Overview
The Company produces film products for novelty, packaging container and custom film product applications. These products include foil balloons, latex balloons (sourced from an external party) and related products, films for packaging applications, and custom film products. We produce all of our film products for packaging and container applications at our facilities inLake Barrington, Illinois . Substantially all of our film products for packaging applications and flexible containers for packaging and storage are sold to customers inthe United States . We market and sell our novelty items - principally foil balloons and latex balloons - inthe United States and a number of additional countries. In addition, the Company assembles and sells Candy Blossoms (containers of arranged candy items) inthe United States . As determined by the Board of Directors beginning in 2019, we have been exiting our foreign operations in order to focus on ourNorth America operations, particularly on foil balloons and related products. The sales entity in theUK was liquidated in 2019. The sales and distribution entity inGermany was fully closed during 2021. As noted herein, we sold Flexo Universal, our Mexican manufacturing subsidiary, duringOctober 2021 . Additionally, we stopped selling our vacuum sealing products as ofMarch 30, 2020 , after allowing the related license agreement to expire. More discussion is available in discontinued operations in this Annual Report on Form 10-K (see Note 23).
We have also changed our capital structure, beginning
Series A Preferred Stock OnJanuary 3, 2020 , the Company entered into a stock purchase agreement (as amended onFebruary 24, 2020 andApril 13, 2020 (the "LF Purchase Agreement")), pursuant to which the Company agreed to issue and sell, andLF International Pte. Ltd. , aSingapore private limited company ("LF International "), which is controlled by Company Chairman, Mr.Yubao Li , agreed to purchase, up to 500,000 shares of the Company's newly created shares of Series A Preferred Stock ("Series A Preferred"), with each share of Series A Preferred initially convertible into ten shares of the Company's common stock, at a purchase price of$10.00 per share, for aggregate gross proceeds of$5,000,000 (the "LF International Offering"). As permitted by the Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of$10.00 per share (the "Additional Shares Offering," and collectively with the LF International Offering, the "Offering"). Approximately$1 million of Series A Preferred has been sold as ofJune 30, 2021 , including to an investor which converted an account receivable of$478,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. The Company completed several closings withLF International fromJanuary 2020 throughJune 2020 . The majority of the funds received reduced our bank debt. We issued a total of 400,000 shares of common stock toLF International and, pursuant to the LF Purchase Agreement, changed our name fromCTI Industries Corporation toYunhong CTI Ltd. LF International had the right to name three directors to serve on our Board. They were Mr.Yubao Li , Ms.Wan Zhang and Ms.Yaping Zhang , the latter two of whom retired from our Board of Directors duringJanuary 2022 . 12
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Table of Contents Series B Preferred Stock InNovember 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 afterNovember 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). InMarch 2021 , the terms of the Series B Preferred were modified to eliminate the ability of the holder to redeem the Series B Preferred. Series C Preferred Stock InJanuary 2021 we entered into an agreement with a related party,LF International Pte. Ltd. which is controlled by Company director, Chairman, President and Chief Executive Officer, Mr.Yubao Li , to purchase shares of Series C Preferred stock. We issued 170,000 shares of Series C Preferred for an aggregate purchase price of$1,500,000 . The Series C Preferred have an initial stated value of$10.00 per share and liquidation preference over common stock. The Series C Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of$1.00 . Series D Preferred Stock InJune 2021 , the Company received$1.5 million from an unrelated third party as an advance on a proposed sale of Series D Redeemable Convertible Preferred Stock, which was ultimately completed. The Series D Preferred have an initial stated value of$10.00 per share and liquidation preference over common stock. The Series D Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of$1.00 . We issued 170,000 shares of Series D Preferred for an aggregate price of$1.5 million . Additionally, 128,000 warrants were issued pursuant to this transaction which are convertible into our common stock at the lesser of$1.75 per share or 85% of the volume weighted average price of the shares over the ten trading days prior to conversion.
Our revenues from continuing operations from each of our product categories in each of the past two years have been as follows:
Twelve Months Ended December 31, 2021 December 31, 2020 $ % of $ % of Product Category (000) Omitted Net Sales (000) Omitted Net Sales D Foil Balloons 18,235 76 % 16,853 80 % Latex Balloons 94 0 % 7 0 % Film Products 2,386 10 % 804 4 % Other 3,370 14 % 3,395 16 % Total 24,086 100 % 21,059 100 % 13
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Our primary expenses include the cost of products sold and selling, general and administrative expenses.
Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead expenses such as supervisory labor, depreciation, utilities expense and facilities expense directly associated with production of our products, warehousing and fulfillment expenses and shipping costs relating to the shipment of products to customers. Cost of products sold is impacted by the cost of the raw materials used in our products, the cost of shipping, along with our efficiency in managing the production of our products. Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation of equipment and facilities utilized in administration, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits, the cost of regulatory compliance and other administrative costs. Purchases by a limited number of customers represent a significant portion of our total revenues. During 2021 and 2020, respectively, sales to our top 10 customers represented 85% and 85%, respectively, of net revenues for each year. During 2021 and 2020, there were two customers to whom our sales represented more than 10% of net revenues.
Our principal customer sales for 2021 and 2020 were:
% of 2021 % of 2020 Customer Product 2021 Sales Revenues 2020 Sales Revenues Wal-Mart Balloons; Candy Blossoms$ 4,537,000 19 %$ 4,973,000 24 % Dollar Tree Stores Balloons$ 13,813,000 57 %$ 12,826,000 61 % The loss of one or both of these principal customers, or a significant reduction in purchases by one or both of them, could have a material adverse effect on our business.
We generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum amount of product from us.
Year Ended
Net Sales For the fiscal year endedDecember 31, 2021 , consolidated net sales from continuing operations of the sale of all products were$24,086,000 compared to consolidated net sales of$21,059,000 for the year endedDecember 31, 2020 , an increase of 14% as more fully described below. Sales of foil balloons from continuing operations were$18,235,000 in 2021 and$16,853,000 in 2020, a increase of 8%. Our largest customer for foil balloons wasDollar Tree Stores . The remaining sales were made to hundreds of customers including distributors and retail stores. Sales of latex balloons from continuing operations were less than$100,000 in each period. The decrease from prior years resulted principally from the sale of Flexo Universal, our latex balloon manufacturing facility. We intend to continue to sell outsourced latex balloons in order to offer a complete product line, but it will be much smaller than prior years. Sales of film products from continuing operations were$2,386,000 in 2021 and$804,000 in 2021, an increase of nearly 200%. Our largest customer in this area underwent a merger and has now come back with more regular purchases. The inability for some vendors to meet customer requirements has also helped us gain more business in this area. Sales of other products from continuing operations decreased to$3,370,000 in 2021 from$3,395,000 in 2020, for virtually no difference from year to year. This category includes sales of Candy Blossoms. Cost of Sales Cost of sales from continuing operations increased to$20,321,000 in 2021 from$17,970,000 in 2020, an increase of 13%. The increase in cost of sales was primarily attributable to the increase in sales, and secondarily related to the broad increase in prices during 2021, which occurred faster than the Company could effectively update its pricing. 14
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General and Administrative Expenses
General and administrative expenses from continuing operations increased to$3,815,000 in 2021 from$3,655,000 in 2020, an increase of 5%. We had financial services consulting expenses, forbearance costs, and other financing costs of approximately$0.8 million that concluded when we changed lenders inSeptember 2021 . Selling and Marketing Selling expenses from continuing operations increased to$131,000 in 2021 from$129,000 in 2020, as total sales increased. Marketing and advertising expense decreased to$323,000 in 2021, from$350,000 in 2020, a decrease of 8%. This area was also impacted by increased sales volume, but with fewer ancillary expenses as many customers were coming back from Covid related issues. Other Income or Expense During 2021, we incurred net interest expense from continuing operations of$564,000 compared to net interest expense of$1,167,000 during 2020. The decrease in interest expense was primarily attributable to the lower average outstanding balance of debt in 2021 as compared to 2020. Additionally, in 2020, we recorded a$1,047,700 net gain on the forgiveness of our Payroll Protection Plan loan. During 2021 we engaged in a Sale and Leaseback transaction of our principal headquarters inLake Barrington, IL. This transaction resulted in a gain of$3.4 million . We also recorded an expense related to the disposition of our Flexo Universal subsidiary. We recorded an approximately$10 million expense in Other Expense and a$6 million gain in Other Comprehensive Income related to this transaction, all non-cash items.
Deemed Dividends on Preferred Stock and Amortization of Beneficial Conversion Feature
In 2020 the Company issued Series A Preferred Stock and Series B Preferred Stock. In connection with these preferred stock issuances, and the related beneficial conversion features, the Company had deemed dividends of$4.4 million in 2020. During 2021, the Company issued Series C Preferred Stock and Series D Preferred Stock. In connection with all of these preferred stock issuances, and the related beneficial conversation features, the Company had deemed dividends of$3.6 million during 2021. Although these deemed dividends do not impact Net loss attributable toYunhong CTI, Ltd. , they do impact Net loss attributable toYunhong CTI Ltd. Common Shareholders and EPS.
Financial Condition, Liquidity and Capital Resources
Cash (Used In) Provided By Operating Activities
During 2021, cash used by operating activities amounted to (
? Depreciation and amortization of$462,000 compared to depreciation and amortization for 2020 of$388,000 ;
? An increase in inventories of
of (
? An increase in accounts receivable of
accounts receivable of (
? A decrease in prepaid expenses and other assets of
increase in prepaid expenses and other assets of
? A decrease in trade payables of (
payables of ($1,361,000 ) in 2020.
Cash Provided By (Used In) Investing Activities
During fiscal 2021, cash provided by investing activities amounted to
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Cash Provided By (Used In) Financing Activities
During fiscal 2021, cash provided by financing activities amounted to
As discussed in Note 3, in the Series A Offering, during 2020 the Company sold
500,000 shares of Series A Preferred and 400,000 shares of common stock for
aggregate gross proceeds of
In
In
InJune 2021 , the Company received$1.5 million from an investor as an advance on a proposed sale of Series D Redeemable Convertible Preferred Stock, which has since occurred. We issued 170,000 shares of newly authorized Series D Preferred Stock and 128,000 warrants to purchase our common stock.
Going Concern, Liquidity and Financial Condition
The Company's financial statements are prepared using account principles generally accepted inthe 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 toDecember 31, 2021 in excess of$20 million . The accompanying financial statements for the year endedDecember 31, 2021 have been prepared assuming the Company will continue as a going concern. The Company's cash resources may be insufficient to meet its anticipated needs during the next twelve months. The Company may require additional financing to fund it future planned operations. The ability of the Company to continue as a going concern is dependent on the Company's execution of its business plans and the ability to raise any needed additional capital at acceptable terms to the Company. While Management plans to mitigate this issue with improved performance now that it has disposed of subsidiaries and their related losses, there can be no guarantee this will be successful. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. DuringDecember 2017 , we entered in new financing agreements withPNC Bank, National Association ("PNC"). The financing agreements with PNC (the "PNC Agreements") included a$6 million term loan and an$18 million revolving credit facility (the "Revolving Credit Facility"), with a credit facility termination date ofDecember 2022 . Available credit under the Revolving Credit facility was determined by eligible receivables and inventory atCTI Industries (U.S. ) and Flexo Universal (Mexico ). We notified PNC of our failure to meet certain financial covenants and conditions during multiple occasions between 2018 and 2021, resulting in amendments to the loan documents, and in some cases forbearance agreements, along with related fees, penalties and other conditions. Pursuant to anApril 2021 forbearance agreement, the Company agreed to pay PNC a Forbearance Fee of$1,000,000 . Provided, however, that, so long as no event of default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by$1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates theEquity Investment (as defined in the agreement) byJune 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 beforeSeptember 30, 2021 , the Forbearance Fee shall be reduced by an additional$500,000 , to$250,000 . As the Company repaid all obligations under the Loan Agreement bySeptember 30, 2021 and theEquity Investment was consummated byJune 30, 2021 , the forbearance fee was$250,000 . During 2021, the Company recorded a forbearance expense of$250,000 . OnSeptember 30, 2021 (the "Closing Date"), the Company entered into a loan and security agreement (the "Agreement") with Line Financial (the "Lender"), which provides for a senior secured financing consisting of a revolving credit facility (the "Revolving Credit Facility) in an aggregate principal amount of up to$6 million (the "Maximum Revolver Amount") and term loan facility (the "Term Loan Facility") in an aggregate principal amount of$731,250 ("Term Loan Amount" and, together with the Revolving Credit Facility, the "Senior Facilities"). Proceeds of loans borrowed under the Senior Facilities were used to repay all amounts outstanding under the Company's PNC Agreements and for the Company's working capital. The Senior Facilities are secured by substantially all assets of the Company. Interest on the Senior Facilities shall be the prime rate published from time to time published in theWall Street Journal (3.25% as ofSeptember 30, 2021 ), plus 1.95% per annum, accruing daily and payable monthly. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The Term Loan Facility shall be repaid by the Company to Lender in 48 equal monthly installments of principal and interest, each in the amount of$15,234 , commencing onNovember 1, 2021 , and continuing on the first day of each month thereafter until the Term Loan Maturity Date (as defined in the Agreement). Also, the Company will pay the Lender collateral monitoring fees of 4.62% of the eligible accounts receivable, inventory, and equipment supporting the Revolving Credit Facility and the Term Loan. In addition, the Company paid the Lender a loan fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon the execution of the Agreement. 16
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The Senior Facilities mature onSeptember 30, 2023 and shall automatically be extended for successive periods of one year each, unless the Company or the Lender gives the other party written notice of termination not less than 90 days prior to the end of such term or renewal term, as applicable. If the Senior Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the anniversary of the Closing Date. The Company has the option to prepay the Term Loan Facility (together with all accrued but unpaid interest and a Term Loan Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not less than 60 days prior written notice to the Lender. The Senior Facilities require that the Company shall, commencingDecember 31, 2021 , maintain TangibleNet Worth of at least$4,000,000 or greater ("Minimum TangibleNet Worth "). Minimum TangibleNet Worth may be adjusted downward by the Lender, from time to time, in its sole and absolute discretion, based on the effect of non-cash charges and other factors on the calculation of TangibleNet Worth . Other debt subordinated to Lender is not considered as a reduction of this calculation. The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, and acquisitions, pay dividends and make other restricted payments, or make capital expenditures exceeding$1,000,000 in the aggregate in any fiscal year. As ofJanuary 1, 2019 , the Company had a note payable toJohn H. Schwan , Director and former Chairman of the Board, for$1.6 million , including accrued interest. This loan accrues interest, is due on demand, and is subordinate to the Senior Facilities. DuringJanuary 2019 ,Mr. Schwan converted$600,000 of the note into approximately 181,000 shares of our common stock at the then market rate of$3.32 per share. As a result of the conversion, the loan balance decreased to$1.0 million . The loan and interest payable toMr. Schwan amounted to$1.2 million and$1.1 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively. No payments were made toMr. Schwan during 2020 or 2021. Interest expense related to this loan amounted to approximately$70,000 and$65,000 for the twelve months endedDecember 31, 2021 and 2020, respectively.
As of
InOctober 2020 , the Company received$1.5 million from an unrelated third party as an advance on a proposed sale of Series C Redeemable Convertible Preferred Stock. As ofDecember 31, 2020 , the Company was in the process of negotiating and finalizing the terms of the arrangement, which has since occurred. As the agreement was not finalized as ofDecember 31, 2020 , the$1.5 million advance was classified as Advance from Investor within liabilities on the accompanying balance sheet and subsequently reclassified as stockholders equity. During 2021,$1.5 million was received for a series D Redeemable Convertible Preferred Stock and 128,000 warrants to purchase our common stock. Seasonality In the foil balloon product line, sales have historically been seasonal. Approximately half of these sales are considered "everyday" in nature while the other half tend to be event driven (certain holidays, graduation season, and other events). The COVID-19 pandemic changed the shape of graduation season for 2020, resulting in a lower demand for balloons during the second quarter 2020, but then a surge of demand related to at-home parties and events. This increase in demand continued into 2021. Critical Accounting Policies The financial statements of the Company are based on the selection and application of significant accounting policies which require management to make various estimates and assumptions. The following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operation. 17
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Revenue Recognition. Substantially all of the Company's revenues are derived from the sale of products. With respect to the sale of products, revenue from a transaction is recognized once it has (i) identified the contract(s) with a customer, (ii) identified the performance obligations in the contract, (iii) determined the transaction price, (iv) allocated the transaction price to the performance obligations in the contract, and (v) recognized revenue as the company satisfies a performance obligation. The Company generally recognizes revenue for the sale of products when the products have been shipped and invoiced. In some cases, product is provided on consignment to customers. In those cases, revenue is recognized when the customer reports a sale of the product. The Company adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price. Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606. The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales. Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment and write-off histories. Our credit risks are continually reviewed, and management believes that adequate provisions have been made for doubtful accounts. However, unexpected changes in the financial condition of customers or changes in the state of the economy could result in write-offs which exceed estimates and negatively impact our financial results. Inventory Valuation. Inventories are stated at the lower of cost or net realizable value. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted at the time of introduction of a new product or design, periodically and at year-end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As ofDecember 31, 2021 , the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of$290,000 . As ofDecember 31, 2020 , the amount of the reserve was$311,000 . In addition, on a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, charges reserve for the value of such inventory. We record freight income as a component of net sales and record freight costs as a component of cost of goods sold. Valuation of Long-Lived Assets. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property and equipment and goodwill) may be impaired or not recoverable. Significant factors which may trigger an impairment review include: changes in business strategy, market conditions, the manner of use of an asset, underperformance relative to historical or expected future operating results, and negative industry or economic trends. We apply the provisions of generally accepted accounting principles inthe United States of America ("U.S. GAAP")U.S. GAAP, under which goodwill is evaluated at least annually for impairment. The Company identified an impairment indicator related to the goodwill associated with Clever Container, a VIE that was untilJune 30, 2019 . As a result of an impairment test, the Company fully impaired the goodwill related to Clever in the first quarter of 2019 and recorded an impairment charge of$220,000 . In the first quarter of 2019, the Company identified an impairment indicator related to the goodwill associated with Flexo. As a result of an impairment test, the Company fully impaired the goodwill related to Flexo in the first quarter of 2019 and recorded an impairment charge of approximately$1 million . We performed a quantitative assessment for the year endedDecember 31, 2019 in which we considered the assets and liabilities of the Company as one operating segment, both recognized and unrecognized, as well as the cash flows necessary to operate the business relating to the assets and liabilities. 18
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Foreign Currency Translation. All balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts are translated using the average exchange rates for the year-to-date periods. The gains and losses resulting from the changes in exchange rates during the period have been reported in other comprehensive income or loss, except that, onNovember 30, 2012 , the Company determined that it does have an expectation of receiving payment with respect to indebtedness of Flexo Universal to the Company, and accordingly, as of and after that date foreign currency gains and losses with respect to such indebtedness has been reported in the statement of operations. This issue became moot with the sale of Flexo Universal duringOctober 2021 , which followed the elimination of other foreign subsidiaries (UK andGermany ). Stock-Based Compensation. We followU.S. GAAP which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values. We use the Black-Scholes option pricing model to determine the fair value of stock options which requires us to estimate certain key assumptions. In accordance with the application ofU.S. GAAP, we incurred no employee stock-based compensation cost for the year endedDecember 31, 2021 . AtDecember 31, 2021 , we had no unrecognized compensation cost relating to stock options. We will have compensation cost related to such equity instruments during 2022, including the inducement grants of restricted stock to the Chief Executive Officer beginningJanuary 2022 . Income Taxes and Deferred Tax Assets. Income taxes are accounted for as prescribed inU.S. GAAP. Under the asset and liability method ofU.S. GAAP, the Company recognizes the amount of income taxes currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years these temporary differences are expected to be recovered or settled. We evaluate all available positive and negative evidence in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before what we have estimated in our current forecasts, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period. Prior toSeptember 30, 2021 , we had been out of compliance with the terms of our credit facility and operating under a forbearance agreement, and had related going concern disclosure. We therefore established a valuation allowance reserve for substantially all of our deferred tax assets. As ofDecember 31, 2021 , the amount of the net deferred tax asset was none, as we continued to record a valuation allowance against the gross value of the deferred tax asset. Each quarter and year-end, management makes a judgment to determine the extent to which the deferred tax asset will be recovered from future taxable income. This value was reduced, in large part, due to changes in US tax law effective 2018 which will impact the value of future deductions. Fair Value Measurements.U.S. GAAP defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.U.S. GAAP clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.U.S. GAAP also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available. InFebruary 2008 , the FASB issued guidance now codified inU.S. GAAP which provides for delayed application of certain guidance related to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). 19
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Table of Contents Variable Interest Entities Primarily due to Clever and VLU having the attribution of related party beneficial ownership and certain financial and operational support, these entities are considered to be variable interest entities, or VIEs, under current accounting guidance. A company with interests in a VIE must consolidate the entity if the company is deemed to be the primary beneficiary of the VIE; that is, if it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. Such a determination requires management to evaluate circumstances and relationships that may be difficult to understand and to make a significant judgment, and to repeat the evaluation at each subsequent reporting date. Prior toJuly 1, 2019 , we had determined that the Company was the primary beneficiary of Clever and VL (despite not having a majority ownership interest). As discussed in Note 2 to the accompanying consolidated financial statements, events that occurred during the start of the third quarter of 2019, caused us to reconsider the primary beneficiary determination for Clever and VL. As a result, the consolidated financial statements as ofDecember 31, 2019 and 2020 excluded the assets, liabilities and operating results of Clever and VL. We also recognized a gain in the amount of$219,000 in connection with the deconsolidation of this VIE.
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