Yunhong Green CTI Ltd. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company designs, manufactures and distributes foil balloons and related products, film and flexible packaging products, and other balloon-related items; it has also begun offering compostable materials. The company changed its name from Yunhong CTI Ltd. and its trading symbol from CTIB to YHGJ in 2023.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1.923 million | $2.263 million | $11.033 million* | $12.478 million |
| Gross profit | $20,000 | $242,000 | $1.661 million | $2.084 million |
| Gross margin | 1.0% | 10.7% | 15.1% | 16.7% |
| Operating loss | $829,000 | $757,000 | $1.107 million | $1.082 million |
| Net loss | $967,000 | $969,000 | $720,000 | $1.389 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(442,000) | $1.187 million |
*The financial statements and product-category table report nine-month 2023 sales of $11.033 million, while the MD&A narrative says $11.330 million. The filing text does not resolve this discrepancy.
Q3 sales fell 15% year over year, and gross margin compressed sharply. Nine-month sales declined about 12% using the financial-statement figure. Lower general and administrative costs partly offset weaker gross profit, but the nine-month operating loss widened slightly. The nine-month net loss was lower largely because the company recognized $895,000 of Employee Retention Tax Credit income; the related cash had been received in 2022. Interest expense increased to $421,000 for the nine months from $325,000.
At September 30, 2023, cash was $64,000, accounts receivable $933,000, inventory $8.528 million, current assets $9.936 million and current liabilities $8.369 million. The current ratio was approximately 1.19, with liquidity heavily dependent on inventory and receivables. Total assets were $14.271 million, total liabilities $11.345 million, and shareholders’ equity $2.926 million. Cash declined $82,000 during the first nine months. The company used $136,000 in investing activities and received $496,000 from financing activities.
Debt included a $3.371 million revolving credit balance and approximately $528,000 of current term-loan obligations at quarter-end. A $1.324 million subordinated related-party note was also classified as current and was due December 31, 2023. The filing says the lender advanced $206,000 and reset the term loan to $731,000 under the September extension, with those changes to appear in October financial statements. The secured credit facilities were extended to September 30, 2025; revised terms include a revolving rate of prime plus 7.82%, a term-loan rate of prime plus 1.45%, and a $50,000 renewal fee.
Material changes, outlook and risks
- Foil balloon sales rose 6% in Q3 but were nearly flat for the nine-month period. Film-product sales fell 87% in Q3 and 61% for the nine months. Management cited inconsistent film orders, industry consolidation and competition.
- Management attributed pressure on balloon demand to elevated helium prices, inflation and trade restrictions affecting helium supply; it also discontinued certain products where price increases were insufficient. The company notes seasonal sales patterns, with a historical low in Q3 and higher activity in Q4.
- Customer concentration is significant: two customers generated 68% of Q3 sales and 76% of nine-month sales. The two customers accounted for 81% of net receivables at quarter-end.
- The filing states there is substantial doubt about the company’s ability to continue as a going concern for one year after issuance. Cash from operations may not meet anticipated needs. Management plans to pursue equity or borrowing, focus on more profitable activities and explore other funding, but gives no assurance these plans will succeed. The subordinated $1.3 million related-party note due December 31, 2023 adds near-term pressure.
- Management cited ongoing effects from supply-chain constraints, inflation, helium cost and availability, and potentially reduced access to capital. No specific earnings or revenue guidance is provided.
- Disclosure controls and internal control over financial reporting were deemed ineffective at September 30, 2023 due to material weaknesses: insufficient accounting expertise for significant or unusual transactions, including non-cash charge timing, and excessive reliance on the Acting CFO, who is also the CEO, in a highly manual control environment.
- Management said ordinary-course lawsuits or claims are not expected to have a material adverse effect. The company reported no defaults on senior securities and no other information under Item 5.
Most important facts for investors to verify
- Reconcile the $11.033 million versus $11.330 million nine-month 2023 sales disclosures.
- Confirm how the December 2023 related-party note will be repaid, refinanced or converted, and assess available liquidity and borrowing capacity.
- Track whether the credit-facility extension, revised interest and fee terms, and covenant compliance provide sufficient operating runway.
- Monitor customer concentration, receivable collection, helium availability and pricing, and whether film-product orders recover.
- Review progress addressing the disclosed material weaknesses and the effect of the $895,000 tax-credit income on comparisons of underlying performance.