Yunhong CTI Ltd. (formerly CTI Industries Corporation) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are with FY 2018. The company designs, manufactures and sells balloons, flexible films, packaging products and other consumer goods. It filed this report on May 14, 2020, after using SEC relief that extended its filing deadline due to COVID-19-related delays.
Financial performance and condition
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales from continuing operations | $40.54 million | $49.42 million |
| Gross profit | $6.32 million | $10.04 million |
| Gross margin | 15.6% | 20.3% |
| Loss from operations | $2.01 million | $0.64 million |
| Net loss, consolidated | $8.07 million | $3.74 million |
| Net loss attributable to Yunhong CTI | $7.13 million | $3.59 million |
| Cash provided by operating activities | $3.67 million | Cash used: $1.23 million |
| Cash used in investing activities | $0.08 million | $0.46 million |
| Cash used in financing activities | $3.59 million | Cash provided: $2.45 million |
Continuing-operation sales declined 18%. Foil balloons were $17.65 million (down 17%); latex balloons $7.41 million (down 6%); vacuum sealing products $8.24 million (down 7%); film products $1.88 million (down 6%); and other products $5.09 million (down 10%). Home organization sales fell to $0.26 million from $3.92 million.
At year-end, cash and cash equivalents were $845,000; current assets were $27.62 million and current liabilities $27.52 million, leaving approximately $100,000 of working capital. Total assets were $31.32 million, total liabilities $30.19 million, and stockholders’ equity $1.98 million. The balance sheet reported a $14.52 million revolving line of credit and $3.45 million of current notes payable; debt was subject to lender defaults and forbearance. Net interest expense was $2.03 million.
Material changes and unusual items
- Sales and profitability deteriorated: lower volume reduced fixed-cost absorption, while seasonal U.S. labor costs rose. Helium supply constraints also hurt foil-balloon sales.
- Discontinued operations generated a $3.21 million net loss, compared with $0.26 million in 2018. The U.K. subsidiary was liquidated in 2019; the German subsidiary was being closed. The filing reports substantial inventory, asset and estimated disposal-related charges associated with these exits.
- The company recorded $1.48 million of impairment on long-lived assets in continuing operations and reported a $219,000 gain on deconsolidating variable-interest entities. Goodwill was fully impaired during 2019.
- Operating cash flow benefited substantially from a $4.51 million inventory reduction. Capital expenditures were approximately $80,000.
- Top ten customers accounted for 75% of revenue in both years. Walmart represented 27% and Dollar Tree 28% of 2019 revenue; sales generally were not subject to minimum-purchase commitments.
Liquidity, outlook and risks
The auditor’s report and management disclosures state that substantial doubt exists about the company’s ability to continue as a going concern. The company was not in compliance with its PNC credit facility at year-end and had entered into repeated forbearance agreements. Under the January 2020 agreement, PNC agreed to forbear from exercising remedies for defaults through no later than December 31, 2020; the company reclassified debt as current because the forbearance was temporary. Covenant breaches had increased borrowing costs, and continued noncompliance could affect credit availability and the company’s ability to continue operating.
After year-end, the company raised approximately $6 million gross through Series A convertible preferred stock sales to LF International and other accredited investors, according to the filing. The preferred stock was initially convertible into common shares at $1 per share. The financing also provided board appointment rights to the investor and involved common-stock inducement shares and placement-agent compensation. The filing says the proceeds were intended to support liquidity and address the bank overadvance. It also reports approximately $1 million of Payroll Protection Program funds received. Management expected available cash, internally generated funds and borrowing capacity to cover working capital needs through 2020, but that assessment depends on financing and execution of its plans.
Management planned to focus on core North American balloon products, exit or liquidate foreign operations, and relocate warehousing and light assembly from Illinois to Texas. The Ziploc license expired on December 31, 2019; the company stopped selling the related vacuum-sealing products on March 30, 2020. COVID-19 created uncertain demand, shipment, supply, workforce and financing risks, including disruption to seasonal and graduation-related sales. Other significant risks include raw-material and helium availability and prices, customer concentration, competition, seasonal working-capital needs, and lender restrictions.
Reporting and governance matters
- The company restated its 2019 interim financial statements to correct timing and classification of charges and discontinued operations, and to make other adjustments. Management identified material weaknesses in financial reporting controls, including insufficient accounting expertise for unusual transactions and excessive reliance on the CFO and Controller. Disclosure controls were deemed ineffective at December 31, 2019.
- The auditor expressed an unqualified opinion on the annual financial statements but included a going-concern emphasis. The auditor did not express an opinion on internal-control effectiveness.
- The filing contains apparent inconsistencies among its financial statements, notes and MD&A, including different reported operating cash flow and continuing-operations loss figures. Certain figures also differ between the face statements and EPS disclosures; the filing text does not provide a clear reconciliation.
Key investor verification points
- Reconcile the reported continuing-operations and per-share losses, operating cash flow, and income-tax figures across the financial statements, notes and MD&A.
- Confirm the amount and terms of preferred-stock financing actually closed, remaining escrow or closing conditions, conversion dilution, placement-agent costs and investor board rights.
- Assess the PNC facility’s current status, covenant compliance, borrowing availability, debt maturity and whether forbearance or other waivers were extended beyond 2020.
- Verify the company’s cash runway, use of PPP funds, seasonal working-capital needs and progress on cost reductions and the planned warehouse relocation.
- Track the completion costs and liabilities of the German and U.K. exits, and the revenue and customer impact of ending vacuum-sealing sales.
- Evaluate remediation of the material weaknesses and the reliability of subsequent financial reporting after the interim restatement.