Yunhong CTI Ltd. — 2022 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a quarterly report. The Illinois-based company makes and sells foil balloons and novelty items, flexible packaging films, and Candy Blossoms. It is focused on its U.S. business after exiting foreign subsidiaries. In 2022, product mix was 60% novelty products, 11% film products, and 29% other products.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net sales | $18.048 million | $24.086 million |
| Gross profit / gross margin | $3.138 million / 17.4% | $3.764 million / 15.6% |
| Operating loss | $1.120 million | $0.506 million |
| Net loss | $1.467 million | $7.554 million |
| Net loss attributable to common shareholders | $2.051 million | $11.845 million |
| Net cash from (used in) operating activities | $2.368 million | ($3.710 million) |
| Cash and cash equivalents at year-end | $146,000 | $66,000 |
| Total assets / total liabilities | $15.282 million / $12.536 million | $17.282 million / $13.231 million |
Gross margin improved despite lower sales, but the operating loss widened as gross profit declined and operating expenses remained substantial. The 2021 net loss included major non-cash charges associated with the sale of the Mexican subsidiary and foreign-currency reclassification; 2021 also included a $3.357 million sale-and-leaseback gain. Net interest expense was $450,000 in 2022, down from $564,000.
Cash provided by operations improved by $6.078 million year over year, supported notably by collections of accounts receivable and changes in accrued liabilities. Investing activities used $163,000; financing activities used $2.125 million, primarily for debt repayment. Year-end cash remained limited.
At December 31, 2022, the company reported $2.878 million drawn on its revolving line, $543,000 in term-loan debt, and $1.267 million in subordinated officer debt. Total debt in the debt note was $4.860 million, of which $3.166 million was current and $1.694 million long term. Operating lease liabilities were an additional $3.882 million. Current assets were $10.478 million versus current liabilities of $7.478 million.
Material changes versus 2021
- Sales fell 25%. Foil-balloon sales declined 40% to $10.858 million; management attributed the main impact to higher helium prices, which it estimated reduced revenue by several million dollars from May through year-end.
- Film-product sales decreased 15% to $2.036 million, reflecting customers’ inventory and ordering patterns. Other-product sales increased 49% to $5.154 million, helped by larger holiday Candy Blossom orders and an everyday offering.
- Operating cash flow turned positive, while the company reduced its line-of-credit balance from $5.003 million to $2.878 million.
- Series A, C, and D preferred shares converted to common stock in 2022. Series B remained outstanding at year-end and converted into about 1.9 million common shares in February 2023; the company reported no preferred stock outstanding after that conversion.
- Common shares outstanding increased substantially during 2022, including through preferred-stock conversions. The filing reports 16.06 million shares outstanding at year-end and 19.97 million as of March 20, 2023.
Outlook, risks, and unusual items
- Going concern: Management and the auditor report substantial doubt about the company’s ability to continue as a going concern. The company has approximately $24 million in cumulative losses, says cash resources may not meet needs over the next 12 months, and may need additional financing. Management’s plans depend on executing its business plan and raising capital if needed; success is not assured.
- Credit facility: The senior secured facilities are due September 30, 2023, subject to automatic one-year extensions unless terminated with notice. The revolving facility has a maximum of $6 million and is limited by eligible collateral. Interest was prime plus 1.95%; covenants restrict, among other things, debt, dividends, and capital expenditures. The lender’s August 2022 amendment barred repayment before September 2023.
- Customer concentration: The top 10 customers accounted for 90% of 2022 revenue. Walmart and Dollar Tree represented approximately 35% and 36%, respectively; neither generally commits to minimum purchases. Losing or materially reducing sales to either could adversely affect results.
- Input and operating risks: The company cites helium price and availability, raw-material and freight costs, supply-chain disruption, inflation, labor availability and expense, competition, and dependence on a limited number of suppliers. It expects local labor costs to rise and says it is implementing production automation.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses, including insufficient accounting resources for complex transactions and excessive dependence on the CEO, who also served as acting CFO. Remediation work was underway; two controller hires during 2022 had left by year-end.
- ERTC financing: In October 2022, the company received $0.9 million from factoring approximately $1.2 million of Employee Retention Tax Credit claims. The proceeds were recorded as deferred income, and a prorated refund may be required if claims are denied. In January 2023, about $0.8 million of claims were processed and forwarded to the factor; about $0.6 million of deferred income was then recognized.
- Other matters: The company regained Nasdaq minimum-bid-price compliance on January 19, 2023 after a delisting notice and appeal. Management does not expect ordinary-course legal proceedings to have a material adverse effect. No specific revenue or earnings guidance is provided.
Most important facts for investors to verify
- Whether the company can fund operations and refinance, renew, or otherwise address the senior facilities due in September 2023.
- Whether operating cash generation can continue despite low year-end cash and the significant working-capital demands of inventory.
- Whether helium costs and availability improve as management anticipated, and whether balloon demand and sales recover.
- Whether the material weaknesses are remediated and whether subsequent financial reporting demonstrates effective controls.
- The status and recoverability of ERTC claims, including any repayment exposure, and the effects of the February 2023 preferred-stock conversion and resulting dilution.
- Whether major customers maintain purchasing levels, given their combined 71% share of 2022 sales and the absence of minimum-purchase commitments.