Yunhong CTI Ltd. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed April 15, 2021. The company designs, manufactures and sells balloons, novelty products, flexible films and related items, primarily in the United States and Mexico.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Continuing-operations revenue | $26.47 million | $32.27 million |
| Gross profit / margin | $3.55 million / 13.4% | $4.38 million / 13.6% |
| Operating loss | $1.41 million | $3.12 million |
| Net loss, including discontinued operations | $4.25 million | $8.07 million |
| Cash provided by operating activities | $1.75 million | $3.67 million |
| Cash used in investing activities | $0.20 million | $0.08 million |
| Cash used in financing activities | $1.38 million | $3.59 million |
Revenue fell 18%. Foil balloon sales declined 3% to $17.06 million; latex balloon sales fell 36% to $4.72 million, primarily due to COVID-19 disruption at the Mexico facility; film product sales fell 57% to $0.80 million; and other sales fell 27% to $3.89 million. Cost of sales was 86.6% of revenue, versus 86.4% in 2019. Lower administrative, selling and marketing expenses partly offset reduced sales.
Continuing-operations loss was $2.51 million; discontinued operations added a $1.74 million loss. Other notable items included a $1.05 million gain from PPP loan forgiveness, $1.28 million of impairment against a related-party note receivable, and $4.38 million of preferred-stock deemed dividends and conversion-feature amortization, which increased the loss attributable to common shareholders.
Liquidity, debt and capital
At year-end, reported cash was $429,000, current assets were $19.15 million and current liabilities were $18.79 million. Total liabilities were $18.83 million. The balance sheet lists a $5.36 million revolving line, $3.91 million of current notes payable and $1.12 million of subordinated officer notes; substantially all debt was classified as current. The PNC term loan and revolver were subject to covenant restrictions, and the company reported that it remained in default/noncompliant. Failure to resolve the situation could expose the company to lender remedies, including liquidation proceedings.
Management said cash resources were likely insufficient for the next twelve months and additional financing was required. The auditor and management identified substantial doubt about the company’s ability to continue as a going concern. Management planned to seek equity or debt funding and focus on more profitable operations, but gave no assurance those plans would succeed.
The company raised approximately $5.6 million through Series A preferred financing and issued $1.5 million of Series B preferred stock. A further $1.5 million investor advance was recorded as a liability at year-end and converted to Series C preferred stock in January 2021. The Series A and B securities carry 8% dividends; Series B has a $5.0 million liquidation preference and may be redeemable at the holder’s option beginning November 2021.
Material changes and outlook
- COVID-19 disrupted production, staffing, supply chains and customer activity. Management said balloon demand related to at-home parties strengthened into 2021, but the pandemic’s continuing effects remained uncertain.
- The company exited or wound down European operations and discontinued its Ziploc-branded vacuum-sealing products. Germany’s closure was expected in 2021. The Lake Zurich warehouse and light-assembly operation moved to Elgin in March 2021.
- The business is highly concentrated: its top ten customers represented 85% of 2020 revenue. Dollar Tree accounted for 47% and Walmart 14%; neither was generally obligated to buy minimum volumes.
- Raw-material and helium costs and availability, seasonal labor costs, and dependence on a limited number of suppliers and customers are material risks. The company also cited intense competition and seasonal working-capital needs.
Contingencies, controls and unusual matters
Several vendor and service-provider disputes were settled or under negotiation, with approximately $100,000 accrued for certain claims. A Benchmark Investments lawsuit filed in March 2021 sought damages exceeding $500,000. Management said it did not expect pending proceedings to have a material effect, although outcomes remain uncertain.
Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020, citing insufficient accounting resources for unusual transactions and excessive reliance on the CFO in a highly manual environment. The independent auditor issued an unqualified opinion on the financial statements but highlighted going-concern uncertainty and identified inventory valuation, PNC financing and the related-party receivable as critical audit matters.
Key facts for investors to verify
- Availability of additional financing, negotiations with PNC, covenant-default status and the company’s ability to meet near-term obligations.
- Current cash and debt figures: the cash-flow statement reports $625,000 at year-end, while the balance sheet reports $429,000; the filing says the difference includes cash classified in discontinued operations.
- Preferred-stock conversion, dividend, redemption and liquidation terms, including resulting dilution and control implications.
- Customer concentration and whether demand recovery, particularly in balloons, offsets continued weakness in latex, film and discontinued businesses.
- Resolution and financial exposure from the Benchmark, equipment-lease and other vendor claims.
- Reported loss-per-share figures are inconsistent within the filing: the statements show $(1.86) for both years, while Note 19 presents different per-share figures. The filing also contains differing inventory-reserve amounts and tax-benefit presentations; confirm against the audited statements and notes.