Business context and reporting period
Yunhong CTI Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company makes and distributes foil balloons, balloon-related products, commercial films and flexible packaging products. Following the 2021 sale of its Mexican latex-balloon subsidiary, it buys latex balloons from an outside vendor. The company operates as a single U.S.-based segment.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $4.418m | $5.712m | $10.215m | $12.311m |
| Gross profit | $0.803m | $0.994m | $1.842m | $2.280m |
| Gross margin | 18.2% | 17.4% | 18.0% | 18.5% |
| Operating income (loss) | ($0.306m) | $3.196m | ($0.325m) | $3.494m |
| Net income (loss) | ($0.399m) | $2.484m | ($0.420m) | $2.103m |
| Net income (loss) attributable to common shareholders | ($0.601m) | $1.614m | ($0.824m) | ($0.517m) |
- Revenue declined 23% in Q2 and 17% in the first half. Foil-balloon sales fell 41% and 32%, respectively; commercial-film sales increased, as did Q2 sales of other products.
- Cost of sales was 81.8% of revenue in Q2 and 82.0% for the first half, versus 82.6% and 81.5% in the prior-year periods. Operating results in 2021 included a $3.357m gain from selling the Lake Barrington facility; the sale substantially distorts year-over-year operating-profit comparisons.
- Operating cash flow was $0.303m for the first half, compared with cash used of $0.617m in 2021. Investing used $0.094m and financing used $0.221m. Cash fell to $0.054m from $0.066m at year-end 2021.
- At June 30, current assets were $11.772m and current liabilities $8.072m, including $8.281m of inventory. The company had $4.782m drawn on a $6.0m revolving facility, subject to eligible collateral. It reported approximately $0.5m of term-loan debt and $1.229m of subordinated related-party notes; operating lease liabilities totaled $4.128m.
- Total assets were $17.132m, total liabilities $13.409m and stockholders’ equity $3.723m. Accumulated deficit was $23.075m. Preferred-stock dividends and accretion reduced income available to common shareholders by $0.202m in Q2 and $0.404m in the first half.
Changes, outlook and risks
- Management attributed lower foil-balloon revenue partly to higher helium prices, which it linked to inflation and restrictions on trade with Russia, as well as discontinuation of products for which it could not obtain sufficient price increases. Supply-chain constraints and inflation also affected operations.
- The company disclosed substantial doubt about its ability to continue as a going concern for one year from issuance of the financial statements. It cited cumulative losses, limited cash and potential insufficiency of operating resources, and said it may need additional financing. Plans include focusing on more profitable activities, raising capital or borrowing, and seeking alternative funding; management gave no assurance these efforts will succeed.
- The Line Financial senior facilities mature September 30, 2023, carry interest at prime plus 1.95%, are secured by substantially all company assets, and include a $4.0m minimum tangible-net-worth covenant and other restrictions. Management stated it believed the company was in compliance as of June 30, 2022. The company had previously experienced covenant defaults with its former lender.
- Revenue is highly concentrated: the top three customers represented 83% of Q2 sales and 82% of first-half sales. Two customers accounted for 71% of Q2 sales; together they owed $2.008m, or 73% of net receivables, at June 30.
- Series A through D preferred stock carries 8% dividends, and certain series are convertible into common shares. The company also disclosed 128,000 warrants and 10.7m shares reserved for preferred-stock conversions and warrant exercises, creating potential dilution.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2022. Management identified material weaknesses involving insufficient accounting expertise for unusual transactions and reliance on the acting CFO, who was also the CEO, in a highly manual control environment.
- No financial guidance was provided. The filing notes seasonal balloon sales, with historically about 40% of foil-balloon sales from December through March. The Benchmark Investments matter concluded by agreement in June 2022; a separate utility claim was settled for $75,000, with $30,000 unpaid at quarter-end.
Most important facts for investors to verify
- Whether the company can secure financing and generate sufficient cash to address the disclosed going-concern doubt.
- Availability under the revolving facility, collateral borrowing-base limits, covenant compliance and refinancing options before the 2023 maturity.
- Customer retention, collections and the business impact of customer concentration and helium-related demand or cost pressures.
- The terms, dividend burden and potential dilution from preferred stock and warrants.
- Progress in remediating the disclosed internal-control material weaknesses.