YUNHONG GREEN CTI LTD. - Quarter Report: 2020 September (Form 10-Q)

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

 

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

 

For the transition period from _________to_________

 

Commission File Number

000-23115

 

YUNHONG CTI LTD.

(Exact name of registrant as specified in its charter)

 

Illinois		36-2848943
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

 

22160 N. Pepper Road
Barrington, Illinois		60010
(Address of principal executive offices)		(Zip Code)

 

(847)382-1000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		CTIB		The Nasdaq Stock Market LLC (The Nasdaq Capital Market)

 

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock as of November 20, 2020 was 5,783,646 (excluding treasury shares).

 

 

 

 

		September 30, 2020				December 31, 2019
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	-			$	845,098
Accounts receivable			5,297,701				9,011,569
Inventories, net			10,643,911				13,959,499
Prepaid expenses			633,223				353,183
Other current assets			1,155,266				1,312,205
Receivable from related party			1,026,813				1,387,131
Current assets of discontinued operations			748,386				756,031
Total current assets			19,505,300				27,624,716
Property, plant and equipment:
Machinery and equipment			21,796,644				23,822,808
Building			3,374,334				3,374,334
Office furniture and equipment			2,221,195				2,289,444
Intellectual property			783,179				783,179
Land			250,000				250,000
Leasehold improvements			390,624				415,737
Fixtures and equipment at customer locations			518,450				518,450
Projects under construction			68,738				74,929
			29,403,164				31,528,881
Less : accumulated depreciation and amortization			(27,397,950	)			(28,997,809	)
Total property, plant and equipment, net			2,005,214				2,531,072
Other assets:
Operating lease right-of-use			359,802				1,046,438
Other assets			78,259				118,857
Total other assets			438,061				1,165,295
TOTAL ASSETS		$	21,948,575			$	31,321,083
LIABILITIES AND EQUITY
Current liabilities:
Bank overdraft		$	29,837			$	-
Trade payables			6,135,867				7,021,580
Line of credit			5,613,063				14,518,107
Notes payable - current portion			2,467,741				3,451,880
Advance from investor			1,500,000				-
Notes payable affiliates - current portion			9,937				12,684
Operating Lease Liabilities			311,678				658,374
Accrued liabilities			1,262,139				1,205,027
Current liabilities of discontinued operations			273,782				656,753
Total current liabilities			17,604,044				27,524,405
Long-term liabilities:
Notes payable - affiliates			10,632				14,340
Notes payable, net of current portion			1,445,683				1,024,441
Operating Lease Liabilities			48,123				388,064
Notes payable - officers, subordinated			1,107,080				1,058,486
Deferred gain (non current)			-				184,840
Total long-term liabilities			2,611,518				2,670,171
TOTAL LIABILITIES			20,215,562				30,194,576
Stockholders' Equity
Yunhong CTI, Ltd stockholders' equity:
Preferred Stock -- no par value, 3,000,000 shares authorized, 548,200 shares issued and outstanding at September 30, 2020 and nil at December 31, 2019 respectively (liquidation preference - $5.482 million as of September 30, 2020)			3,132,600				-
Common stock - no par value, 15,000,000 shares authorized, 5,271,698 and 3,835,930 shares issued and 5,228,040 and 3,835,930 shares outstanding at September 30, 2020 and December 31, 2019 respectively			14,537,828				13,898,494
Paid-in-capital			4,695,658				3,587,287
Accumulated earnings			(13,112,986	)			(9,992,841	)
Accumulated other comprehensive loss			(6,640,664	)			(5,348,812	)
Less: Treasury stock, 43,658 shares			(160,784	)			(160,784	)
Total Yunhong CTI, Ltd Stockholders' Equity			2,451,652				1,983,344
Noncontrolling interest			(718,639	)			(856,837	)
Total Stockholders' Equity			1,733,013				1,126,507
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	21,948,575			$	31,321,083

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2020				2019				2020				2019
Net Sales		$	5,980,766			$	6,365,352			$	18,793,620			$	24,259,037
Cost of Sales			5,719,824				6,284,645				16,441,524				20,925,512
Gross profit			260,942				80,707				2,352,096				3,333,525
Operating expenses:
General and administrative			1,067,122				1,167,207				3,253,561				3,865,527
Selling			31,723				55,907				112,113				285,015
Advertising and marketing			69,569				92,061				271,563				428,798
Impairment of long-lived assets			-				-				-				1,472,382
Gain on loss of control of VIEs			-				(218,527	)			-				(218,527	)
Gain on sale of assets			-				(23,054	)			(45,700	)			(70,263	)
Total operating expenses			1,168,414				1,073,594				3,591,537				5,762,932
Loss from operations			(907,472	)			(992,887	)			(1,239,441	)			(2,429,407	)
Other (expense) income:
Interest expense			(255,138	)			(464,546	)			(1,033,240	)			(1,493,264	)
Gain on forgiveness of Payroll Protection Program Funding			247,554				-				1,047,700				-
Other Expense			(15,621	)			(82,873	)			(387,961	)			(485,742	)
Foreign currency loss			15,100				(25,747	)			(169,357	)			(27,458	)
Total other expense, net			(8,105	)			(573,166	)			(542,858	)			(2,006,464	)
Loss from continuing operations before taxes			(915,577	)			(1,566,053	)			(1,782,299	)			(4,435,871	)
Income tax expense			-				-				-				-
Loss from continuing operations			(915,577	)			(1,566,053	)			(1,782,299	)			(4,435,871	)
Loss from discontinued operations , net of tax			(113,055	)			(658,518	)			(1,199,648	)			(2,105,755	)
Net Loss		$	(1,028,632	)		$	(2,224,571	)		$	(2,981,947	)		$	(6,541,626	)
Less: Net (loss) income attributable to noncontrolling interest			(74,692	)			(282,985	)			138,198				(861,475	)
Net loss before foreign currency adjustment and Preferred Share Dividends		$	(953,940	)		$	(1,941,586	)		$	(3,120,145	)		$	(5,680,151	)
Other Comprehensive Income (Loss)
Foreign currency adjustment			5,324				(281,817	)			(1,291,852	)			15,603
Comprehensive Loss		$	(1,023,308	)		$	(2,506,388	)		$	(4,273,799	)		$	(6,526,023	)
Deemed Dividends on preferred stock and amortization of beneficial conversion feature		$	(114,561	)		$	-			$	(2,733,329	)		$	-
Net Loss attributable to Yunhong CTI Ltd Shareholders		$	(1,068,501	)		$	(1,941,586	)		$	(5,853,474	)		$	(5,680,151	)
Basic loss per common share
Continuing operations		$	(0.19	)		$	(0.34	)		$	(1.05	)		$	(0.93	)
Discontinued operations			(0.02	)			(0.17	)			(0.27	)			(0.55	)
Basic loss per common share		$	(0.21	)		$	(0.51	)		$	(1.32	)		$	(1.48	)
Diluted loss per common share
Continuing operations		$	(0.19	)		$	(0.34	)		$	(1.05	)		$	(0.93	)
Discontinued operations			(0.02	)			(0.17	)			(0.27	)			(0.55	)
Diluted loss per common share		$	(0.21	)		$	(0.51	)		$	(1.32	)		$	(1.48	)
Weighted average number of shares and equivalent shares of common stock outstanding:
Basic			4,902,131				3,835,950				4,426,420				3,835,950
Diluted			4,902,131				3,835,950				4,426,420				3,835,950

 

		For the Nine Months Ended September 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(2,981,947	)		$	(6,541,626	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			792,104				835,302
Amortization of deferred gain on sale/leaseback			(45,700	)			(82,422	)
Gain on forgiveness of PPP Funding			(1,047,700	)			-
Provision for losses on accounts receivable			20,666				399,463
Provision for losses on inventories			(40,482	)			1,249,519
Other			-				248,974
Impairment on assets held for sale			-				604,483
Gain on deconsolidation of Clever			-				(218,534	)
Impairment of Related Party Note Receivable			350,000				-
Impairment of Prepaid, Current and Non Current Assets			-				168,931
Impairment of long-lived assets			-				1,252,283
Stock Based Compensation			-				72,401
Loss on disposition of Asset			-				17,480
Change in assets and liabilities:
Accounts receivable			2,915,506				2,776,396
Inventories			2,314,744				1,435,411
Prepaid expenses and other assets			(289,820	)			228,389
Operating Lease Liability			(470,771	)			-
Trade payables			(852,231	)			1,892,670
Accrued liabilities			330,695				(166,823	)
Net cash provided by operating activities			995,064				4,172,297
Cash flows from investing activities:
Purchases of property, plant and equipment			(139,708	)			(144,222	)
Net cash used in investing activities			(139,708	)			(144,222	)
Cash flows from financing activities:
Change in checks written in excess of bank balance			29,837				(391,313	)
Repayment of debt and revolving line of credit			(10,158,387	)			(4,721,867	)
Advance from investor			1,500,000
Proceeds from issuance of stock			5,426,601				-
Cash paid for stock issuance costs			(1,024,313	)			-
Amortization of deferred financing fees			64,887				(82,763	)
Proceeds from PPP			1,047,700				-
Proceeds from issuance of long-term debt			876,791				650,000
Net cash used in financing activities			(2,236,884	)			(4,545,943	)
Effect of exchange rate changes on cash			536,430				205,692
Net decrease in cash and cash equivalents			(845,098	)			(312,176	)
Cash and cash equivalents at beginning of period			845,098				428,150
Cash and cash equivalents at end of period		$	-			$	115,974
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		$	1,033,350			$	1,558,817
Common stock issued for accounts payable		$	-			$	303,000
Conversion of debt to Series A Preferred		$	478,000			$	-
Accrued Dividend on preferred stock		$	255,000			$	-
Issuance of Placement agent warrants in connection with Series A Preferred offering		$	919,000			$	-
Issuance of Common stock to placement agent		$	306,000			$	-
Amortization of beneficial conversion feature and deemed dividend on Series A Preferred stock		$	2,200,000			$	-
Common stock issued for Notes Payable		$	-			$	600,000

 

		Yunhong CTI, Ltd
		Nine Months Ended September 30, 2020
																										Accumulated
																						Accumulated				Other				Less
		Preferred Stock								Common Stock								Paid-in				(Deficit)				Comprehensive				Treasury Stock								Noncontrolling
		Shares				Amount				Shares				Amount				Capital				Earnings				Loss				Shares				Amount				Interest				TOTAL
Balance December 31, 2019			-			$	-				3,879,608			$	13,898,494			$	3,587,287			$	(9,992,841	)		$	(5,348,812	)			(43,658	)		$	(160,784	)		$	(856,837	)		$	1,126,507
Convertible Preferred Stock Issuance - cash			362,660				3,509,933				140,000				116,667				-				-				-				-				-				-				3,626,600
Convertible Preferred Stock Issuance - conversion of debt			48,200				478,017				-				-				-				-				-				-				-				-				478,017
Common stock issued for placement agent fees			-				(306,000	)			200,000				306,000				-				-				-				-				-				-				-
Warrants issued to placement agent and other issuance costs			-				(752,924	)			-				-				752,924				-				-				-				-				-				-
Placement agent fees and issuance costs			-				(820,160	)			-				-				-				-				-				-				-				-				(820,160	)
Beneficial Conversion feature on Preferred Stock			-				(2,328,473	)			-				-				2,328,473				-				-				-				-				-				-
Deemed Dividend on beneficial conversion feature of Preferred Stock			-				2,328,473				-				-				(2,328,473	)			-				-				-				-				-				-
Accrued Deemed Dividend			-				52,741				-				-				(52,741	)			-				-				-				-				-				-
Net Loss			-				-				-				-				-				(638,696	)			-				-				-				144,577				(494,119	)
Foreign Currency Translation			-				-				-				-				-				-				(1,363,503	)			-				-				-				(1,363,503	)
Balance March 31, 2020			410,860			$	2,161,607				4,219,608			$	14,321,161			$	4,287,470			$	(10,631,537	)		$	(6,712,315	)			(43,658	)		$	(160,784	)		$	(712,260	)		$	2,553,342
Convertible Preferred Stock Issuance - cash			180,000				1,583,334				260,000				216,667				-				-				-				-				-				-				1,800,001
Warrants issued to placement agent and other issuance costs			-				(166,181	)			-				-				166,181				-				-				-				-				-				-
Placement agent fees and issuance costs			-				(204,153	)			-				-				-				-				-				-				-				-				(204,153	)
Beneficial Conversion feature on Preferred Stock			-				(140,000	)			-				-				140,000				-				-				-				-				-				-
Deemed Dividend on beneficial conversion feature of Preferred Stock			-				140,000				-				-				(140,000	)			-				-				-				-				-				-
Accrued Deemed Dividend			-				97,554				-				-				(97,554	)			-				-				-				-				-				-
Net Loss			-				-				-				-				-				(1,527,509	)			-				-				-				68,313				(1,459,196	)
Foreign Currency Translation			-				-				-				-				-				-				66,327				-				-				-				66,327
Balance June 30, 2020			590,860			$	3,472,161				4,479,608			$	14,537,828			$	4,356,097				(12,159,046	)		$	(6,645,988	)			(43,658	)		$	(160,784	)		$	(643,947	)		$	2,756,321
Preferred Stock converted			(42,660	)			(444,607	)			444,607				-				444,607				-				-				-				-				-				-
Common stock issued for warrants exercised			-				-				332,483				-				-				-				-				-				-				-				-
Stock based compensation			-				-				15,000				-				-				-				-				-				-				-				-
Accrued Deemed Dividend			-				105,046				-				-				(105,046	)			-				-				-				-				-				-
Net Loss			-				-				-				-				-				(953,940	)			-				-				-				(74,692	)			(1,028,632	)
Foreign Currency Translation			-				-				-				-				-				-				5,324				-				-				-				5,324
Balance September 30, 2020			548,200			$	3,132,600				5,271,698			$	14,537,828			$	4,695,658				(13,112,986	)		$	(6,640,664	)			(43,658	)		$	(160,784	)		$	(718,639	)		$	1,733,013

		Nine Months Ended September 30, 2019
																										Accumulated
																						Accumulated				Other				Less
		Preferred Stock								Common Stock								Paid-in				(Deficit)				Comprehensive				Treasury Stock								Noncontrolling
		Shares				Amount				Shares				Amount				Capital				Earnings				Loss				Shares				Amount				Interest				TOTAL
Balance December 31, 2018			-			$	-				3,578,885			$	13,898,494			$	2,506,437			$	(2,865,486	)		$	(6,050,347	)			(43,658	)		$	(160,784	)		$	(1,072,585	)		$	6,255,729
Note Conversion - Schwan			-				-				180,723				-				600,000				-				-				-				-				-				600,000
Stock Issued			-				-				20,000				-				-				-				-				-				-				-				-
Stock Option Expense			-				-				-				-				28,967				-				-				-				-				-				28,967
Net Income			-				-				-				-				-				(2,494,089	)			-				-				-				(62,388	)			(2,556,477	)
Other comprehensive income, net of taxes			-				-				-				-				-				-				-				-				-				-				-
Foreign currency translation			-				-				-				-				-				-				235,876				-				-				-				235,876
Balance March 31, 2019			-			$	-				3,779,608			$	13,898,494			$	3,135,404			$	(5,359,575	)		$	(5,814,471	)			(43,658	)		$	(160,784	)		$	(1,134,973	)		$	4,564,095
Note Conversion - Schwan			-				-				-				-				-				-				-				-				-				-				-
Stock Issued			-				-				100,000				-				303,000				-				-				-				-				-				303,000
Stock Option Expense			-				-				-				-				23,429				-				-				-				-				-				23,429
Net Income			-				-				-				-				-				(1,244,477	)			-				-				-				(516,102	)			(1,760,579	)
Other comprehensive income, net of taxes			-				-				-				-				-				-				-				-				-				-				-
Foreign currency translation			-				-				-				-				-				-				61,333				-				-				-				61,333
Balance June 30, 2019			-			$	-				3,879,608			$	13,898,494			$	3,461,833			$	(6,604,052	)		$	(5,753,138	)			(43,658	)		$	(160,784	)		$	(1,651,075	)		$	3,191,278
Note conversion - Schwan			-				-				-				-				-				-				-				-				-				-				-
Less deconsolidation of VIE			-				-				-				-				-				-				-				-				-				1,087,035				1,087,035
Stock Issued			-				-				-				-				-				-				-				-				-				-				-
Stock Option Expense			-				-				-				-				20,005				-				-				-				-				-				20,005
Net Income			-				-				-				-				-				(1,941,586	)			-				-				-				(282,985	)			(2,224,571	)
Other comprehensive income, net of taxes			-				-				-				-				-				-				15,603				-				-				-				15,603
Foreign currency translation			-				-				-				-				-				-				(297,209	)			-				-				-				(297,209	)
Balance September 30, 2019			-			$	-				3,879,608			$	13,898,494			$	3,481,838			$	(8,545,638	)		$	(6,034,744	)			(43,658	)		$	(160,784	)		$	(847,025	)		$	1,792,141

 

Note 1 - Basis of Presentation

 

The accompanying condensed (a) consolidated balance sheet as of September 30, 2020, which has been derived from unaudited consolidated financial statements, 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. 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, 2019.

 

Principles of consolidation and nature of operations:

 

Yunhong CTI Ltd. (formerly CTI Industries Corporation), its former United Kingdom subsidiary (CTI Balloons Limited), its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), its German subsidiary (CTI Europe GmbH) and 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 CTI Balloons Limited (“CTI Balloons”) and CTI Europe GmbH (“CTI Europe”). CTI Balloons has been fully liquidated as of the fourth quarter 2019.Accordingly, the operations of these entities are classified as discontinued operations in these financial statements.

 

The consolidated financial statements include the accounts of Yunhong CTI Ltd., its wholly owned subsidiaries CTI Balloons Limited 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., Venture Leasing L.L.C. (“VL”), and Clever Organizing Solutions (formerly Clever Container Company, L.L.C. “Clever”). The last three entities have been consolidated as variable interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation. The treatment of VL and Clever changed during 2019 as described in the next section.

 

Variable Interest Entities (“VIEs”):

 

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.

 

The Company has variable interests in VL and Clever. 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. 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 $219,000. In accordance with ASC 810-10 because the carrying value of the noncontrolling interest of Clever which was eliminated exceeded the net carrying value of the assets and liabilities of Clever. The Company determined that there was no fair value associated with its remaining noncontrolling interest in Clever based on an income approach.

 

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, and assumptions used as inputs in the Black-Scholes option-pricing model. In addition, issues pertaining to COVID-19 have added assumptions related to 2020 sales activities well as the timing of recovery and condition of the broader market after COVID-19 related shutdowns and limitations.

 

 

Earnings per share:

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.

 

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

 

As of September 30, 2020 and 2019, shares to be issued upon the exercise of options and warrants aggregated 479,802 and 471,144, respectively. The number of shares included in the determination of earnings on a diluted basis for the three months ended September 30, 2020 and 2019 were none, as doing so would have been anti-dilutive.

 

 

Significant Accounting Policies:

 

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2019. There were no significant changes to these accounting policies during the three or nine months ended September 30, 2020.

 

On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

On January 1, 2018, we adopted ASC 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.

 

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.

 

 

Prior Period Reclassification

 

Certain amounts in prior periods have been reclassified to conform with current period presentation and had no effect on prior period net loss or stockholders’ equity.

 

 

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 are being 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.

 

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.

 

CTI Balloons recorded losses from discontinued operations, net of taxes of ($433,000) and ($996,000) for the three and nine months ended September 30, 2019.

 

CTI Europe recorded a loss from discontinued operations, net of taxes of $(76,000) for the three months ended September 30, 2020, compared to a gain from discontinued operations, net of taxes of $313,000 for the nine months ended September 30, 2020. The net losses, net of taxes, were ($566,000) and ($1,735,000) for the three and nine month periods ended September 30, 2019, respectively.

 

Our Ziploc product line recorded a loss from discontinued operations, net of taxes of ($37,000) for the three months ended September 30, 2020, compared to a loss from discontinued operations, net of taxes of ($1,513,000) for the nine months ended September 30, 2020. The net gain, net of taxes, was $340,000 for the three months ended September 30, 2019 compared to a gain from discontinued operations, net of taxes of $625,000 for the nine-month period ended September 30, 2019, respectively.

 

 

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 Consolidated Statements of Income for the three months ended:

 

 

 

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 Consolidated Statements of Income for the nine months ended:

 

 

 

The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:

 

Yunhong CTI Ltd.

Consolidated Balance Sheet

 

 

 

The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. The following table summarizes depreciation from discontinued operations for each of the periods presented:

 

 

 

 

Note 3 – Liquidity and Going Concern

 

The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the credit agreement with PNC Bank, National Association (“PNC”) (the “Credit Agreement”) (see Note 4). As indicated in Note 4, twice during 2018 we violated covenants in our credit facility and during March 2019 we entered into a forbearance agreement with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but we remained out of compliance with the terms of our credit facility, as amended, including the covenants as of June 30, 2019 calculated on or about July 31, 2019. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to the Company, in which PNC advised that line of credit advances would continue to be available to the Company at PNC’s sole discretion, and subject to its terms and conditions. On October 18, 2019, we entered into a new forbearance agreement with PNC (“Amendment 4”). Identified events of default were waived until January 10, 2020 with respect to CTI Industries Corporation, but not its Mexican subsidiary (Flexo), subject to its terms and conditions. On January 13, 2020, we entered into a new forbearance agreement with PNC (“Amendment 5”). PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to PNC under the Loan Agreement for a period ending no later than December 31, 2020.

 

During 2019, we attempted to execute a major capital event with a partner that would infuse money, among other attributes. That effort was unsuccessful as envisioned. We were subsequently successful in obtaining new financing during 2020. On January 3, 2020 we entered into a securities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company Chairman Mr. Yubao Li, pursuant to which we sold to LF International 500,000 shares of our Series A Convertible Preferred Stock at a purchase price of $10.00 per share and for aggregate proceeds of $5,000,000. Pursuant to the LF Purchase Agreement, we were authorized to sell an additional $2 million shares of Series A to other investors under similar financial terms, approximately $1 million of which has been sold as of September 30, 2020, including to an investor which converted an accounts receivable of $478,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. There were several closings with the 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. During the transaction and subsequent interim closings, LF International had the right to name three directors to serve on our Board. They are Mr. Yubao Li, our Chairman of the Board, Ms. Wan Zhang and Ms. Yaping Zhang.     

 

The Credit Agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We believe that, during the first three months of 2020, the Company’s standalone US business would have complied with the Credit Agreement’s requirement that the Company maintain a fixed charge coverage ratio of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the “Fixed Charge Coverage Ratio”).The Company, as a consolidated group, however, did not comply with the Fixed Charge Coverage Ratio, resulting in the noncompliance.

 

 

The Lender has continued to make advances to the Company (“Discretionary Advances”), although it is not required to do so under the terms of the Loan Agreement due to the Events of Default. On July 17, 2020, the Lender provided the Company notice that multiple previously disclosed events, which each constitute an Event of Default, are continuing to occur. Additionally, the Lender required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, the Lender advised that it may cease making discretionary advances to the Company. On July 22, 2020, the Company’s board of directors authorized the Company to seek such funding and, to ensure that the Company met the Lender’s equity funding commitment deadline. Mr. Yubao Li, the Company’s Chairman, committed that, in the event the Company does not obtain funding of at least $3,000,000, he would provide the necessary funding. In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Convertible Preferred Stock (the terms of which are currently being negotiated and finalized).  Additionally, in October, the Company received a $1.5 million advance on a separate proposed equity financing for which the terms have not yet been finalized.   The Lender has continued to make the Discretionary Advances throughout this period and has indicated that we have complied with their request.    

  

In addition to the above, financial performance in 2017, 2018 and 2019, included net losses attributable to the Company of $1.6 million, $3.6 million, and $7.1 million, respectively. While these results included significant charges related to the disposition of subsidiaries, we believe that the result raises substantial doubt about our ability to continue as a going concern one year from the date these financial statements are issued.

 

Additionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs, along with a supply disruption in the helium market during 2019. These changes in cash flows have created very significant strain within our operations and have therefore increased our attempts to obtain additional funding resources.

 

In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed.

  

Finally, claims have been filed in court by certain vendors regarding claims of non-payment pursuant to contractual obligations. While many have been resolved, the sum of the outstanding claims made or threatened exceeds $0.5 million in the aggregate. The cost of defense and potential ultimate resolution increases the strain on our financial resources.

 

Management’s plans include:

 

(1)

Working with our new investor group to expand our business in profitable ways.

(2)

Working with our bank to resolve our compliance failure on a long-term basis.

(3)

Relocating our existing operation in Lake Zurich, IL to a lower cost environment in Laredo, TX and Nuevo Laredo, Mexico.

(4)

Evaluating and potentially executing a transaction of our facility in Lake Barrington, IL.

(5)

Simplifying our group structure, focusing on the most profitable products and markets, and

(6)

Exploring alternative funding sources.

 

Management Assessment

 

Considering both quantitative and qualitative information, we believe that our plans to obtain additional financing may provide us with an ability to finance our operations through 2020 and, if successfully executed, may mitigate the substantial doubt about our ability to continue as a going concern.

 

 

Note 4 - Debt

 

During December 2017, we terminated a prior credit arrangement and entered in new financing agreements (the “PNC Agreements”) with PNC Bank, National Association (“PNC”). The PNC Agreements include a $6 million term loan and an $18 million revolving credit facility, with a termination date of December 2022.

 

 

Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet two financial covenants as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (the “Amendment 1”) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in interest rate. During September 2018, we filed a preliminary prospectus on Form S-1 for a planned equity issuance. On October 8, 2018, we entered into Consent and Amendment No. 2 (the “Amendment 2”) to our PNC Agreements. Amendment 2 reduced the amount of new funding proceeds that must be used to repay the term loan from $5 million to $2 million and waived the calculation of financial ratios for the period ended September 30, 2018, in exchange for a new covenant committing to raise at least $7.5 million in gross proceeds from our equity issuance by November 15, 2018 and pay an amendment fee. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement.

 

We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures were waived and financial covenants as of March 31, 2019 were not considered, with the next calculation due July 31, 2019 for the period ended June 30, 2019. We received a temporary over-advance of $1.2 million, which declined to zero over a six-week period under the terms of this agreement and paid a fee of $250,000.

 

On August 1, 2019, PNC issued a Notice of Default and Reservation of Rights letter, indicating the end of the forbearance period and continued events of default with our credit agreement, as amended. We entered into a new forbearance agreement during October 2019 which completed January 2020. In conjunction with new equity financing, on January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) between PNC and the Company became effective, pursuant to which PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to PNC under the Loan Agreement for a period ending no later than December 31, 2020. In addition, on June 15, 2020, we received a notice of noncompliance and reservation of rights letter from the bank related to failing the covenant calculation during the first quarter of 2020. We remain noncompliant with the terms of our facility and have thus reclassified long-term bank debt to current liabilities on our balance sheet.

 

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:

 

●

Restrictive Covenants: The Credit Agreement includes several restrictive 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: The Credit Agreement includes a series of financial covenants we are required to meet including:

o

We were required to maintain a "Leverage Ratio", which is defined as the ratio of (a) Funded Debt (other than the Shareholder Subordinated Loan) as of such date of determination to (b) EBITDA (as defined in the PNC Agreements) for the applicable period then ended. This requirement was removed during the January 2020 Amendment 5.

 

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

 

              

 

The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We believe that, during the first three months of 2020, the standalone US business would have complied with the fixed charge coverage ratio, but consolidated group did not result in a new condition of noncompliance.

 

Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as well as in Note 3, we remain out of compliance with the terms of this facility.

 

As of December 2017, Mr. Schwan was owed a total of $1,099,000, with additional accrued interest of $400,000, 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 converted $600,000 of his balance into approximately 181,000 shares of our common stock at the then market rate. No payments were issued to Mr. Schwan during 2019 or the nine months ended September 30, 2020, with $49,000 and $46,000, respectively, of interest recorded as an expense during the first nine months of 2020 and 2019, respectively.

 

During 2020, Flexo replaced a $260,000 line of credit with three line of credit totaling $260,000.  Flexo’s total debt instruments are $1.75 million.   

 

On April 30, 2020, the Company executed a promissory note (the “Note”) with PNC Bank National Association (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $1,047,700 (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). All the funds under the PPP Loan were disbursed to the Company on April 23, 2020. The Note provides for a fixed interest rate of one percent per year with a maturity date of April 30, 2022 (the “Maturity Date”). Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of disbursement of the PPP Loan. The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company carefully monitored all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company has used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments.  During the three months ended June 30, 2020 the Company recorded $800,000 in other income for the PPP anticipated grant related to payroll utility and rent payment. During the three months ended September 30, 2020 the Company recorded $248,000 in other income for the PPP anticipated grant related to payroll utility and rent payment, which resulted in no deferred other income liability balance as of September 30, 2020.  

 

Note 5 - Stock-Based Compensation; Changes in Equity

 

The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.

  

The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest, 0.42% - 1.65%, to be applied, the estimated dividend yield and expected volatility, 153.73% - 161.48%,  of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2020 and 2019. The expected volatility is based on historical volatility of the Company’s common stock.

 

The Company’s net loss for the three months ended September 30, 2020 and 2019 includes approximately none and $20,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 2020 and 2019 includes approximately none and $72,000, respectively, of compensation costs related to share based payments. As of September 30, 2020, there was no unrecognized compensation expense related to non-vested stock option grants and stock grants.

 

 

On April 10, 2009, the Board approved for adoption, and on June 5, 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 510,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorized the issuance of up to 300,000 shares of our common stock in the form of equity-based awards. Because no registration on Form S-8 was filed for these additional shares within 12 months of approval by our shareholders, those additional shares are not available for issuance in the normal course. As of September 30, 2020, options for 20,000 shares remain outstanding.

 

A summary of the Company’s stock option activity, which includes grants of restricted stock, non-qualified stock options, incentive stock options, warrants and related information, is as follows:

 

 

The instruments above have no aggregate intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended September 30, 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on September 30, 2020.

 

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 (the “LF International”), which is controlled by Company director Mr. Yubao Li, agreed to purchase, up to 500,000 shares of the Company’s newly created shares of 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”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in the sale of 250,000 shares of Series A Preferred for aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company’s board of directors (the “Board”) (subject to certain adjustments), effective as of the first closing. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 12, 2020, the Company changed its name to Yunhong CTI Ltd.

 

On January 30, 2020, the Company sold 20,600 shares of Series A Preferred to an investor for an aggregate purchase price of $206,000.

 

On February 21, 2020, the Company sold 22,060 shares of Series A Preferred to an investor for an aggregate purchase price of $220,600.

 

The Purchase Agreement contemplates a second closing for the purchase and sale of an additional 250,000 shares of Series A Preferred (the “Second Closing”). On February 24, 2020, to permit an interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and LF International entered into an amendment to the Purchase Agreement (the “Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, 70,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $700,000 (the “Interim Closing”). As an inducement to enter into the Purchase Agreement Amendment, the Company i) granted to the Investor the right to appoint and elect a second member to the Company’s Board of Directors and ii) agreed to issue to LF International 140,000 shares of the Company’s common stock. On February 28, 2020, the Company and LF International closed on the Interim Closing.

 

On April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred.

 

 

On April 13, 2020, to permit an additional interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and LF International entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, 130,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $1,300,000 (the “Additional Interim Closing”). As an inducement to enter into the Second Purchase Agreement Amendment, the Company i) granted to LF International the right to appoint and elect a third member to the Board and ii) agreed to issue to LF International 260,000 shares of common stock.

  

On June 5, 2020, the Company and LF International conducted the Second Closing, as modified by the Interim Closing and Additional Interim Closing (the “Final Closing”), and closed on the issuance of 50,000 shares of Series A Preferred at a purchase price of $10.00 per share to LF International for aggregate gross proceeds of $500,000 to the Company. As a result of the Final Closing, LF International held, in the aggregate, approximately 57% of the voting control of the Company, resulting in a change in control of the Company.

 

The issuance of the Company’s Series A Preferred Stock generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series A Preferred was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the closing dates by approximately $2.5 million as of the closing dates.  We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series A Preferred Stock. As the Series A Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance.  The accretion was recognized as dividend equivalents.  Holders of the Series A Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion.  In the nine months ending September 30, 2020 the Company accrued $255,341 of these dividends. 

 

During the three months ended September 30, 2020, 332,000 shares of the Company’s common stock were issued upon the exercise of 500,000 warrants. During the third quarter 2020, 42,660 convertible preferred shares were converted into 426,600 shares of common stock.  An additional 18,007 shares of common stock were issued as satisfaction of the accrued dividend on the preferred shares.

 

In 2020, the Company issued 15,000 shares to its former president in satisfaction of his stock compensation plan which accelerated upon his resignation.

 

In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Redeemable Convertible Preferred Stock.   As of September 30, 2020, the Company was in the process of negotiating and finalizing the terms of the arrangement.  On November 17, 2020, the Company finalized the associated stock purchase agreement for the sale of 170,000 new issued shares of Series B Redeemable Convertible Preferred Stock.   Each share is convertible into ten shares of the Company’s common stock and Holders of the Series B Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. The stock purchase agreement is subject to customary conditions for closing.  As the agreement was not finalized as of September 30, 2020, the $1.5 million advance is classified as Advance from Investor within liabilities on the accompanying balance sheet.