Yunhong CTI Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company designs, manufactures and distributes balloon products, films and flexible packaging products. Comparisons below are with the corresponding 2020 periods unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $6.33 million | $5.75 million | $13.74 million | $12.81 million |
| Gross profit | $866,000 | $610,000 | $1.96 million | $2.09 million |
| Gross margin | 13.7% | 10.6% | 14.3% | 16.3% |
| Operating income (loss) | $2.86 million | $(962,000) | $2.69 million | $(332,000) |
| Net income (loss) | $2.48 million | $(1.46) million | $2.10 million | $(1.95) million |
| Net income (loss) attributable to Yunhong CTI | $1.78 million | $(1.53) million | $1.36 million | $(2.17) million |
- Sales rose 10.1% in Q2 and 7.3% for the first half. Foil balloon sales increased 35.6% in Q2 and 22.2% year to date; latex balloon sales fell 45.4% and 51.6%, respectively, with the filing citing COVID-related restrictions on Mexican production.
- Q2 operating income included a $3.36 million gain on the April sale of the Lake Barrington facility. The gain substantially influenced reported profitability.
- After preferred-stock deemed dividends and accretion, income attributable to common shareholders was a loss of $517,000 for the first half, versus a loss of $6.08 million in 2020. Basic EPS was $0.28 in Q2 and $(0.09) for the first half; the filing reports diluted Q2 EPS of $0.12.
Cash flow, debt and liquidity
- First-half operating cash use was $631,000, compared with $1.03 million in 2020. Investing activities provided $3.45 million, principally related to the facility sale; financing activities used $2.70 million, largely for debt repayments. Cash declined by $352,000 to $273,000.
- At June 30, current assets were $19.15 million and current liabilities $15.25 million (current ratio approximately 1.26). Total liabilities were $18.22 million. The company reported $2.88 million drawn on its line of credit, $2.26 million of current notes payable, $1.16 million owed to an officer, and $1.50 million due as an investor advance.
- The company sold its Illinois facility for $3.5 million—$2.0 million cash and a $1.5 million purchaser note—and leased it back for ten years. First-year base rent is $500,000, increasing annually. The cash proceeds were committed to PNC debt repayment.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year after issuance. It said operating cash may be insufficient for the next 12 months and additional financing is required.
Material developments, outlook and risks
- The company was out of compliance with PNC credit-facility terms and had continuing defaults. PNC agreed to forbear from enforcement only through the earlier of September 30, 2021, a new default or a termination event. The amended facility reduced the revolving advance limit from $18 million to $9 million and moved its termination date to December 31, 2021.
- PNC’s conditions included at least $1.5 million of equity investment applied to debt reduction, evidence by August 15 of refinancing or identified funds to repay the facility, and full repayment by September 30. A $1.5 million June advance for a proposed Series D preferred-stock sale remained classified as a liability because terms were not finalized. The filing does not clearly establish whether this advance satisfied the required equity-investment condition.
- A $1.0 million forbearance fee could be reduced subject to specified financing and repayment conditions. The company also remained subject to higher interest rates and potential further credit restrictions while out of compliance.
- In July 2021, the company agreed to sell/redeem its Flexo Universal interest for $500,000, partly payable over 12 months. Closing was conditioned, among other matters, on release from a lease guarantee and full repayment of PNC obligations.
- International operations and the Ziploc product line were reported as discontinued operations; CTI Europe was disposed of in Q2 2021. Discontinued operations contributed $146,000 of first-half income in 2021, compared with a $1.09 million loss in 2020.
- Customer concentration is significant: the largest customer represented 54% of Q2 sales and 53% of first-half sales. The top three customers accounted for 71% and 73%, respectively.
- COVID-19 continued to affect operations and could constrain access to capital. The company reported ineffective disclosure controls and internal control over financial reporting, citing insufficient accounting personnel for unusual transactions and excessive reliance on the CFO in a highly manual environment.
- Legal matters include a pending Benchmark Investments complaint seeking more than $500,000 and a July 2021 transportation-provider claim for about $99,000, in addition to settled or ongoing disputes described in the filing. Management stated it did not expect the proceedings, individually or collectively, to materially adversely affect results.
Key facts for investors to verify
- Whether the company met PNC’s equity, refinancing-evidence and September 30 repayment requirements, and the status of any defaults, fees or lender enforcement rights.
- Whether the $1.5 million purchaser note was collected and applied to revolving debt, and whether the proposed Series D financing was finalized.
- Available cash and borrowing capacity, near-term obligations, and progress toward management’s stated financing and going-concern plans.
- Whether the Flexo transaction closed and satisfied its PNC repayment and lease-guarantee conditions.
- Underlying operating performance excluding the one-time facility-sale gain, including gross-margin trends, Mexican production and customer concentration.
- Remediation of the disclosed material weaknesses and resolution or updated assessment of significant legal claims.