Yunhong CTI Ltd. — Q1 2023 Form 10-Q
Business and period. The company designs, manufactures and distributes foil balloons and related products, and produces films for packaging and other commercial uses. It also distributes purchased latex balloons. This summary covers the three months ended March 31, 2023; the comparable period is Q1 2022. The filing reports one operating segment, with manufacturing in the United States.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $5.051 million | $5.797 million |
| Gross profit / margin | $1.127 million / 22.3% | $1.039 million / 17.9% |
| Operating income (loss) | $12,000 | $(19,000) |
| Net income (loss) | $396,000 | $(21,000) |
| Net income (loss) attributable to common shareholders | $385,000 | $(223,000) |
| Basic and diluted earnings (loss) per share | $0.02 | $(0.04) |
| Operating cash flow | $(1.369) million | $2,000 |
| Cash at period end | $130,000 | $208,000 |
Q1 2023 net income included $526,000 of other income; the filing does not clearly explain its nature. Interest expense was $142,000, up from $96,000. No income tax expense was recorded.
Liquidity, debt and balance sheet
- At March 31, 2023, current assets were $11.907 million and current liabilities were $9.288 million, for working capital of approximately $2.619 million. Cash was limited to $130,000; accounts receivable were $3.344 million and inventory was $7.944 million.
- The revolving credit balance was $4.284 million, up from $2.878 million at year-end 2022. The facility permits up to $6 million of revolving borrowings; the term-loan balance was reported at approximately $0.5 million. The senior facilities are secured by substantially all company assets and bear interest at prime plus 1.95% (9.95% using the filing’s March 31 prime-rate reference of 8%).
- The senior facilities mature September 30, 2023. Management expects to obtain a replacement or extension but gives no assurance. The company reported compliance with its tangible-net-worth covenant.
- A subordinated note payable to director and former chairman John H. Schwan was approximately $1.3 million and is due December 31, 2023. The balance sheet’s presentation of notes payable is not fully clear, so total debt should be verified against the underlying statements and agreements.
- Total liabilities were $12.527 million and shareholders’ equity was $4.035 million. Common shares outstanding were 19,971,755 at March 31, 2023, compared with 16,059,991 at December 31, 2022.
Changes, outlook and risks
- Sales declined 13% year over year. Foil balloon revenue fell 9% to $3.474 million, which management associated in part with helium costs remaining elevated. Film product revenue dropped 89% to $89,000 after a major customer entered 2023 with inventory. Other product revenue rose 34% to $1.488 million.
- Gross profit increased despite lower sales, which management attributed to lower cost of sales and improved cost and mix efficiencies. General and administrative expense rose to $961,000 from $837,000, partly due to new audit-firm start-up and transition costs. Selling, advertising and marketing expenses together fell to $154,000 from $221,000.
- Operating cash use was driven principally by a $1.726 million increase in accounts receivable and decreases in accrued liabilities. Financing activities provided $1.409 million, principally from revolving and long-term debt; cash declined by $16,000 during the quarter.
- The company disclosed substantial doubt about its ability to continue as a going concern for one year from issuance. Management’s plans include focusing on profitable business lines and seeking equity, borrowing or other financing, but it cannot assure success. The filing also cites COVID-19 effects, supply-chain constraints, inflation, helium cost and availability, and potentially reduced access to capital.
- Customer concentration is significant: the top three customers accounted for 86% of Q1 sales, and the top ten for 91%. Two customers alone represented 50% and 32% of sales.
- Disclosure controls and internal control over financial reporting were considered ineffective at March 31, 2023. Management identified material weaknesses involving insufficient accounting expertise for unusual transactions and excessive reliance on the Acting CFO, who is also the CEO, in a highly manual control environment.
- No formal financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. Balloon sales are seasonal, with historical concentration in December through March.
- As a subsequent event, in April 2023 the company issued 125,000 restricted shares to Garden State Securities to settle tail compensation associated with a prior investment arrangement.
Investor verification priorities
- Assess the going-concern risk, cash runway, and the status and terms of refinancing or extending the credit facility before its September 30, 2023 maturity.
- Review the source and expected recurrence of the $526,000 of other income that materially contributed to reported net income.
- Verify debt balances and maturities, including the balance-sheet presentation of notes payable and the related-party Schwan note.
- Monitor collections and customer exposure: receivables rose sharply, and sales and receivables are concentrated among a small number of customers.
- Track remediation of the disclosed material weaknesses and confirm that future filings consistently report effective controls and accurate accounting for unusual transactions.
- Review the effects of the preferred-stock and debt/deposit conversions on share count and potential dilution, including the April 2023 share issuance.