Yunhong Green CTI Ltd. — Q1 2024 Form 10-Q
Business and period: The company designs, manufactures and distributes foil balloons, distributes purchased latex balloons, and produces films and flexible packaging products. All manufacturing is in the United States. This unaudited report covers the three months ended March 31, 2024, compared with Q1 2023. The company filed the report on September 25, 2024; it marked “No” for having filed all required reports during the preceding 12 months.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior balance-sheet date |
|---|---|---|
| Net sales | $4.894 million | $5.051 million |
| Gross profit / margin | $895,000 / about 18% | $1.127 million / about 22% |
| Operating income (loss) | ($353,000) | $12,000 |
| Net income (loss) | ($576,000); ($0.03) per share | $396,000; $0.02 per share |
| Cash used in operations | $767,000 | $1.369 million |
| Cash and cash equivalents | $49,000 | $921,000 at December 31, 2023 |
| Total assets / liabilities | $16.746 million / $11.468 million | $17.247 million / $13.515 million at December 31, 2023 |
Cash used in investing was $154,000, mainly for property and equipment. Financing provided $49,000: $500,000 was received for preferred stock, $1 million of related-party debt was repaid, and revolving-credit borrowings increased by $565,000. Current assets were $12.551 million and current liabilities $8.249 million at quarter-end.
The revolving credit balance was $5.556 million, against a stated facility maximum of $6 million; term-loan balance was approximately $0.7 million. The facilities are secured by substantially all company assets and mature September 30, 2025. The revolving facility bears interest at prime plus 7.82%; the term loan bears prime plus 1.45%. The company reported covenant compliance. It also paid $1 million of a former chairman’s related-party note in January, with approximately $0.3 million remaining to be paid at a future date.
Changes and notable items
- Sales fell 3% year over year. Foil-balloon sales declined 16% to $2.919 million; management attributed the decline mainly to order and shipment timing and noted open orders were $0.5 million higher year over year. Film-product sales increased to $305,000 from $89,000; other-product sales rose 12% to $1.670 million.
- Gross profit declined 21% as cost of sales increased despite lower sales. Management cited lower volume, mix inefficiencies, and unusual repair and maintenance costs. Operating expenses rose to $1.248 million from $1.115 million; G&A and selling, advertising and marketing costs increased.
- Interest expense increased to $218,000 from $142,000. The company attributed this to higher rates and a borrowing-structure change. Q1 2023 included $526,000 of other income, compared with $5,000 of other expense in Q1 2024, contributing to the year-over-year earnings reversal.
- In March, the company issued Series E and F preferred stock with stated liquidation preferences of $1.3 million and $0.7 million, respectively, and 8.5% annual dividends. The financings included warrants for 556,000 common shares, exercisable at the lower of $1.52 or 90% of the specified 10-day VWAP. The company recorded $14,000 of preferred-stock deemed dividends.
- Subsequent event: on June 30, 2024, a wholly owned subsidiary acquired certain assets from an affiliated seller using 5 million common shares valued at $6.25 million. The company initially assigned $4.05 million to acquired assets and $2.2 million to a prepayment for anticipated operating expenses; purchase accounting was not final.
Liquidity, outlook and risks
Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance. Operating cash resources may be insufficient for the next 12 months. Management plans to focus on profitable activities and seek equity, borrowing or other funding, but gave no assurance it can obtain financing or achieve profitable operations. The filing provides no quantified earnings or revenue guidance.
Risks include very low quarter-end cash, reliance on external funding, the secured credit facilities and their covenants, and exposure to supply-chain constraints, inflation, helium availability and capital-market conditions. Revenue is highly concentrated: the top three customers represented 86% of Q1 sales and the top ten 93%; two customers alone represented 46% and 35%. The company also reported that its two largest customers accounted for 51% and 42% of net receivables, respectively.
Disclosure controls and internal control over financial reporting were deemed ineffective at March 31, 2024, due to material weaknesses involving insufficient accounting expertise for significant or unusual transactions and excessive reliance on the acting CFO, who is also the CEO, in a highly manual environment. The company changed auditors in April 2024 after its former auditor agreed to SEC suspension. The filing says the resulting review work delayed required filings; Nasdaq had set a September 27, 2024 deadline for delinquent filings, with delisting risk if unmet. The company stated this filing partially addressed the requirement.
Management said ordinary-course legal claims were not expected to have a material adverse effect. The filing reports no formal guidance and no material litigation identified.
Important facts for investors to verify
- Whether the company can secure sufficient financing and maintain going-concern viability, given $49,000 of cash and disclosed substantial doubt.
- Current borrowing availability under the $6 million revolving facility, its borrowing-base limits, interest costs, and ongoing covenant compliance.
- Customer concentration, collections from the two major customers, and the timing of foil-balloon orders and shipments.
- The final valuation and accounting for the June 2024 related-party asset acquisition, including the $2.2 million operating-expense prepayment.
- Progress in remediating control weaknesses and completing required filings following the auditor change and prior filing delays.