Yunhong CTI Ltd. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. The company makes foil balloons, films and related products. After selling its Mexican latex-balloon subsidiary in October 2021, it focused on its U.S. operations.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.263 million | $5.184 million | $12.478 million | $17.495 million |
| Gross profit / margin | $242,000 / 10.7% | $656,000 / 12.7% | $2.084 million / 16.7% | $2.936 million / 16.8% |
| Operating income (loss) | $(757,000) | $(281,000) | $(1.082) million | $3.213 million |
| Net income (loss) | $(969,000) | $(638,000) | $(1.389) million | $1.465 million |
| Net loss attributable to common shareholders | $(1.115) million | $(801,000) | $(1.939) million | $(1.140) million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1.187 million | $(1.204) million |
Q3 sales declined 56%; nine-month sales declined 29%. Q3 cost of sales was 89% of revenue, versus 87% a year earlier; nine-month cost of sales was 83% in both periods. Nine-month 2021 results included a $3.357 million gain on sale of the Lake Barrington facility, while discontinued operations also affected the prior-year comparison.
At September 30, 2022, cash was $101,000; current assets were $11.337 million and current liabilities $8.289 million. The current ratio was approximately 1.37. The company had drawn $3.972 million of its $6 million revolving facility, subject to eligible collateral. The balance sheet reported a $462,000 noncurrent term-loan balance and $1.252 million of subordinated related-party notes payable; operating lease liabilities totaled $4.005 million. Total liabilities were $13.499 million, against shareholders’ equity of $2.815 million.
Material changes and business developments
- Foil-balloon revenue fell 62% in Q3 and 41% for the first nine months. Management attributed pressure to higher helium prices, including inflation and restrictions on trade with Russia, and discontinuation of products for which price increases were insufficient. Film revenue rose 27% year to date, while Q3 film revenue declined 22%.
- In September, holders converted Series A, C and D preferred stock into common shares, including shares for accrued dividends. Common shares issued increased from 5.93 million at December 31, 2021 to 16.10 million at September 30, 2022. Series B preferred stock remained outstanding, with a $1.7 million liquidation preference.
- Operating cash flow improved year over year, helped by a $2.032 million reduction in accounts receivable, partly offset by a $1.286 million inventory increase. Cash used in financing was $1.031 million, primarily reflecting debt repayments.
- In August, the lender reduced the collateral monitoring fee to 2.77% and barred repayment of the facility before September 2023. The senior facilities mature September 30, 2023, subject to renewal terms; the company reported covenant compliance.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance. Cash from operations may be insufficient for anticipated needs. Management plans to focus on profitable activities and seek equity, borrowing or other financing, but gave no assurance of success.
- Post-quarter financing: In October 2022, the company received $900,000 by monetizing a remaining employee-retention-tax-credit claim of approximately $1.2 million. It may have to repay the advance if the claim is rejected. A separate $570,000 investor deposit remained a current liability because investment terms were not agreed.
- Customer and operating exposure: The top three customers accounted for 79% of Q3 sales and 89% of nine-month sales. Customer A alone represented 49% and 44%, respectively. Management cited helium pricing, supply-chain constraints, inflation and COVID-19 impacts. Foil-balloon sales are seasonal, with historically higher sales from December through March.
- Controls and governance: Disclosure controls and internal control over financial reporting were ineffective at September 30, 2022. Reported material weaknesses included insufficient accounting expertise for unusual transactions and dependence on the CEO/acting CFO in a highly manual environment. On November 8, the company terminated its independent auditor and said it intended to hire a replacement.
- Management said routine legal proceedings were not expected to have a material adverse effect. The filing provided no financial guidance or quantified outlook.
Important facts for investors to verify
- Whether the company can secure adequate financing and maintain liquidity, including availability under the collateral-based credit facility and the outcome of the tax-credit claim.
- Whether sales and margins recover after the sharp decline in foil-balloon revenue, and how customer concentration and helium costs affect results.
- The terms and dilution implications of preferred-stock conversions, remaining Series B stock, warrants and any future equity financing.
- Progress addressing the disclosed control weaknesses and appointment of a new independent auditor.
- Debt covenant compliance, the facility’s 2023 maturity and renewal terms, and the company’s ability to meet lease and debt obligations.