Business Context and Reporting Period
Yunhong CTI Ltd. filed this unaudited Form 10-Q for the quarter ended September 30, 2021. The company makes and sells foil and latex balloons, film products, and related items. Results below generally reflect continuing operations; CTI Europe had been divested in the second quarter of 2021.
Financial Results
Amounts are in U.S. dollars. Year-to-date means the nine months ended September 30.
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $6.234 million | $5.981 million | $19.976 million | $18.794 million |
| Gross profit | $575,000 | $261,000 | $2.534 million | $2.352 million |
| Gross margin | 9.2% | 4.4% | 12.7% | 12.5% |
| Operating income (loss) | $(591,000) | $(907,000) | $2.101 million | $(1.239) million |
| Net income (loss), consolidated | $(638,000) | $(1.029) million | $1.465 million | $(2.982) million |
| Net income (loss) attributable to Yunhong CTI, before preferred deemed dividends | $(633,000) | $(954,000) | $737,000 | $(3.120) million |
| Net income (loss) attributable to Yunhong CTI shareholders after preferred deemed dividends | $(801,000) | $(1.069) million | $(1.140) million | $(5.853) million |
- Sales increased 4.2% in Q3 and 6.3% year to date. Year-to-date foil balloon sales rose to $13.9 million from $12.4 million; latex balloon sales declined to $2.4 million from $3.7 million.
- Year-to-date operating income included a $3.357 million gain on the sale of the Lake Barrington facility. Excluding that gain, operating results would have been a loss; the filing does not provide this adjusted measure.
- Q3 interest expense was $114,000, down from $255,000; year-to-date interest expense was $527,000, down from $1.033 million.
Cash Flow, Liquidity and Debt
| Metric | September 30, 2021 | December 31, 2020 or comparable period |
|---|---|---|
| Cash and cash equivalents | $426,000 | $429,000 at December 31, 2020 |
| Current assets | $19.766 million | $19.151 million |
| Current liabilities | $16.694 million | $18.787 million |
| Total liabilities | $19.586 million | $18.831 million |
| Shareholders’ equity | $5.297 million | $1.187 million |
| Operating cash flow, 9M | $(2.939) million | $995,000 provided in 9M 2020 |
- Investing activities provided $3.401 million, primarily from the facility sale; financing activities used $650,000. Cash declined by $199,000 during the nine months.
- At quarter end, the company reported a $3.264 million line of credit, $3.778 million current notes payable, $1.175 million subordinated officer notes, and a $1.5 million investor advance. The investor advance was pending final terms for a proposed Series D preferred-stock transaction.
- On September 30, the company replaced its PNC facilities with Line Financial senior secured facilities: a revolving facility of up to $6 million and a $731,250 term loan. The filing reports $1.0 million of unused borrowing capacity. The facilities bear interest at prime plus 1.95%, are secured by substantially all company assets, and mature September 30, 2023, subject to renewal provisions.
- Operating lease liabilities were $3.763 million. The Lake Barrington property was sold for $3.5 million and leased back for ten years, with annual base rent starting at $500,000 and increasing to $652,386.
Material Changes, Outlook and Risks
- Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year after issuance. It cited cumulative losses exceeding $13 million, potentially insufficient operating cash, and dependence on additional financing and achieving profitable operations. Management said it planned to raise capital, focus on more profitable activities, and pursue other funding, but gave no assurance of success.
- COVID-19 continued to affect operations; Mexican government restrictions had constrained latex balloon production. The company also identified the possibility of reduced access to capital. Foil balloon sales are seasonal, with historically about 40% occurring from December through March.
- Customer concentration is significant: the top three customers represented 71% of nine-month sales; one customer alone represented 53%. The two customers accounting for more than 10% of sales owed $1.422 million, or 27% of accounts receivable, at quarter end.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Management reported material weaknesses involving insufficient accounting expertise for significant or unusual transactions and overreliance on the CFO in a highly manual control environment.
- The company’s October 28, 2021 sale of its Flexo Universal interests for $500,000 occurred after quarter end and was not treated as held for sale at September 30. Payment was structured as $100,000 at closing and installments over 12 months.
- A Benchmark Investments lawsuit seeking damages in excess of $500,000 remained pending; the company said loss probability could not be estimated and recorded no accrual. Other disclosed disputes had been settled or were subject to payment plans. The filing provided no formal earnings or revenue guidance.
Most Important Facts for Investors to Verify
- How much liquidity is actually available under the Line Financial facility, and whether the company can meet its covenants, including the $4 million minimum tangible net worth requirement beginning December 31, 2021.
- Whether operating cash burn improves and the company obtains sufficient financing to address the going-concern uncertainty.
- The sustainability of reported year-to-date profitability given the $3.357 million facility-sale gain and the continuing operating losses in Q3.
- The terms and potential dilution or dividend burden of preferred stock, including the CEO-controlled investor’s Series C investment and the proposed Series D arrangement.
- Progress in remediating the disclosed material weaknesses, and the outcome of the pending Benchmark Investments litigation.