Yunhong CTI Ltd. — Q2 2023 Form 10-Q
Period: Quarter and six months ended June 30, 2023; filed August 11, 2023. The company designs, manufactures and distributes foil and latex balloon products, packaging films and related products. Manufacturing is in the U.S.; latex balloons are purchased from an unrelated vendor for distribution.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4.059 million | $4.418 million | $9.110 million | $10.215 million |
| Gross profit / margin | $514,000 / 12.7% | $803,000 / 18.2% | $1.641 million / 18.0% | $1.842 million / 18.0% |
| Operating loss | $290,000 | $306,000 | $278,000 | $325,000 |
| Net income (loss) | $(149,000) | $(399,000) | $247,000 | $(420,000) |
| Net income (loss) attributable to common shareholders | $(149,000) | $(601,000) | $236,000 | $(824,000) |
Q2 sales declined 8% year over year; first-half sales declined 11%. In Q2, foil balloon revenue rose 10%, while “other” revenue fell 56%. First-half foil balloon sales were down 1%, film products down 50%, and other products down 14%. Cost of sales was 87% of Q2 sales versus 82% a year earlier, compressing gross margin. First-half cost of sales was 82% of sales in both years.
First-half operating cash flow was negative $1.361 million, compared with positive $303,000 in 2022. Investing cash use was $94,000 in each period; financing provided $1.409 million versus $221,000 used in 2022. Cash declined by $46,000 during the first half to $100,000.
Financial position and material changes
- At June 30, current assets were $11.134 million and current liabilities $8.629 million, leaving working capital of $2.505 million. Cash was $100,000; accounts receivable was $2.959 million and inventory $7.639 million.
- The revolving credit balance increased to $4.288 million from $2.878 million at year-end 2022. The balance sheet also lists $521,000 of current term-loan debt and notes payable balances, including $1.305 million classified as subordinated related-party notes. Operating lease liabilities were $3.628 million in total. The filing’s debt presentation should be checked against the underlying notes.
- Total liabilities were $11.738 million versus $12.536 million at December 31, 2022. Stockholders’ equity increased to $3.889 million from $2.746 million.
- In February 2023, Series B preferred stock and approximately $885,000 of notes/deposits were converted into common shares. Common shares issued increased to 20.14 million from 16.10 million at year-end; 20,096,755 shares were outstanding on August 1, 2023.
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. It cited cumulative losses of approximately $23 million, limited operating cash, and possible need for additional financing. Plans include pursuing equity or debt financing, focusing on more profitable activities and exploring other funding, but success is not assured.
- Credit facility: The senior secured facility, with a revolving limit of up to $6 million, matures September 30, 2023. The company was negotiating a replacement or extension and expected to obtain acceptable financing, but gave no assurance. Interest is based on prime plus 1.95%; the facility is secured by substantially all company assets and includes covenants.
- Other income: Employee Retention Tax Credit income of $300,000 in Q2 and $895,000 in the first half was recognized in 2023 when government processing occurred; the related cash had been received in 2022. This helped drive the first-half return to net income. Interest expense rose to $297,000 for the first half from $205,000, reflecting higher rates.
- Risks: Helium costs remained elevated versus historical levels, and the company cited inflation, supply-chain constraints, and potential effects on access to capital. Sales are seasonal; the filing says about 40% of foil balloon sales historically occur December through March. Customer concentration is high: the top three customers represented 85% of Q2 sales and 86% of first-half sales; two customers together accounted for 83% of receivables at June 30.
- Controls and contingencies: Management concluded disclosure controls and internal control over financial reporting were ineffective, citing insufficient accounting expertise for unusual transactions and reliance on the CEO as acting CFO in a highly manual environment. Management did not expect ordinary-course legal matters to have a material adverse effect. No specific financial guidance was provided.
Key facts for investors to verify
- Whether the credit facility was renewed or replaced before its September 30, 2023 maturity, and the resulting terms and covenant compliance.
- Liquidity and financing plans supporting management’s going-concern assessment, including cash generation and access to capital.
- The debt classifications and balances shown on the balance sheet, including related-party and other notes payable.
- Customer concentration, collection of major receivables, and the sustainability of gross margins amid helium and other cost pressures.
- Progress in remediating the disclosed material weaknesses in financial reporting controls.