Overview





The Company produces film products for novelty, packaging container and custom
film product applications. These products include foil balloons, latex balloons
(sourced from an external party) and related products, films for packaging
applications, and custom film products. We produce all of our film products for
packaging and container applications at our facilities in Lake Barrington,
Illinois. Substantially all of our film products for packaging applications and
flexible containers for packaging and storage are sold to customers in the
United States. We market and sell our novelty items - principally foil balloons
and latex balloons - in the United States and a number of additional countries.
In addition, the Company assembles and sells Candy Blossoms (containers of
arranged candy items) in the United States.



As determined by the Board of Directors beginning in 2019, we have been exiting
our foreign operations in order to focus on our North American operations,
particularly on foil balloons and related products. The sales entity in the UK
was liquidated in 2019. The sales and distribution entity in Germany was fully
closed during 2021. As noted herein, we sold Flexo Universal, our Mexican
manufacturing subsidiary, during October 2021. Additionally, we stopped selling
our vacuum sealing products as of March 30, 2020, after allowing the related
license agreement to expire. More discussion is available in discontinued
operations in this Annual Report on Form 10-K (see Note 19).

We have also changed our capital structure, beginning January 2020. This includes:





Series A Preferred Stock



On January 3, 2020, the Company entered into a stock purchase agreement (as
amended on February 24, 2020 and April 13, 2020 (the "LF Purchase Agreement")),
pursuant to which the Company agreed to issue and sell, and LF International
Pte. Ltd., a Singapore private limited company ("LF International"), which is
controlled by Company Chairman, Mr. Yubao Li, agreed to purchase, up to 500,000
shares of the Company's newly created shares of Series A Preferred Stock
("Series A Preferred"), with each share of Series A Preferred initially
convertible into ten shares of the Company's common stock, at a purchase price
of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the "LF
International Offering"). As permitted by the Purchase Agreement, the Company
may, in its discretion issue up to an additional 200,000 shares of Series A
Preferred for a purchase price of $10.00 per share (the "Additional Shares
Offering," and collectively with the LF International Offering, the "Offering").
Approximately $1 million of Series A Preferred has been sold as of June 30,
2021, including to an investor which converted an account receivable of $478,000
owed to the investor by the Company in exchange for 48,200 shares of Series A
Preferred. The Company completed several closings with LF International from
January 2020 through June 2020. The majority of the funds received reduced our
bank debt. We issued a total of 400,000 shares of common stock to LF
International and, pursuant to the LF Purchase Agreement, changed our name from
CTI Industries Corporation to Yunhong CTI Ltd. LF International had the right to
name three directors to serve on our Board. They were Mr. Yubao Li, Ms. Wan
Zhang and Ms. Yaping Zhang, the latter two of whom retired from our Board of
Directors during January 2022. In the three and nine months ended September 30,
2022, the Company accrued $67,000 and $267,000 of these dividends in each
period, respectively. On September 1, 2022, the investor converted Preferred
Series A into 5 million shares of common stock and approximately 1.3 million
shares of common stock representing accrued dividends.



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Series B Preferred Stock



In November 2020, we issued 170,000 shares of Series B Preferred for an
aggregate purchase price of $1,500,000. The Series B Preferred have an initial
stated value of $10.00 per share and liquidation preference over common stock.
The Series B Preferred is convertible into shares of our common stock equal to
the number of shares determined by dividing the sum of the stated value and any
accrued and unpaid dividends by the conversion price of $1.00. The Series B
Preferred accrues dividends at a rate of 8 percent per annum, payable at our
election either in cash or shares of the Company's common stock. Initially, the
Series B Preferred, in whole or part, was redeemable at the option of the holder
(but not mandatorily redeemable) at any time on or after November 30, 2021 for
the stated value, plus any accrued and unpaid dividends and thus was classified
as mezzanine equity and initially recognized at fair value of $1.5 million (the
proceeds on the date of issuance). In March 2021, the terms of the Series B
Preferred were modified to eliminate the ability of the holder to redeem the
Series B Preferred. The carrying value as of December 31, 2022 and 2021 amounted
to $1,851,000 and $1,715,000, respectively. The December 31, 2022 balance
consists of $1,500,000 original carrying value, $304,000 accrued dividends and
$47,000 accretion. During February 2023, the investor converted Series B into
approximately 1.9 million shares of common stock.



Series C Preferred Stock



In January 2021 we entered into an agreement with a related party, LF
International Pte. Ltd. which is controlled by Company director, Chairman,
President and Chief Executive Officer, Mr. Yubao Li, to purchase shares of
Series C Preferred stock. We issued 170,000 shares of Series C Preferred for an
aggregate purchase price of $1,500,000. The Series C Preferred have an initial
stated value of $10.00 per share and liquidation preference over common stock.
The Series C Preferred is convertible into shares of our common stock equal to
the number of shares determined by dividing the sum of the stated value and any
accrued and unpaid dividends by the conversion price of $1.00. The carrying
value as of September 1, 2022 and December 31, 2021 amounted to $1,698,000 and
$1,630,000, respectively. On September 1, 2022, the investor converted Series C
into 1.7 million shares of common stock and accrued dividends in the amount of
approximately 0.3 million shares of common stock.



Series D Preferred Stock



In June 2021, the Company received $1.5 million from an unrelated third party as
an advance on a proposed sale of Series D Redeemable Convertible Preferred
Stock, which was ultimately completed. The Series D Preferred have an initial
stated value of $10.00 per share and liquidation preference over common stock.
The Series D Preferred is convertible into shares of our common stock equal to
the number of shares determined by dividing the sum of the stated value and any
accrued and unpaid dividends by the conversion price of $1.00. We issued 170,000
shares of Series D Preferred for an aggregate price of $1.5 million.
Additionally, 128,000 warrants were issued pursuant to this transaction which
are convertible into our common stock at the lesser of $1.75 per share or 85% of
the volume weighted average price of the shares over the ten trading days prior
to conversion. The carrying value as of September 1, 2022 and December 31, 2021
amounted to $1,580,000 and $1,512,000, respectively. On September 1, 2022, the
investor converted Preferred Series D into 1.7 million shares of common stock
and received accrued dividends of approximately 0.1 million shares of common
stock.



Preferred Stock      Balance as of         Accrued Deemed         Balance as of
  Rollforward      December 31, 2021         Dividends          December 31, 2022
   Series B                 1,715,000              136,000               1,851,000




Warrants

A summary of the Company's stock warrant activity is as follows:





                                                       Weighted
                                                       Average
                                    Shares under       Exercise
                                       Option           Price
Balance at December 31, 2021              128,000     $     1.75
Granted                                         -              -
Cancelled/Expired                               -              -
Exercised/Issued                                -              -
Outstanding at December 31, 2022          128,000           1.75

Exercisable at December 31, 2022 128,000 $ 1.75

As of December 31, 2022 the Company reserved the following shares of its common stock for the exercise of warrants, and preferred stock:





Series B Preferred Stock                    1,700,000
2021 Warrants                                 128,572

Shares reserved as of December 31, 2022 1,828,572






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Effective January 2022, and in accordance with the Employment Agreement of Chief
Executive Officer Frank Cesario, a grant of restricted stock was made in the
amount of 250,000 shares. 25,000 shares vested immediately, while the remaining
225,000 are subject to performance conditions as further detailed in the share
grant. Specifically, the restrictions on the remaining 225,000 shares will lapse
based on satisfaction of the following performance goals and objectives and
continued employment through the date of meeting such targets:

? The restrictions on 56,250 shares of the award will lapse and the award will vest when the Company's trailing-twelve-month EBITDA equals or exceeds $1 million at any time on or after January 1, 2022.



? The restrictions on 56,250 shares of the award will lapse and the award will
vest in the event the Company's common shares trade at or above $5/share for ten
or more consecutive trading days.

? The restrictions on 56,250 shares of the award will lapse and the award will
vest when the Company's operating cash flow, calculated cumulatively from the
date of employment, equals or exceeds $1.5 million. On February 16, 2023, the
Compensation Committee determined this condition had been satisfied.

? The restrictions on 56,250 shares of the award will lapse and the award will
vest in the event the Company is able to refinance its current lender with a
traditional lender on terms and conditions customary for such financing. On
August 23, 2022, the Compensation Committee determined this condition had been
satisfied with an amended agreement with the Company's lender.



During 2022, the Compensation Committee awarded the Company's Chief Operating
Officer a grant of 100,000 shares of restricted stock. 20,000 of those shares
vest over a 12 month period while the remaining shares vest 20,000 each based on
the performance conditions above.



The Compensation Committee (as defined in the Plan) shall be responsible for
determining when the conditions above have been satisfied. The Company records
compensation expense with each vesting, and records a likelihood of vesting
weighted analysis to the extent it has visibility to do so. Without such
visibility, it considers such probability as de minimis until additional
information is available.

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, 2022                    December 31, 2021
                          $                % of                $                % of
Product Category    (000) Omitted        Net Sales       (000) Omitted        Net Sales

Foil Balloons               10,858               60 %            18,235               76 %

Film Products                2,036               11 %             2,386               10 %

Other                        5,154               29 %             3,464               14 %

Total                       18,048              100 %            24,086              100 %




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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 2022 and 2021, respectively, sales to our top 10
customers represented 90% and 85%, respectively, of net revenues for each year.
During 2022 and 2021, there were two customers to whom our sales represented
more than 10% of net revenues.

Our principal customer sales for 2022 and 2021 were:





                                                                 % of 2022                        % of 2021
Customer                     Product            2022 Sales       Revenues        2021 Sales       Revenues
Wal-Mart             Balloons; Candy Blossoms   $ 6,497,000              35 %   $  4,537,000              19 %
Dollar Tree Stores   Balloons                   $ 6,729,000              36 %   $ 13,813,000              57 %




The loss of one or both of these principal customers, or a significant reduction
in purchases by one or both of them, could have a material adverse effect on our
business.

We generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum amount of product from us.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net Sales



For the fiscal year ended December 31, 2022, consolidated net sales from
continuing operations of the sale of all products were $18,048,000 compared to
consolidated net sales of $24,086,000 for the year ended December 31, 2021, a
decrease of 25% as more fully described below.



Sales of foil balloons were $10,858,000 in 2022 and $18,235,000 in 2021, a
decrease of 40%. Our largest customer for foil balloons was Dollar Tree Stores.
The remaining sales were made to hundreds of customers including distributors
and retail stores. The first half of 2022 saw a significant increase in the
price of helium which gradually reduced as the year progressed and into 2023. As
most of our foil balloons are ultimately filled with helium, this was the
primary reason for the decline in sales related to the prior year.



Sales of film products were $2,036,000 in 2022 and $2,386,000 in 2021, a
decrease of 15%. Our second largest customer entered 2022 with excess inventory
and only started placing orders for new material during the second half of the
year. Our largest customer purchased more material than usual during the first
nine months of the year, ending with sufficient material not to need new
material during the last three months of 2022.



Sales of other products increased to $5,154,000 in 2022 from $3,464,000 in 2021,
an increase of 49%. This category includes sales of Candy Blossoms, which
featured larger holiday orders than the prior year as well as the launch of

an
everyday offering.



Cost of Sales

Cost of sales decreased to $14,910,000 in 2022 from $20,321,000 in 2021, a decrease of 27%. The decrease in cost of sales was primarily attributable to the decrease in sales.





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General and Administrative Expenses

General and administrative expenses increased to $3,720,000 in 2022 from $3,815,000 in 2021, a decrease of 2%.





Selling and Marketing



Selling expenses from continuing operations increased to $136,000 in 2022 from
$132,000 in 2021. Marketing and advertising expense increased to $402,000 in
2022, from $323,000 in 2021, an increase of 21%.



Other Income or Expense



During 2022, we incurred net interest expense of $450,000 compared to net
interest expense of $564,000 during 2021. The decrease in interest expense was
primarily attributable to the lower average outstanding balance of debt in

2022
as compared to 2021.




During 2021 we engaged in a Sale and Leaseback transaction of our principal
headquarters in Lake Barrington, IL. This transaction resulted in a gain of $3.4
million. We also recorded an expense related to the disposition of our Flexo
Universal subsidiary. We recorded an approximately $10 million expense in Other
Expense and a $6 million gain in Other Comprehensive Income related to this
transaction, all non-cash items.

Deemed Dividends on Preferred Stock and Amortization of Beneficial Conversion Feature


In 2020 the Company issued Series A Preferred Stock and Series B Preferred
Stock. In connection with these preferred stock issuances, and the related
beneficial conversion features, the Company had deemed dividends of $4.4 million
in 2020. During 2021, the Company issued Series C Preferred Stock and Series D
Preferred Stock. In connection with all of these preferred stock issuances, and
the related beneficial conversation features, the Company had deemed dividends
of $0.6 million during 2022 and $3.6 million during 2021. Although these deemed
dividends do not impact Net loss attributable to Yunhong CTI, Ltd., they do
impact Net loss attributable to Yunhong CTI Ltd. Common Shareholders and EPS. As
Series A, C and D preferred stock all converted during 2022, only Series B
preferred stock dividends remained on an ongoing basis. Series B converted into
common during 2023, ending the related dividend accrual.

Financial Condition, Liquidity and Capital Resources

Cash (Used In) Provided By Operating Activities

During 2022, cash generated by operating activities amounted to $2,368,000, compared to cash used by operating activities during 2021 of ($3,710,000). Significant changes in working capital items affecting cash flow used in operating activities were:





  ? Depreciation and amortization of $383,000 compared to depreciation and
    amortization for 2021 of $462,000;

? An increase in inventories of $449,000 compared to an increase in inventories

of $604,000 in 2021;

? An decrease in accounts receivable of ($1,825,000) compared to an increase in

accounts receivable of $1,673,000 in 2021;

? A decrease in prepaid expenses and other assets of ($836,000) compared to a

decrease in prepaid expenses and other assets of ($132,000) in 2021; and

? A decrease in trade payables of ($819,000) compared to a decrease in trade


    payables of ($1,173,000) in 2021.

Cash Provided By (Used In) Investing Activities

During fiscal 2022, cash used in investing activities amounted to ($163,000) compared to cash provided by investing activities during fiscal 2021 of $3,378,000.





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Cash Provided By (Used In) Financing Activities

During fiscal 2022, cash used by financing activities amounted to ($2,125,000), compared to cash provided by financing activities of $626,000 during fiscal 2021

In October 2020, we received an advance of $1,500,000 from an investor. In January 2021, we finalized the transaction with the investor and issued 170,000 shares of newly authorized Series C Preferred Stock.





In June 2021, the Company received $1.5 million from an investor as an advance
on a proposed sale of Series D Redeemable Convertible Preferred Stock, which has
since occurred. We issued 170,000 shares of newly authorized Series D Preferred
Stock and 128,000 warrants to purchase our common stock.

Going Concern, Liquidity and Financial Condition





The Company's financial statements are prepared using account principles
generally accepted in the United States ("U.S. GAAP") applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has a cumulative net
loss from inception to December 31, 2022 of approximately $24 million. The
accompanying financial statements for the year ended December 31, 2022 have been
prepared assuming the Company will continue as a going concern. The Company's
cash resources may be insufficient to meet its anticipated needs during the next
twelve months. The Company may require additional financing to fund it future
planned operations. The ability of the Company to continue as a going concern is
dependent on the Company's execution of its business plans and the ability to
raise any needed additional capital at acceptable terms to the Company. While
Management plans to mitigate this issue with improved performance now that it
has disposed of subsidiaries and their related losses, there can be no guarantee
this will be successful. The accompanying financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.




During December 2017, we entered in new financing agreements with PNC Bank,
National Association ("PNC"). The financing agreements with PNC (the "PNC
Agreements") included a $6 million term loan and an $18 million revolving credit
facility (the "Revolving Credit Facility"), with a credit facility termination
date of December 2022. Available credit under the Revolving Credit facility was
determined by eligible receivables and inventory at CTI Industries (U.S.) and
Flexo Universal (Mexico).

We notified PNC of our failure to meet certain financial covenants and conditions during multiple occasions between 2018 and 2021, resulting in amendments to the loan documents, and in some cases forbearance agreements, along with related fees, penalties and other conditions.


On September 30, 2021 (the "Closing Date"), the Company entered into a loan and
security agreement (the "Agreement") with Line Financial (the "Lender"), which
provides for a senior secured financing consisting of a revolving credit
facility (the "Revolving Credit Facility) in an aggregate principal amount of up
to $6 million (the "Maximum Revolver Amount") and term loan facility (the "Term
Loan Facility") in an aggregate principal amount of $731,250 ("Term Loan Amount"
and, together with the Revolving Credit Facility, the "Senior Facilities").
Proceeds of loans borrowed under the Senior Facilities were used to repay all
amounts outstanding under the Company's PNC Agreements and for the Company's
working capital. The Senior Facilities are secured by substantially all assets
of the Company. The Company has been in compliance with the terms of these
Senior Facilities since inception in September 2021.



Interest on the Senior Facilities shall be the prime rate published from time to
time published in the Wall Street Journal (7.5% as of December 16, 2022), plus
1.95% per annum, accruing daily and payable monthly. Interest shall be
calculated on the basis of a 360-day year for the actual number of days elapsed.
The Term Loan Facility shall be repaid by the Company to Lender in 48 equal
monthly installments of principal and interest, each in the amount of $15,234,
commencing on November 1, 2021, and continuing on the first day of each month
thereafter until the Term Loan Maturity Date (as defined in the Agreement).
Also, the Company was to 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. During August 2022 the terms above
were modified to reduce the collateral monitoring fee to 2.77%, and added a
provision that barred the Company from repaying the facility prior to September
2023. 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.



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The Senior Facilities mature on September 30, 2023 and shall automatically be
extended for successive periods of one year each, unless the Company or the
Lender gives the other party written notice of termination not less than 90 days
prior to the end of such term or renewal term, as applicable. If the Senior
Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25%
of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the
anniversary of the Closing Date. The Company has the option to prepay the Term
Loan Facility (together with all accrued but unpaid interest and a Term Loan
Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not
less than 60 days prior written notice to the Lender.



The Senior Facilities require that the Company shall, commencing December 31,
2021, maintain Tangible Net Worth of at least $4,000,000 or greater ("Minimum
Tangible Net Worth"). Minimum Tangible Net Worth may be adjusted downward by the
Lender, from time to time, in its sole and absolute discretion, based on the
effect of non-cash charges and other factors on the calculation of Tangible Net
Worth. Other debt subordinated to Lender is not considered as a reduction of
this calculation.



The Senior Facilities contain certain affirmative and negative covenants that
limit the ability of the Company, among other things and subject to certain
significant exceptions, to incur debt or liens, make investments, enter into
certain mergers, consolidations, and acquisitions, pay dividends and make other
restricted payments, or make capital expenditures exceeding $1,000,000 in the
aggregate in any fiscal year.



As of January 1, 2019, the Company had a note payable to John H. Schwan, former
Director and former Chairman of the Board, for $1.6 million, including accrued
interest. This loan accrues interest, is due on demand, and is subordinate to
the Senior Facilities. During January 2019, Mr. Schwan converted $600,000 of the
note into approximately 181,000 shares of our common stock at the then market
rate of $3.32 per share. As a result of the conversion, the loan balance
decreased to $1.0 million. The loan and interest payable to Mr. Schwan amounted
to $1.3 million and $1.2 million as of December 31, 2022 and December 31, 2021,
respectively. No payments were made to Mr. Schwan during 2022 or 2021. Interest
expense related to this loan amounted to approximately $74,000 and $70,000 for
the twelve months ended December 31, 2022 and 2021, respectively.

As of December 31, 2021, the Company had a note payable to Alex Feng for $166,667. This loan accrues interest at 3% and is subordinate to the Senior Facilities. The subordination agreement signed September 30, 2021 changed the term of the maturity date from November 2023 to March 2024 and payment date starting April 2022.


In October 2020, the Company received $1.5 million from an unrelated third party
as an advance on a proposed sale of Series C Redeemable Convertible Preferred
Stock. As of December 31, 2020, the Company was in the process of negotiating
and finalizing the terms of the arrangement, which has since occurred. As the
agreement was not finalized as of December 31, 2020, the $1.5 million advance
was classified as Advance from Investor within liabilities on the accompanying
balance sheet and subsequently reclassified as stockholders equity. During 2021,
$1.5 million was received for a series D Redeemable Convertible Preferred Stock
and 128,000 warrants to purchase our common stock.



Through September 30, 2022, the Company has received approximately $160,000 in
Employee Retention Tax Credits ("ERTC") from the United States Government
related to claims that were filed during 2021. $123,000 is listed as General and
Administrative, while the remainder is in Other Income. During October 2022 the
Company executed a financing transaction wherein the remaining open claims for
$1.2 million in ERTC was sold to a third party for $0.9 million. Once the $1.2
million is ultimately paid, those funds will be immediately transferred to the
third party . To the extent any of the $1.2 million in ERTC claims are
determined by the United States Government not to be payable, a prorated portion
of the $0.9 million must be returned to that investor. The $0.9 million is
listed as a deferred income current liability as of December 31, 2022, which
will be recognized upon acceptance and processing of the amended returns by the
United States Government. During January 2023, approximately $0.8 million of
claims had been processed and refunds issued, which was forwarded to the third
party above. As a result, approximately $0.6 million of the deferred income
liability was recognized during January 2023.



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 in 2021. As 2022 returned to a more standardized calendar of
events relative to COVID-19, the sales activities returned to a more traditional
shape (excluding the impact of helium pricing).



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.



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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 of December 31, 2022, the
Company had established a reserve for obsolescence, marketability or excess
quantities with respect to inventory in the aggregate amount of $155,000. As of
December 31, 2021, the amount of the reserve was $290,000. In addition, on a
periodic basis, the Company disposes of inventory deemed to be obsolete or
unsaleable and, at such time, charges reserve for the value of such inventory.
We record freight income as a component of net sales and record freight costs as
a component of cost of goods sold.



Valuation of Long-Lived Assets. We evaluate whether events or circumstances have
occurred which indicate that the carrying amounts of long-lived assets
(principally property and equipment and goodwill) may be impaired or not
recoverable. Significant factors which may trigger an impairment review include:
changes in business strategy, market conditions, the manner of use of an asset,
underperformance relative to historical or expected future operating results,
and negative industry or economic trends. We apply the provisions of generally
accepted accounting principles in the United States of America ("U.S. GAAP")
U.S. GAAP, under which goodwill is evaluated at least annually for impairment.



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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, on November 30, 2012, the Company determined that it does have an
expectation of receiving payment with respect to indebtedness of Flexo Universal
to the Company, and accordingly, as of and after that date foreign currency
gains and losses with respect to such indebtedness has been reported in the
statement of operations. This issue became moot with the sale of Flexo Universal
during October 2021, which followed the elimination of other foreign
subsidiaries (UK and Germany).



Stock-Based Compensation. We follow U.S. GAAP which requires all stock-based
payments to employees, including grants of employee stock options, to be
recognized in the consolidated financial statements based on their grant-date
fair values.



We use the Black-Scholes option pricing model to determine the fair value of
stock options which requires us to estimate certain key assumptions. In
accordance with the application of U.S. GAAP, we incurred no employee
stock-based compensation cost for the year ended December 31, 2022. At December
31, 2022, we had approximately $3,000 unrecognized compensation cost relating to
stock options, as well as performance based awards for which the ultimate
vesting is unknown.



Income Taxes and Deferred Tax Assets. Income taxes are accounted for as
prescribed in U.S. GAAP. Under the asset and liability method of U.S. GAAP, the
Company recognizes the amount of income taxes currently payable. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years these temporary differences are expected to be
recovered or settled.



We evaluate all available positive and negative evidence in each tax
jurisdiction regarding the recoverability of any asset recorded in our
Consolidated Balance Sheets and provide valuation allowances to reduce our
deferred tax assets to an amount we believe is more likely than not to be
realized. We regularly review our deferred tax assets for recoverability
considering historical profitability, our ability to project future taxable
income, the expected timing of the reversals of existing temporary differences
and tax planning strategies. If we continue to operate at a loss in certain
jurisdictions or are unable to generate sufficient future taxable income within
the defined lives of such assets, we could be required to increase our valuation
allowance against all or a significant portion of our deferred tax assets. This
increase in valuation allowance could result in substantial increases in our
effective tax rate and could have a material adverse impact on our operating
results. Conversely, if and when our operations in some jurisdictions become
sufficiently profitable before what we have estimated in our current forecasts,
we would be required to reduce all or a portion of our current valuation
allowance and such reversal would result in an increase in our earnings in

such
period.



Prior to September 30, 2021, we had been out of compliance with the terms of our
credit facility and operating under a forbearance agreement, and had related
going concern disclosure. We therefore established a valuation allowance reserve
for substantially all of our deferred tax assets. As of December 31, 2022 and
2021, the amount of the net deferred tax asset was none, as we continued to
record a valuation allowance against the gross value of the deferred tax asset.
Each quarter and year-end, management makes a judgment to determine the extent
to which the deferred tax asset will be recovered from future taxable income.
This value was reduced, in large part, due to changes in US tax law effective
2018 which will impact the value of future deductions.



Fair Value Measurements. U.S. GAAP defines fair value, establishes a framework
for measuring fair value, establishes a fair value hierarchy based on the
quality of inputs used to measure fair value and enhances disclosure
requirements for fair value measurements. U.S. GAAP clarifies that fair value is
an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants. U.S. GAAP also requires that a fair value measurement reflect the
assumptions market participants would use in pricing an asset or liability based
upon the best information available. In February 2008, the FASB issued guidance
now codified in U.S. GAAP which provides for delayed application of certain
guidance related to non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).



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