Yunhong CTI Ltd. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed April 15, 2022. The filing is an annual report, not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Business context
The company develops, manufactures, distributes and sells novelty products—principally foil balloons—as well as flexible-film packaging products and Candy Blossoms. Continuing operations are focused on North America. In October 2021, the company sold Flexo Universal, its Mexican subsidiary; its results are presented as discontinued operations. Foil balloons accounted for 76% of continuing-operations revenue.
Financial performance and position
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales, continuing operations | $24.09 million | $21.06 million |
| Gross profit / gross margin | $3.76 million / 15.6% | $3.09 million / 14.7% |
| Operating loss | ($0.51 million) | ($1.04 million) |
| Net loss | ($7.55 million) | ($4.30 million) |
| Net loss attributable to common shareholders | ($11.85 million) | ($8.82 million) |
| Basic and diluted loss per share | ($2.01) | ($1.52) |
| Cash from (used in) operating activities | ($3.71 million) | $1.32 million |
| Cash and cash equivalents at year-end | $65,830 | $322,179 |
Revenue rose 14%. Foil-balloon sales increased 8% to $18.24 million; film-product sales rose to $2.39 million from $0.80 million; other-product sales were nearly flat at $3.37 million. Cost of sales increased 13% to $20.32 million. The filing attributes pressure to broad price increases that outpaced the company’s ability to adjust customer pricing.
The larger net loss reflects unusual items, including a $3.36 million sale-and-leaseback gain, foreign-currency loss reclassification and the Flexo Universal disposal. The statements report a $5.89 million foreign-currency reclassification and a $4.33 million loss on sale of subsidiary; the discontinued-operations note describes an approximately $10 million disposal-related expense and approximately $6 million reversal of prior other comprehensive income. These presentations should be read together. The 2020 comparison also included a $1.05 million PPP loan-forgiveness gain. Preferred-stock deemed dividends and beneficial-conversion-feature amortization were $3.57 million in 2021 and reduced earnings attributable to common shareholders, but not reported net loss.
At December 31, 2021, total assets were $17.28 million, total liabilities $13.23 million, and stockholders’ equity $4.05 million. Current assets were $12.47 million and current liabilities $10.37 million; cash was minimal. Debt included a $5.00 million revolving balance, a $559,000 term-loan balance, approximately $1.19 million owed to a former director, and a $167,000 subordinated related-party note. The company classified all reported debt as current. Operating lease liabilities were $3.53 million.
Material changes and financing
- The company sold its Lake Barrington headquarters and plant in a sale-and-leaseback transaction for $3.5 million, recognizing a $3.36 million gain, and entered a ten-year lease. First-year annual rent is $500,000, rising to approximately $652,000 in the final year.
- In September 2021, the company repaid its former PNC facility and entered a senior secured Line Financial facility: up to $6 million revolving credit and a $731,250 term loan. The facilities mature September 30, 2023, carry interest at prime plus 1.95%, and are secured by substantially all company assets. A minimum tangible-net-worth covenant applies; the company said it was compliant at year-end.
- The company issued $1.5 million each of Series C and Series D convertible preferred stock in 2021. Series C was purchased by an entity controlled by Chairman Yubao Li. Preferred stock generally carries an 8% dividend and conversion at $1 per common share, subject to its terms. Series D also included 128,572 warrants with a variable exercise price. Preferred conversions and warrants create substantial potential dilution relative to 5.89 million common shares outstanding at year-end.
- The company continued exiting foreign operations: it sold Flexo Universal in October and completed the closure of its German sales entity during 2021. The UK entity had been liquidated in 2019. Management says the focus is on core North American products.
Outlook, risks and contingencies
Going concern: The auditor’s report states that recurring operating losses and the need for additional capital raise substantial doubt about the company’s ability to continue as a going concern. Management says financing, the sale of subsidiaries and operating changes provide adequate capital for at least twelve months from the report date, but acknowledges additional funding may be needed and success is not assured.
Key risks: COVID-19 effects; supply-chain disruptions, inflation and raw-material availability and cost; seasonal labor shortages and higher labor costs; intense competition; dependence on a limited supplier base; and customer concentration. The top ten customers accounted for 85% of revenue in both years. Dollar Tree represented 57% of 2021 revenue and Walmart 19%; customer arrangements generally do not require minimum purchases.
Legal and other matters: Benchmark Investments seeks damages exceeding $500,000; the case remains pending, potential loss cannot be estimated and no accrual was recorded. A separate utilities claim was settled in March 2022 for $75,000. In January 2022, Frank Cesario returned as CEO and acting CFO after the CFO’s departure. The company disclosed two internal-control material weaknesses: insufficient accounting resources for unusual transactions and excessive dependence on the CFO in a highly manual environment. Management reported remediation efforts underway. Nasdaq’s minimum-bid-price deficiency was resolved on March 30, 2022; the shareholder-meeting deficiency remained subject to a June 17, 2022 deadline.
No specific revenue, earnings or cash-flow guidance is provided. Management’s stated priorities include growing core product lines, improving profitability and using Yunhong Group relationships for sourcing and sales opportunities.
Important facts for investors to verify
- Whether cash generation, working capital and available borrowing capacity can support operations, given $65,830 of reported cash and the auditor’s going-concern warning.
- The terms, availability and covenant headroom of the Line Financial facility, including borrowing-base limits, fees and the current classification of debt.
- The final accounting and cash proceeds for the Flexo Universal disposal, including collection of the $255,000 note receivable and the reported disposal-related charges.
- The potential dilution, dividend obligations and control implications of convertible preferred stock and warrants; compare the conversion rights with year-end common shares outstanding.
- Customer concentration and the ability to pass on higher input, freight and labor costs without losing sales volume.
- Progress in remediating the disclosed material weaknesses and the outcome of the pending Benchmark litigation.