Yunhong Green Cti Ltd 10-Q for FY2021 Q2
Yunhong Green Cti Ltd. (YHGJ)
About this 10-Q
Yunhong Green Cti Ltd filed this 10-Q on August 20, 2021, covering the quarter ended June 30, 2021 (FY2021 Q2).
Headline figures
Quarter ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.33M
- up 10.1% from $5.75M a year earlier
- Net income
- $1.78M
- compared with a net loss of $1.53M a year earlier
- Diluted EPS
- $0.12
- compared with -$0.41 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to_________
Commission File Number
YUNHONG CTI LTD.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
| | ||
| | | |
| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | The (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☐ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of the registrant’s common stock, no par value per share, as of August 13th, 2021 was
| Item No. 1. |
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| Condensed Consolidated Balance Sheets at June 30, 2021(unaudited) and December 31, 2020 |
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| Notes to Condensed Consolidated Financial Statements (unaudited) |
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| Item No. 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item No. 3 |
Quantitative and Qualitative Disclosures Regarding Market Risk |
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| Item No. 4 |
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| Item No. 1 |
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| Item No. 1A |
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| Item No. 2 |
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| Item No. 3 |
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| Item No. 4 |
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| Item No. 5 |
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| Item No. 6 |
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| Exhibit 31.1 |
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| Exhibit 31.2 |
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| Exhibit 32 |
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| Condensed Consolidated Balance Sheets |
| June 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Income Tax Receivable | ||||||||
| 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 SHAREHOLDERS' 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 | ||||||||
| Total long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Mezzanine equity: | ||||||||
| Series B Preferred stock -- par value, share authorized shares issued and outstanding at June 30, 2021 and December 31, 2020 | ||||||||
| Equity: | ||||||||
| Yunhong CTI, Ltd stockholders' equity: | ||||||||
| Series A Preferred Stock -- par value, shares authorized, shares issued and outstanding at June 30, 2021 and December 31, 2020 (liquidation preference - $ million as of June 30, 2021) | ||||||||
| Series B Preferred Stock -- par value, shares authorized, shares issued and outstanding at June 30, 2021 and at December 31, 2020 respectively (liquidation preference - $ million as of June 30, 2021) | ||||||||
| Series C Preferred Stock -- par value, shares authorized, shares issued and outstanding at June 30, 2021 and at December 31, 2020 respectively (liquidation preference - $ million as of June 30, 2021) | ||||||||
| Common stock - par value, shares authorized, and shares issued and and shares outstanding at June 30, 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 Shareholders' Equity | ||||||||
| TOTAL LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS' EQUITY | $ | $ | ||||||
| See accompanying notes to condensed consolidated unaudited financial statements |
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
| For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net Sales |
$ | $ | $ | $ | ||||||||||||
| Cost of Sales |
||||||||||||||||
| Gross profit |
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| Operating expenses: |
||||||||||||||||
| General and administrative |
||||||||||||||||
| Selling |
||||||||||||||||
| Advertising and marketing |
||||||||||||||||
| Gain on sale of assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total operating (income) expenses |
( |
) | ( |
) | ||||||||||||
| Income (loss) from operations |
( |
) | ( |
) | ||||||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Gain on forgiveness of Payroll Protection Program Funding |
||||||||||||||||
| Other Expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Foreign currency gain |
( |
) | ( |
) | ||||||||||||
| Total other income (expense), net |
( |
) | ( |
) | ( |
) | ||||||||||
| Income (Loss) from continuing operations before taxes |
( |
) | ( |
) | ||||||||||||
| Income tax expense |
||||||||||||||||
| Income (Loss) from continuing operations |
( |
) | ( |
) | ||||||||||||
| Gain (loss) from discontinued operations, net of tax |
( |
) | ( |
) | ||||||||||||
| Net Income (Loss) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Less: Net income attributable to noncontrolling interest |
||||||||||||||||
| Net income (loss) attributable to Yunhong CTI, Ltd |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Other Comprehensive Income (Loss) |
||||||||||||||||
| Foreign currency adjustment |
( |
) | ||||||||||||||
| Reclassification of foreign currency translation gains to earnings |
( |
) | ( |
) | ||||||||||||
| Comprehensive Income Loss |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Deemed Dividends on preferred stock and amortization of beneficial conversion feature |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net Income (Loss) attributable to Yunhong CTI Ltd 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 condensed consolidated unaudited financial statements |
| Condensed Consolidated Statements of Cash Flows (Unaudited) |
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred gain on sale/leaseback | ( | ) | ||||||
| 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 | ||||||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Change in ROU Liability | ( | ) | ( | ) | ||||
| Trade payables | ( | ) | ||||||
| Accrued liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| 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 Series A 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 | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash payments for interest | $ | $ | ||||||
| Conversion of debt to Series A Preferred | $ | $ | ||||||
| Accrued Divided and Accretion on 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 Preferred in exchange from advance from investor | $ | $ | ||||||
| Lease right-of-use assets and lease liability | $ | $ | ||||||
| Amortization of beneficial conversion feature and deemed dividend on Series C Preferred stock | $ | $ | ||||||
| Cash payments for tax | $ | $ | ||||||
| See accompanying notes to condensed consolidated unaudited financial statements |
| Consolidated Statements of Stockholders' Equity |
| Yunhong CTI, Ltd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three and Six Months Ended June 30, 2020 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Other | Less |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock |
Series B Preferred Stock |
Series C Preferred Stock |
Common Stock |
Paid-in |
(Deficit) | Comprehensive |
Treasury Stock |
Noncontrolling |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Earnings |
Loss |
Shares | Amount | Interest | TOTAL | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2019 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - cash |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - conversion of debt |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Warrants issued to placement agent and other issuance costs |
- | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend on BCF of Series A Preferred Stock |
- | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Placement agent fees and issuance costs |
- | ( |
) | - | - | - | - | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial Conversion feature (BCF) on Series A Preferred Stock |
- | ( |
) | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend on BCF of Series A Preferred Stock |
- | - | - | - | - | - | - | ( |
) | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Accrued Deemed Dividend - Series A Preferred Stock |
- | - | - | - | ( |
) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2020 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - cash |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Convertible Preferred Stock Issuance - conversion of debt |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation |
- | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2020 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||||||||||||||
| Yunhong CTI, Ltd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three and Six Months Ended June 30, 2021 |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Other | Less |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock |
Series B Preferred Stock |
Series C Preferred Stock |
Common Stock |
Paid-in |
(Deficit) | Comprehensive | Treasury Stock |
Noncontrolling |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Earnings |
Loss |
Shares |
Amount |
Interest |
TOTAL |
||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||||||||||||||||||||
| Series C Convertible Stock Issuance |
- | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Series B Convertible Stock Modification |
- | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrants exercised - cashless |
- | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial Conversion feature (BCF) on Series A Preferred Stock |
- | ( |
) | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Deemed Dividend on BCF of Series A Preferred Stock |
- | - | - | - | - | - | - | ( |
) | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| 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 |
- | - | - | - | - | - | - | - | ( |
) | - | - | - | - | - | ( |
) | |||||||||||||||||||||||||||||||||||||||||||
| Net Loss |
- | - | - | - | - | - | - | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation |
- | - | - | - | - | - | - | - | - | - | ( |
) | - | - | - | ( |
) | |||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||||||||||
| 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 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 |
- | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss |
- | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign Currency Translation |
- | - | - | - | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance June 30, 2021 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| See accompanying notes to condensed consolidated unaudited financial statements |
Yunhong CTI Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying condensed (a) consolidated balance sheet as of June 30, 2021 and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2020.
Principles of consolidation and nature of operations:
Yunhong CTI Ltd, its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), its German subsidiary (CTI Europe GmbH) and its 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 2 Discontinued Operations, effective in the third quarter of 2019, the Company determined that it was exiting the business formerly conducted by CTI Europe GmbH (“CTI Europe”). Accordingly, the operations of this entity are classified as discontinued operations in these financial statements. The entity has been fully disposed of in the second quarter of 2021.
The condensed consolidated financial statements include the accounts of Yunhong CTI Ltd., and CTI Supply, Inc. and its majority owned subsidiaries, Flexo Universal and CTI Europe, as well as the accounts of Venture Leasing S. A. de R. L.
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.
Use of estimates:
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts and inventory valuation, and assumptions used as inputs in the Black-Scholes option-pricing model.
Earnings per share:
Basic income (loss) per share is computed by dividing net income (loss) attributable to Yunhong CTI Ltd shareholders by the weighted average number of shares of common stock outstanding during each period.
Diluted income (loss) per share is computed by dividing the net income (loss) attributable to Yunhong CTI Ltd shareholders by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
As of June 30, 2021 and 2020, shares to be issued upon the exercise of options and warrants aggregated and
Significant Accounting Policies:
The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2020. There were no significant changes to these accounting policies during the three and six months ended June 30, 2021.
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.
Note 2 – Discontinued Operations
In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of CTI Balloons and CTI Europe. These actions 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 has reported the results of these operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and divested its CTI Europe subsidiary in the second quarter of 2021.
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 had a major effect on our operations and financial results. Therefore, this product line has been presented as discontinued operations.
CTI Europe recorded a gain from discontinued operations, net of taxes of $
Our Ziploc product line recorded a loss from discontinued operations, net of taxes of for the three and six months ended June 30, 2021. The loss, net of taxes, was ($
Summarized Discontinued Operations Financial Information
The following table summarizes the major line items for the operations that are included in the income from discontinued operations, net of tax line item in the Unaudited Consolidated Statements of Comprehensive Income for the three months ended:
| June 30, 2021 | June 30, 2020 | |||||||
| Income Statement | ||||||||
| Net Sales | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross Loss | ( | ) | ( | ) | ||||
| SG&A | ||||||||
| Operating Income | ( | ) | ( | ) | ||||
| Other Expense | ( | ) | ||||||
| Pretax loss from discontinued operations | ( | ) | ( | ) | ||||
| Gain from classification to held for sale | ||||||||
| Net Income (loss) from discontinued operations | ( | ) | ||||||
| Non-controlling Interest share of profit/loss | ||||||||
| Net Loss | $ | $ | ( | ) | ||||
The following table summarizes the major line items for the operations that are included in the income from discontinued operations, net of tax line item in the Unaudited Consolidated Statements of Income for the six months ended:
| June 30, 2021 | June 30, 2020 | |||||||
| Income Statement | ||||||||
| Net Sales | $ | $ | ||||||
| Cost of Sales | ||||||||
| Gross Loss | ( | ) | ( | ) | ||||
| SG&A | ||||||||
| Operating Income | ( | ) | ( | ) | ||||
| Other Expense (Income) | ( | ) | ||||||
| Pretax loss from discontinued operations | ( | ) | ( | ) | ||||
| Gain from classification to held for sale | ||||||||
| Income (Loss) from discontinued operations | ( | ) | ||||||
| Non-controlling Interest share of profit/loss | ||||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
Note 3 – Liquidity and Going Concern
The Company’s financial statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has a cumulative net loss from inception to June 30, 2021 of over $
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing, continuing to focus our Company on the most profitable elements, and exploring alternative funding sources on an as needed basis. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s primary sources of liquidity have traditionally been comprised of cash and cash equivalents as well as availability under the Credit Agreement with PNC (see Note 4). As of March 2019, October 2019 and January 2020, we entered into forbearance agreements with PNC. We encountered subsequent compliance failures with covenants during 2020 and we were out of compliance with the terms of our credit facility, as amended, as of June 30, 2021.
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 $
| ● | The maximum revolving advance amount is reduced from $ |
| ● | The Termination date of the loan agreement is revised from December 14, 2022 to December 31, 2021 |
| ● | On or before June 30, 2021 or such later date as the lender agrees in its sole discretion, the Company shall receive an equity investment of at least $ |
| ● | On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021 |
| ● | On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash |
| ● | The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement) shall be increased from $ |
| ● | Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates shall no longer be considered eligible receivables |
| ● | Modifications will be made to the budget, testing and variance provisions of the Loan Agreement. |
In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender a Forbearance Fee of $
Note 4 - Debt
During December 2017, we terminated a prior credit arrangement and entered in new financing agreements (as amended to date, the “PNC Agreements”) with PNC Bank, National Association (“PNC”). The PNC Agreements, included a $
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).
Certain terms of the PNC Agreements include:
| ● | Negative Covenants: Negative covenants under which we are prohibited from, or restricted in our ability to: |
| o | Borrow money; |
| o | Pay dividends and make distributions; |
| o | Make certain investments; |
| o | Use assets as security in other transactions; |
| o | Create liens; |
| o | Enter into affiliate transactions; |
| o | Merge or consolidate; or |
| o | Transfer and sell assets. |
| ● | Financial Covenants: Financial covenants we are required to meet including: |
| o | We are required to maintain a "Fixed Charge Coverage Ratio", which is defined as the ratio of (a) EBITDA for such fiscal period, minus Unfinanced Capital Expenditures made during such period, minus distributions (including tax distributions) and dividends made during such period, minus cash taxes paid during such period to (b) all Debt Payments made during such period. The highest values allowed for each quarterly calculation are as follow: |
| Fiscal Quarter Ratio | ||||||
| June 30, 2020 | to | 1.00 | ||||
| September 30, 2020 | to | 1.00 | ||||
| December 31, 2020 | to | 1.00 | ||||
| March 31, 2021 | to | 1.00 | ||||
| June 30, 2021 and thereafter | to | 1.00 |
The PNC Agreements provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time.
Failure to comply with these covenants has caused us to pay a higher rate of interest (increased by
As of January 1, 2019, the Company had a note payable to John H. Schwan, Director and former Chairman of the Board, for $
The loan and interest payable to Mr. Schwan amounted to $
During 2020, Flexo replaced a $
Note 5 - Shareholders' Equity
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, 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 the Chairman of the Board of Directors Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued
Advance from Investor
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 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 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 June 30, 2021 | ||||||||
| Exercisable at June 30, 2021 | $ | |||||||
Note 6 - 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.
In July, 2017, God’s Little Gift, Inc. (d\b\a) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company based on disputed compensation amounts over several years. This action was resolved by mutual agreement between the parties during January 2019. Mr. Page received
FedEx Trade Networks Transport and Brokerage Inc. v. CTI Industries Corp., Case No. 20 L 46, was filed on January 27, 2020 in the Circuit Court of the 19th Judicial Circuit, Lake County, Illinois. The complaint for breach of contract sought $
Airgas USA, LLC v. CTI Industries Corp., Case No. 01-20-0014-7852 was filed with the American Arbitration Association on or about September 8, 2020. The claim seeks $
On October 19, 2020, Jules and Associates, Inc. sent CTI a demand letter related to the lease of certain equipment. The letter demanded $
Benchmark Investments, Inc. v. Yunhong CTI Ltd filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on CTI on March 31, 2021. The complaint seeks damages in excess of $
On July 16, 2021, Transportation Solutions Group LLC d/b/a Redwood Multimodal filed a Complaint against CTI for breach of contract or in the alternative quantum alleging damages for unpaid invoices in the amount of $
Note 7 - Other Comprehensive Income
In the three months ended June 30, 2021 and 2020, the Company incurred other comprehensive income of approximately $
Note 8 - Geographic Segment Data
The Company has determined that it operates primarily in business segment that designs, manufactures, and distributes film and film related products for use in packaging, storage, and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's continuing operations by geographic area is as follows:
| Net Sales to Outside Customers | ||||||||
| For the Three Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| $ | $ | |||||||
| Net Sales to Outside Customers | ||||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| $ | $ | |||||||
| Total Assets at | ||||||||
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| United States | $ | $ | ||||||
| Mexico | ||||||||
| Assets Held for Sale International Subsidiaries | ||||||||
| $ | $ | |||||||
Note 9 - Inventories, Net of Continuing Operations
| June 30, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| In Transit | ||||||||
| Allowance for excess quantities | ( | ) | ( | ) | ||||
| Total inventories | $ | $ | ||||||
Note 10 - Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the three and six months ended June 30, 2021 and 2020, there were customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three and six months ended June 30, 2021 and 2020 are as follows:
| Three Months Ended | Three Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | |||||||||||||||
| Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
| Customer A | $ | % | $ | % | ||||||||||||
| Customer B | $ | % | $ | % | ||||||||||||
| Six Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | |||||||||||||||
| Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
| Customer A | $ | % | $ | % | ||||||||||||
| Customer B | $ | % | $ | % | ||||||||||||
As of June 30, 2021, the total amounts owed to the Company by these customers were approximately $
Note 11 - Related Party Transactions
John H. Schwan, who resigned as Chairman of the Board on June 1, 2020, is the brother of 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 $
During the period from January 2003 to the present, John H. Schwan has made loans to the Company which had outstanding balances of $
Items identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of June 30, 2021 and December 31, 2020 include loans by shareholders to Flexo Universal totaling and $
On July 1, 2019, the Company deconsolidated Clever, and as result the Company recorded a note receivable of $
In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by the Chairman of the Board of Directors Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued
Note 12 - Derivative Instruments; Fair Value
The Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that all derivative instruments be recognized on the balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-one matching of the derivative instrument to our underlying transaction. As of June 30, 2021, we had no such instrument.
Note 13 - Leases
We adopted ASC Topic 842 (Leases) on January 1, 2019. In July 2020, the Company entered into a lease agreement for a building through June 2021 (with no extension options). The monthly lease payments are $
Note 14 - Subsequent Events
On July 30, 2021, Yunhong CTI Ltd. (the “Company”) entered into an agreement (the “Agreement”) whereby it agreed to the redemption of all of its equity interests in Flexo Universal S DE RL DE CV, a Mexican corporation (“Flexo”), in a transaction whereby Kingman Distributions, S.A. DE C.V, a Mexican corporation (the “Buyer”), will become the majority owner of Flexo (the “Transaction”).
In connection with the Transaction, Flexo will purchase and redeem all of the Company’s equity interests in Flexo in return for a purchase price of Five Hundred Thousand Dollars ($
The closing is conditioned on, among other things, (i) the Company being released from all obligations in connection with its guaranty of the real property lease for Flexo’s operating location in Guadalajara, Mexico, and (ii) the Company repaying its obligations in full to PNC Bank, National Association pursuant to the terms of the Revolving Credit, Term Loan and Security Agreement, dated as of December 14, 2017, as amended between the Company and the bank. The Transaction will close when all of the closing conditions set forth in in the Agreement have been satisfied.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Quarterly Report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, those discussed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 under the heading “Risk Factors.”
Overview
We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and most of our foil balloons at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, and Latin America. We also market and sell Candy Blossoms and party goods.
Summary of Subsequent Events
On July 30, 2021, Yunhong CTI Ltd. (the “Company”) entered into an agreement (the “Agreement”) whereby it agreed to the redemption of all of its equity interests in Flexo Universal S DE RL DE CV, a Mexican corporation (“Flexo”), in a transaction whereby Kingman Distributions, S.A. DE C.V, a Mexican corporation (the “Buyer”), will become the majority owner of Flexo (the “Transaction”).
In connection with the Transaction, Flexo will purchase and redeem all of the Company’s equity interests in Flexo in return for a purchase price of Five Hundred Thousand Dollars ($500,000), of which One Hundred Thousand Dollars ($100,000) is to be paid at the closing of the Transaction, and the remainder is to be paid in installments over twelve months following the closing date (the “Installment Obligations”). The Installment Obligations are to be secured by a pledge of the assets of Flexo, as well as by guaranties provided by the Buyer and Pablo Gortazar, an individual with an ownership interest in Flexo, pursuant to a Guaranty and Security Agreement to be entered into among the Company, the Buyer, Flexo and Mr. Gortazar at the closing.
The closing is conditioned on, among other things, (i) the Company being released from all obligations in connection with its guaranty of the real property lease for Flexo’s operating location in Guadalajara, Mexico, and (ii) the Company repaying its obligations in full to PNC Bank, National Association pursuant to the terms of the Revolving Credit, Term Loan and Security Agreement, dated as of December 14, 2017, as amended between the Company and the bank. The Transaction will close when all of the closing conditions set forth in in the Agreement have been satisfied.
Comparability
In July 2019, management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the Board authorized management to divest these international subsidiaries. These actions 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 has reported the results of these International operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019, its Ziploc product line in the first quarter 2020, and divested its CTI Europe (Germany) subsidiary in the second quarter 2021.
Results of Operations
Net Sales. For the three month periods ended June 30, 2021 and 2020, net sales were $6,325,000 and $5,745,000, respectively.
For the three-month period ended June 30, 2021 and 2020, net sales by product category were as follows:
| Three Months Ended |
||||||||||||||||||||||||
| June 30, 2021 |
June 30, 2020 |
|||||||||||||||||||||||
| $ | % of |
$ | % of |
|||||||||||||||||||||
| Product Category |
(000) Omitted |
Net Sales |
(000) Omitted |
Net Sales |
Variance |
% change |
||||||||||||||||||
| Foil Balloons |
4,573 | 72 | % | 3,372 | 59 | % | 1,201 | 35.6 | % | |||||||||||||||
| Latex Balloons |
609 | 10 | % | 1,115 | 19 | % | (506 | ) | -45.4 | % | ||||||||||||||
| Film Products |
505 | 8 | % | 371 | 6 | % | 134 | 36.0 | % | |||||||||||||||
| Other |
638 | 10 | % | 887 | 16 | % | (249 | ) | -28.1 | % | ||||||||||||||
| Total |
6,325 | 100 | % | 5,745 | 100 | % | 580 | 10.1 | % | |||||||||||||||
For the six month periods ended June 30, 2021 and 2020, net sales were $13,741,000 and $12,813,000, respectively.
For the six month period ended June 30, 2021 and 2020, net sales by product category were as follows:
| June 30, 2021 |
June 30, 2020 |
|||||||||||||||||||||||
| $ | % of |
$ | % of |
|||||||||||||||||||||
| Product Category |
(000) Omitted |
Net Sales |
(000) Omitted |
Net Sales |
Variance |
% change |
||||||||||||||||||
| Foil Balloons |
9,606 | 70 | % | 7,864 | 61 | % | 1,746 | 22.2 | % | |||||||||||||||
| Latex Balloons |
1,306 | 10 | % | 2,698 | 21 | % | (1,392 | ) | -51.6 | % | ||||||||||||||
| Film Products |
950 | 7 | % | 586 | 5 | % | 364 | 62.1 | % | |||||||||||||||
| Other |
1,879 | 14 | % | 1,665 | 13 | % | 214 | 12.9 | % | |||||||||||||||
| Total |
13,741 | 100 | % | 12,813 | 100 | % | 932 | 7.3 | % | |||||||||||||||
Foil Balloons. Revenues from the sale of foil balloons increased during the three months period from $3,372,000 ending June 30, 2020 compared to $4,573,000 during the three month period of 2021. Revenues from the sale of foil balloons increased during the six month period from $7,864,000 ending June 30, 2020 compared to $9,610,000 during the six month period of 2021. Due to COVID-19 related issues, graduation season did not occur as it normally does during 2020. This is the third strongest event in our annual sales period.
Latex Balloons. Revenues from the sale of latex balloons were $609,000 and $1,306,000 during the three and six month periods ended June 30, 2021, compared to $1,115,000 and $2,698,000 during the same periods of 2020. Latex balloons encountered a COVID-19 constraint, as production activities were severely limited by the Mexican government.
Films. Revenues from the sale of commercial films were $505,000 and $950,000 during the three and six month periods ended June 30, 2021, compared to $371,000 and $586,000 during the same periods of 2020.
Other Revenues. Revenues from the sale of other products were $638,000 and $1,879,000 during the three and six month periods ended June 30, 2021, compared to $887,000 and $1,665,000 during the same periods of 2020. The revenues from the sale of other products during the first six months of 2021 and 2020 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers and (ii) the sale of accessories and supply items related to balloon products.
Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales of our top three and ten customers for the three month periods ended June 30, 2021 and 2020.
| Three Months Ended June 30, |
||||||||
| % of Sales |
||||||||
| 2021 |
2020 |
|||||||
| Top 3 Customers |
71 | % |
66 | % |
||||
| Top 10 Customers |
82 | % |
83 | % |
||||
| Six Months Ended June 30, |
||||||||
| % of Sales |
||||||||
| 2021 |
2020 |
|||||||
| Top 3 Customers |
73 | % |
65 | % |
||||
| Top 10 Customers |
87 | % |
81 | % |
||||
During the three and six months ended June 30, 2021 and 2020, there were two customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three and six months ended June 30, 2021 and 2020 are as follows:
| Three Months Ended |
Three Months Ended |
|||||||||||||||
| June 30, 2021 |
June 30, 2020 |
|||||||||||||||
| Customer |
Net Sales |
% of Net Sales |
Net Sales |
% of Net Sales |
||||||||||||
| Customer A |
$ | 3,421,000 | 54 | % |
$ | 2,508,000 | 43 | % |
||||||||
| Customer B |
$ | 812,000 | 13 | % |
$ | 947,000 | 16 | % |
||||||||
| Six Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, 2021 |
June 30, 2020 |
|||||||||||||||
| Customer |
Net Sales |
% of Net Sales |
Net Sales |
% of Net Sales |
||||||||||||
| Customer A |
$ | 7,344,000 | 53 | % |
$ | 5,675,000 | 44 | % |
||||||||
| Customer B |
$ | 2,106,000 | 15 | % |
$ | 2,110,000 | 17 | % |
||||||||
As of June 30, 2021, the total amounts owed to the Company by these customers were approximately $2,202,000 or 42% of the Company’s consolidated net accounts receivable. The amounts owed at June 30, 2020 by these customers were approximately $4,012,000 or 56% of the Company’s consolidated net accounts receivable.
Cost of Sales. During the three and six month period ended June 30, 2021, the cost of sales was $5,459,000 and $11,782,000, compared to $5,136,000 and $10,722,000 respectively for the same period of 2020 due to higher sales volume.
General and Administrative. During the three and six month period ended June 30, 2021, general and administrative expenses were $1,257,000 and $2,378,000 compared to $1,484,000 and $2,186,000 respectively for the same period in 2020.
Selling, Advertising and Marketing. During the three and six month period ended June 30, 2021, selling, advertising and marketing expenses were $107,000 and $247,000 as compared to $108,000 and $282,000 respectively for the same period in 2020.
Gain on Sale of Assets. On April 23, 2021, the Company sold its facility in Lake Barrington, Illinois and as a result of the sale recognized a gain amounting to $3,357,000.
Other Income (Expense). During the three and six month period ended June 30, 2021, the Company incurred interest expense of $181,000 and $413,000 compared to interest expense of $337,000 and $778,000 respectively during the same period of 2020. Interest expense decreased due to the reduction of the Company's senior debt facility.
For the three and six month period ended June 30, 2021, the Company had a foreign currency transaction gain of $36,000 and $9,000 as compared to a loss of $30,000 and $184,000 respectively during the same period of 2020.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the six months ended June 30, 2021, net cash used in operations was $631,000, compared to net cash used by operations during the six months ended June 30, 2020 of $1,028,000.
Significant changes in working capital items during the three months ended June 30, 2021 included:
| ● |
A decrease in accounts receivable of $162,000 compared to a decrease in accounts receivable of $1,154,000 in the same period of 2020. |
| ● |
An increase in inventory of $457,000 compared to a decrease in inventory of $1,682,000 in 2020. |
| ● |
An increase in trade payables of $43,000 compared to a decrease in trade payables of $1,832,000 in 2020. |
| ● | A gain on sale of assets of $3,357,000 in 2021 and nil in 2020 | |
| ● |
A decrease in prepaid expenses and other assets of $219,000 compared to a decrease of $38,000 in 2020. |
|
| ● |
An increase in accrued liabilities of $314,000 compared to an increase in accrued liabilities of $11,000 in 2020. |
Investing Activity. During the six months ended June 30, 2021, cash provided by investing activity was $3,454,000, compared to cash used in investing activity for the same period of 2020 in the amount of $72,000. Investing activity consisted principally of the cash flows from the sale and leaseback of our Lake Barrington, Illinois facility, as further described below under the heading "Liquidity and Capital Resources"..
Financing Activities. During the six months ended June 30, 2021, cash used in financing activities was $2,695,000 compared to cash used in financing activities for the same period of 2020 in the amount of $346,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt.
Liquidity and Capital Resources.
At June 30, 2021, the Company had cash balances of $273,000 compared to cash balances of $104,000 for the same period of 2020.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses. Management’s plans to continue as a going concern include raising additional capital through sales of equity securities and borrowing, continuing to focus our Company on the most profitable elements, and exploring alternative funding sources on an as needed basis. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The COVID-19 pandemic has impacted the Company’s business operations to some extent and is expected to continue to do so and, in light of the effect of such pandemic on financial markets, these impacts may include reduced access to capital. The ability of the Company to continue as a going concern is dependent upon its ability to successfully secure other sources of financing and attain profitable operations. There is substantial doubt about the ability of the Company to continue as a going concern for one year from the issuance of the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company’s primary sources of liquidity have traditionally been comprised of cash and cash equivalents as well as availability under the Credit Agreement with PNC (see Note 4). As of March 2019, October 2019 and January 2020, we entered into forbearance agreements with PNC. We encountered subsequent compliance failures with covenants during 2020 and we were out of compliance with the terms of our credit facility, as amended, as of March 31, 2021.
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 $3,500,000, consisting of $2,000,000 in cash and a promissory note with a principal amount of $1,500,000, due and payable on May 3, 2021 (the “Purchaser Promissory Note”). 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 ten years. The annual base rent commences at $500,000 for the first year of the term and escalates annually to $652,386 during the last year of the term of the lease. Concurrently with the entry into the PSA and the Lease, the Company entered into a Consent, Forbearance and Amendment No. 6 to Revolving Credit, Term Loan and Security Agreement (the “Amendment Agreement”) with PNC for itself and for the other participant lenders thereunder (collectively, the “Lender”). Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement (the “Existing Defaults”) and were continuing. Pursuant to the Amendment Agreement, the Lender consented to the transactions contemplated by the PSA and the Lease, as required under the Loan Agreement. As a condition to the Amendment Agreement, the Company agreed that the full $2,000,000 in cash proceeds from the sale of the Lake Barrington Facility would be applied to repay the $2,000,000 term loan owed to the Lender pursuant to the Loan Agreement. The Company further agreed that $1,500,000 in proceeds from the Purchaser Promissory Note will be applied to amounts due and owing to the Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”). Pursuant to the Amendment Agreement, the Lender agreed to forbear from exercising its rights and remedies with respect to the Existing Event of Defaults under the Loan Agreement for a period ending on the earlier of September 30, 2021, the occurrence of a new event of default under the Loan Agreement, or the occurrence of a Termination Event (as defined therein). Additionally, certain additions and amendments to the Loan Agreement were set forth in the Amendment Agreement, including:
| ● |
The Maximum Revolving Advance Amount is reduced from $18,000,0000 to $9,000,000; |
| ● |
The Termination Date of the Loan Agreement is revised from December 14, 2022 to December 31, 2021; |
| ● |
On or before June 30, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the Revolving Credit Advance under the Loan Agreement (the “Equity Investment”); |
| ● |
On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021; |
| ● |
On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash; |
| ● |
The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement) shall be increased from $1,025,000 to $2,525,000; |
| ● |
Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates shall no longer be considered eligible receivables; |
| ● |
Modifications will be made to the budget, testing and variance provisions of the Loan Agreement. |
In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender 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 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.
Seasonality
In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years.
Please see pages 11-13 of our Annual Report on Form 10-K for the year ended December 31, 2020 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three and six months ended June 30, 2021.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Not applicable.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission's rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and 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 June 30, 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 June 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q 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 June 30, 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 a result of the material weaknesses, we have concluded that we did not maintain effective internal control over financial reporting as of June 30, 2021.
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.
In July, 2017, God’s Little Gift, Inc. (d\b\a) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company based on disputed compensation amounts over several years. This action was resolved by mutual agreement between the parties during January 2019. Mr. Page received 20,000 shares of CTI common stock, $5,000 in cash, and a minimum payout in his monthly royalty calculation of $7,667 beginning March 1, 2019 and ending August 1, 2021. The balance remaining as of June 30, 2021 and December 31, 2020 amounted to $15,324 and $53,659, respectively.
FedEx Trade Networks Transport and Brokerage Inc. v. CTI Industries Corp., Case No. 20 L 46, was filed on January 27, 2020 in the Circuit Court of the 19th Judicial Circuit, Lake County, Illinois. The complaint for breach of contract sought $163,964.75 in damages, plus interest and court costs. On October 15, 2020, the case was dismissed with leave to reinstate pursuant to settlement. The settlement calls for the payment of $100,400.00 in monthly installments of $10,000 per month for a period of ten (10) months and with the last payment being in the amount of $10,400. The first payment came due and was made on October 30, 2020, and payments have been made monthly. The balance remaining as of June 30, 2021 and December 31, 2020 amounted to $10,400 and $70,400, respectively.
Airgas USA, LLC v. CTI Industries Corp., Case No. 01-20-0014-7852 was filed with the American Arbitration Association on or about September 8, 2020. The claim seeks $212,000, plus interest, attorneys’ fees and costs for breach of contract. Claimant agreed to give CTI an extension to respond to the claim so the parties could attempt to resolve. On February 10, 2021, Airgas accepted CTI’s offer to pay $125,000 over 10 months. Airgas agreed to the settlement in March of 2021. The balance as of June 30, 2021 and December 31, 2020 amounted to $100,000 and 125,000, respectively
On October 19, 2020, Jules and Associates, Inc. sent CTI a demand letter related to the lease of certain equipment. The letter demanded $65,846.99 for alleged past due amounts under the lease as well as a return of the equipment. Discussions regarding the return of the equipment are ongoing and no lawsuit has been filed. On April 5, 2020, Jules and Associates, Inc. filed and served on CTI a demand for arbitration with JAMS related to the lease of certain equipment. The demand requests $98,244.55 for alleged past due amounts, plus amounts that Jules alleges continue to accrue under the lease, attorneys’ fees and costs, as well as a return of the equipment or its fair market value. CTI has settled this matter with Jules for $90,000 to be paid in installments as follows: $15,000 upon execution of a settlement agreement, $25,000 on October 15; $25,000 on November 15; and $25,000 on December 15. Additionally, as part of the settlement, CTI is entitled to keep the equipment and Jules will execute a bill of sale to CTI for the equipment upon receipt of the settlement amount. CTI is waiting for Jules to send a draft settlement agreement on those terms. The liability recorded by the Company as of June 30, 2021 and December 31, 2020 amounted to $107,410 and $75,187, respectively.
Benchmark Investments, Inc. v. Yunhong CTI Ltd filed a case in the United States District Court for the Southern District of New York on March 16, 2021 and served on CTI on March 31, 2021. The complaint seeks damages in excess of $500,000. CTI has filed our Answer and Counterclaim to the complaint.
On July 16, 2021, Transportation Solutions Group LLC d/b/a Redwood Multimodal filed a Complaint against CTI for breach of contract or in the alternative quantum alleging damages for unpaid invoices in the amount of $98,660.88, plus attorneys’ fees and costs. The case is pending in the Circuit Court of Cook County, Illinois, Law Division under Case Number 2021 L 7225. CTI was served on July 30 and its deadline to appear and answer or otherwise plead is August 30, 2021. The Company has reached out to Plaintiff to attempt to resolve this matter.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
On December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association and the other participant lenders thereunder (collectively, “Lender”).
Prior to January 13, 2020, certain events of default under the Loan Agreement had occurred (the "Prior Defaults"). On January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) between Lender and the Company became effective, pursuant to which Lender agreed to, among other things, forebear from exercising the rights and remedies in respect of the Prior Defaults afforded to Lender under the Loan Agreement for a period ending no later than December 31, 2020 (the “Forbearance Period”).
On June 15, 2020, the Lender provided the Company notice (the “Default Notice”) that (i) an additional Event of Default (as defined in the Loan Agreement) had occurred and is continuing as a result of the Company's failure to maintain a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the "March FCCR Default"), (ii) as a result of the occurrence and continuance of the March FCCR Default, the Forbearance Period has ended, and (iii) as a result of the termination of the Forbearance Period, the Lender is entitled to exercise immediately all of its rights and remedies under the Loan Agreement including, without limitation, ceasing to make further advances to the Company and declaring all obligations to be immediately due and payable in accordance with the Loan Agreement.
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 $3,500,000, consisting of $2,000,000 in cash and a promissory note with a principal amount of $1,500,000, due and payable on May 3, 2021 (the “Purchaser Promissory Note”). 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 ten years. The annual base rent commences at $500,000 for the first year of the term and escalates annually to $652,386 during the last year of the term of the lease. Concurrently with the entry into the PSA and the Lease, the Company entered into a Consent, Forbearance and Amendment No. 6 to Revolving Credit, Term Loan and Security Agreement (the “Amendment Agreement”) with PNC for itself and for the other participant lenders thereunder (collectively, the “Lender”). Prior to entering into the Amendment Agreement, PNC had notified the Company that various events of default had occurred under the Loan Agreement (the “Existing Defaults”) and were continuing. Pursuant to the Amendment Agreement, the Lender consented to the transactions contemplated by the PSA and the Lease, as required under the Loan Agreement. As a condition to the Amendment Agreement, the Company agreed that the full $2,000,000 in cash proceeds from the sale of the Lake Barrington Facility would be applied to repay the $2,000,000 term loan owed to the Lender pursuant to the Loan Agreement. The Company further agreed that $1,500,000 in proceeds from the Purchaser Promissory Note will be applied to amounts due and owing to the Lender under revolving credit advances made pursuant to the Loan Agreement (the “Revolving Loans”). Pursuant to the Amendment Agreement, the Lender agreed to forbear from exercising its rights and remedies with respect to the Existing Event of Defaults under the Loan Agreement for a period ending on the earlier of September 30, 2021, the occurrence of a new event of default under the Loan Agreement, or the occurrence of a Termination Event (as defined therein). Additionally, certain additions and amendments to the Loan Agreement were set forth in the Amendment Agreement, including:
| ● |
The maximum revolving advance amount is reduced from $18,000,000 to $9,000,000 |
| ● |
The Termination date of the loan agreement is revised from December 14, 2022 to December 31, 2021 |
| ● |
On or before June 30, 2021 or such later date as the lender agrees in its sole discretion, the Company shall receive an equity investment of at least $1,500,000 and apply 100% of the proceeds to a reduction of the revolving line of credit advance under the loan agreement (the Equity Investment) |
| ● |
On or before August 15, 2021, or such later date as the Lender agrees in its sole discretion, the Company shall deliver to Lender (i) a binding term sheet, in form and substance acceptable to Lender, from a financing source that provides for the refinance and payment in full, in cash, of the obligations owing under the Loan Agreement on or before September 30, 2021, or (ii) evidence, in form and substance satisfactory to the Lender, that certain equity holders of the Company have available and identifiable funds that are on deposit with a depository institution that are sufficient to pay in full, in cash, all of the Company obligations under the Loan Agreement on or before September 30, 2021 |
| ● |
On or before September 30, 2021, the Company will cause all of the amounts owing under the Loan Agreement to be paid in full in cash |
| ● |
The Forbearance Reserve (as defined in Amendment No. 5 to the Loan Agreement) shall be increased from $1,025,000 to $2,525,000 |
| ● |
Effective August 1, 2021, accounts receivable from Wal-Mart Stores and its affiliates shall no longer be considered eligible receivables |
| ● |
Modifications will be made to the budget, testing and variance provisions of the Loan Agreement. |
In consideration for entering into the Loan Amendment, the Company agreed to pay the Lender 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 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.
Item 4. Mine Safety Disclosures
Not applicable.
None.
The following are being filed as exhibits to this report:
| Exhibit Number |
Description |
| 31.1* |
|
| 31.2* |
|
| 32** |
|
| 101* |
Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * |
Filed herewith |
| ** |
furnished herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 20, 2021 |
Yunhong CTI Ltd. |
| By: /s/ Jennifer M. Connerty Jennifer M. Connerty Chief Financial Officer
By: /s/ Yubao Li Yubao Li President and Chief Executive Officer |