Note 18 - Other Stockholders' Equity

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

18.   Other Stockholders’ Equity

Series A Preferred Stock

As discussed in Notes 3 and 17, in the Series A Offering, the Company sold 500,000 shares of Series A Preferred and 400,000 shares of common stock for aggregate gross proceeds of $5,000,000. In connection with the Series A Offering, we changed our name from CTI Industries Corporation to Yunhong CTI Ltd. and LF International named three directors to serve on our Board. They were Mr. Yubao Li, our Chairman of the Board, Ms. Wan Zhang (retired from Board January 2022) and Ms. Yaping Zhang (retired from Board January 2022).  

Additionally, in 2020 the Company sold 42,660 shares of Series A Preferred for an aggregate purchase price of $426,600. On April 1, 2020, an investor exchanged accounts receivable of $482,000 into 48,200 shares of Series A Preferred.

Each share of Series A Preferred is convertible into ten shares of the Company’s common stock. Holders of the Series A Preferred are 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 2021 and 2020 the Company accrued $400,000 and $380,000 of these dividends, respectively. 

The issuances of the Company’s Series A Preferred generated a beneficial conversion feature. The fair value of the common stock into which the Series A Preferred was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the closing dates by approximately $2.5 million as of the closing dates.  We recognized this BCF by allocating the intrinsic value of the conversion option ($2.5 million) 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 dates of issuance.  The accretion was recognized as dividend equivalents. 

In 2020, 90,860 shares of Series A Preferred were converted into 941,388 shares of the Company’s common stock, including shares issued for accrued dividends. No such conversions occurred during 2021.

Series B Preferred

In November 2020, we issued 170,000 shares of Series B Preferred for an aggregate purchase price of $1,500,000. The Series B Preferred have an initial stated value of $10.00 per share and liquidation preference over common stock. The Series B Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series B Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock. Initially, the Series B Preferred, in whole or part, was redeemable at the option of the holder (but not mandatorily redeemable) at any time on or after November 30, 2021 for the stated value, plus any accrued and unpaid dividends and thus was classified as mezzanine equity and initially recognized at fair value of $1.5 million (the proceeds on the date of issuance). In March 2021, the terms of the Series B Preferred were modified to eliminate the ability of the holder to redeem the Series B Preferred. As the Series B Preferred is no longer redeemable, the Series B Preferred is not classified as mezzanine equity as of December 31, 2021. As a result, the carrying value as of December 31, 2021 amounted to $1,714,707 which consists of $1,500,000 original carrying value, $150,000 accrued dividends and $64,707 accretion ($46,707 which occurred in 2021).

Series C Preferred

In January 2021 we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued 170,000 shares of Series C Preferred for an aggregate purchase price of $1,500,000. The Series C Preferred have an initial stated value of $10.00 per share and liquidation preference over common stock. The Series C Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series C Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock. The issuance of the Series C Preferred generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series C Preferred was convertible exceeded the allocated purchase price of the Series C Preferred at the closing dates by greater than the allocated purchase price. Therefore, the BCF was the purchase price of the Series C Preferred ($1.5 million) and was allocated to Additional Paid-in Capital, resulting in a discount on the Series C Preferred Stock. As the Series C Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance. The accretion to the carrying value of the Series C Preferred is treated as a deemed dividend, recorded as a charge to Additional Paid in Capital and deducted in computing earnings per share.

Series D Preferred

In June 2021, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series D Redeemable Convertible Preferred Stock. As of September 30, 2021, the Company was in the process of negotiating and finalizing the terms of the arrangement. As the agreement was not finalized as of September 30, 2021, the $1.5 million advance was classified as Advance from Investor within liabilities on the balance sheet at that time. Now that the terms have been finalized, the investment is classified as equity, similar to the prior Convertible Preferred issuances, above. The Series D Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of $1.00. The Series C Preferred accrues dividends at a rate of 8 percent per annum, payable at our election either in cash or shares of the Company’s common stock. The issuance of the Series D Preferred generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series D Preferred was convertible exceeded the allocated purchase price of the Series D Preferred at the closing dates by greater than the allocated purchase price. Therefore, the BCF was the purchase price of the Series D Preferred ($0.3 million) and was allocated to Additional Paid-in Capital, resulting in a discount on the Series D Preferred Stock. In addition, 128,572 warrants were issued with respect to the transaction, convertible into the Company’s common stock at the lower of $1.75 per share or 85% of the ten day volume weighted average price (VWAP). An additional $230,000 of paid in capital value was attributed to the warrants, which are set to expire December 1, 2024.

Common Stock

During 2020, 400,000 shares of our common stock were issued to LF related to the acceleration of closings in our Series A Offering, and an additional 200,000 shares were issued to Garden State Securities in its representation of the Company in the Series A Offering.  

Restricted Stock

In 2020, 15,000 shares of restricted stock vested to Mr. Hyland, former Chief Executive Officer, pursuant to the terms of the grant related to his employment with the Company. There were no other shares of restricted stock outstanding during 2020 or 2021. During 2022, 250,000 shares of restricted stock were granted to the incoming Chief Executive Officer pursuant to an employment agreement. 25,000 of those shares are to vest immediately and the remaining shares are schedule to vest upon the achievement of certain performance conditions.

Stock Options

The Compensation Committee (“Committee”) administers the Company’s stock-based plans. The exercise price of the stock options shall be fixed by the Committee at whatever price the Committee may determine in good faith. Unless the Committee determines otherwise, options generally had a 4-year term with a 3-year vesting schedule. Unless the Committee provides otherwise, options terminate upon the termination of a participant’s employment, except that the participant may exercise an option to the extent it was exercisable on the date of termination and for a period of time after termination.

In 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan and subsequent awards categorized as inducement of employment authorized the issuance of up to 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.

The Company, at the discretion of the board, may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.

The Company recognized share based compensation expense of approximately $0 in both 2021 and 2020. As of December 31, 2021 and 2020, respectively, there was no unrecognized compensation expense related to non-vested stock option grants.

Warrants

In connection with the Series A Offering, in 2020 the Company issued 792,660 warrants to purchase 792,660 shares of the Company’s common stock for $1 per share. During 2020, 597,500 warrants were exercised in cash-less exchange for 391,308 shares of the Company’s common stock. In January and February 2021, the remaining 195,160 warrants were exercised in a cash-less exchange for 103,104 shares of the Company’s common stock.

The Series D Offering also included warrants to purchase up to 128,572 shares of the Company’s common stock at an exercise price of the lower of $1.75 per share or 85% of the lowest daily volume-weighted average price of the Common Stock during the 10 trading days prior to the date of exercise. If unexercised, these warrants expire December 1, 2024.

The Company has applied the Black-Scholes model to value stock-based awards. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of the Company’s Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company’s Common Stock.

The valuation assumptions we have applied to determine the value of warrants granted in 2021 and 2020 were as follows:

Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility.

Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities with a similar maturity in effect at the time of the grant, which was 0.30% and 0.30%, during 2021 and 2020, respectively.

Expected life: The expected life of the warrants represents the period of time warrants were expected to be outstanding. The Company used an expected life of 5 years for all warrants granted during 2021 and 2020.

Dividend yield: The estimate for dividend yield is 0%, as the Company did not issue dividends during 2021 or 2020 and does not expect to do so in the foreseeable future.

Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.

A summary of the Company’s stock options, warrants and related information, is as follows:

	Options			Weighted Average Exercise Price		Warrants			Weighted Average Exercise Price
Balance at January 1, 2020		471,144		$	3.95		-
Granted		-					792,660			1.00
Cancelled/Expired		(471,144	)		3.95
Exercised/Issued		-					(597,500	)		1.00
Balance at December 31, 2020		-					195,160			1.00
Granted		-					128,572			1.75
Cancelled/Expired		-
Exercised/Issued							(195,160	)		1.00
Balance at December 31, 2021		-					128,572		$	1.75
Exercisable at December 31, 2021							128,572		$	1.75

As there are no active stock options, there is no aggregate intrinsic value (the difference between the closing price of the Company’s common stock as of December 31, 2021 and 2020, respectively, 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 December 31, 2021 and 2020, respectively.  The warrants have an intrinsic value of $230,000 and $140,615 as of December 31, 2021 and 2020, respectively.

As of December 31, 2021 and 2020, the Company reserved the following shares of its common stock for the exercise of warrants, and preferred stock:

2020 Warrants	195,160
Series A Preferred Stock	5,482,000
Series B Preferred Stock	1,700,000
Shares reserved as of December 31, 2020	7,377,160
Series C Preferred Stock	1,700,000
Series D Preferred Stock	1,700,000
2020 Warrants exercised	(195,160	)
2021 Warrants	128,572
Shares reserved as of December 31, 2021	10,710,572