Yunhong CTI Ltd. — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021, with comparisons to Q1 2020. The company makes foil and latex balloons, film products, and related items. CTI Europe and certain other activities are reported as discontinued operations; the company says it is focusing on its North American core business.
Financial performance and position
- Revenue: $7.42 million, up 4.9% from $7.07 million. Foil balloon sales increased 12.1% to $5.04 million; latex balloon sales fell 56.0% to $697,000, which management attributed to COVID-related Mexican production restrictions. Film and other product sales rose.
- Profitability: Gross profit was $1.09 million, down from $1.48 million; gross margin was approximately 14.7%, versus 21.0%. Operating loss was $166,000, compared with operating income of $630,000. Continuing-operations loss was $482,000; a $101,000 discontinued-operations gain brought net loss to $380,000. Net loss attributable to Yunhong CTI shareholders was $422,000 before preferred-stock deemed dividends and accretion; after those charges, the reported shareholder loss was $2.13 million. Basic and diluted loss per share was $0.36, versus $0.76.
- Costs and margins: Cost of sales rose to $6.32 million from $5.59 million. General and administrative expense rose to $1.12 million from $702,000, primarily due to PNC covenant-violation costs and vendor legal matters. Selling, advertising and marketing expense declined to $139,000 from $175,000.
- Cash flow: Operating activities used $1.42 million, versus providing $842,000 in Q1 2020, with the increase in accounts receivable a significant use of cash. Investing used $46,000; financing provided $1.56 million, principally from debt and revolving-credit proceeds. Cash and equivalents on the balance sheet were $85,605 at quarter-end, plus $75,632 classified in discontinued operations; the cash-flow statement reports combined ending cash of $161,237.
- Liquidity and debt: Current assets were $20.83 million and current liabilities $19.57 million (current ratio approximately 1.06). The balance sheet lists a $6.75 million line of credit, $3.69 million of current notes payable, and $1.14 million owed to an officer, among other liabilities. Total liabilities were $19.72 million. The company reported being out of compliance with its PNC credit facility at March 31.
- Other balance-sheet metrics: Total assets were $23.55 million; total shareholders’ equity was $3.82 million. Accounts receivable rose to $7.24 million, while inventory was nearly unchanged at $10.92 million.
Material changes versus Q1 2020
- Revenue increased modestly, but gross profit declined and operations shifted from income to loss, reflecting higher cost of sales and substantially higher G&A expense.
- Operating cash flow deteriorated from positive $842,000 to negative $1.42 million, largely reflecting a $1.86 million increase in accounts receivable.
- Interest expense declined to $231,000 from $441,000 as senior debt was reduced. Foreign-currency transaction loss also narrowed to $26,000 from $154,000.
- Discontinued operations improved from a $487,000 loss to $101,000 of income, including a $251,000 gain from classification as held for sale. The company said the CTI Europe disposal had been delayed by COVID-related issues and was expected to be completed in the following three months.
Outlook, risks, contingencies and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern for one year from issuance. It reported cumulative losses exceeding $14 million, said operating cash may not meet needs over the next 12 months, and stated additional financing is required. Management’s plans include raising capital, borrowing, and focusing on profitable activities, but it gave no assurance these plans will succeed.
- PNC arrangements and subsequent property sale: On April 23, 2021, after quarter-end, the company sold its Lake Barrington facility for $3.5 million: $2.0 million cash and a $1.5 million purchaser note due May 3, 2021. It simultaneously agreed to lease the facility for 10 years, with annual base rent starting at $500,000 and escalating to $652,386. The sale proceeds were designated for PNC debt repayment. PNC agreed to forbear from remedies on existing defaults through the earliest of September 30, 2021, a new default, or a termination event. The amended facility requires at least $1.5 million of equity investment by June 30, refinancing arrangements or evidence of available funds by August 15, and full repayment by September 30. The revolving advance limit was reduced from $18 million to $9 million; a $1 million forbearance fee may be reduced if specified conditions are met.
- Concentration: One customer accounted for 54% of Q1 sales and 33% of quarter-end net receivables. The top three customers represented 77% of sales and the top ten 92%.
- Preferred shares and dilution: The company issued $1.5 million of Series C preferred stock to LF International, an entity controlled by the company’s chairman, in exchange for an investor advance. Preferred stock carries 8% dividends and conversion features. A beneficial conversion feature generated a $1.5 million deemed dividend charge. Series B preferred terms were modified to eliminate holder redemption rights; the filing reclassified it from mezzanine equity to shareholders’ equity.
- Legal matters: The company disclosed several vendor disputes and settlements. Benchmark Investments sued in March 2021 seeking damages in excess of $500,000; the company’s response was due June 4, 2021. Management said it did not expect disclosed proceedings, individually or in aggregate, to have a material adverse effect.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, citing material weaknesses involving insufficient accounting expertise for significant or unusual transactions and overreliance on the CFO in a highly manual control environment.
- Outlook: No numerical revenue, earnings, or cash-flow guidance is provided. The company warned that COVID-19 could continue to affect operations and access to capital. Balloon sales are seasonal, with roughly 40% historically occurring December through March.
Important facts for investors to verify
- Whether the company received the purchaser’s $1.5 million note proceeds and applied the sale proceeds to PNC debt as required, and whether the PNC repayment and refinancing deadlines were met.
- Whether the required $1.5 million equity investment was completed, and the final amount of the forbearance fee and any subsequent lender action.
- Current cash, borrowing availability, debt balances, covenant status, and the company’s progress in addressing the going-concern uncertainty.
- Whether CTI Europe’s disposal was completed and the final proceeds, costs, and effects of discontinued operations.
- Customer concentration and collection of the major customer’s receivable, as well as the outcome and exposure from the Benchmark claim and other vendor disputes.
- The filing contains differing foreign-currency translation descriptions: the income statement reports a $16,267 loss, while a note describes approximately $32,000 of income for Q1 2021. Verify the correct presentation in subsequent filings.