December 31, 2021 (FY2021).
Headline figures
Fiscal year ended December 31, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $24.09M
- up 14.4% from $21.06M a year earlier
- Net loss
- $8.27M
- compared with a net loss of $4.43M a year earlier
- Diluted EPS
- -$2.01
- compared with -$1.52 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year 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
YUNHONG CTI LTD.
(Exact name of registrant as specified in its charter)
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| incorporation or organization) | ||
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| (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 | Ticker symbol(s) | Name of each exchange on which registered |
| | | The |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
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 has fi led a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting fi rm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Based upon the closing price of $2.60 per share of the Registrant’s Common Stock as reported on NASDAQ Capital Market tier of The NASDAQ Stock Market on June 30, 2021, the aggregate market value of the voting common stock held by non-affiliates of the Registrant was then approximately $
The number of shares outstanding of the Registrant’s Common Stock as of March 25, 2022 was
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders (the “2022 Proxy Statement”) is incorporated by reference in Part III of this Form 10-K to the extent stated herein. The 2022 Proxy Statement, or an amendment to this Form 10-K, will be filed with the SEC within 120 days after December 31, 2021. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof.
INDEX
FORWARD LOOKING STATEMENTS
| Part I |
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| Item No. 1 |
1 |
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| Item No. 1B |
10 |
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| Item No. 2 |
11 |
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| Item No. 3 |
11 |
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| Part II |
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| Item No. 5 |
11 |
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| Item No. 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
12 |
| Item No. 7A |
Quantitative and Qualitative Disclosures Regarding Market Risk |
20 |
| Item No. 8 |
20 |
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| Item No. 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
20 |
| Item No. 9A |
20 |
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| Item No. 9B |
21 |
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| Part III |
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| Item No. 10 |
21 |
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| Item No. 11 |
26 |
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| Item No. 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
29 |
| Item No. 13 |
31 |
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| Item No. 14 |
31 |
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| Part IV |
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| Item No. 15 |
32 |
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Annual Report on Form 10-K. We disclaim any intent or obligation to update any forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, our participation in highly competitive markets, potential changes in the cost or availability of raw materials, our dependence on a limited number of suppliers, the possible inability to obtain an adequate supply of raw materials, our reliance on a limited number of key customers, the loss of one or more of our key customers, changing consumer demands, developments or changes in technology, risks of international operations and political environments, dependence on our intellectual property, compliance with federal, state or local regulations, the resolution of litigation or other legal proceedings to which we may become involved, restrictions included in the Company’s credit facility, the availability of funds under the Company’s credit facility, damage to or destruction of one or both of the Company’s principal plants, our ability to service our indebtedness, our ability to invest in needed plant or equipment.
PART I
Business Overview
We develop, produce, distribute and sell a number of consumer products throughout the United States and in several other countries, and we produce film products for commercial and industrial uses in the United States. Many of our products utilize flexible films and, for a number of years, we have been a leading developer of innovative products which employ flexible films including novelty balloons, pouches and films for commercial packaging applications.
Our principal lines of products include:
Novelty Products consisting principally of foil and latex balloons and other inflatable toy items; and
Flexible Films for food and other commercial and packaging applications.
In addition to these principal product lines, for the past several years, we have engaged in the assembly and sale of Candy Blossoms (small gift bouquets of arranged candy items often including ribbons and/or a small foil balloon).
We leverage our technology to design and develop proprietary products which we develop, market and sell for our customers. We have been engaged in the business of developing flexible film products for over 40 years and have acquired significant technology and know-how in that time. We currently hold several patents related to flexible film products, including specific films, zipper closures, valves and other features of these products.
We print, process and convert flexible film into finished products and we produce latex balloons and novelty items. Our principal production processes include:
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Coating and laminating rolls of flexible film. Generally, we adhere polyethylene film to another film such as nylon or polyester; |
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Printing film and latex balloons. We print both plastic and latex films, with a variety of graphics, for use as packaging film or for balloons; |
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Converting printed film to balloons; |
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Converting film to flexible containers; |
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Producing or reselling latex balloons and other latex novelty items; and |
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Assembling and inflating of novelty products and balloons and Candy Blossoms. |
In 1978, we began manufacturing metalized balloons (often referred to as "foil" balloons), which are balloons made of a base material (usually nylon or polyester) often having vacuum deposited aluminum and polyethylene coatings. These balloons remain buoyant when filled with helium for much longer periods than latex balloons and permit the printing of graphic designs on the surface. In 1985, we began marketing latex balloons and, in 1988, we began manufacturing latex balloons. In 1999, we acquired an extrusion coating and laminating machine and began production of coated and laminated films, which we have produced since that time.
For more than 20 years, we have been engaged in the coating, laminating and printing of flexible films for our novelty and container products and for the production of laminated and printed films we supply to others.
We market and sell our foil and latex balloons and related novelty items throughout the United States, Canada and Mexico and in a number of other countries. We supply directly to retail stores and chains and through distributors, who in turn sell to retail stores and chains. Our balloon and novelty products are sold to consumers through a wide variety of retail outlets including general merchandise, discount and drugstore chains, grocery chains, card and gift shops and party goods stores, as well as through florists and balloon decorators.
Most of our foil balloons contain printed characters, designs and social expression messages, such as “Happy Birthday,” “Get Well” and similar items. We may obtain licenses from time to time for well-known characters and print those characters and messages on our balloons.
We provide customized laminated films and printed films to customers who utilize the film to produce bags or pouches for the packaging of food, liquids and other items. In 2014, we began assembling and producing Candy Blossoms - containers including candy items and, often, air-inflated balloons.
In 2021, our revenues from our product lines, as a percent of total revenues were:
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Novelty Products |
76% of revenues |
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Flexible Film Products |
10% of revenues |
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Candy Blossoms and Other Products |
14% of revenues |
We are an Illinois corporation with our principal offices and plant at 22160 N. Pepper Road, Lake Barrington, Illinois.
Business Strategies and Developments
Our business strategies, and recent developments related to our business, include:
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Management. During December 2019, Mr. Frank Cesario, who joined CTI during 2017 as Chief Financial Officer, became both President and Chief Executive Officer. During 2020 we changed our name to Yunhong CTI Ltd., as we received a significant investment from LF International Pte, Ltd. Mr. Yubao Li, Chairman of the Yunhong China Group, became a director and then Chairman of Yunhong CTI Ltd. He replaced Mr. Cesario in September 2020 as Chief Executive Officer, at which time Mr. Cesario retired from the Company. During 2020 Ms. Jana Schwan became our Chief Operating Officer after having served as Vice President of Operations and a number of other roles during her 20 years with the Company. During 2021, Mr. Cesario rejoined the Company’s Board of Directors. During January 2022, Mr. Cesario rejoined the Company as Chief Executive Officer, with Mr. Li retaining the role of Chairman of the Board of Directors. |
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Financing. From 2018 through 2020 we had multiple events of default with our primary lender, resulting in the Company incurring substantial penalties and fees. In addition, the Company had to enter into several forbearance agreements, pursuant to which the lender agreed to not take action against the Company for its default. During 2020 we entered into several individual securities purchase agreements with certain accredited investors for the purchase of shares of our Series A and B Convertible Preferred Stock. We sold Series C and D Convertible Preferred Stock during 2021 and executed a sale / leaseback transaction of our Lake Barrington, IL property. We entered into a smaller credit facility with a new entity during September 2021 as we repaid our prior lender and terminated that prior credit facility. |
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Strategy. Our management determined to focus on achieving growth and profitability within the current scope of our core product lines – foil balloons and related products – from our United States based business. We reviewed our operations and, during 2019, decided to sell or liquidate our subsidiaries in the UK and Europe. We attempted to sell our subsidiary in Mexico in early 2020 and it was ultimately not successful at the time (during to the Covid-19 pandemic). That effort was ultimately completed during October 2021. In an attempt to increase profitability, we announced an intention to relocate our warehousing and light assembly facility from Lake Zurich, IL to Laredo, TX during 2020. Due to certain factors including the Covid-19 pandemic, we instead relocated this facility to Elgin, IL during March 2021 and are no longer pursuing a relocation to Texas. |
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Focus on our Core Assets and Expertise. We have been engaged in the development, production and sale of film and container products for 40 years and have developed assets, technology and expertise which, we believe, enable us to develop, manufacture, purchase, market and sell innovative products of high quality within our areas of knowledge and expertise. We have focused our efforts on these core assets and areas of expertise – film novelty products, specialty film products, laminated films and printed films – to develop new products, to market and sell our products and to build our revenues. |
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Develop New Products, Product Improvements and Technologies. We engage in research, design, innovation and development for the purpose of developing and improving products, materials, methods and technologies within our core product categories. We work to develop and identify new products, to improve existing products and to develop new technologies within our core product areas in order to enhance our competitive position and increase our sales. We seek to leverage our technology to develop innovative and proprietary products. In our novelty product lines, our development work includes new designs, new character licenses, new product developments, new materials and improved production methods. We work with customers to develop custom film products which serve the unique needs or requirements of the customer. Now that we are connected to the Yunhong China Group, we plan to look for opportunities to add value and grow with group members. |
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Develop New Channels of Distribution and New Sales Relationships. We seek to organically develop new channels of distribution and new sales relationships, both for existing and new products. Over the past several years, we have developed new distributors and customers for our products in the United States and in Europe, Mexico, Latin America and Australia. We also look to leverage resources within the Yunhong China Group for a wide range of topics, from sales to sourcing. |
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Product and Line Extensions. We intend to pursue new product lines and product line extensions, through internal developments. |
Products
Foil Balloons. We have designed, produced and sold foil balloons since 1979 and, we believe, are one of the largest manufacturers of foil balloons in the United States. Currently, we produce several hundred foil balloon designs, in different shapes and sizes.
In addition to size and shape, a principal element of our foil balloon products is the printed design or message contained on the balloon. These designs may include figures and licensed characters, but frequently are of our own design. We recognize that consumer trends and preferences, and competing products, are constantly changing. In order to compete effectively in this product line we must constantly innovate and develop new designs, shapes and products.
Latex Balloons. Our former subsidiary in Guadalajara, Mexico, Flexo Universal, S. de R.L. de C.V. (“Flexo Universal”) manufactures latex balloons in a wide variety of sizes and colors. Many of these balloons are marketed under the name Partyloons® and balloons are also marketed on a private label basis. We also manufactured toy balloon products including punch balls, water bombs and "Animal Twisties." Flexo Universal was sold during October 2021. The Company currently sources latex products from a foreign supplier and resells those products to customers that seek both foil and latex solutions.
Packaging Films and Custom Film Products. A large and increasing number of both consumer and commercial products are packaged in pouches or containers utilizing flexible films. Often such containers include printed labels and designs. We produce and sell films that may be utilized for the packaging of a wide variety of products and liquids. We laminate, extrusion coat and adhesive coat flexible films for these purposes and we provide flexographic printing for the films we produce. We can produce a variety of customized film products, and printing services, to meet the specific packaging needs of a wide variety of customers.
Other Products. In 2014, we began assembly and sale of our Candy Blossom product line (typically a presentation of candy with a balloon in a decorate arrangement for gifting). We have since supplemented this product line with related products.
Markets
Foil Balloons
The foil balloon came into existence in the late 1970s. During the 1980s, the market for foil balloons grew rapidly. Initially, the product was sold principally to individual vendors, small retail outlets and at fairs, amusement parks, shopping centers and other outdoor facilities and functions. Foil balloons remain buoyant when filled with helium for extended periods of time and they permit the printing and display of graphics and messages. As a result, the product has significant appeal as a novelty and message item. Foil balloons became part of the "social expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, we and other participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of the balloons to retail outlets including grocery, general merchandise, discount and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators. These outlets now represent the principal means for the sale of foil balloons throughout the United States and in a number of other countries, although individual vendors remain a means of distribution in certain areas.
Foil balloons are now sold in virtually every region of the world. The United States remains the largest market for these products.
Foil balloons are sold in the United States and foreign countries directly by producers to retail outlets and through distributors and wholesalers. Often the sale of foil balloons by the wholesalers/distributors is accompanied by related products including latex balloons, floral supplies, candy containers, mugs, plush toys, baskets and a variety of party goods.
Latex Balloons
For a number of years, latex balloons and related novelty/toy latex items have been marketed and sold throughout the United States and in many other countries. Latex balloons are sold as novelty/toy items for decorative purposes, as part of floral designs and as party goods and favors. In addition to standard size and shape balloons, inflatable latex items include punch balls, water bombs, balloons to be twisted into shapes, and other specialty designs. Often, latex balloons include printed messages or designs.
Latex balloons are sold principally in retail outlets, including party goods stores, general merchandise stores, discount chains, gift stores and drugstore chains. Latex balloons are also purchased by balloon decorators and floral outlets for use in decorative or floral designs. Printed latex balloons are sold both in retail outlets and for balloon decoration purposes including floral designs.
Latex balloons are sold both through distributors and directly to retail outlets by the producers.
Printed and Specialty Films
The industry and market for printed and specialty films are fragmented and include many participants. There are hundreds of manufacturers of printed and specialty film products in the United States and in other markets. In many cases, companies who provide food and other products in film packages also produce or process the films used for their packages. The market for the Company's film products consists principally of companies who utilize the films for the packaging of their products, including food products and other items, usually by converting the film to a flexible container.
Marketing, Sales and Distribution
Balloon Products
We work in collaboration with our customers on designs, promotions, and other elements of marketing and selling. Our customers are typically retailers who sell our products to individual consumers. These relationships generally can be terminated unilaterally by either us or our customers. We must maintain good relationships with our customers if this sales model is to be successful.
We market and sell our foil balloon, latex balloon and related novelty products throughout the United States and in a number of other countries. We maintain marketing, sales and support staff and a customer service department in the United States. We sell directly to foreign customers from the United States.
We sell and distribute our balloon products (i) through our sales staff and customer service personnel in the United States, (ii) through a network of distributors and wholesalers, (iii) through several groups of independent sales representatives, and (iv) to retail chains. Our balloon products are generally sold through retail outlets including grocery, general merchandise and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators.
We sometimes engage in advertising and promotional activities to promote the sale of our balloon products. We produce catalogs of our balloon products, and also prepare various flyers and brochures for special or seasonal products, which we disseminate to customers, potential customers and others. We maintain websites which show images of our products.
Printed and Specialty Films
We market and sell printed and laminated films directly and through independent sales representatives throughout the United States. We sell laminated and printed films to companies that utilize these films to produce packaging for a variety of products, including food products, in both solid and liquid form, such as cola syrup, coffee, juices and other items. We seek to identify and maintain customer relationships in which we provide added value in the form of technology or systems.
Other Products
Other products are sold by our internal sales force directly to customers and also by independent sales representatives. These products are generally sold directly to consumers or to retail outlets.
Production and Operations
We conduct our operations at our facilities including: (i) our 68,000 square feet facility in Lake Barrington, Illinois, incorporating our headquarters office, production and warehouse space, (ii) our 69,000 square foot facility in Elgin, Illinois consisting of warehouse, packaging and office space, and (iii) a 73,000 square foot facility in Guadalajara, Mexico, consisting of office, warehouse and production space for Flexo Universal which remained with Flexo Universal upon the sale of that entity in October 2021.
Our production operations include (i) lamination and extrusion coating of films, (ii) slitting of film rolls, (iii) printing on film and on latex balloons, (iv) converting film to completed products including balloons, flexible containers and pouches, (v) producing latex balloon products (until Flexo Universal was sold in October 2021), (vi) inflating of air-filled balloons, and (vii) assembling Candy blossoms. We perform all of the lamination, extrusion coating and slitting activities in our Lake Barrington, Illinois plant and produced all of our latex balloon products at our Guadalajara, Mexico plant. We print on films in Lake Barrington, Illinois and we printed on latex balloons in Guadalajara, Mexico. We complete air-filling and assembly of balloons in all our facilities except Lake Barrington, Illinois. We assemble Candy blossoms in our Elgin, Illinois facility.
We warehouse raw materials in Lake Barrington, Illinois and we warehouse finished goods at our facilities in Lake Barrington, Illinois and Elgin, Illinois. We maintain customer service and fulfillment operations at each of our warehouse locations. We conduct sales operations for the United States and for all other markets at the Lake Barrington, Illinois facility. In addition to warehouse and sales activities at these locations, we engage in some assembly, balloon inflation and related activities.
We maintain a graphic arts and development department at our Lake Barrington, Illinois facility which designs our balloon products and graphics. Our creative department operates a networked, computerized graphic arts system for the production of these designs and of printed materials including catalogues, advertisements and other promotional materials. As many of our products are custom designed or created to fulfill promotional schedules, we sometimes have excess inventory that must be sold at a discount or disposed of. Any such disposition will typically negatively impact our profit margin.
We conduct administrative and accounting functions at our headquarters in Lake Barrington, Illinois.
Raw Materials
The principal raw materials we use in manufacturing our products are (i) petroleum or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii) latex, and (iv) printing inks. The cost of raw materials represents a significant portion of the total cost of our products, with the result that fluctuations in the cost of raw materials have a material effect on our profitability. During the past several years, we have experienced significant fluctuations in the cost of these raw materials. We do not have any long-term agreements for the supply of raw materials and may experience wide fluctuations in the cost of raw materials in the future. Further, although we have been able to obtain adequate supplies of raw materials in the past, there can be no assurance that we will be able to obtain adequate supplies of one or more of our raw materials in the future.
Many of the foil balloons we produce and sell are intended to be filled with helium in order to be buoyant. Over the past several years, the price of helium has fluctuated substantially and the availability of helium has, on occasion, been limited. During 2018 and 2019, the availability of helium declined and the cost of helium increased. The supply of helium has since improved significantly. Any future occurrence of limited availability and/or an increase in the cost of helium could adversely affect our sales of foil balloons.
Competition
The balloon and novelty industry is highly competitive, with numerous competitors. We believe the principal manufacturers of foil balloons whose products are sold in the United States including Anagram International, Inc., Pioneer Balloon Company, Convertidora International S.A. de C.V., and Betallic, LLC. Several companies market and sell foil balloons designed by them and manufactured by others for them. In addition, there are several additional foil balloon manufacturers in Europe and China who participate in our markets.
We compete for the sale of latex balloons in the United States, Canada, Mexico, Latin America, the United Kingdom, Australia and Europe. There are a number of other companies situated in the United States, Mexico, Asia, South America and Europe who manufacture latex balloons and with whom we compete in the markets in which we participate. The markets are highly competitive with respect to price, quality and terms.
The market for films, packaging, and custom products is fragmented, and competition in this area is difficult to gauge. However, there are numerous participants in this market and the Company can expect to experience intense quality and price competition.
Many of the companies in these markets offer products and services that are the same or similar to those offered by us and our ability to compete depends on many factors within and outside our control. There are a number of well-established competitors in each of our product lines, several of which possess substantially greater financial, marketing and technical resources and have established extensive, direct and indirect channels of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and services than we can. Competitive pressures include, among other things, price competition, new designs and product development and copyright licensing.
Patents, Trademarks and Copyrights
We have developed or acquired a number of intellectual property rights which we believe are significant to our business. As of December 31, 2021, we held 6 issued patents in the United States and 7 issued patents in foreign countries. These patents are scheduled to expire at various times during the 2020s. While these intellectual property rights are helpful, their degree of protection is uncertain. Competitors may violate our intellectual property rights, forcing us to decide whether to challenge them. Such rights may or may not withstand challenge. Conversely, entities may charge us with violating their intellectual property rights. Failure to protect our rights, or conflict with the rights of one or more other entities, may negatively impact our financial and competitive position.
Proprietary Designs and Copyright Licenses. We design the shapes and graphic designs of most of our foil balloon products.
Trademarks. We own five registered trademarks in the United States relating to our balloon products. Some of these trademarks are registered in foreign countries, principally in the European Union.
Patent Rights. We own, or have license rights under, or have applied for, patents related to our balloon products, certain film products and certain flexible container products.
Research and Development
We maintain a product development and research group for the development or identification of new products, product designs, product components and sources of supply. Research and development includes (i) creative product development and design, (ii) creative marketing, and (iii) engineering development. During each of the fiscal years ended December 31, 2021 and 2020, we estimate that the total amount spent on research and development activities was approximately $206,000 and $317,000, respectively.
Employees
As of December 31, 2021, the Company had 66 full-time employees in the United States, of whom 16 are executive or supervisory, 2 are in sales, 35 are in manufacturing or warehouse functions and 13 are clerical. The Company is not a party to any collective bargaining agreement in the United States, has not experienced any work stoppages, and believes that its relationship with its employees is satisfactory.
Beginning November 2018, the Company experienced severe difficulty in securing adequate seasonal workers in its US operations, forcing it to pay substantially higher costs in the form of overtime and a holiday premium. The Company expects its local labor market in the US (near Chicago) to continue to become more costly over time, which, if not changed, would negatively impact its future profitability.
Regulatory Matters
Our manufacturing operations in the United States are subject to the U.S. Occupational Safety and Health Act ("OSHA"). We believe we are in material compliance with OSHA. The Company generates liquid, gaseous and solid waste materials in its operations in Lake Barrington, Illinois and the generation, emission or disposal of such waste materials are, or may be, subject to various federal, state and local laws and regulations regarding the generation, emission or disposal of waste materials. We believe we are in material compliance with applicable environmental rules and regulations. Several states have enacted laws limiting or restricting the release of helium filled foil balloons. We do not believe such legislation will have any material effect on our operations.
An increasing number of regulations and actions relate to the integrity and security of individually identifiable data. Additionally, we require the effective use of data in running our business. While we are not aware of losses in the past, access of such data by unauthorized persons may expose us to costs, fines, penalties, and loss of customer confidence.
International Operations
We conducted operations in one location outside of the United States until October 2021:
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Flexo Universal, a 99%-owned subsidiary in Guadalajara, Mexico. Flexo Universal maintains a plant, offices and warehouse in Guadalajara, Mexico where it produces latex and foil balloons and print latex balloons. Flexo Universal conducts sales, warehousing and fulfillment operations, servicing principally the Company and other customers in the United States, Mexico, Latin America and certain customers in Europe. |
Available Information
We maintain our corporate website at www.ctiindustries.com and we make available, free of charge, through this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with, or furnish to, the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we electronically file that material with, or furnish it to, the SEC. You may also read and copy material filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and you may obtain information on the operation of the Public Reference Room by calling the SEC in the U.S. at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov, which contains reports, proxy and information statements and other information that we file electronically with the SEC. Our website also includes corporate governance information, including our Code of Ethics and our Board Committee Charters. The information contained on our website does not constitute a part of this report.
Item No. 1A – Risk Factors
Our business and results of operations have been and may continue to be negatively impacted by the spread of COVID-19.
We sell our products throughout the United States and in many foreign countries and may be impacted by public health crises beyond our control. This could disrupt our operations and negatively impact consumer spending and confidence levels, and supply availability and costs, all of which can affect our financial results, condition, and outlook. Our customers, suppliers and distributors may experience similar disruption. Importantly, the global pandemic resulting from COVID-19 has disrupted global health, economic and market conditions
Throughout 2021 and into 2022 the landscape improved from 2020, but the issue continues to drive elements of disruption in the ability to travel, attract and retain workers, manage production configurations and protocols, the supply chain and customer base. While we cannot predict the duration or scope of the COVID-19 pandemic, the resurgence of infections in one or more markets, or the impact of vaccines across the globe, the COVID-19 pandemic has negatively impacted our business and is expected to continue to impact our financial results, condition and outlook in a way that may be material.
COVID-19 has also delayed certain strategic transactions the Company intended to close during 2020, most notably its attempted sale of Flexo Universal which was ultimately realized during October 2021 and the potential relocation of certain activities to the Laredo, Texas area, which is no longer a consideration of the Company.
Our business and results of operations have been and may continue to be negatively impacted by supply chain disruptions and inflationary pressure.
2021 saw material shortages, supply chain interruption, and reduced ability to transport goods throughout the United States and on a global scale. These pressures forced us to take steps to ensure the availability of product, including buying materials at higher prices and more aggressively managing lead times. Despite these efforts, our ability to fulfill customer demands was challenged. We also were forced to pass cost increases on to customers in the form of price increases, which threatened our ability to maintain sales volume. While we believe we were largely successful in passing along these increased costs, such pressures may negatively impact our financial results and book of business going forward.
Item No. 1B – Unresolved Staff Comments
As of the filing of this Annual report on Form 10-K, we had no unresolved comments from the staff of the Securities and Exchange Commission.
We executed a sale and leaseback transaction during 2021 on our principal plant and offices located in Lake Barrington, Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility includes approximately 68,000 square feet of office, manufacturing and warehouse space. The lease is for ten years, and annual rent increases from $500,000 the first year to $652,000 during the final year.
During 2021 we entered into a sublease agreement, expiring on August 30, 2022 to rent approximately 69,000 square feet of warehouse and assembly space in Elgin, Illinois. The annual lease cost for this facility is $408,000. The Company is currently engaged in discussions to extend that lease.
In 2017, Flexo Universal entered into a 5-year lease agreement, expiring March 2022, for the lease of approximately 73,000 square feet of manufacturing, warehouse and office space in Guadalajara, Mexico. The lease cost for these premises is 493,090 Mexican Pesos per month (approximately $20,000 per month). This property continues with Flexo Universal after the October 2021 sale of that subsidiary.
We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our existing facilities provide sufficient production capacity for our present needs and for our presently anticipated needs in the foreseeable future. We also believe that, with respect to leased properties, upon the expiration of our current leases, we will be able to either secure renewal terms or to enter into leases for alternative locations at market terms.
Item No. 3 – Legal Proceedings
The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.
Benchmark Investments, Inc. v. Yunhong CTI Ltd., Case No. 1:21-cv-02279, was filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on the Company on March 31, 2021. The complaint seeks damages in excess of $500,000. The Company has filed its Answer and Counterclaim to the complaint. The matter is currently still pending. The Company is currently unable to estimate the probability of any potential loss and thus no accrual has been recorded.
During February 2022, Engie Resources LLC filed a claim against the Company, seeking payment of $94,000 related to utilities provided during 2019. During March 2022, the parties agreed to settle all claims for a series of payments to be made by the Company during 2022 totaling $75,000.
Item No. 4. – Mine Safety Disclosures
Not Applicable.
PART II
Item No. 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company's common stock was admitted to trading on the NASDAQ SmallCap Market (now the NASDAQ Capital Market) under the symbol “CTIB” on November 5, 1997.
As of December 31, 2021 there were approximately 400 holders of record of the Company’s Common Stock. The Company’s total number of beneficial owners of common stock of the Company was approximately 30.
The Company did not pay any cash dividends on its Common Stock during 2021 or 2020 and has no plans to pay dividends in the foreseeable future. Under the terms of the Company’s current loan agreements, the amount of dividends the Company may pay is limited by the terms of the financial covenants. During 2022 the Company received two deficiency notices from NASDAQ – one for the failure to hold an annual meeting of shareholders during 2021, and the other for failure to maintain the required $1 bid price during a 30 day period in 2022. The Company must hold, and plans to hold, an annual meeting on or before June 17, 2022 to satisfy the first deficiency, and has 180 days, with a possible further extension of 180 days, to satisfy the bid price issue. On March 30, 2022, the NASDAQ informed the Company that it had regained compliance with the minimum bid price issue and that the matter was resolved.
On March 28, 2022, our common stock closed at $1.19 per share.
Equity Compensation Plan Information
There were no stock option incentive plans outstanding as of December 31, 2021. Effective January 2022, the Company issued an inducement grant to its newly hired Chief Executive Officer for 250,000 shares of restricted stock. 25,000 of those shares vested during January 2022, while the remaining shares are subject to achievement of certain performance conditions.
Item No. 6 – Selected Financial Data
We are a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item.
Item No. 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company produces film products for novelty, packaging container and custom film product applications. These products include foil balloons, latex balloons (sourced from an external party) and related products, films for packaging applications, and custom film products. We produce all of our film products for packaging and container applications at our facilities in Lake Barrington, Illinois. Substantially all of our film products for packaging applications and flexible containers for packaging and storage are sold to customers in the United States. We market and sell our novelty items – principally foil balloons and latex balloons – in the United States and a number of additional countries. In addition, the Company assembles and sells Candy Blossoms (containers of arranged candy items) in the United States.
As determined by the Board of Directors beginning in 2019, we have been exiting our foreign operations in order to focus on our North America operations, particularly on foil balloons and related products. The sales entity in the UK was liquidated in 2019. The sales and distribution entity in Germany was fully closed during 2021. As noted herein, we sold Flexo Universal, our Mexican manufacturing subsidiary, during October 2021. Additionally, we stopped selling our vacuum sealing products as of March 30, 2020, after allowing the related license agreement to expire. More discussion is available in discontinued operations in this Annual Report on Form 10-K (see Note 23).
We have also changed our capital structure, beginning January 2020. This includes:
Series A 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 Chairman, 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 as of June 30, 2021, 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, the latter two of whom retired from our Board of Directors during January 2022.
Series B 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). In March 2021, the terms of the Series B Preferred were modified to eliminate the ability of the holder to redeem the Series B Preferred.
Series C Preferred Stock
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by Company director, Chairman, President and Chief Executive Officer, 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.
Series D 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, which was ultimately completed. The Series D Preferred have an initial stated value of $10.00 per share and liquidation preference over common stock. The Series D 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. We issued 170,000 shares of Series D Preferred for an aggregate price of $1.5 million. Additionally, 128,000 warrants were issued pursuant to this transaction which are convertible into our common stock at the lesser of $1.75 per share or 85% of the volume weighted average price of the shares over the ten trading days prior to conversion.
Our revenues from continuing operations from each of our product categories in each of the past two years have been as follows:
| Twelve Months Ended |
||||||||||||||||
| December 31, 2021 |
December 31, 2020 |
|||||||||||||||
| $ | % of |
$ | % of |
|||||||||||||
| Product Category |
(000) Omitted |
Net Sales |
(000) Omitted |
Net Sales |
||||||||||||
| D |
||||||||||||||||
| Foil Balloons |
18,235 | 76 | % |
16,853 | 80 | % |
||||||||||
| Latex Balloons |
94 | 0 | % |
7 | 0 | % |
||||||||||
| Film Products |
2,386 | 10 | % |
804 | 4 | % |
||||||||||
| Other |
3,370 | 14 | % |
3,395 | 16 | % |
||||||||||
| Total |
24,086 | 100 | % |
21,059 | 100 | % |
||||||||||
Our primary expenses include the cost of products sold and selling, general and administrative expenses.
Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead expenses such as supervisory labor, depreciation, utilities expense and facilities expense directly associated with production of our products, warehousing and fulfillment expenses and shipping costs relating to the shipment of products to customers. Cost of products sold is impacted by the cost of the raw materials used in our products, the cost of shipping, along with our efficiency in managing the production of our products.
Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation of equipment and facilities utilized in administration, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits, the cost of regulatory compliance and other administrative costs.
Purchases by a limited number of customers represent a significant portion of our total revenues. During 2021 and 2020, respectively, sales to our top 10 customers represented 85% and 85%, respectively, of net revenues for each year. During 2021 and 2020, there were two customers to whom our sales represented more than 10% of net revenues.
Our principal customer sales for 2021 and 2020 were:
| Customer |
Product |
2021 Sales |
% of 2021 Revenues |
2020 Sales |
% of 2020 Revenues |
|||||||||||||
| Wal-Mart |
Balloons; Candy Blossoms |
$ | 4,537,000 | 19 | % |
$ | 4,973,000 | 24 | % |
|||||||||
| Dollar Tree Stores |
Balloons |
$ | 13,813,000 | 57 | % |
$ | 12,826,000 | 61 | % |
|||||||||
The loss of one or both of these principal customers, or a significant reduction in purchases by one or both of them, could have a material adverse effect on our business.
We generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum amount of product from us.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Net Sales
For the fiscal year ended December 31, 2021, consolidated net sales from continuing operations of the sale of all products were $24,086,000 compared to consolidated net sales of $21,059,000 for the year ended December 31, 2020, an increase of 14% as more fully described below.
Sales of foil balloons from continuing operations were $18,235,000 in 2021 and $16,853,000 in 2020, a increase of 8%. Our largest customer for foil balloons was Dollar Tree Stores. The remaining sales were made to hundreds of customers including distributors and retail stores.
Sales of latex balloons from continuing operations were less than $100,000 in each period. The decrease from prior years resulted principally from the sale of Flexo Universal, our latex balloon manufacturing facility. We intend to continue to sell outsourced latex balloons in order to offer a complete product line, but it will be much smaller than prior years.
Sales of film products from continuing operations were $2,386,000 in 2021 and $804,000 in 2021, an increase of nearly 200%. Our largest customer in this area underwent a merger and has now come back with more regular purchases. The inability for some vendors to meet customer requirements has also helped us gain more business in this area.
Sales of other products from continuing operations decreased to $3,370,000 in 2021 from $3,395,000 in 2020, for virtually no difference from year to year. This category includes sales of Candy Blossoms.
Cost of Sales
Cost of sales from continuing operations increased to $20,321,000 in 2021 from $17,970,000 in 2020, an increase of 13%. The increase in cost of sales was primarily attributable to the increase in sales, and secondarily related to the broad increase in prices during 2021, which occurred faster than the Company could effectively update its pricing.
General and Administrative Expenses
General and administrative expenses from continuing operations increased to $3,815,000 in 2021 from $3,655,000 in 2020, an increase of 5%. We had financial services consulting expenses, forbearance costs, and other financing costs of approximately $0.8 million that concluded when we changed lenders in September 2021.
Selling and Marketing
Selling expenses from continuing operations increased to $131,000 in 2021 from $129,000 in 2020, as total sales increased. Marketing and advertising expense decreased to $323,000 in 2021, from $350,000 in 2020, a decrease of 8%. This area was also impacted by increased sales volume, but with fewer ancillary expenses as many customers were coming back from Covid related issues.
Other Income or Expense
During 2021, we incurred net interest expense from continuing operations of $564,000 compared to net interest expense of $1,167,000 during 2020. The decrease in interest expense was primarily attributable to the lower average outstanding balance of debt in 2021 as compared to 2020. Additionally, in 2020, we recorded a $1,047,700 net gain on the forgiveness of our Payroll Protection Plan loan.
During 2021 we engaged in a Sale and Leaseback transaction of our principal headquarters in Lake Barrington, IL. This transaction resulted in a gain of $3.4 million. We also recorded an expense related to the disposition of our Flexo Universal subsidiary. We recorded an approximately $10 million expense in Other Expense and a $6 million gain in Other Comprehensive Income related to this transaction, all non-cash items.
Deemed Dividends on Preferred Stock and Amortization of Beneficial Conversion Feature
In 2020 the Company issued Series A Preferred Stock and Series B Preferred Stock. In connection with these preferred stock issuances, and the related beneficial conversion features, the Company had deemed dividends of $4.4 million in 2020. During 2021, the Company issued Series C Preferred Stock and Series D Preferred Stock. In connection with all of these preferred stock issuances, and the related beneficial conversation features, the Company had deemed dividends of $3.6 million during 2021. Although these deemed dividends do not impact Net loss attributable to Yunhong CTI, Ltd., they do impact Net loss attributable to Yunhong CTI Ltd. Common Shareholders and EPS.
Financial Condition, Liquidity and Capital Resources
Cash (Used In) Provided By Operating Activities
During 2021, cash used by operating activities amounted to ($3,709,000), compared to cash provided by operating activities during 2020 of $1,322,000. Significant changes in working capital items affecting cash flow used in operating activities were:
| ● |
Depreciation and amortization of $462,000 compared to depreciation and amortization for 2020 of $388,000; |
|
| ● |
An increase in inventories of $604,000 compared to an decrease of inventories of ($1,828,000) in 2020; |
|
| ● |
An increase in accounts receivable of $1,673,000 compared to a decrease in accounts receivable of ($3,991,000) in 2020; |
|
| ● |
A decrease in prepaid expenses and other assets of $132,000 compared to an increase in prepaid expenses and other assets of $249,000 in 2020; and |
|
| ● |
A decrease in trade payables of ($1,173,000) compared to a decrease in trade payables of ($1,361,000) in 2020. |
Cash Provided By (Used In) Investing Activities
During fiscal 2021, cash provided by investing activities amounted to $3,378,000 compared to cash used in investing activities during fiscal 2020 of ($115,000).
Cash Provided By (Used In) Financing Activities
During fiscal 2021, cash provided by financing activities amounted to $626,000, compared to cash used in financing activities of ($2,267,000) during fiscal 2020
As discussed in Note 3, in the Series A Offering, during 2020 the Company sold 500,000 shares of Series A Preferred and 400,000 shares of common stock for aggregate gross proceeds of $5,000,000.
In November 2020, we issued 170,000 shares of Series B Preferred for an aggregate purchase price of $1,500,000.
In October 2020, we received an advance of $1,500,000 from an investor. In January 2021, we finalized the transaction with the investor and issued 170,000 shares of newly authorized Series C Preferred Stock.
In June 2021, the Company received $1.5 million from an investor as an advance on a proposed sale of Series D Redeemable Convertible Preferred Stock, which has since occurred. We issued 170,000 shares of newly authorized Series D Preferred Stock and 128,000 warrants to purchase our common stock.
Going Concern, Liquidity and Financial Condition
The Company’s financial statements are prepared using account principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a cumulative net loss from inception to December 31, 2021 in excess of $20 million. The accompanying financial statements for the year ended December 31, 2021 have been prepared assuming the Company will continue as a going concern. The Company’s cash resources may be insufficient to meet its anticipated needs during the next twelve months. The Company may require additional financing to fund it future planned operations. The ability of the Company to continue as a going concern is dependent on the Company’s execution of its business plans and the ability to raise any needed additional capital at acceptable terms to the Company. While Management plans to mitigate this issue with improved performance now that it has disposed of subsidiaries and their related losses, there can be no guarantee this will be successful. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
During December 2017, we entered in new financing agreements with PNC Bank, National Association (“PNC”). The financing agreements with PNC (the “PNC Agreements”) included a $6 million term loan and an $18 million revolving credit facility (the “Revolving Credit Facility”), with a credit facility termination date of December 2022. Available credit under the Revolving Credit facility was determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).
We notified PNC of our failure to meet certain financial covenants and conditions during multiple occasions between 2018 and 2021, resulting in amendments to the loan documents, and in some cases forbearance agreements, along with related fees, penalties and other conditions. Pursuant to an April 2021 forbearance agreement, the Company agreed to pay PNC a Forbearance Fee of $1,000,000. Provided, however, that, so long as no event of default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by $1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates the Equity Investment (as defined in the agreement) by June 30, 2021, the Forbearance Fee shall be reduced by $250,000, to $750,000, and (ii) if the Company causes all of the obligations under the Loan Agreement to be paid in full, in cash, on or before September 30, 2021, the Forbearance Fee shall be reduced by an additional $500,000, to $250,000. As the Company repaid all obligations under the Loan Agreement by September 30, 2021 and the Equity Investment was consummated by June 30, 2021, the forbearance fee was $250,000. During 2021, the Company recorded a forbearance expense of $250,000.
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 PNC 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 (3.25% as of September 30, 2021), 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.
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 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 January 1, 2019, the Company had a note payable to John H. Schwan, Director and former Chairman of the Board, for $1.6 million, including accrued interest. This loan accrues interest, is due on demand, 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 $1.0 million. The loan and interest payable to Mr. Schwan amounted to $1.2 million and $1.1 million as of December 31, 2021 and December 31, 2020, respectively. No payments were made to Mr. Schwan during 2020 or 2021. Interest expense related to this loan amounted to approximately $70,000 and $65,000 for the twelve months ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, the Company had a note payable to Alex Feng for $166,667. This loan accrues interest at 3% and is subordinate to the Senior Facilities. The subordination agreement signed September 30, 2021 changes the term of the maturity date from November 2023 to March 2024 and payment date starting April 2022.
In October 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series C Redeemable Convertible Preferred Stock. As of December 31, 2020, the Company was in the process of negotiating and finalizing the terms of the arrangement, which has since occurred. As the agreement was not finalized as of December 31, 2020, the $1.5 million advance was classified as Advance from Investor within liabilities on the accompanying balance sheet and subsequently reclassified as stockholders equity. During 2021, $1.5 million was received for a series D Redeemable Convertible Preferred Stock and 128,000 warrants to purchase our common stock.
Seasonality
In the foil balloon product line, sales have historically been seasonal. Approximately half of these sales are considered “everyday” in nature while the other half tend to be event driven (certain holidays, graduation season, and other events). The COVID-19 pandemic changed the shape of graduation season for 2020, resulting in a lower demand for balloons during the second quarter 2020, but then a surge of demand related to at-home parties and events. This increase in demand continued into 2021.
Critical Accounting Policies
The financial statements of the Company are based on the selection and application of significant accounting policies which require management to make various estimates and assumptions. The following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operation.
Revenue Recognition. Substantially all of the Company's revenues are derived from the sale of products. With respect to the sale of products, revenue from a transaction is recognized once it has (i) identified the contract(s) with a customer, (ii) identified the performance obligations in the contract, (iii) determined the transaction price, (iv) allocated the transaction price to the performance obligations in the contract, and (v) recognized revenue as the company satisfies a performance obligation. The Company generally recognizes revenue for the sale of products when the products have been shipped and invoiced. In some cases, product is provided on consignment to customers. In those cases, revenue is recognized when the customer reports a sale of the product.
The Company adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.
The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment and write-off histories. Our credit risks are continually reviewed, and management believes that adequate provisions have been made for doubtful accounts. However, unexpected changes in the financial condition of customers or changes in the state of the economy could result in write-offs which exceed estimates and negatively impact our financial results.
Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted at the time of introduction of a new product or design, periodically and at year-end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As of December 31, 2021, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of $290,000. As of December 31, 2020, the amount of the reserve was $311,000. In addition, on a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, charges reserve for the value of such inventory. We record freight income as a component of net sales and record freight costs as a component of cost of goods sold.
Valuation of Long-Lived Assets. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property and equipment and goodwill) may be impaired or not recoverable. Significant factors which may trigger an impairment review include: changes in business strategy, market conditions, the manner of use of an asset, underperformance relative to historical or expected future operating results, and negative industry or economic trends. We apply the provisions of generally accepted accounting principles in the United States of America (“U.S. GAAP”) U.S. GAAP, under which goodwill is evaluated at least annually for impairment.
The Company identified an impairment indicator related to the goodwill associated with Clever Container, a VIE that was until June 30, 2019. As a result of an impairment test, the Company fully impaired the goodwill related to Clever in the first quarter of 2019 and recorded an impairment charge of $220,000. In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Flexo. As a result of an impairment test, the Company fully impaired the goodwill related to Flexo in the first quarter of 2019 and recorded an impairment charge of approximately $1 million. We performed a quantitative assessment for the year ended December 31, 2019 in which we considered the assets and liabilities of the Company as one operating segment, both recognized and unrecognized, as well as the cash flows necessary to operate the business relating to the assets and liabilities.
Foreign Currency Translation. All balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts are translated using the average exchange rates for the year-to-date periods. The gains and losses resulting from the changes in exchange rates during the period have been reported in other comprehensive income or loss, except that, on November 30, 2012, the Company determined that it does have an expectation of receiving payment with respect to indebtedness of Flexo Universal to the Company, and accordingly, as of and after that date foreign currency gains and losses with respect to such indebtedness has been reported in the statement of operations. This issue became moot with the sale of Flexo Universal during October 2021, which followed the elimination of other foreign subsidiaries (UK and Germany).
Stock-Based Compensation. We follow U.S. GAAP which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values.
We use the Black-Scholes option pricing model to determine the fair value of stock options which requires us to estimate certain key assumptions. In accordance with the application of U.S. GAAP, we incurred no employee stock-based compensation cost for the year ended December 31, 2021. At December 31, 2021, we had no unrecognized compensation cost relating to stock options. We will have compensation cost related to such equity instruments during 2022, including the inducement grants of restricted stock to the Chief Executive Officer beginning January 2022.
Income Taxes and Deferred Tax Assets. Income taxes are accounted for as prescribed in U.S. GAAP. Under the asset and liability method of U.S. GAAP, the Company recognizes the amount of income taxes currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years these temporary differences are expected to be recovered or settled.
We evaluate all available positive and negative evidence in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before what we have estimated in our current forecasts, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period.
Prior to September 30, 2021, we had been out of compliance with the terms of our credit facility and operating under a forbearance agreement, and had related going concern disclosure. We therefore established a valuation allowance reserve for substantially all of our deferred tax assets. As of December 31, 2021, the amount of the net deferred tax asset was none, as we continued to record a valuation allowance against the gross value of the deferred tax asset. Each quarter and year-end, management makes a judgment to determine the extent to which the deferred tax asset will be recovered from future taxable income. This value was reduced, in large part, due to changes in US tax law effective 2018 which will impact the value of future deductions.
Fair Value Measurements. U.S. GAAP defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. U.S. GAAP clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. U.S. GAAP also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available. In February 2008, the FASB issued guidance now codified in U.S. GAAP which provides for delayed application of certain guidance related to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
Variable Interest Entities
Primarily due to Clever and VLU having the attribution of related party beneficial ownership and certain financial and operational support, these entities are considered to be variable interest entities, or VIEs, under current accounting guidance. A company with interests in a VIE must consolidate the entity if the company is deemed to be the primary beneficiary of the VIE; that is, if it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Such a determination requires management to evaluate circumstances and relationships that may be difficult to understand and to make a significant judgment, and to repeat the evaluation at each subsequent reporting date. Prior to July 1, 2019, we had determined that the Company was the primary beneficiary of Clever and VL (despite not having a majority ownership interest). As discussed in Note 2 to the accompanying consolidated financial statements, events that occurred during the start of the third quarter of 2019, caused us to reconsider the primary beneficiary determination for Clever and VL. As a result, the consolidated financial statements as of December 31, 2019 and 2020 excluded the assets, liabilities and operating results of Clever and VL. We also recognized a gain in the amount of $219,000 in connection with the deconsolidation of this VIE.
Item No. 7A – Qualitative and Quantitative Disclosures Regarding Market Risk
Not applicable.
Item No. 8 – Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements contained in Part IV hereof.
Item No. 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item No. 9A – Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission's rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of December 31, 2021. Based on this evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were not effective as of December 31, 2021, the end of the period covered by this Annual Report on Form 10-K, due to the material weaknesses described below.
(b) Management's Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. 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 Chief Financial Officer within an environment that is highly manual in nature. As of the date of this filing, our Acting Chief Financial Officer and our Chief Executive Officer are the same person, which reduces the value of the system design in this aspect. |
Management concluded that there is a reasonable possibility that a material misstatement could occur in the consolidated financial statements if the control deficiencies were not remediated. Accordingly, management concluded that the matters described above are material weaknesses in the Company’s internal control over financial reporting and that the Company did not maintain effective internal control over financial reporting as of December 31, 2021.
Plan for Remediation of Material Weakness
Management has enhanced its available resource base and adjusted its processes with respect to the areas listed above. Additional procedures are in the process of being established and will be evaluated for effectiveness in the future. A controller has been brought on to provide assistance in this area. Further, the Company views the combination of Acting Chief Financial Officer duties with the Chief Executive Officer as temporary in nature.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by its registered public accounting firm pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which permits the Company to provide only management’s report in this annual report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item No. 9B – Other Information
None
PART III
Item No. 10 – Directors, Executive Officers and Corporate Governance of the Registrant
The members of our Board of Directors (the “Board”), and our executive officers, together with their respective ages and certain biographical information are set forth below. Directors hold office until the next annual meeting of our stockholders and until their successors have been duly elected and qualified. Our executive officers are elected by and serve at the designation and appointment of the Board.
The following is a brief account of the business experience of each of our directors and executive officers during the past five years or more.
| Name |
Age |
Position |
||
| Yubao Li |
40 |
Chairman of the Board of Directors |
||
| Frank J. Cesario |
52 |
Chief Executive Officer and Director; Acting Chief Financial Officer |
||
| Jana M. Schwan |
45 |
Chief Operating Officer |
||
| Douglas Bosley |
54 |
Director |
||
| Gerald (J.D.) Roberts, Jr. |
62 |
Director |
||
| Philip Wong |
43 |
Director |
Yubao Li, Chairman of the Board of Directors. Mr Li has served as a Director of the Company since January 13, 2020 and was elected as Chairman of the Board on June 1, 2020. Mr. Li has been serving as the Chairman of Yunhong International since its inception in January 2019 and served as its Chief Executive Officer from January 2019 to September 2019. Mr. Li has been serving as the president of Hubei Academy of Science and Technology Service Station since July 2018, one of the key multi-disciplinary universities in the province of Hubei.Since June 2018, Mr. Li has been serving as the Director of Photoproteins Research Centre at China’s Academy of Management Science, a research institute situated in Beijing where he supports innovation by defining the research focus of the group. Mr. Li also serves as a director and/or officer of several other entities, including as the Executive Director and General Manager of Hubei Teruiga Energy Co., Ltd, a new energy technology company, since November 2017, the Executive Director of Hubei Yuntong Energy Co., Ltd., a solar power and agriculture company, since April 2016, the Executive Director and General Manager of Hubei Yun Hong photovoltaic Co., Ltd., a solar power and agriculture company, since May 2016, the President of Hubei Yunhong Deren Tourism Co., Ltd., a tourism project developer, since May 2016 and the President of Yunhong Group Holdings Co., Ltd., a company engaged in the business of solar power construction and solar photovoltaic power generation, since 2013. In addition, in 2013, Mr. Li founded China Hubei Yunhong Energy Group Co., Ltd., a Chinese nutrition company operating in China and abroad, and he currently serves as the Chairman of its board of directors.
Frank Cesario, Chief Executive Officer and Director; Acting Chief Financial Officer. Mr. Cesario first joined the Company in November 2017 as Chief Financial Officer. In December 2019 he was named President and Chief Executive Officer, and Director. He resigned as Chief Financial officer in June 2020 and President and Chief Executive Officer, and Director, in September 2020. During March 2021 he rejoined the Board as a Director. During January 2022 he was hired by the Company as Chief Executive Officer and Director. Upon the resignation of then Chief Financial Officer Jennifer Connerty during January 2022, Mr. Cesario also became the Acting Chief Financial Officer. Mr. Cesario brings 20 years of CFO experience at manufacturing entities. Prior to joining the Company, Mr. Cesario served in similar roles with Nanophase Technologies Corporation and ISCO International, Inc., then publicly traded global suppliers of advanced materials and telecommunications equipment, respectively, as well as Turf Ventures LLC, a privately held chemicals distributor. From September 2020 until January 2022, Mr. Cesario served as Chief Financial Officer of Radiac Abrasives, Inc., a privately held manufacturer. He began his career with KPMG Peat Marwick and then served in progressively responsible finance positions within Material Sciences Corporation and Outokumpu Copper, Inc. Mr. Cesario holds an MBA (Finance) from DePaul University and a B.S. (Accountancy) from the University of Illinois, and is a registered CPA in the State of Illinois.
Douglas Bosley is a founding partner of Witan Law Group and a member of the firm’s Corporate Transactional and Securities practice. Mr. Bosley represents businesses and entrepreneurs at all stages of growth from inception to exit. Mr. Bosley’s practice focuses on three general areas of financing transactions, mergers and acquisitions and general corporate matters. Mr. Bosley’s financing experience includes representing venture capital firms and venture-backed companies, mezzanine debt transactions, and a wide range of other types of financing and securities transactions, as well as general corporate matters including formation and start-ups; equity compensation; contracts such as licensing, joint ventures, representative agreements, and development and service level agreements; and corporate governance matters. Before founding Witan Law, Mr. Bosley was a partner at Bosley Till Neue & Talerico (BTNT), a law firm, where he headed the transactional and securities practices. Prior to BTNT, Mr. Bosley operated Bosley Business Law, which he founded after more than a decade of sophisticated corporate and securities transactional experience at some of the world’s largest and most reputable corporate law firms. Mr. Bosley also served as general counsel of a Sacramento-based venture capital and professional services firm. He is a frequent speaker on legal issues related to start-ups, mergers and acquisitions and venture capital transactions. Mr. Bosley is a graduate of the Duke University School of Law, graduating with high honors and earning Order of the Coif. He received his B.A. in Economics from California State University, Sacramento.
Gerald (J.D.) Roberts, Jr. is Vice President of Strategy and Business Development at a Fortune 50 Corporation, having served in that capacity since 2018. In the previous 20 years, he held several senior roles at Aerojet Rocketdyne Holdings, Inc. and GenCorp/Aerojet. His career began in the aerospace and electronics industries in the United States and Australia, where he worked with companies including E-Systems, McDonnell Douglas, Northrop-Grumman, Gulfstream, Learjet and Hawker de Havilland. Mr. Roberts combined his credentials in engineering, finance and operations and his significant experience in strategic planning, organizational restructuring, and mergers, acquisitions, and divestitures to build value in international business opportunities. Mr. Roberts holds a Six Sigma greenbelt certification and has completed post-graduate coursework in Mergers and Acquisitions, leadership, strategic alliances, negotiation, innovation, and financial analysis. He received his MBA (Finance) from the University of California, Davis, and his B.S. in Mechanical Engineering from Virginia Tech.
Philip Wong is CEO of Shark AI Capital Corporation, an innovative business lending firm which he co-founded in 2020. Previously, he served as Chief Investment Officer of American Credit, Inc., as a Commercial Loan Officer at Applepie Capital, Inc., as Vice President / Senior Relationship Manager at Bank of the West / BNP Paribas, and as First Vice President / Senior Relationship Manager at Preferred Bank, among other roles in banking in business credit. Mr. Wong and has completed certifications in agile software development, software products management, healthcare analytics, and product management and marketing. He received his B.A. in Asian Studies from San Francisco State University.
Executive Officers Other Than Nominees
Jana Schwan. Ms. Schwan has been employed by the Company in various operational, purchasing, and product development capacities since September 2002, and currently leads its Sales, Marketing and Business Development activities in addition to all Operations of the Company. Ms. Schwan was named Vice President of Operations in 2017 and Chief Operating Officer in 2020.
Jana Schwan is the daughter of John Schwan, who prior to his retirement from the Company served in several capacities, including as Chairman of the Board of Directors.
Except as disclosed in this Item 10 or Item 13 (Certain Relationships and Related Transactions, and Director Independence), there are no arrangements or understandings with major stockholders, customers, suppliers or others pursuant to which any of our directors or members of senior management were selected as such. In addition, there are no family relationships among our executive officers and directors.
Our future success depends, in significant part, on the continued service of certain key execute officers, managers, and others in various aspects of our business. We may not be able to find an appropriate replacement for any of our key personnel. Any loss or interruption of our key personnel’s service to the Company could adversely affect our ability to implement our business plan.
Corporate Governance
The business and affairs of the Company are managed under the direction of the Board of Directors in accordance with the Illinois Business Corporation Act and the Articles of Incorporation and By-laws of the Company, as amended. Members of the Board of Directors are kept informed of the Company’s business through discussions with the Chairman of the Board of Directors, the Chief Executive Officer, the President and other officers, by reviewing materials provided to them and by participating in meetings of the Board of Directors and its committees.
As of January 2022, the Board of Directors had five members. The Board has determined that each of Douglas Bosley, Gerald (J.D.) Roberts, Jr., and Philip Wong, presently directors of the Company, are independent based upon the application of the rules and standards of the NASDAQ Stock Market.
The Board of Directors met 17 times during 2021. Each of the Directors was present for at least 75% of such meetings.
Board Leadership Structure
Yubao Li is Chairman of the Board of Directors, Frank Cesario is Chief Executive Officer and Jana Schwan is Chief Operating Officer. Mr. Cesario and Ms. Schwan are responsible for senior management functions. Mr. Cesario reports into the Board of Directors. The Board of Directors believes that this combination and allocation of roles provides the most efficient and effective leadership model for the Company, providing perspective and direction with regard to business strategies and plans to both the Board and management. The Company has no bylaw or policy in place that mandates that an officer serve as Chairman of the Board. The Board of Directors periodically evaluates its leadership structure.
Mr. Wong has been designated as the lead independent director. Mr. Wong is responsible for (i) communicating regularly with the Chief Executive Officer and other officers of the Company on behalf of the Board of Directors, and particularly the independent members of the Board of Directors, and (ii) calling separate meetings of the independent directors of the Company. At any such meetings, only independent directors are present and the independent directors are free to discuss any aspect of the Company’s business and risk management without the influence of interested directors or management.
All members of the Company’s Audit, Compensation and Nominating and Governance Committees have been determined to be independent based on application of the rules and standards of the NASDAQ Stock Market.
Board Role in Risk Oversight
The Board of Directors plays an active role, as a whole and at the committee level, in overseeing management of the Company’s risks. The Board regularly reviews information regarding our credit, liquidity and operations, as well as the risks associated with each. The Audit Committee oversees management of financial risks through regular meetings with the Company’s independent registered public accounting firm and the Company’s Chief Executive Officer, President and Chief Financial Officer. The Company’s Compensation Committee evaluates and addresses risks relating to executive compensation, our incentive compensation plans and other compensatory arrangements. The Nominating and Governance Committee manages risks associated with the independence of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of those risks, the entire Board of Directors is regularly informed through management and committee reports to the full Board about these and other operational risks.
Committees of the Board of Directors
The Board of Directors has standing Audit, Compensation and Nominating and Governance Committees.
Audit Committee
Since 2000, the Company has had a standing Audit Committee, which is presently composed of Mr. Wong (Chairman), Mr. Bosley and Mr. Roberts. Each of the members of the Audit Committee is independent based on the application of the rules and standards of the NASDAQ Stock Market and Rule 10a-3(b) under the Securities Exchange Act of 1934. Mr. Wong has been designated as, and is, the Company’s “Audit Committee Financial Expert” in accordance with Item 407(d)(5) of Regulation S-K and meets the requirements for an audit committee expert as set forth in that item. The Audit Committee has primary responsibility meetings with management and independent auditors to discuss the Company’s financial statements. The Company’s Board of Directors has adopted a written charter, as amended, for the Company’s Audit Committee, a copy of which has been posted and can be viewed on the Company’s Internet website at http://www.ctiindustries.com under the section entitled “Investor Relations.” In addition, the Audit Committee has adopted a complaint monitoring procedure to enable confidential and anonymous reporting to the Audit Committee of concerns regarding, among other things, questionable accounting or auditing matters. The Audit Committee has primary responsibility for:
| Appointing, compensating, and retaining our registered independent public accounting firm; |
| Overseeing the work performed by any outside accounting firm; |
| Assisting the Board of Directors in fulfilling its responsibility by reviewing the financial reports provided by us to the SEC, our stockholders, or to the general public, as well as the Company’s internal financial and accounting controls; and |
| Recommending, establishing, and monitoring procedures designed to improve the quality and reliability of the disclosure of our financial condition and results of operations. |
The Audit Committee met four times during 2021.
Compensation Committee
The Compensation Committee is composed of Mr. Roberts (Chairman), Mr. Bosley and Mr. Wong. The Board has determined that each of the members of the Compensation Committee is independent as defined in the listing standards for the NASDAQ Stock Market. The Compensation Committee reviews and acts on the Company’s executive compensation and employee benefit and retirement plans, including their establishment, modification and administration. It also recommends to the Board of Directors the compensation of the Chief Executive Officer and certain other executive officers. The Compensation Committee has a charter which has been posted and can be viewed on the Company’s Internet website at http://www.ctiindustries.com under the section entitled “Investor Relations.” The Compensation Committee did not meet in 2021.
Nominating and Governance Committee
In 2005, the Company established a Nominating and Governance Committee. The Nominating and Governance Committee consists of Mr. Bosley (Chairman), Mr. Roberts and Mr. Wong. The Nominating and Governance Committee does not have a charter. The Board of Directors has determined that each of the members of the Nominating and Governance Committee is independent as defined in the listing standards for the NASDAQ Stock Market.
The Nominating and Governance Committee has not adopted a formal policy with regard to consideration of director candidates recommended by security holders. The Company believes that continuing service of qualified incumbent members of the Board of Directors promotes stability and continuity at the Board level, contributes to the Board’s ability to work as a collective body and provides the benefit of familiarity and insight into the Company’s affairs. Accordingly, the process of the Nominating and Governance Committee for identifying nominees reflects the Company’s practice of re-nominating incumbent directors who continue to satisfy the criteria for membership on the Board. For vacancies that are anticipated on the Board of Directors, the Nominating and Governance Committee intends to seek out and evaluate potential candidates from a variety of sources that may include recommendations by security holders, members of management, the Board of Directors, consultants and others. The minimum qualifications for potential candidates for the Board of Directors include demonstrated business experience, decision-making abilities, personal integrity and a good reputation.
The Board’s statement regarding diversity is below. This has become a larger factor in the Nominating Committee’s evaluation of potential candidates. While there is no formal policy for considering diversity when nominating a potential director, it is a consideration that is evaluated along with other qualifications of potential candidates, and broadly a goal of the Company. In light of the foregoing, it is believed that a formal, written policy and procedure with regard to consideration of director candidates recommended by security holders is not necessary in order for the Nominating and Governance Committee to perform its duties.
The Nominating Committee did not meet in 2021. All of the independent directors of the Board of Directors participated in the nominating process and, in separate session, voted in favor of recommending to the Board of Directors the nomination of each of the nominees for election as directors.
Board Diversity
The current Board has five directors, all male, two of whom are of Asian background and three Caucasian. The Board recently had two female directors who retired from the Board during January 2022. With only five directors, the Company has limited opportunity to maintain the breadth of diversity it seeks at all times. The Company has made diversity a goal, particularly as it moved from a 100% Caucasian, 100% male Board of Directors at the beginning of 2020 to three Asian directors, two of whom female, later that year. The Company plans to continue to strive for broad representation on its Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the NASDAQ Stock Market. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of such forms furnished to the Company, the Company believes that during calendar year 2021, all Section 16(a) filing requirements applicable to the officers, directors and ten-percent beneficial shareholders were satisfied.
Code of Ethics
The Company has adopted a code of ethics that applies to its senior executive and financial officers. The Company’s Code of Ethics seeks to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure of information to the Commission, (iii) compliance with applicable governmental laws, rules and regulations, (iv) prompt internal reporting of violations of the Code to predesignated persons, and (v) accountability for adherence to the Code. A copy of the Code of Ethics has been posted and may be viewed on the Company’s Internet website at http://www.ctiindustries.com under the heading “Investor Relations.” The Company will provide to any person without charge upon request a copy of the Code of Ethics. You may make such request by sending a written request to the Corporate Secretary at 22160 N. Pepper Road, Lake Barrington, Illinois 60010 and providing a return address
Item No. 11 – Executive Compensation
The following table sets forth summary compensation information with respect to the Principal Executive Officer and each of the two other most highly compensated executive officers. These individuals, including the Principal Executive Officer, are collectively referred to in this proxy statement as the Named Executive Officers.
| Non-Equity |
||||||||||||||||||||||
| Option |
Incentive Plan |
All other |
||||||||||||||||||||
| Name/Title |
Year |
Salary |
Awards |
Compensation |
compensation |
Total |
||||||||||||||||
| (1) | (2) | (3) | ||||||||||||||||||||
| Frank Cesario |
2021 |
$ | - | $ | - | $ | - | $ | 1,500 | $ | 1,500 | |||||||||||
| Chief Executive Officer(4) |
2020 |
$ | 149,249 | $ | - | $ | - | $ | - | $ | 149,249 | |||||||||||
| Jana M. Schwan |
2021 |
$ | 165,538 | $ | - | $ | - | $ | 9,500 | $ | 175,038 | |||||||||||
| Chief Operating Officer (5) |
2020 |
$ | 154,671 | $ | - | $ | - | $ | 8,707 | $ | 163,378 | |||||||||||
| Jennifer M. Connerty |
2021 |
$ | 152,885 | $ | - | $ | - | $ | - | $ | 152,885 | |||||||||||
| Chief Financial Officer (6) |
2020 |
$ | 145,039 | $ | - | $ | - | $ | - | $ | 145,039 | |||||||||||
SUMMARY COMPENSATION TABLE
| (1) |
Reflects the compensation expense recognized in 2021 and 2020 for stock option awards under ASC Topic 718 as reported in the Company's audited financial statements. |
| (2) |
Amounts determined under the Company's incentive compensation program. |
| (3) |
Amounts for include matching 401(k) contributions and insurance premiums |
| (4) |
Mr. Cesario’s compensation ceased during September 2020 when he left the Company and restarted January 2022 when he rejoined the Company as Chief Executive Officer and Acting Chief Financial Officer. |
| (5) |
Ms. Schwan became Chief Operating Officer in 2020. |
| (6) |
Ms. Connerty became Chief Financial Officer in 2020. She resigned from the Company during January 2022. |
Narrative Disclosure for Summary Compensation Table
Employment Agreements with Our Named Executive Officers
No employment agreements existed until January 2022, when Mr. Cesario entered into an employment agreement with the Company. That agreement includes a base salary of $250,000 per year. Mr. Cesario received an inducement grant of stock in the amount of 250,000 shares, 25,000 of which vested immediately, with the remaining shares scheduled to vest based upon the achievement of certain goals and objectives as set forth in the agreement. Mr. Cesario is eligible to receive a performance-based bonus of $300,000. In the event that Mr. Cesario is terminated without cause, he is eligible to receive twelve (12) months of salary in accordance with the agreement.
Information Relating to Cash Incentives
The Board of Directors previously had adopted an Incentive Compensation Plan providing for annual incentive compensation to be paid to executive and managerial employees of the Company. Under the Plan, designated Named Executive Officers and several other executive officers and managers may receive incentive compensation payments, determined on a quarterly and annual basis, based upon the income of the Company before provision for income tax or for incentive compensation if the net income exceeds a threshold amount of profit for any quarter of $100,000 and, for the year, of $250,000. The benefits under the Plan are divided into two Pools of compensation. Pool I (representing the largest pool of incentive compensation) covers senior executive officers and managers who participate in the pool of incentive compensation based upon a percentage allocation recommended by the Compensation Committee and determined by the Board of Directors each year. Pool II covers other executives and managers who are selected to participate in proportions determined by management. The Compensation Committee recommends the amount of the incentive compensation awards which, in the aggregate, may not exceed sixteen percent of the net income of the Company (before provision for income tax or incentive compensation under the Plan). Further, the amount of incentive compensation to any participant may not exceed the annual base compensation of the participant. The Compensation Committee believed such incentive compensation motivates participants to achieve strong profitability which is viewed as the most significant element of corporate performance, provides rewards for strong corporate performance and aligns the incentive with the interests of the shareholders. Incentive compensation participation levels are generally determined during the first quarter of each fiscal year.
In determining the executives who participate in the incentive compensation awards in Pool I each year, and the relative amount of the award to each participant, the Compensation Committee considers and takes into account (i) the position of the executive, (ii) the level of responsibility and authority of the executive, (iii) the performance of the executive, and (iv) the extent to which the executive is in a position to affect the financial results and profitability of the Company. The current Board of Directors is considering a revised incentive plan and terminating the plan described in this section. No replacement plan has yet been adopted, but the Board of Directors and Management have both indicated their desire to change this program.
Long-Term Equity Incentives
From time to time, upon the recommendation and action of the Compensation Committee and Board of Directors, stock options or grants under the 2009 Incentive Stock Plan have been awarded to officers, directors, or management personnel of the Company. At the Company’s Annual Meeting of Shareholders held in May 2009, the Company’s 2009 Incentive Stock Plan was approved by the shareholders.
The Board of Directors adopted and approved a new incentive option plan in April 2018 which was submitted to, and approved by, our stockholders at the annual meeting of stockholders on June 8, 2018 (the “Plan”). Under the Plan, the Compensation Committee of the Board of Directors is authorized to issue incentive options, non-statutory options, restricted stock awards and stock grants to officers, directors, management personnel and consultants of the Company. The Board of Directors determined that no further options would be granted under the 2009 Incentive Stock Plan.
Stock and option grants under the Plan will be determined from time to time by the Compensation Committee in consultation with management. The actual grant for each executive is determined by taking into consideration (i) individual performance, (ii) corporate performance and (iii) prior grants to, or stock ownership of the Company by, the executive or director. Generally, stock options are granted with an exercise price equal to or greater than the closing price of the Company’s common stock on the NASDAQ Stock Market on the date of the grant.
No stock options or grants were awarded or issued during 2021.
Retirement Benefits
The Company maintains a 401(k) employee savings plan in which all salaried employees are eligible to participate. The plan is a tax qualified retirement plan.
Under the 401(k) Plan, employees may contribute up to 15% of their eligible compensation to the Plan and the Company will contribute a matching amount to the Plan each year. Participating employees may direct the investment of individual and company contributions into one or more of the investment options offered by the Plan. Under the terms of the Plan, the Company has made a matching contribution equal to 100% of employee contributions that do not exceed 1% of eligible compensation plus 50% of employee contributions between 1% and 5% of eligible compensation. During 2017, the Board of Directors determined to cease matching contributions under the 401(k) Plan for the balance of the year. No such matching contributions were made during 2020 or 2021.
Outstanding Equity Awards
There are no outstanding equity awards as of December 31, 2021
Payments Upon Termination or Change of Control
None as of December 31, 2021. The employment agreement with Frank Cesario, effective January 2022, includes payment of twelve months salary upon termination except for cause as is defined by that agreement.
Director Compensation
The following table sets forth the compensation of directors of the Company during the year ended December 31, 2021:
DIRECTOR COMPENSATION
| Director's |
Option |
All other |
||||||||||||||
| Name |
Fees |
Awards (1) |
compensation |
Total |
||||||||||||
| Wan Zhang |
$ | - | $ | - | $ | - | $ | - | ||||||||
| Yaping Zhang |
$ | - | $ | - | $ | - | $ | - | ||||||||
| Yubao Li |
$ | - | $ | - | $ | - | $ | - | ||||||||
| John M. Klimek |
$ | - | $ | - | $ | - | $ | - | ||||||||
| Frank Cesario |
$ | - | $ | - | $ | - | $ | - | ||||||||
| (1) |
Reflects the compensation expense recognized in 2021 for stock option awards under ASC Topic 718 as reported in the Company's audited financial statements. |
Narrative Description of Director Compensation
Payments to non-employee directors were suspended during 2019, and had not restarted as of December 31, 2021. The Company intends to begin paying non-employee directors during 2022.
Agreements Between Third Parties and Directors
There are no agreements or arrangements by which any directors or nominees are to receive compensation or other payments from third parties in return for serving on the Board of Directors.
Item No. 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Board of Directors knows of no other matters to be presented for shareholder action at the Annual Meeting. On matters which may be raised at the Annual Meeting that are not covered by this Proxy Statement, the persons named in the proxy will have full discretionary authority to vote.
BENEFICIAL OWNERSHIP OF SHARES BY MANAGEMENT
AND SIGNIFICANT SHAREHOLDERS
The following table provides information concerning the beneficial ownership of the Company’s Common Stock by each director and nominee for director, certain executive officers, and by all directors and officers of the Company as a group as of December 31, 2021. In addition, the table provides information concerning the current beneficial owners, if any, known to the Company to hold more than 5 percent of the outstanding Common Stock of the Company.
The amounts and percentage of stock beneficially owned are reported based on regulations of the Securities and Exchange Commission (“SEC”) governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days after December 31, 2021. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities in which he has no economic interest. The percentage of Common Stock beneficially owned is based on 5,886,750 shares of Common Stock outstanding as of December 31, 2021.
| Shares of |
Shares of |
Percent of |
||||||||||
| Name and Address |
Common Stock |
Preferred Stock |
Common |
|||||||||
| of Beneficial Owner |
Beneficially Owned |
Beneficially Owned |
Stock |
|||||||||
| Yubao Li/Yunhong |
7,100,000 | (1) | 670,000 | (2)(3) | 44.1 | % | ||||||
| Mr. Wang |
1,700,000 | (5) | 170,000 | 10.5 | % | |||||||
| Icy Melon |
1,828,000 | (6) | 170,000 | 11.3 | % | |||||||
| Frank J. Cesario |
27,000 | - | * | |||||||||
| Jana Schwan |
5,725 | - | * | |||||||||
| All Current Directors and Executive Officers as a group |
10,660,725 | 1,010,000 | 66.16 | % | ||||||||
Represents 400,000 shares of common stock and 6,700,000 shares of common stock issuable upon conversion of 670,000 shares of Series A preferred and Series C preferred
Represents approximately 100% of the outstanding shares of the Company’s Series A & C Preferred.
These shares are held by LF Investments Pte. Ltd., a Singapore private limited company controlled by Mr. Li.
Pursuant to the Series A Certificate of Designation (as defined below), no holder of Series A Preferred may convert any portion of the Series A Preferred which would result in the holder beneficially owning more than 4.99% of the outstanding common stock of the Company. This limitation may be waived upon sixty-one (61) days’ prior notice from the holder to the Company.
Represents 1,700,000 shares of common stock issuable upon conversion of 170,000 shares of Series B preferred
Represents 1,700,000 shares of common stock issuable upon conversion of 170,000 shares of Series D preferred including 128,000 warrants
*Less than one percent
Item No. 13 – Certain Relationships and Related Transactions
As of December 2017, Mr. John H. Schwan was owed a total of $1.1 million, with additional accrued interest of $0.4 million, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. During January 2019, Mr. Schwan and the Company agreed to an exchange of $0.6 million of his debt for approximately 181,000 shares of CTI common stock at the then market rate of $3.32 per share. As of December 31, 2021, the balance of Mr. Schwan’s note was approximately $1.2 million, including accrued interest. Mr. Schwan is the father of Jana Schwan.
Relationships and transactions in which the Company and its directors and executive officers or their immediate family members are participants or have conflicts of interest are reviewed and approved by the Audit Committee. While the Audit Committee has not adopted a written policy for the review and approval of related party transactions, in determining whether to approve or ratify any such transaction, the Audit Committee considers, in addition to such other factors it may deem appropriate in the circumstances, whether (i) the transaction is fair and reasonable to the Company, (ii) under all of the circumstances, the transaction is in, or not inconsistent with, the Company’s best interests, and (iii) the transaction will be on terms no less favorable to the Company than could have been obtained in an arms’ length transaction with an unrelated third party. The Audit Committee, in its discretion, may request information from any party to facilitate its consideration of matter. The Audit Committee does not allow a director to participate in any review, approval or ratification of any transaction if he or she, or his or her immediate family member, has a direct or indirect material interest in the transaction.
Item No. 14 – Principal Accountant Fees and Services
The following table sets forth the amount of fees billed by RBSM LLP, our independent registered public accounting firm, for professional services during the years ended December 31, 2021 and 2020:
| Dec. 31, 2021 |
Dec. 31, 2020 |
|||||||
| Audit Fees (1) |
$ | 254,400 | $ | 242,094 | ||||
| Other Audit Related Fees (2) |
- | 3,500 | ||||||
| All Other Fees (3) |
- | 25,000 | ||||||
| Total Fees |
$ | 254,400 | $ | 270,594 | ||||
| (1) |
Includes the annual financial statement audit and limited quarterly reviews and expenses. |
| (2) |
Includes fees and expenses for other audit related activity provided by RBSM LLP. |
| (3) |
Primarily represents tax services, which include preparation of tax returns and other tax consulting services. |
All audits, tax and other services to be performed by RBSM LLP for the Company must be pre-approved by the Audit Committee. The Audit Committee reviews the description of services and an estimate of the anticipated costs to perform those services. Services not previously approved cannot commence until such approval has been granted. Pre-approval is granted usually at regularly scheduled meetings. If unanticipated items arise between meetings of the Audit Committee, the Audit Committee has delegated approval authority to the Chairman of the Audit Committee, in which case the Chairman communicates such pre-approvals to the full Committee at its next meeting.
The Audit Committee of the Board of Directors reviews all relationships with its independent auditors, including the provision of non-audit services, which may relate to the independent registered public accounting firm’s independence.
PART IV
Item No. 15 – Exhibits and Financial Statement Schedules
(a)(1) The following documents are filed under pages F-1 through F-29 and are included as part of this Form 10-K:
| F-1 | |
| F-2 | |
| F-3 | |
| F-5 | |
| F-6 | |
| F-7 |
(a)(2) All financial statement schedules are omitted because the information is inapplicable or presented in the notes to the financial statements, except for Schedule II – Valuation and qualifying accounts.
(a)(3) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed on the attached Exhibit Index.
| Exhibit Number |
Document |
| 3.1 |
|
| 3.2 |
|
| 3.3 |
|
| 3.4 |
|
| 3.5 |
|
| 3.6 |
|
| 3.7 |
|
| 4.1 |
|
| 10.1 | |
| 10.2 |
|
| 10.3 |
|
| 10.4 |
|
| 10.5 |
|
| 10.6 |
|
| 10.7 |
|
| 10.8 |
|
| 10.9 |
|
| 10.10 |
|
| 10.11 |
|
| 10.12 |
|
| 13 |
| 10.14 |
|
| 10.15 |
|
| 10.16 |
|
| 10.17 |
|
| 10.18 |
|
| 10.19 |
|
| 10.20 |
|
| 10.21 |
|
| 10.22 |
|
| 10.23 |
|
| 10.24 |
|
| 10.25 |
|
| 10.26 |
|
| 10.27 |
|
| 10.28 |
|
| 10.29 |
|
| 10.30 |
|
| 10.31 |
|
| 10.32 |
|
| 14.1 |
|
| 23.1 |
Consent of Independent Registered Public Accounting Firm, RBSM LLP. |
| 31.1 |
|
| 31.2 |
|
| 32.1 |
|
| 99.1 |
|
| 101 |
Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
| (a) |
The Exhibits listed in subparagraph (a)(3) of this Item 15 are attached hereto unless incorporated by reference to a previous filing. |
|
| (b) |
The Schedule listed in subparagraph (a)(2) of this Item 15 is attached hereto. |
Item No. 16 – Summary
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized on April 15, 2022.
| Yunhong CTI, LTD |
||
| By: |
/s/ Frank Cesario |
|
| Frank Cesario, Chief Executive Officer, Acting Chief Financial Officer, Director |
||
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| Signatures |
Title |
Date |
| /s/ Yubao Li Yubao Li |
Chairman of the Board of Directors |
April 15, 2022 |
| /s/ Douglas Bosley Douglas Bosley |
Director |
April 15, 2022 |
| /s/ Gerald (J.D.) Roberts, Jr. Gerald (J.D.) Roberts, Jr. |
Director |
April 15, 2022 |
| /s/ Philip Wong Philip Wong |
Director |
April 15, 2022 |
Yunhong CTI, LTD and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2021 and 2020
Contents
Financial Statement Schedule:
All other schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Yunhong CTI Ltd. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Yunhong CTI Ltd. and Subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the two year period ended December 31, 2021, and the related notes (collectively referred to as the financial statement). We did not audit the December 31, 2021 and 2020 financial statements of Flexo Universal S. de R.L. de C.V., a 99.82 percent owned subsidiary (Flexo) which the Company sold on October 28, 2021. The Company has reclassified operations related to Flexo as discontinued operations for the period from January 1, 2021 to October 28, 2021 and for the year ended December 31, 2020. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Flexo, is based solely on the report of the other auditors. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flow for each of the years in the two year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
The Company's Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and will require additional capital to continue as a going concern. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventories Valuation
Critical Audit Matter Description
The Company's inventories, net of reserves totaled approximately $7,876,000 as of December 31, 2021. As described in Note 2 and Note 8 to the consolidated financial statements, inventories are valued at the lower of cost or net realizable value. On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and the shelf life of the products. As of December 31, 2021, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of $290,000.
Given the judgments made by management a high degree of subjective and complex auditor judgment was required to evaluate management's estimates of the net realizable value of its inventory and reserves for excess and obsolete inventory.
How the Critical Audit Matter Was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included the following:
| ● |
We reviewed and evaluated the appropriateness and consistency of management’s methods. |
| ● |
We reviewed and evaluated the significant assumptions and tested the accuracy and completeness of the underlying data used in management's inventory reserve calculation. |
| ● |
We recalculated the reserve using management’s methodology and evaluated the methodology and the significant assumptions for reasonableness. |
| /s/ |
|
| We have served as the Company’s auditor since 2019. |
|
| |
April 15, 2022
| Yunhong CTI, Ltd |
| December 31, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Receivable from related party | ||||||||
| Current assets of discontinued operations | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment: | ||||||||
| Machinery and equipment | ||||||||
| Building | ||||||||
| Office furniture and equipment | ||||||||
| Intellectual property | ||||||||
| Land | ||||||||
| 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 | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| TOTAL ASSETS | ||||||||
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Trade payables | $ | $ | ||||||
| Line of credit | ||||||||
| Notes payable - current portion | ||||||||
| Advance from Investor | ||||||||
| Notes payable affiliates - current portion | ||||||||
| Notes payable - officers, subordinated | ||||||||
| Operating lease liabilities | ||||||||
| Accrued liabilities | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities | ||||||||
| Deferred gain (non current) | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Mezzanine equity: | ||||||||
| Preferred stock -- par value, share authorized shares issued and outstanding at December 31, 2020 and none at December 31, 2021 (liquidation preference - $ million as of December 31, 2020) | ||||||||
| Equity: | ||||||||
| Yunhong CTI, Ltd stockholders' equity: | ||||||||
| Series A Preferred Stock -- par value, shares authorized, shares issued and outstanding at December 31, 2021 and 2020 respectively (liquidation preference - $ million as of December 31, 2021) | ||||||||
| Series B Preferred Stock -- par value, shares authorized, issued and outstanding at December 31, 2021 and none as of December 31, 2020 respectively (liquidation preference - $ million as of December 31, 2021) | ||||||||
| Series C Preferred Stock -- par value, shares authorized, issued and outstanding at December 31, 2021 and none as of December 31, 2020 respectively (liquidation preference - $ million as of December 31, 2021) | ||||||||
| Series D Preferred Stock -- par value, shares authorized, issued and outstanding at December 31, 2021 and none as of December 31, 2020 respectively (liquidation preference - $ million as of December 31, 2021) | ||||||||
| Common stock - par value, shares authorized, and shares issued and and shares outstanding at December 31, 2021 and December 31, 2020 respectively | ||||||||
| Paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ||||||
| Less: Treasury stock, shares | ( | ) | ( | ) | ||||
| Total Yunhong CTI, Ltd Stockholders' Equity | ||||||||
| Noncontrolling interest | ( | ) | ||||||
| Total Stockholders' Equity | ||||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes to consolidated financial statements
| Yunhong CTI, Ltd |
| Consolidated Statements of Operations and Comprehensive Income (Loss) |
| For the Twelve Months Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| 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 | ( | ) | ( | ) | ||||
| Gain on forgiveness of Payroll Protection Program funding | ||||||||
| Gain on Sale and Leaseback Transaction | ||||||||
| Reclassification of Cumulative Foreign Currency Loss | ( | ) | ||||||
| Loss on Sale of Subsidiary | ( | ) | ||||||
| Other income/(expense) | ( | ) | ||||||
| Total other expense, net | ( | ) | ( | ) | ||||
| Loss from continuing operations before taxes | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Loss from continuing operations | ( | ) | ( | ) | ||||
| Income (Loss) from discontinued operations , net of tax | ( | ) | ||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Less: Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Net loss attributable to Yunhong CTI, Ltd | $ | ( | ) | $ | ( | ) | ||
| Other Comprehensive Income (Loss) | ||||||||
| Foreign currency adjustment | ( | ) | ( | ) | ||||
| Reclassification of foreign currency adjustment to earnings | ||||||||
| 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 | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | ( | ) | ||||||
| Basic income (loss) per common share | $ | ( | ) | $ | ( | ) | ||
| Diluted income (loss) per common share | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | ( | ) | ||||||
| Diluted income (loss) per common share | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to consolidated financial statements
| Yunhong CTI, Ltd |
| Yunhong CTI, Ltd |
||||||||||||||||||||||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||||||||||||||||||
| Other |
Less |
|||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock |
Common Stock |
Paid-in |
Accumulated |
Comprehensive |
Treasury Stock |
Noncontrolling |
||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Loss |
Shares |
Amount |
Interest |
TOTAL |
||||||||||||||||||||||||||||||||||
| Balance December 31, 2019 |
- | $ | - | $ | $ | $ | ( |
) |
$ | ( |
) |
( |
) |
$ | ( |
) |
$ | ( |
) |
|||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - cash |
||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - conversion of accounts payable |
||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock converted |
( |
) |
( |
) |
- | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for placement agent fees |
( |
) |
- | |||||||||||||||||||||||||||||||||||||||||
| Warrants issued to placement agent and other issuance costs |
( |
) |
- | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrants exercised - cashless |
- | |||||||||||||||||||||||||||||||||||||||||||
| Common stock issued - cashless |
- | |||||||||||||||||||||||||||||||||||||||||||
| Placement agent fees and issuance costs |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||
| Beneficial Conversion feature (BCF) on Series A Preferred Stock |
( |
) |
- | |||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend on BCF of Series A Preferred Stock |
( |
) |
- | |||||||||||||||||||||||||||||||||||||||||
| BCF on Series B Preferred Stock |
||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend on BCF of Series B Preferred Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series A Preferred Stock |
( |
) |
- | |||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series B Preferred Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||
| Accretion of Series B Preferred Stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||
| Net Loss |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||
| Foreign equity | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
( |
) |
$ | ( |
) |
$ | ( |
) |
|||||||||||||||||||||||||||
| Yunhong CTI, Ltd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other |
Less |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock |
Series B Preferred Stock |
Series C Preferred Stock |
Series D Preferred Stock |
Common Stock |
Paid-in |
Accumulated |
Comprehensive |
Treasury Stock |
Noncontrolling |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
(Deficit) Earnings |
Loss |
Shares |
Amount |
Interest |
TOTAL |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 |
$ | - | $ | - | - | $ | - | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||
| Series D Convertible Preferred Stock Issuance |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series C Convertible Preferred Stock Issuance |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B Convertible Preferred Stock Modification |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - conversion of debt |
- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrants exercised - cashless |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BCF on Series C Preferred Stock |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend on BCF of Series C Preferred Stock |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series A Preferred Stock |
- | - | ( |
) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series B Preferred Stock |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series C Preferred Stock |
( |
) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of Series B Preferred Stock |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Completion of HFS |
- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income (Loss) |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 |
$ | $ | $ | $ | $ | $ | $ | ( |
) | $ | - | ( |
) | $ | ( |
) | $ | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
| Yunhong CTI, Ltd |
| For the Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activites | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of ROU asset | ||||||||
| Realized currency translation gain | ( | ) | ||||||
| Gain on forgiveness of PPP Funding | ( | ) | ||||||
| Gain on sale of building | ( | ) | ||||||
| Provision for losses on accounts receivable | ||||||||
| Provision for losses on inventories | ( | ) | ||||||
| Impairment of Note Receivable | ||||||||
| Deconsolidation of disposed entities | ||||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Change in ROU liability | ( | ) | ( | ) | ||||
| Trade payables | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds from Sale of building | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Repayment of debt and revolving line of credit | ( | ) | ( | ) | ||||
| Proceeds from advance from investor | ||||||||
| Proceeds from issuance of preferred stock | ||||||||
| Cash paid for stock issuance costs | ( | ) | ||||||
| Cash paid for deferred financing fees | ( | ) | ||||||
| Proceeds from PPP | ||||||||
| Proceeds from issuance of long-term debt and revolving line of credit | ||||||||
| Net cash used in financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash | ( | ) | ||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations.” | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash payments for interest | $ | $ | ||||||
| Conversion of accounts payable debt to Series A Preferred | $ | $ | ||||||
| Accrued dividend and accretion on Series A and B Preferred Stock | $ | $ | ||||||
| Issuance of Placement agent warrants in connection with Series A Preferred offering | $ | $ | ||||||
| Issuance of Common stock to placement agent | $ | $ | ||||||
| Issuance of Series C and D Preferred offerings | $ | $ | ||||||
| Cash receipts for tax refund | $ | $ | ||||||
| Amortization of beneficial conversion feature and deemed dividend on Series C and D Preferred stock | $ | $ | ||||||
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements Years Ended
December 31, 2021 and 2020
1. Nature of Business
Nature of Operations
Yunhong CTI Ltd. (formerly CTI Industries Corporation), its former subsidiaries - United Kingdom subsidiary (CTI Balloons Limited), Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), and German subsidiary (CTI Europe GmbH); as well as current subsidiary CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products. As discussed in Note 23 Discontinued Operations, effective in 2019, the Company determined that it was exiting CTI Balloons Limited and CTI Europe, and during 2021 sold its interest in Flexo Universal. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Yunhong CTI Ltd., its wholly owned subsidiary CTI Supply, Inc. and former wholly owned subsidiary CTI Balloon Ltd and its former majority owned subsidiaries, Flexo Universal and CTI Europe. All significant intercompany accounts and transactions have been eliminated upon consolidation. As discussed in Note 23 Discontinued Operations, effective in 2019, the Company determined that it was exiting CTI Balloons Limited and CTI Europe, and during 2021 sold its interest in Flexo Universal. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements.
Variable Interest Entities
The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical exchange rate for stockholders’ equity, and a weighted average exchange rate for each period for revenues and expenses. Translation adjustments are recorded in accumulated other comprehensive income (loss) as the local currencies of the subsidiaries are the functional currencies. Foreign currency transaction gains and losses are recognized in the period incurred and are included in the consolidated statements of operations.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts, inventory valuation, deferred tax assets, goodwill and intangible asset valuation, leasehold assets and liabilities, Preferred Stock deemed dividends and beneficial conversion feature values, and assumptions used as inputs in the Black-Scholes option-pricing model.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less.
Accounts Receivable
Trade receivables are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts, evaluating the individual customer receivables through consideration of the customer’s financial condition, credit history and current economic conditions and use of historical experience applied to an aging of accounts. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for a period over the customer’s normal terms. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis, to reflect the actual cost of production of inventories.
Production costs of work in process and finished goods include material, labor and overhead. Inventory is not recorded in excess of net realizable value.
Property, Plant and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line method over the lesser of the estimated useful life or the lease term. The estimated useful lives range as follows:
| (in years) | ||||||
| Building | - | |||||
| Machinery and equipment | - | |||||
| Projects that prolong the life and increase efficiency of machinery | - | |||||
| Light Machinery | - | |||||
| Heavy Machinery | - | |||||
| Office furniture and equipment | - | |||||
| Intellectual Property | - | |||||
| Leasehold improvements | - | |||||
| Furniture and equipment at customer locations | - | |||||
Light machinery consists of forklifts, scissor lifts, and other warehouse machinery. Heavy machinery consists of production equipment including laminating, printing and converting equipment. Projects in process represent those costs capitalized in connection with construction of new assets and/or improvements to existing assets including a factor for interest on funds committed to projects in process of $
Stock-Based Compensation
The Company has stock-based incentive plans which may grant stock option, restricted stock and unrestricted stock awards. The Company recognizes stock-based compensation expense based on the grant date fair value of the award and the related vesting terms. The fair value of stock-based awards is determined using the Black-Scholes model, which incorporates assumptions regarding the risk-free interest rate, expected volatility, expected option life, and dividend yield. See Note 18 for additional information.
Fair Value Measurements
Current professional accounting guidance applies to all assets and liabilities that are being measured and reported on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The requirements prescribe a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. A Level 1 input includes a quoted market price in an active market or the price of an identical asset or liability. Level 2 inputs are market data other than Level 1 inputs that are observable either directly or indirectly including quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. Level 3 inputs are unobservable and corroborated by little or no market data.
The carrying value amounts of the Company’s cash and cash equivalents, accounts and notes receivable, accounts payable and other current liabilities are reasonable estimates of their fair values due to the short-term nature of these instruments. The fair value of business segments (as needed for purposes of determining indications of impairment to the carrying value of goodwill) is determined using an average of valuations based on market multiples and discounted cash flows, and consideration of our market capitalization. See Note 5 for further discussion.
Valuation of Long Lived Assets
The Company evaluates whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property, plant and equipment) may be impaired or not recoverable. The significant factors that are considered that could trigger an impairment review include: changes in business strategy, market conditions, or the manner of use of an asset; underperformance relative to historical or expected future operating results; and negative industry or economic trends. In evaluating an asset for possible impairment, management estimates that asset’s future undiscounted cash flows and appraised values to measure whether the asset is recoverable. The Company measures the impairment based on the projected discounted cash flows of the asset over its remaining life.
Deferred Financing Costs
Deferred financing costs are amortized over the term of the loan. Upon a refinancing, existing unamortized deferred financing costs are expensed.
Income Taxes
The Company accounts for income taxes using the liability method. As such, deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation allowance when management cannot determine, in its opinion, that it is more likely than not that the Company will recover that recorded value of the deferred tax asset. The Company is subject to U.S. Federal, state and local taxes as well as foreign taxes in Mexico (through October 2021). U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested.
Unrecognized tax benefits are accounted for as required by U.S. GAAP which prescribes a more likely than not threshold for financial statement presentation and measurement of a tax position taken or expected to be taken in a tax return. See Note 11 for further discussion.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606. In most cases, the Company has a single product delivery performance obligation. Accrued product returns are estimated based on historical data and evaluation of current information.
The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
A disaggregation of product net sales is presented in Note 20.
Research and Development
The Company conducts product development and research activities which include (i) creative product development and (ii) engineering. During the years ended December 31, 2021 and 2020, research and development activities totaled $
Advertising Costs
The Company expenses advertising costs as incurred.
Note 3 – Liquidity and Going Concern
The Company’s financial statements are prepared using account principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a cumulative net loss from inception to December 31, 2021 in excess of $
The Company’s primary sources of liquidity have traditionally been comprised of cash and cash equivalents as well as availability under a Credit Agreement. Until September 30, 2021, that Credit Agreement was with PNC (see Note 9), which began in December 2017 as an $
During September 2021, we entered into a new credit agreement with Line Financial, using those proceeds and the proceeds from multiple preferred stock issuances and the sale of preferred stock and the sale / leaseback transaction of our Lake Barrington, IL property (below) to fully repay PNC. The new agreement with Line Financial includes a revolving credit facility for up to $
During January 2020, we entered into an equity financing arrangement. The primary investor, LF International Pte, purchased $
In November 2020, we issued
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued
On April 23, 2021, the Company entered into a Purchase and Sale Agreement (“PSA”) with an unaffiliated purchaser (the “Purchaser”) pursuant to which the Company sold its facility in Lake Barrington, Illinois (the “Lake Barrington Facility”), in which our headquarters office, production and warehouse space are located, to the Purchaser. The sale price for the Lake Barrington Facility was $
Concurrently with the closing under the PSA, the Company and the Purchaser entered into a lease agreement pursuant to which the Company agreed to lease the Lake Barrington Facility from the Purchaser for a period of years. The annual base rent commences at $
In June 2021, the Company received $
The elimination of certain subsidiaries and business lines has improved our cash flow. The Company believes it is in compliance with its credit facility. The combination of all of these factors has led management to conclude that the Company has adequate capital to operate its business for at least twelve months as of the date of this report.
4. New Accounting Pronouncements
Recent Accounting Pronouncements Not Yet Adopted
Credit Loss
In June 2016, the FASB issued authoritative guidance to replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public entities, the guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, which for the Company was the first quarter of fiscal 2021. The adoption did not have a material impact on its consolidated financial statements.
Income Taxes
In December 2019, the FASB issued authoritative guidance that simplifies the accounting for income taxes as part of the overall initiative to reduce complexity in accounting standards. Amendments include removal of certain exceptions to the general principles of Accounting Standards Codification 740, Income Taxes. The amendments also include simplification in several other areas, such as recognition of deferred tax assets on step-up in tax basis in goodwill and accounting for franchise tax that is partially based on income. For public entities, the guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, which for the Company was the first quarter of fiscal 2021. The adoption did not have a material impact on its consolidated financial statements.
5. Fair Value Disclosures; Derivative Instruments
U.S. GAAP clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. U.S. GAAP also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available.
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
| ● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, or unobservable but corroborated by market data, for substantially the full term of the financial instrument. |
| ● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of the input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
6. Other Comprehensive Loss
For the year ended December 31, 2021 the Company incurred other comprehensive gain of approximately $
7. Major Customers
For the year ended December 31, 2021, the Company had
8. Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted periodically and at year end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory for estimated obsolescence or unmarketable items, primarily by reviewing future demand requirements and shelf life of the product.
Inventories of continuing operations are comprised of the following:
| December 31, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work in Process | ||||||||
| Finished Goods | ||||||||
| Allowance for excess quantities | ( | ) | ( | ) | ||||
| Total inventories | $ | $ | ||||||
9. Notes Payable
Long term debt consists of:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Subordinated notes (officer) due December 2023 | $ | $ | ||||||
| Related Party Note | ||||||||
| Term Loan (2021 is net of deferred finance costs of $) | ||||||||
| Line of Credit | ||||||||
| Total long-term debt | ||||||||
| Less current portion | ( | ) | ( | ) | ||||
| Total Long-term debt, net of current portion | $ | $ | ||||||
During December 2017, we entered in new financing agreements with PNC Bank, National Association (“PNC”). The financing agreements with PNC (the “PNC Agreements”) included a $
We notified PNC of our failure to meet certain financial covenants and conditions during multiple occasions between 2018 and 2021, resulting in amendments to the loan documents, and in some cases forbearance agreements, along with related fees, penalties and conditions. Pursuant to an April 2021 forbearance agreement, the Company agreed to pay PNC a Forbearance Fee of $
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 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
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 December 31, 2021, 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 $
As of December 31, 2021, the Company had a note payable to Alex Feng for $
On April 30, 2020, the Company executed a promissory note (the “Note”) with PNC (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $
10. Subordinated Debt – Related Parties
As discussed in Note 9 above, as of December 31, 2021, the company owes a balance of Mr. Schwan’s note of approximately $
11. Income Taxes
Tax Reform act of 2017
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law and introduced significant changes to U.S. tax law. The Company reflected the impacts of changes in tax law to the financial statements including the federal income tax rate reduction from 35% to 21%; the new limitations on the tax deductibility of interest expense; the acceleration of business asset expensing; the repeal of the alternative minimum tax ("AMT"); the limitation on the use of net operating losses generated in future years; and the Global Intangible Low Taxed Income regime.
On March 27, 2020, the CARES Act was enacted into law and introduced changes to U.S. tax law including revised limitations on the tax deductibility of interest expense and the limitation on the use of net operating losses. The Company is reviewing the implications of these statutes to its 2020 financial statements.
Due to an ownership change in the first quarter of 2020, the future utilization of certain post-change income tax attributes of Yunghong CTI Ltd , including net operating loss carryovers, are anticipated to be limited for U.S. income tax purposes.
The provision (benefit) for income taxes consists of the following:
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Current: | ||||||||
| Federal | $ |
| $ | ( | ) | |||
| State | ||||||||
| Foreign | ||||||||
| Total Current | ( | ) | ||||||
| Deferred: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Foreign | ||||||||
| Total Deferred | ||||||||
| Provision (Benefit) for income taxes | ( | ) | ||||||
Income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| U.S. Federal provision (benefit) | ||||||||
| At Statutory Rate | $ | ( | ) | $ | ( | ) | ||
| State Taxes | ( | ) | ( | ) | ||||
| Change in Valuation Allowance | ||||||||
| NOL Carryback Claim (CARES Act) | ( | ) | ||||||
| Nondeductible Expenses | ( | ) | ||||||
| Foreign Taxes |
| ( | ) | |||||
| Deconsolidation & Impairment | ( | ) | ||||||
| Other |
| |||||||
| Rounding |
| ( | ) | |||||
| Total | $ | $ | ( | ) | ||||
Deferred Tax Assets and Liabilities
Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets for federal and state income taxes are as follows):
| Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Deferred Tax Assets: | ||||||||
| Federal & State NOL Carryforward | ||||||||
| Foreign Tax Credit & Other Credits | ||||||||
| Reserves and Accruals | ||||||||
| Capital Loss Carryforward | ||||||||
| Unicap 263A Adjustment | ||||||||
| Other DTA | ( | ) | ( | ) | ||||
| Foreign NOL Carryforward | ||||||||
| Deferred Interest Expense | ||||||||
| ERC Wage Disallowance | ||||||||
| Deconsolidation & Impairment | ||||||||
| Total Gross DTA | ||||||||
| Less: Val. Allowance | ( | ) | ( | ) | ||||
| Total Deferred Tax Assets | ( | ) | ( | ) | ||||
| Deferred Tax Liabilities: | ||||||||
| Fixed Assets & Intangibles | ||||||||
| Other DTL | ||||||||
| Section 481(a) Adjustment | ( | ) | ||||||
| Total Gross DTL | ||||||||
| Net Deferred Tax Assets | ||||||||
Realization of our deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Due to the lack of earnings history and in light of management’s comments regarding going concern for most of 2019 through September 30, 2021, a valuation allowance has been recorded to reduce the deferred tax assets to its net realizable value. The valuation allowance increased by $
Net Operating Loss and Tax Credit Carryforwards
As of December 31, 2021, we had a net operating loss carryforward for federal income tax purposes of approximately $
12. Employee Benefit Plan
The Company has a defined contribution plan for substantially all employees. Profit sharing contributions may be made at the discretion of the Board of Directors. Under the plan, the maximum contribution for the Company is
13. Related Party Transactions
Ms. Jana M. Schwan is the Company’s Chief Operating Officer. Her father, John H. Schwan, held several positions with the Company over many years, most recently as Chairman of the Board until June 2020. His brother is Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance services to the Company. The Company made payments to Schwan Incorporated of approximately $
As discussed in Note 9, Mr. John H. Schwan was owed approximately $
On July 1, 2019, the Company deconsolidated Clever, and as result the Company has a note receivable of $
14. Variable Interest Entities (“VIE”) and Transactions
During 2010, two entities owned by officers and/or principal shareholders of the Company (John H. Schwan and Stephen M. Merrick, who were officers and directors of the Company during the relevant time period) provided financing for Flexo Universal, the Company’s Mexico subsidiary at that time, for the acquisition and construction of latex balloon production and related equipment. The entities included Venture Leasing L.L.C., (“VLUS”), an Illinois limited liability company which is
Mr. Schwan and Mr. Merrick, through entities owned by them, arranged for a line of credit in the amount of $
The Company has not provided any guarantees related to VLUS or VLM and no creditors of the variable interest entities have recourse to the general credit of the Company as a result of including VLUS & VLM in the consolidated financial statements. The accounts of VLM and VLUS have been consolidated with the accounts of the Company. On May 31, 2016, Flexo Universal purchased the equipment from VLM for Mexican Peso or $
Mr. Schwan and Mr. Merrick were partial owners of Clever Container (renamed Clever Organizing Solutions; “Clever”), an Illinois limited liability company engaged in the sale and distribution through a network of independent distributors, of household items including containers and organizing products. Together they own roughly half of Clever. The Company acquired a
Through June 30, 2019, the Company had determined that it was the primary beneficiary of these entities and included them in our consolidated results. In the third quarter 2019, we determined that operationally material changes in our involvement with Clever and VL resulted in us having no power over the decisions which impact their financial performance. The Company ceased providing financial, inventory management and purchasing, reporting and other support functions. Therefore, we are no longer the primary beneficiary of these entities. Effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. Upon deconsolidation of these entities, we recognized a gain of $
15. Goodwill
Under the provisions of U.S. GAAP, goodwill is subject to at least annual assessments for impairment by applying a fair-value based test. U.S. GAAP also requires that an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.
In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Clever. As a result of an impairment test, the Company fully impaired the goodwill related to Clever in the first quarter and recorded an impairment charge of $
16. Commitments
Operating Leases
We adopted ASC Topic 842 (Leases) on January 1, 2019 using the modified retrospective method. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations.
Upon adoption of ASC 842 we recorded a $
We determine if an arrangement is a lease at inception. Most of our operating leases do not provide an implicit rate of interest so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the course of ordinary business including warehouses and manufacturing facilities, as well as vehicles and equipment used in our operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of assets and related improvements are limited by the expected lease term, unless there is a reasonably certain expected transfer or title or purchase option. Some lease agreements include renewal options at our sole discretion. Any guaranteed residual value is included in our lease liability.
The table below describes our lease position as of December 31, 2021 and 2020:
| Assets | As of December 31, 2021 | As of December 31, 2020 | ||||||
| Operating lease right-of-use assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net lease assets | ||||||||
| Liabilities | ||||||||
| Current | ||||||||
| Operating | ||||||||
| Noncurrent | ||||||||
| Operating | ||||||||
| Total lease liabilities | ||||||||
| Weighted average remaining term (years) – operating leases | ||||||||
| Weighted average discount rate – operating leases | % | % | ||||||
During the year ended December 31, 2021 and 2020, we recorded expenses related to
| Year ended December 31 | ||||||||
| 2021 | 2020 | |||||||
| Operating right-of-use lease asset amortization | ||||||||
| Financing lease asset amortization | ||||||||
| Related interest expense | ||||||||
| Total expense during twelve months ended December 31 | ||||||||
The following table summarizes the maturities of our lease liabilities for all operating leases as of December 31, 2021
| (in thousands) | 12/31/2021 | |||
| 2022 | ||||
| 2023 and thereafter | ||||
| Total lease payments | ||||
| less: Imputed interest | ( | ) | ||
| Present value of lease liabilities | ||||
17. Convertible Redeemable Preferred Stock
Series A 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
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 Preferred
In November 2020, we issued
Series C Preferred
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued
Series D Preferred
In June 2021, the Company received $
Warrants
In connection with the Series A Offering, in 2020 the Company issued
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 |
| - | Dividend yield: The estimate for dividend yield is |
| - | Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements. |
A summary of the Company’s stock warrant activity is as follows:
| Shares under Option | Weighted Average Exercise Price | |||||||
| Balance at December 31, 2020 | $ | |||||||
| Granted | ||||||||
| Cancelled/Expired | - | |||||||
| Exercised/Issued | ( | ) | ||||||
| Outstanding at December 31, 2021 | ||||||||
| Exercisable at December 31, 2021 | $ | |||||||
18. Other Stockholders’ Equity
Series A Preferred Stock
As discussed in Notes 3 and 17, in the Series A Offering, the Company sold
Additionally, in 2020 the Company sold
Each share of Series A Preferred is convertible into
The issuances of the Company’s Series A Preferred generated a beneficial conversion feature. 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 $
In 2020,
Series B Preferred
In November 2020, we issued
Series C Preferred
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued
Series D Preferred
In June 2021, the Company received $
Common Stock
During 2020,
Restricted Stock
In 2020,
Stock Options
The Compensation Committee (“Committee”) administers the Company’s stock-based plans. The exercise price of the stock options shall be fixed by the Committee at whatever price the Committee may determine in good faith. Unless the Committee determines otherwise, options generally had a
In 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan and subsequent awards categorized as inducement of employment authorized the issuance of up to
On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorized the issuance of up to
The Company, at the discretion of the board, may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.
The Company recognized share based compensation expense of approximately $
Warrants
In connection with the Series A Offering, in 2020 the Company issued
The Series D Offering also included warrants to purchase up to
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.
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
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
Dividend yield: The estimate for dividend yield is
Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.
A summary of the Company’s stock options, warrants and related information, is as follows:
| Options | Weighted Average Exercise Price | Warrants | Weighted Average Exercise Price | |||||||||||||
| Balance at January 1, 2020 | $ | - | ||||||||||||||
| Granted | - | |||||||||||||||
| Cancelled/Expired | ( | ) | ||||||||||||||
| Exercised/Issued | - | ( | ) | |||||||||||||
| Balance at December 31, 2020 | - | |||||||||||||||
| Granted | - | |||||||||||||||
| Cancelled/Expired | - | |||||||||||||||
| Exercised/Issued | ( | ) | ||||||||||||||
| Balance at December 31, 2021 | - | $ | ||||||||||||||
| Exercisable at December 31, 2021 | $ | |||||||||||||||
As there are
As of December 31, 2021 and 2020, the Company reserved the following shares of its common stock for the exercise of warrants, and preferred stock:
| 2020 Warrants | ||||
| Series A Preferred Stock | ||||
| Series B Preferred Stock | ||||
| Shares reserved as of December 31, 2020 | ||||
| Series C Preferred Stock | ||||
| Series D Preferred Stock | ||||
| 2020 Warrants exercised | ( | ) | ||
| 2021 Warrants | ||||
| Shares reserved as of December 31, 2021 |
19. Earnings Per Share
Basic earnings per share is computed by dividing net loss attributable to Yunhong CTI Ltd. Common shareholders by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing net loss attributable to Yunhong CTI Ltd. Common shareholders by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
| Consolidated earnings per share | 2021 | 2020 | ||||||
| Loss from continuing operations | $ | ( | ) | $ | ( | ) | ||
| Loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Deemed dividends on preferred stock and amortization of beneficial conversion feature | ( | ) | ( | ) | ||||
| Loss from continuing operations attributable to Yunhong CTI Ltd common shareholders | $ | ( | ) | $ | ( | ) | ||
| (Gain)/loss attributable to noncontrolling interest | ( | ) | ||||||
| Loss from discontinued operations attributable to Yunhong CTI Ltd common shareholders | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted loss per common share: | ||||||||
| Continuing operations | $ | ( | ) | $ | ( | ) | ||
| Discontinued operations | ( | ) | ||||||
| $ | ( | ) | $ | ( | ) | |||
| Basic and Diluted weighted average number of shares and equivalent shares of common stock oustanding | ||||||||
20. Product and Geographic Segment Data
The Company’s operations consist of a single business segment which designs, manufactures, and distributes film products.
The following table provides a breakdown of product net sales from operations in each of the years indicated (in thousands):
| Twelve Months Ended | ||||||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||
| $ | % of | $ | % of | |||||||||||||
| Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
| Foil Balloons | % | % | ||||||||||||||
| Latex Balloons | % | % | ||||||||||||||
| Film Products | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| Total | % | % | ||||||||||||||
21. Contingencies
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations.
22. 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.
Benchmark Investments, Inc. v. Yunhong CTI Ltd., Case No. 1:21-cv-02279, was filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on the Company on March 31, 2021. The complaint seeks damages in excess of $
During February 2022, Engie Resources LLC filed a claim against the Company, seeking payment of $
23. Discontinued Operations
In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of CTI Balloons and CTI Europe. These actions were taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company reported the results of these operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes were applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and CTI Europe (Germany) subsidiary in the first half of 2021.
In connection with management’s intentions to simplify these operations and organizational structure, we identified write-offs of $
In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis therefore, this product line has been presented as discontinued operations and was abandoned as of March 31, 2020. The Ziploc® product line recorded losses from discontinued operations, net of taxes of ($
In October 2021, the Company sold its interest in Flexo Universal (its subsidiary in Mexico that manufactured latex balloons). This transaction was recorded during the fourth quarter of 2021. The Company recorded an expense of approximately $
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items for the International operations that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income for the year ended
| December 31, 2021 | December 31, 2020 | |||||||
| Income Statement | ||||||||
| Net Sales | ||||||||
| Cost of Sales | ||||||||
| Gross Margin | ( | ) | ( | ) | ||||
| SG&A | ||||||||
| Operating Income | ( | ) | ( | ) | ||||
| Other Income / (Expense) | ( | ) | ||||||
| Loss from discontinued operations | ( | ) | ( | ) | ||||
| Gain from classification to held for sale | ||||||||
| Net Loss prior to non-controlling interest | ( | ) | ||||||
| Non-controlling Interest share of income/loss | ||||||||
| Net Income / (Loss) | ( | ) | ||||||
The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:
| December 31, 2021 | December 31, 2020 | |||||||
| Balance Sheet | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash on hand and Banks | - | |||||||
| Accounts Receivable | - | |||||||
| Inventory | - | |||||||
| Prepaid & Other | - | |||||||
| TOTAL Current Assets | - | |||||||
| NET Property, Plant, and Equipment | - | |||||||
| Other Assets | ||||||||
| Operating lease right-of-use | - | |||||||
| Other | - | |||||||
| TOTAL Other Assets | - | |||||||
| TOTAL Non-Current Assets | - | |||||||
| Valuation Allowance on Assets Held for Sale | - | ( | ) | |||||
| TOTAL Assets | - | |||||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Trade Accounts Payable | - | |||||||
| Operating Lease Liabilities - Current | - | |||||||
| Other/Accrued Liabilities | - | |||||||
| TOTAL Current Liabilities | - | |||||||
| Non-Current Liabilities | ||||||||
| Operating Lease Liabilities - Non Current | - | |||||||
| Other Non-Current | - | |||||||
| TOTAL Non-Current Liabilities | - | |||||||
| TOTAL Liabilities | - | |||||||
24. Subsequent Events
During January 2022, the Company made several announcements. Mr. Frank Cesario was hired as Chief Executive Officer, as position he previously held until he resigned from the Company during 2020. He had been the Company’s Chief Financial Officer from 2017 until 2020 when the Chief Financial Officer position was taken by Ms. Jennifer Connerty. Ms. Connerty resigned from the Company effective January 2022. Mr. Cesario is serving as Acting Chief Financial Officer. Three Directors retired from the Board of Directors – Mr. John Klimek, Ms. Wan Zhang and Ms. Yaping Zhang. Three Directors joined the Board of Directors – Messrs. Douglas Bosley, Gerald (J.D.) Roberts, Jr., and Philip Wong.
During 2022 the Company received two notices of deficiency from the NASDAQ. One notice related to a failure to hold an annual meeting of shareholders during 2021. The Company was granted until June 17, 2022 to hold an annual meeting of shareholders in order to resolve this deficiency, which the Company intends to do. The other notice related to a failure to maintain a $
During February 2022, Engie Resources LLC filed a claim against the Company, seeking payment of $
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statements of Yunhong CTI, Ltd., and Subsidiaries on Form S-8 (File Nos. 333-76006, 333-76008 and 333-169442) of our report dated April 15, 2022, with respect to our audit of the consolidated financial statements of Yunhong CTI, Ltd., as of December 31, 2021, which is included in this Annual Report on Form 10-K of Yunhong CTI, Ltd. Our report on the consolidated financial statements includes an explanatory paragraph expressing substantial doubt regarding Yunhong CTI, Ltd.'s ability to continue as a going concern.
/s/ RBSM LLP
RBSM LLP
New York, NY
April 15, 2022
Exhibit 31.1
CERTIFICATION
I, Frank Cesario, certify that:
1. I have reviewed this annual report on Form 10-K of Yunhong CTI Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
|
|
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 15, 2022
|
/s/ Frank Cesario |
|
|
Frank Cesario, Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Frank Cesario, certify that:
1. I have reviewed this annual report on Form 10-K of Yunhong CTI Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
|
|
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 15, 2022
|
/s/ Frank Cesario |
|
|
Frank Cesario Acting Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Yunhong CTI Ltd. (the “Company”) for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Frank Cesario, as Chief Executive Officer and Acting Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ Frank Cesario |
|
|
Frank Cesario Chief Executive Officer |
|
|
Date: April 15, 2022 |
|
|
/s/ Frank Cesario |
|
|
Frank Cesario Acting Chief Financial Officer |
|
|
Date: April 15, 2022 |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-K or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
FLEXO UNIVERSAL, S. DE R.L. DE C.V.
INDEPENDENT AUDITOR’S REPORT
AS OF OCTOBER 28, 2021 AND DECEMBER 31, 2020
Santa Rita No. 1110, Col. Chapalita Oriente, Zapopan, Jalisco, México. C.P. 45040
TEL: +52 33 3647 2715 /33 3647 2732 / 33 3647 2752 EMAIL: vghlbgdl@hlbguadalajara.com.mx www.hlb.global
FLEXO UNIVERSAL, S. DE R.L. DE C.V.
I N D E X
|
1.- |
Independent Auditors’ Report. |
|
2.- |
Balance Sheet. |
|
3.- |
Statement of (Loss) Income. |
|
4.- |
Statements of Changes in Stockholders’ Equity. |
|
5.- |
Statement of Cash Flow. |
|
6.- |
Notes to the financial statements. |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Flexo Universal, S. de R.L de C.V.
We have audited the attached financial statements of Flexo Universal, S. de R.L. of C.V. as of October 28, 2021 and the corresponding income statement, stockholders' equity and cash flows for the period from January 1 to October 28, 2021. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.
We draw attention to Note 2 of the financial statements, which describes the basis of accounting. The financial statements are prepared according to Financial Reporting Standards Applicable Mexico (FRS), which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinions are not modified with respect to this matter.
Emphasis paragraph
On July 30, 2021, a Redemption Agreement was signed in which he agreed the reduction and and form of payment of the capital stock owned by YUNHONG CTI LTD., (Before CTI Industries INC,) was agreed for a total of $47,328,869 Mexican pesos, represented by the same number of social parts.
In the Shareholders' Assembly held on October 11, 2021, it was unanimously agreed to increase and reduce the share capital as follows:
Increases for the amount of $2,049,999 and the same number of social parts and in compliance with the agreement indicated in the previous paragraph, a decrease for the amount of $47,328,869. and the same number of social parts, reimbursement in favor of YUNHONG CTI LTD., (Before CTI Industries INC,) who, as of that date, ceases to be a shareholder of Flexo Universal, S. de R.L. de C.V.
By virtue of what is stated in the previous paragraphs, the financial statements that are presented are those that show the accounting records of the company as of October 28, 2021 and are not comparable with the audited financial statements as of December 31, 2020 that are presented .
Basis of the opinion.
Exception opinion
Due to the Management's decision to present financial statements closing on October 28, 2021 and which we were informed of later, we did not observe the physical inventories as of that date and due to the nature of the accounting records we were unable to satisfy ourselves, through the application of other audit procedures, the reasonableness of said inventories and the cost of sale for the period from January 1 to October 28, 2021.
Opinion.
In our opinion except for the possible effects in the period from January 1 to October 28, 2021 of the fact described in the paragraph "basis for the opinion with caveats, the financial statements referred to above present fairly, in all material respects, the financial position of Flexo Universal, S. de RL de C.V., as of October 28 2021, and the results of their operations and their cash flows for the year that ended, in conformity with the basis of accounting described above.
Vargas Graf y Cía., S.C
Zapopan, Jalisco, México C. Cp, 45040
C.P.C. Luis Alberto Garcia Sanchez
Certified Public Accountant
Partner
February 14, 2022
Santa Rita No. 1110, Col. Chapalita Oriente, Zapopan, Jalisco, México. C.P. 45040
TEL: +52 33 3647 2715 /33 3647 2732 / 33 3647 2752 EMAIL: vghlbgdl@hlbguadalajara.com.mx www.hlb.global
|
FLEXO UNIVERSAL, S. DE R.L. DE C.V. |
|||
|
BALANCE SHEET AS OF OCTOBER 28, 2021 AND DECEMBER 31, 2020 |
|||
|
( In Mexican pesos ) |
|||
|
(Notes 1 & 2) |
|
October 28, 2021 |
2020 |
|||||||
|
CURRENT ASSETS: |
||||||||
|
Cash and cash equivalents |
$ | 653,001 | $ | 2,109,034 | ||||
|
Accounts receivables |
69,236,818 | 64,522,563 | ||||||
|
Other accounts receivables (Note 3) |
29,644,715 | 27,852,763 | ||||||
|
Related parties (Note 4) |
- | 19,118,170 | ||||||
|
Inventories (Note 5) |
73,962,358 | 73,557,469 | ||||||
|
Total current assets |
173,496,892 | 187,159,999 | ||||||
|
NON CURRENT ASSETS: |
||||||||
|
Machinery and equipment (Note 6) |
2,313,987 | 3,016,497 | ||||||
|
Warranty deposits |
3,157,146 | 3,116,161 | ||||||
|
Other assets |
584,608 | 868,242 | ||||||
|
Deferred income tax (Note 14) |
14,433,489 | 10,489,760 | ||||||
|
Other deferred assets (Note 10 ) |
542,744 | 695,391 | ||||||
|
Total non current assets |
21,031,974 | 18,186,051 | ||||||
|
TOTAL ASSETS |
$ | 194,528,866 | $ | 205,346,050 | ||||
|
CURRENT LIABILITIES |
||||||||
|
Accounts payable to suppliers, accrued expenses and other accounts payable (Note 7) |
$ | 93,398,955 | $ | 82,219,266 | ||||
|
Related parties (Note 4) |
31,766,448 | |||||||
|
Current portion of long term liabilities to related parties (Note 8) |
11,605,002 | |||||||
|
Total current liabilities |
125,165,403 | 93,824,268 | ||||||
|
DEFERRED LIABILITIES |
||||||||
|
Deferred Sales (Note 10 ) |
2,187,733 | 2,803,033 | ||||||
|
TOTAL LIABILITIES |
127,353,136 | 96,627,301 | ||||||
|
STOCKHOLDERS' EQUITY |
||||||||
|
Capital stock (Note 11 ) |
2,132,075 | 47,410,945 | ||||||
|
Legal Reserve |
4,205,584 | 4,205,584 | ||||||
|
Accumulated results |
57,102,220 | 68,754,493 | ||||||
|
Period's net (loss) profit |
3,735,851 | (11,652,273 | ) | |||||
|
TOTAL STOCKHOLDERS' EQUITY |
67,175,730 | 108,718,749 | ||||||
|
Contingencies (Note 13) |
- | - | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUTIY |
$ | 194,528,866 | $ | 205,346,050 | ||||
|
The enclosed notes are an integral part of these financial statements |
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FLEXO UNIVERSAL, S. DE R.L. DE C.V. |
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STATEMENT OF OPERATIONS FOR THE YEARS ENDED |
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|
OCTOBER 28, 2021 AND DECEMBER 31, 2020 |
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|
( In Mexican pesos ) |
|
OCTOBER 28, 2021 |
2020 |
|||||||
|
Net sales |
$ | 66,528,652 | $ | 121,251,658 | ||||
|
Cost of products sold |
(70,318,544 | ) | (109,027,146 | ) | ||||
|
GROSS PROFIT |
(3,789,891 | ) | 12,224,512 | |||||
|
Operating expenses |
||||||||
|
Administration and sales expenses |
(16,041,848 | ) | (21,301,889 | ) | ||||
|
Other income, (expenses) - net |
19,302,500 | 898,337 | ||||||
| 3,260,652 | (20,403,552 | ) | ||||||
|
OPERATION NET PROFIT |
(529,240 | ) | (8,179,040 | ) | ||||
|
INTEGRAL FINANCING RESULTS |
||||||||
|
Exchange rate fluctuations - net |
3,544,682 | (1,962,745 | ) | |||||
|
interest - net |
1,485,312 | (6,621,181 | ) | |||||
| 5,029,994 | (8,583,926 | ) | ||||||
|
PROFIT BEFORE INCOME TAXES AND EPS |
4,500,754 | (16,762,966 | ) | |||||
|
Income tax |
- | - | ||||||
|
Deferred income tax |
(764,903 | ) | 5,110,693 | |||||
| (764,903 | ) | 5,110,693 | ||||||
|
NET PROFIT |
$ | 3,735,851 | $ | (11,652,273 | ) | |||
|
The accompanying notes are an integral part of these financial statements |
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FLEXO UNIVERSAL, S. DE R.L. DE C.V. |
|||
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STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY |
|||
|
FOR THE YEARS ENDED OCTOBER 28, 2021 AND DECEMBER 31, 2020 |
|||
|
( In Mexican pesos ) |
|
October 28, 2021 |
2020 |
|||||||
|
CAPITAL STOCK |
||||||||
|
Initial period balance |
$ | 47,410,945 | $ | 47,410,945 | ||||
| 49,999 | ||||||||
| (47,328,869 | ) | |||||||
| 2,000,000 | ||||||||
|
Initial and final period balance |
2,132,075 | 47,410,945 | ||||||
|
LEGAL RESERVE |
- | |||||||
|
Initial period balance |
4,205,584 | 4,205,584 | ||||||
| - | - | |||||||
|
Final period balance |
4,205,584 | 4,205,584 | ||||||
|
ACCUMULATED RESULTS |
||||||||
|
Initial period balance |
68,754,493 | 76,261,596 | ||||||
|
Transfer from net profit (loss) |
(11,652,273 | ) | (7,507,103 | ) | ||||
|
Final period balance |
57,102,220 | 68,754,493 | ||||||
|
NET PROFIT (LOSS) |
||||||||
|
Initial period balance |
(11,652,273 | ) | (7,507,103 | ) | ||||
|
Transfer to accumulated results |
11,652,273 | 7,507,103 | ||||||
|
Net loss |
3,735,851 | (11,652,273 | ) | |||||
|
Final period balance |
3,735,851 | (11,652,273 | ) | |||||
|
TOTAL |
$ | 67,175,730 | $ | 108,718,749 | ||||
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The accompanying notes are an integral part of these financial statements |
|||
|
FLEXO UNIVERSAL, S. DE R.L. DE C.V. |
|||
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CASH FLOW STATEMENT |
|||
|
FOR THE YEARS ENDED OCTOBER 28, 2021 AND DECEMBER 31, 2020 |
|||
|
( In Mexican pesos ) |
|
October 28, 2021 |
2020 |
|||||||
|
OPERATING ACTIVITIES: |
||||||||
|
Net profit |
$ | 3,735,851 | $ | (11,652,273 | ) | |||
|
Items related with investment activities |
||||||||
|
Depreciation |
660,370 | 1,071,779 | ||||||
|
Items related with financing activities |
||||||||
|
Interest |
(1,485,312 | ) | 6,621,181 | |||||
| 2,910,909 | (3,959,313 | ) | ||||||
|
Trade debtors and other receivables (increase) decrease |
(6,506,207 | ) | (5,712,032 | ) | ||||
|
Inventories increase |
(404,889 | ) | 18,315,288 | |||||
|
Other assets (increase) decrease |
395,296 | (3,010,412 | ) | |||||
|
Assets, Liabilities to related parties increase (decrease) |
50,884,618 | (2,451,537 | ) | |||||
|
Suppliers and other liabilities (decrease) increase |
11,179,689 | 7,868,687 | ||||||
|
Deferred Sales |
(615,300 | ) | (2,257,182 | ) | ||||
|
Taxes paid |
(3,943,729 | ) | (127,657 | ) | ||||
|
Net cash flow from financial activities |
53,900,387 | 8,665,842 | ||||||
|
INVESTING ACTIVITIES: |
||||||||
|
Machinery and equipment acquisition (net) |
42,140 | (184,680 | ) | |||||
| 42,140 | (184,680 | ) | ||||||
|
FINANCING ACTIVITIES: |
||||||||
|
Long term liabilities to related parties |
(11,605,002 | ) | (399,276 | ) | ||||
|
Paid interest |
1,485,312 | (6,621,181 | ) | |||||
|
Decrease and payment of capital |
(47,328,869 | ) | ||||||
|
Increase in capital |
2,049,999 | |||||||
| (55,398,560 | ) | (7,020,457 | ) | |||||
|
INCREASE IN CASH AND CASH EQUIVALENTS |
$ | (1,456,033 | ) | $ | 1,460,705 | |||
|
Cash and cash equivalents at beginning of year |
$ | 2,109,034 | $ | 648,329 | ||||
|
Cash and cash equivalents at end of year |
$ | 653,001 | $ | 2,109,034 | ||||
|
The accompanying notes are an integral part of these financial statements |
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NOTES TO FINACIALSTATEMENTS
FLEXO UNIVERSAL, S. DE R.L. DE C.V.
As of December 31st, 2020 and 2019
In Mexican pesos.
NOTE 1 – COMPANY DESCRIPTION:
Flexo Universal S. de R.L. de C.V., (FLEXO) was constituded in 2002. Until October 11,, 2021 as indicated below it was Subsidiary of CTI Industries INC, a North American company that owned 99.8269% of its capital stock.
Its main activity is the production of latex and mylar balloons
On July 30, 2021, a Redemption Agreement was signed in which he agreed the reduction and and form of payment of the capital stock owned by YUNHONG CTI LTD., (Before CTI Industries INC,) was agreed for a total of $47,328,869 Mexican pesos, represented by the same number of social parts.
In the Shareholders' Assembly held on October 11, 2021, it was unanimously agreed to increase and reduce the share capital as follows:
Increases for the amount of $2,049,999 and the same number of social parts and in compliance with the agreement indicated in the previous paragraph, a decrease for the amount of $47,328,869. and the same number of social parts, reimbursement in favor of YUNHONG CTI LTD., (Before CTI Industries INC,) who, as of that date, ceases to be a shareholder of Flexo Universal, S. de R.L. de C.V.
Irregular exercise
By virtue of what is stated in the previous paragraphs, the financial statements that are presented and on which the opinion of the public accountant was issued are those that show the accounting records of the company as of October 28, 2021
On August 28, 2015 by unanimous vote of shareholders, Flexo Universal was transformed to a Limited Liability Company with Variable Capital (S de RL de CV).
Going concern
The company meets its working capital needs by investing the profits currently generated, as well as by contracting short- and long-term bank credits.
The financial structure of the company has allowed it to have liquidity and the payment of interest has been made punctually, likewise it is up to date in its tax obligations. The company's management considers that it has sufficient resources to continue as a going concern company.
NOTE 2 – MAIN ACCOUNTING POLICIES
|
a. |
Basis for presentation |
The significant accounting policies adopted by the company are in accordance with the Financial Reporting Standards in Mexico (FRS) and Interpretations to the Financial Reporting Standards (IFRS).
Those Standards (FRS), may differ from accounting principles generally accepted in the United States of America (US GAAP). However, under an analysis of similarities, convergences and important differences between the two standards with respect to the operations recorded that generate the financial information of the Company, we can conclude that there are no differences that could lead to material adjustments and alter that information
|
b. |
Estimates and assumptions |
The preparation of financial statements in accordance with Mexican financial reporting standards requires the company's management to make certain estimates and provisions that may affect the value of some assets and liabilities at the date of the balance sheet, as well as the value and measurement of revenues, costs and expenses during the reported period. Even if the final result of these estimates and provisions may differ from the calculated, management believes that those were appropriate used to the circumstances.
|
c. |
Monetary unit |
Per Mexican laws, Financial Statements are prepared in Mexican pesos ($).
|
d. |
Cash and equivalents |
Mainly represented by deposits in bank accounts.
|
e. |
Accounts receivable and estimation for allowance for doubtful accounts |
Represent collection right originated from inventory sales. Accounts in foreign currency are valuated at the year closing exchange rate.
Estimates for doubtful collection accounts represent the inherent probable loss of all receivables due to the behaviour of historic tendencies of the accounts receivable. Since 2009 the company has issued a provision to absorb the uncollectible accounts.
|
f. |
Inventories |
Inventories of finished goods, production in process and raw materials, are recorded at its historic acquisition and production cost using the absorbing cost system. The acquisition cost includes all associated expenses to get the inventories ready to be sold. Inventories are valued at the average cost method net from the estimates which does not exceed their realization value.
|
g. |
Machinery and equipment |
Acquisitions of fixed assets are recorded at their acquisition cost.
Acquisition costs include all associated expenses so that fixed assets are ready to be used.
Depreciation is calculated using the straight-line method, beginning in the year in which the assets are used, and according to the following rates:
|
Rates % |
||||
|
Leasehold improvements |
10.00 | |||
|
Molds |
20.00 | |||
|
Computer equipment |
30.00 | |||
|
Machinery and office equipment |
10.00 | |||
|
Tools and medical equipment |
35.00 | |||
|
Transport equipment |
25.00 | |||
|
Forklift |
25.00 | |||
|
h. |
Long lived assets evaluation |
Impairment of long-term assets – As of January 1°, 2004 the C-15 standard “Impairment in the value of long-lasting assets and its disposal” became effective. This standard requires that companies determine the effect of impairment in long lasting assets in use, in case of detection of indication of impairment or losses for impairment recognized in those assets. In opinion of the Company’s management, there are no traces of impairment that could have an effect in the results, in accordance with the standard.
|
i. |
Income tax |
Income tax. - The current income tax is determined according to current tax legislation. The deferred income tax is recorded in accordance with the asset and liability method, which compares the accounting and tax values of them. Deferred tax is recognized (assets and liabilities) for future tax consequences attributable to temporary differences between the values reflected in the financial statements of existing assets and liabilities and their respective tax bases and for tax loss carry forwards and tax credits not used. The assets and liabilities of deferred tax are calculated using the rates established in the law that will be applied to taxable income in years when it is estimated that the temporary differences will reverse. The effect of changes in tax rates on deferred taxes is booked in the results of the period in which those changes are approved. The deferred tax asset is recorded only when there is a high probability of recovery. As of January 1°, 2008, this FRS was modified, the main changes are:
|
● |
Caused and deferred Employee Profit Sharing (PTU). - This concept is considered as an ordinary expense based on the benefits to employees, that is the reason why it is now classified in the results statement in other income and expenses. |
|
● |
Cumulative Effect of Income Tax -- The previous FRS stated that this component will be presented separately in equity, the change consists to reclassify this concept to cumulative results. |
| ● |
|
j. |
Liabilities |
The Company applies the dispositions of FRS C-9 “Liabilities, provisions, contingent assets and liabilities and commitments”. Bulletin C-9 establishes the valuation, presentation and disclosure, general rules of liabilities provisions, contingent assets and liabilities.
|
k. |
Labor liabilities |
As of February 2014, the Company’s management decided to outsource payroll services through the figure "Outsourcing".
|
l. |
Recognition of revenue |
Revenue is recognized in the period in which the risks and benefits of inventory are transferred to customers who acquire them, which generally occurs when these inventories are delivered and the corresponding invoice is prepared.
Income from contracts with customers.- In October 2015, the financial reporting standard D-1 "Income from contracts with customers" was approved by the Issuer Council of CINIF, which establishes a single integral model to be used by the entities in the booking of income from contracts with clients.
The basic principle this standard is that an entity must recognize the income represented by the promised transfer of goods or services to customers for the amounts that reflect the considerations that the entity expects to receive in exchange for those goods or services. Specifically, the standard establishes the application of five steps to recognize income:
Step 1: Identify the contract or contracts with the client
Step 2: Identify the obligations to be fulfilled in the contract
Step 3: Determine the price of the transaction
Step 4: Assign the price of the transaction between the obligations to be fulfilled in the contract; and
Step 5: Recognize income when the entity satisfies the obligation to comply.
Under this standard, an entity must recognize the income when the obligation is satisfied, that is, when the "control" of the goods or services agreed of the obligation of compliance has been transferred to the client. Appendices have also been included in standard D-1 to deal with specific situations. In addition, the number of disclosures required has increased.
This standard is mandatory as of January 1, 2019
|
m. |
Foreign currency operations |
Foreign currency operations are accounted at the exchange rate of the day of their occurrence. Assets and liabilities in foreign currency are registered in Mexican pesos at the exchange rate published by the Central Bank (Banco de Mexico) at the date of the financial statements. Exchange rate differences in assets and liabilities in foreign currency are registered in the year’s result.
|
n. |
Income statement |
Income statements are classified by its operative activities. According to the company’s opinion; this classification allows evaluating the result of its operations identifying the cost of goods sold and administrative and sales expenses.
|
o. |
Integral Financial Result (RIF) |
The RIF includes net accrued interests, exchange rate profit (loss), monetary position gain (loss) and derivate financial instruments profit (loss).
Exchange rate profit (loss) originated by transactions in foreign currency, is the result of exchange rates fluctuations at the date of the operation registry, at the date of realization or at the period end valuation.
|
p. |
Leases.- |
In 2019, companies must adopt the new model to register and report their leases in financial statements, whether for premises, offices, buildings, equipment and other types of assets that they have the right to use and are controlled by service contracts such as for example, transportation. Previously, these contracts were generally recognized monthly as an operating expense based on the amount of rent.
In this sense, the International Accounting Standards Board (IASB), the Mexican Council of Financial Information Standards (CINIF) and the Financial Accounting Standards Board (FASB) were given the task of issuing the new standard of “Leases” applicable in each One of these accounting frameworks: IFRS, Mexican FRS and US GAAP, which will minimize the differences and disadvantages that may arise between some companies that otherwise record these leases in their financial statements.
The financial statements as of December 31, 2020 and 2019 do not recognize the effects of the application of standard NIF D-5 Leases, effective as of this year.
However, in the consolidated financial statements of CTI Industries INC., The holding company that owns 99.8260% of the Company's capital stock, the future income of the useful life of the contract is recognized at current value, at current rates stipulated, based on the regulatory provisions of the financial reporting standard ASC-842 in force as of 2019.
NOTE 3 – OTHER ACCOUNTS RECEIVABLE
As of October 28, 2021 and December 31st, 2020, the other accounts receivable are integrated as follows:
|
October 28, 2021 |
2020 |
|||||||
|
Other Collective taxes |
6,147,488 | 6,651,529 | ||||||
|
Creditable VAT |
23,497,227 | 21,201,234 | ||||||
| $ | 29,644,715 | $ | 27,852,763 | |||||
NOTE 4 – RELATED PARTIES
Following a summary of the operations with related parties which originate the balances with related parties as of October 28, 2021 and December 31st, 2020 is presented:
|
to October 28,2021 |
2020 |
|||||||
|
Goods Sold: |
||||||||
|
CTI Industries Corporation (Note) |
$ | 737,846 | $ | 3,097,426 | ||||
|
Inventory Purchases: |
||||||||
|
CTI Industries Corporation |
$ | - | $ | 788,524 | ||||
|
Sale of Machinery (Fixed Assets) |
||||||||
|
CTI Industries Corporation (Note) |
$ | 6,181,200 | ||||||
|
Reduction and payment of Share Capital |
||||||||
|
CTI Industries Corporation |
$ | (47,328,869 | ) | |||||
|
Interest |
||||||||
|
CTI Industries Corporation |
$ | (7,186,919 | ) | $ | 40,177 | |||
Accounts receivable and (payable) to related parties are:
|
Receivable- (Payable) |
||||||||
|
Net balances |
||||||||
|
October 28, 2021 |
2020 |
|||||||
|
CTI Industries Corporation |
$ | (8,075,520 | ) | $ | 17,963,587 | |||
|
Pablo Gortazar de Oyarzabal |
87,736 | (139,832 | ) | |||||
|
CTI Balloons Limited |
- | 482,487 | ||||||
|
CTI Europe GMBH |
- | 1,435,511 | ||||||
|
Kingman, S.A. de C.V. |
(23,252,310 | ) | ||||||
|
Venture Leasing, S. de R.L. de C.V. |
(526,354 | ) | (623,583 | ) | ||||
| $ | (31,766,448 | ) | $ | 19,118,170 | ||||
As indicated in Note 1 hereof, CTI Industries Co. ceased to be a shareholder of the Company, however, during the period from January 1 to October 11, the date on which it ceased to be a shareholder, it is considered a related party.
Note: The sales of machinery and inventories were considered as part of the payment of the capital reimbursement.
For the year 2020 the company has with transfer pricing study for transactions with related parties where such operations must be comparable to those used in/or arm's-length transactions.
NOTE 5 – INVENTORIES
The balance of this account is integrated as follows:
|
October 28, 2021 |
2020 |
|||||||
|
Inventory of raw materials and materials |
68,126,238 | 70,487,865 | ||||||
|
Production in process |
5,836,120 | 3,069,604 | ||||||
| $ | 73,962,358 | $ | 73,557,469 | |||||
NOTE 6 – MACHINERY AND EQUIPMENT
This item is analysed follows:
|
October 28, 2021 |
2020 |
|||||||
|
Machinery |
$ | 26,048,084 | $ | 26,021,972 | ||||
|
Leasehold improvements |
3,003,934 | 3,003,934 | ||||||
|
Molds |
5,845,490 | 5,815,740 | ||||||
|
Computer equipment and softwere |
1,441,941 | 1,437,630 | ||||||
|
Transport equipment |
653,463 | 653,463 | ||||||
|
Furniture and office equipment |
559,922 | 559,922 | ||||||
|
Leased machinery |
171,584 | 134,684 | ||||||
| 37,724,419 | 37,627,345 | |||||||
|
Depreciations and amortizations |
(35,410,432 | ) | (34,610,848 | ) | ||||
|
Total Machinery and equipment |
$ | 2,313,987 | $ | 3,016,497 | ||||
The depreciation and amortization methods and the annual rates are stated in note 2g. The charge to results amounted $660,370. and $1,071,779. for the periods ended on October 28, 2021 and December 31st, 2020 respectively.
Leasehold agreement
The company celebrated a leasehold agreement with Cuauhtemoc Inmobiliaria S.A. de C.V., for the building and facilities where it is located, both plant and administrative offices. This agreement establishes that the term of the leasehold is of mandatory 5 years. This agreement takes place since March 1st, 2017 and ends on February 28th, 2022.
The charge to results amounted $6’093,139. and $6’793,081.for the years ended on October 28, 2021 and December 31st, 2020 respectively.
NOTE 7 – OTHER ACCOUNTS PAYABLE
Some items presented in the Balance Sheet are analysed as follows, as of October 28, 2021 and December 31st, 2020.
|
October 28, 2021 |
2020 |
|||||||
|
Accounts payable to suppliers, accrued expenses |
||||||||
|
and other accounts payable: |
||||||||
|
Suppliers |
$ | 40,339,568 | $ | 43,754,022 | ||||
|
Sundry creditors |
43,503,752 | 36,266,481 | ||||||
|
Rated reserves |
8,378,608 | 1,755,200 | ||||||
|
Taxes payable |
1,177,026 | 443,563 | ||||||
| $ | 93,398,955 | $ | 82,219,266 | |||||
NOTE 8 – LONG TERM LIABILITIES TO RELATED PARTIES
|
As of October 28, 20212020 |
As of December 31, 2020 |
|||||||
|
CTI Industries |
||||||||
|
Term promissory note |
||||||||
|
The note issued in favor of CTI Industries Corporation that redocuments the amounts that Flexo Universal, S. de RL, of CV, owed on December 31, 2013 to CTI Industries Corporation, which includes $ 68,669. US dollars by principal and accrued interest $ 502,545. The amount of the interest accrued as of December 31, 2017 and December 31, 2018 amounted to the amount of $ 559,701 and 511,895. Such document will be paid as of March 31, 2014 and, subsequently, the first day of each calendar quarter until the debt has been fully settled. it is 2.5% per year, in case of default, an 8% annual rate will be established at the discretion of the creditor. |
- | 11,655,803 | ||||||
|
Current portion of long term liabilities |
- | (11,655,803 | ) | |||||
|
Loans current account 2014 |
||||||||
| Undocumented loans current account totaling $ 55.817 US dollars, without interest and agreed term | - | 1,113,477 | ||||||
|
Current portion of long term liabilities |
- | (1,113,477 | ) | |||||
|
Loans current account 2015 |
||||||||
|
|
||||||||
| Undocumented loans current account totaling $ 39,000. US dollars, without interest and agreed term | - | 777,999 | ||||||
|
Current portion of long term liabilities |
- | (777,999 | ) | |||||
|
Loans current account 2016 |
||||||||
| Undocumented loans current account totaling $ 97,363. US dollars, without interest and agreed term | - | (1,942,277 | ) | |||||
|
Current portion of long term liabilities |
- | 1,942,277 | ||||||
|
Pablo Gortazar |
||||||||
| Loan made by PABLO GORTAZAR to liquidate CTF INTERNATIONAL's financing amounted $980,704 Mexican Pesos. | - | - | ||||||
|
Loan made by PABLO GORTAZAR to liquidate CREDIT UNION's fiancincing amounted $776,070 Mexican pesos, with an interest annual rate LIBOR +.25 points |
||||||||
| - | 11,605,002 | |||||||
|
Total long term liabilities to related parties |
- | (11,605,002 | ) | |||||
|
Total current portion of long term liabilities |
$ | - | $ | - | ||||
As indicated in Note 1 hereof, on July 30, 2021, a Redemption Agreement was signed in which the reduction and form of payment of the capital stock owned by YUNHONG CTI LTD., (formerly CTI Industries INC,) was signed. for a total of $47,328,869 Mexican pesos.
Part of the decrease in capital consisted of the cancellation of current accounts both in favor of and in charge of CTI Industries and other related accounts.
NOTE 9 – POSITION AND TRANSACTION IN FOREING CURRENCY
As of October 28, 2021 and December 31st, 2020, the company had rights and (obligations) in foreign currency as follows:
|
US Dollars |
||||||||
|
October 28, 2021 |
2020 |
|||||||
|
Assets |
$ | 353,135 | $ | 1,496,988 | ||||
|
Liabilities |
(2,186,956 | ) | (2,352,009 | ) | ||||
| Excess of assets over (liabilities), assets in foreign currency | $ | (1,833,821 | ) | $ | (855,021 | ) | ||
Assets where translated and adjusted using the exchange rate $ 20.1888 and $ 18.8452 pesos per US dollar, as of October 28, 2021 and December 31st, 2020 respectively. As of February , 2022 the exchange rate is $ 20.37 pesos per dollar.
NOTE 10 – DEFERRED ASSETS AND LIABILITIES
In May 28, 2019 Flexo Universal, S. de R.L. de C.V., soldfour microturbines to BBVA Leasing México SA de CV in $4´102,000.00 MXN pesos plus VAT. It is cost of sales was $968,548.50 MXN pesos.
On May 30, 2019, Flexo Universal, S de RL de CV enteredinto a leasewith BBVA Leasing México SA de CV onsaidequipment, theterm of theleasebeingfor 5 years, expiring in May 2024.
The profit generated in this operation was deferred according to theterms of the lease in 60 months from June 2019, Monthly amounts are:
|
Income |
$ | 68,366.67 | ||
|
Cost of sale |
$ | 16,960.76 | ||
|
Profit |
$ | 51,405.91 |
During the irregular year 2021, from January 1 to October 28, and during fiscal year 2020 in which 12 months were recognized in income, the following balances remained as of October 28, 2021 to apply to future income and costs:
|
Income |
Cost |
Profit |
||||||||||
|
Initial balance |
$ | 2,803,033.32 | $ | - 695,391.02 | $ | 2,107,642.30 | ||||||
|
Applied from January 1 to October 28, 2021 |
$ | - 615,300.00 | $ | 152,646.81 | $ | - 462,653.19 | ||||||
|
Final balance as of October 28, 2021 |
$ | 2,187,733.32 | $ | - 542,744.21 | $ | 1,644,989.11 | ||||||
|
Income |
Cost |
Profit |
||||||||||
|
Initial balance |
$ | 3,623,433.32 | $ | - 898,920.13 | $ | 2,724,513.20 | ||||||
|
Applied in 2020 |
$ | - 820,400.00 | $ | 203,529.09 | $ | - 616,870.91 | ||||||
|
Final balance |
$ | 2,803,033.32 | $ | - 695,391.02 | $ | 2,107,642.30 | ||||||
NOTE 11 – CONTRIBUTED CAPITAL
The company’s capital stock integrated as follows as of October 28, 2021 and December 31st, 2020:
|
October 28, 2021 |
2020 |
|||||||
|
Fixed capital stock |
$ | 50,000 | $ | 50,000 | ||||
|
Variable capital stock |
2,082,075 | 47,360,945 | ||||||
|
Total capital stock |
$ | 2,132,075 | $ | 47,410,945 | ||||
The company’s capital stock is variable, with a fixed minimum of $50,000 without the possibility of retirement. The variable part has not limit.
Until August 31, 2015, the share capital was represented by common, nominative shares since the transformation of society in a Limited Liability Company with Variable Capital (1 September 2015), the capital is represented by Social Parties.
In the General Assembly of partners held on October 11, 2021, the following agreements were made:
|
1. Increase in Capital Stock class II social shares |
$ | 49,999. | ||
|
2. Increase in Capital Stock Class II social shares |
$ | 2,000,000. | ||
|
The increases add up to |
$ | 2,049,999. | ||
|
3. Reduction of Social Capital class II social shares |
$ | 49,999. | Note | |
|
4. Reduction of Social Capital class II social shares |
$ | 47,278,870. | Note | |
|
The decreases add up to |
$ | 47,328,869. | ||
|
Net decrease |
$ | 45,278,870. |
Note. Reductions made in compliance with the share redemption agreement entered into on July 30, 2021 between Kingman Distributions, S.A. de C.V.; Yunhong, CTI. (formerly CTI Industries); Flexo Universal, S.de R.L. de C.V., and Pablo Gortazar.
Said event is indicated in Note 1 of those present.
In this way, the Capital Stock as of October 28, 2021 is integrated as follows:
|
Social Parties |
|||||||||
|
Class I |
Class II |
||||||||
|
Number of parts |
Value |
Number of parts |
Value |
||||||
|
1a |
$ | 50,000 | |||||||
|
1 |
60,154 | ||||||||
|
1 |
21,921 | ||||||||
|
1 |
2,000,000 | ||||||||
|
1a |
$ | 50,000 |
2 |
$ | 2,082,075 | ||||
As of December 31, 2020, the capital stock was made up as follows:
|
Social Parties |
|||||||||||
|
Class I |
Class II |
||||||||||
|
Number of parts |
Value |
Number of parts |
Value |
||||||||
|
1 |
$ | 49,999 | 1 | $ | 47,278,870 | ||||||
|
1 |
1 | 1 | 60,154 | ||||||||
| 1 | 21,921 | ||||||||||
|
2 |
$ | 50,000 | 3 | $ | 47,360,945 | ||||||
NOTE 12 – EARNED (LOSS) SURPLUS:
Legal reserve
According to the General Law of Mercantile Societies, 5% ofthe fiscal year’s net profits should be kept to form the legal reserve until it reaches 20% of the capital stock. The legal reserve may be capitalized but not distributed unless the society is dissolved, and must be replenished when it decreases for any reason.
NOTE 13 – CONTINGENCIES:
|
a) |
Transfer pricing. - For related party transactions, tax differences could arise if the tax authority when reviewing such operations considers that the prices and amounts used by the company are not comparable to those used with or between independent parties in comparable operations. |
|
b) |
Review by the tax authorities.- According to current tax legislation, the authorities are entitled to examine up to five fiscal years prior to the last income tax return submitted. |
|
c) |
Pledge guarantees granted in credits granted to third parties. |
Contingency that existed until October 11, 2021, date on which YUNHONG CTI LTD., (Before CTI Industries INC,) ceased to be a shareholder of Flexo Universal, S de R.L. de C.V., the Guarantee was released by PNC Bank, National Asociation
On December 13, 2017, the shareholders met outside the General Assembly of Partners and the following resolutions were unanimously adopted by all partners:
• Approval of the conclusion of the contract and constitution of pledge on:
o The representative parts of the Company's capital stock of which they are holders.
o Certain assets without transfer of ownership.
• Pledges that are granted in accordance with the revolving credit and guarantee contract signed on December 14, 2017 between PNC Bank, National Association as Pledgeable Creditor "Accrediting" and "Agent" and CTI Industries Corporation as "Accredited" is being holder owning 99.8260% of the shares of Flexo Universal, S de RL de C.V., a company that is credited as a secured debtor "Guarantor"
• Such pledges are granted to guarantee the total and timely payment of each and every one of the guaranteed obligations without any limitation and must not be canceled, terminated or reduced until the payment and full and timely fulfillment of all the guaranteed operations.
• The pledged assets are as follows:
o All accounts receivable.
o All equipment and accessory goods. (Fixed assets)
o All intangible assets in general.
o All inventory.
o Securities, financial assets and investment properties.
o All contractual rights
o All the fruits and products of the described goods.
From the moment in which an event of default occurs and as long as it remains in force, the PNC BANK, NATIONAL ASSOCIATION pledgee may execute, at the cost of the pledgee FLEXO UNIVERSAL, S.DE R.L. DE C.V., the pledges constituted in terms of the revolving credit and guarantee contract entered into
NOTE 14- INCOME TAX (IT), CORPORATE FLAT TAX RATE :
Cost (benefit) of the tax applied to result is integrated as follows:
|
To October 28, 2021 |
2020 |
|||||||
|
ISR payable |
$ | - | $ | - | ||||
|
Deferred ISR |
-3,943,728 | -5,110,693 | ||||||
|
Net |
$ | -3,943,728 | $ | -5,110,693 | ||||
|
a. |
IT.-The main differences between the accounting profit and the tax result are: |
|
To October 28, 2021 |
2020 |
|||||||
|
Net (Loss) profit |
$ | -3,735,851 | $ | -11,652,273 | ||||
|
Plus (minus) |
||||||||
| Excess of accounting depreciation net over the fiscal depreciation | -898,426 | -634,290 | ||||||
| Excess of accounting deductions net over the fiscal deductions | -4,125,097 | -972,644 | ||||||
|
Fiscal (loss) profit |
-8,759,374 | -13,259,207 | ||||||
|
Minus employee profit sharing (PTU) paid |
- | - | ||||||
|
Tax basis to IT |
-8,759,374 | -13,259,207 | ||||||
|
Rate |
- | - | ||||||
|
IT payable (ISR) |
$ | - | $ | - | ||||
As October 28, 2021 and December 31st, 2020 temporary differences and fiscal losses carry forward recognized by the company on the deferred IT calculations are:
|
To October 28, 2021 |
2020 |
|||||||
|
Year effect calculation: |
||||||||
|
Deferred expenses |
$ | 994,441 | $ | 1,563,631 | ||||
|
Guarranty deposits |
(2,261,264 | ) | (2,261,264 | ) | ||||
|
Reserv for doubtful accounts |
(2,729,796 | ) | (1,688,710 | ) | ||||
|
Deferred liabilities |
(2,119,367 | ) | (2,803,033 | ) | ||||
|
Liabilities |
(19,052,914 | ) | (8,271,603 | ) | ||||
|
Fiscal loss of the year 2019 |
(22,942,728 | ) | (21,504,888 | ) | ||||
|
Base |
(48,111,628 | ) | (34,965,867 | ) | ||||
|
Tax Rate |
0.30 | 0.30 | ||||||
| -14,433,488 | -10,489,760 | |||||||
|
Recognized |
-10,489,760 | -5,379,067 | ||||||
|
Complement |
$ | -3,943,728 | -5,110,693 | |||||
NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS.
The Mexican Council for Research and Development of Financial Reporting Standards (CINIF), an independent body in charge of the development of the Mexican Accounting Standards, has made public the submission of the following FRS (Financial Reporting Standards) listed below:
Improvements to NIF 2021
|
D-5, |
Leases |
|
C-2, |
Investment in financial instruments |
|
B-3, |
Statement of comprehensive income. |
|
C-19, |
Financial instruments payable. |
|
C-20, |
Financial instruments receivable. |
NIF C-15, replaces and leaves without effect Bulletin C-15
This NIF will become effective on January 1, 2022, allowing its early application.
Is important to note that the use of FRS increases the quality of the financial information contained in the financial statements, thus ensuring their greater acceptance, not only nationally, but also internationally.
NOTE 16 -.APPROVAL OF THE ISSUANCE OF THE FINANCIAL STATEMENTS.
The financial statements were authorized for issue, by Pablo Gortazar de Oyarzabal, General Manager and Legal Representative, and subject to the approval of the general assembly of partners of the Company who may decide its modification in accordance with the provisions of the General Law of Commercial Societies.
The accompanying explanatory notes are an integral part of the financial statements.
Flexo Universal, S. de R.L. de C.V.
__________________________
Lic. Pablo Gortazar de Oyarzabal
Legal Representative