Yunhong CTI Ltd.

Good day and welcome to the Yunhong CTI First Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, May 19, 2022. The earnings press release accompanying this conference call was issued after the close of market on May 18th. On the call today is Yunhong CTI's Chief Executive Officer, Frank Cesario, as well as Chief Operating Officer, Jana Xuan. Before we begin, we want to note that you should read the forward-looking statement in the company's earnings press release. During today's call, management will make certain predictive statements that reflect its current views about future performance and financial results. The company bases these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties. The company's Form 10-K for the year ended December 31, 2021, lists some of the most important risk factors that could cause actual results to differ from its predictions. Please also note that the company's earnings press release make reference to the adjusted EBITDA and non-GAAP financial measure. The company's views adjusted EBITDA as an operating performance measure and, as such, the company believes that the GAAP financial measure most directly comparable to its net income or loss. For further information, please refer to the earnings press release and the company's periodic filings with the Securities and Exchange Commission. At this time, I would like to now turn the call over to Frank Cesario, Chief Executive Officer of Yanhong CTI. Sir, please go ahead.

Thank you, Jenny. Good morning, and thank you, everyone, for joining us on our call today. Rarely has the term first quarter meant as much as it does to us today. This is the first quarter that our reconfigured company has reported its results. We still have to talk about last year's results with and without our former Flexo subsidiary, but 2022 is clean. This should make us easier to understand as we move forward. Fresh out of the gate, we got one small but typical curveball that we're used to dealing with. With a sizable portion of our revenue driven by events such as Valentine's Day, Mother's Day, and graduation, The timing of our shipments is highly impactful to our quarterly results. For Valentine's Day, most of that business ships by December 31st of the previous year, about a month and a half before the holiday. But there's always some spillover into January that we have to estimate. Even more pronounced is the question of what will ship in late March versus early April for Mother's Day and graduation season. Last year, more went in March, while this year, some of that shipped in April. You can see that in our inventory numbers. To get ahead of it, I don't know how that's going to shake out in 2023. Every year we're making some kind of guess because it's just a matter of days from Q1 to Q2. That timing is always somewhat dependent on our forecasting and, you know, the ability to make deliveries. You've seen from our results that our revenue is down from 6.6 million to 5.8 million, but I know that our margin rate was similar despite the volume change, and, of course, our bottom line was much improved. More on that in a moment. Remember Flexo and the loss they contributed last year? Yeah, I don't either. I look at, we look at adjusted EBITDA as the most useful metric. While we're on the topic, we've decided to put a toe in the pool of forecasting and share that we expect to post more than $1.2 million in adjusted EBITDA in 2022. As our business continues to mature, we'll decide how to best share expectations at the right level. For now, we want to focus on the single most important number that we look at internally. We could end up reporting an adjusted EBITDA number for 2022 in excess of 1.2 million, so that's a figurative line in the sand that we're drawing today. With all the caveats that you know and heard about at the beginning of the call, that's where we're going to start. We're all concerned about supply chain disruption, the flow of helium into the marketplace. To provide some perspective on these topics, I've asked Jonna Schwan, our Chief Operating Officer, to share what the market is looking like and how we're addressing these issues. Jonna?

Thanks Frank and hello everyone. Let me start with helium. In 2019 we had an immense commercial helium shortage in the marketplace that hurt everyone in our industry. Today we are seeing a tightening in helium supply once again with some customers struggling to get a hundred percent of what they require. But so far it seems less impactful than 2019. We will of course keep an eye on the helium supply as we progress through the year. On the topic of supply chain, we have ordered more material earlier than we would have otherwise in order to try to mitigate these issues. Fortunately, the vast majority of our materials are from domestic supplier partners that we have known for a very long time. So an open communication flow has been keeping us out of trouble. Freight availability and timing is touch and go at best, but our team continues to work the issue. Nobody has a perfect answer or even a good answer here, but we believe our relationships will continue to pay dividends. Thus far, we have largely executed what we planned for, and I expect that that will continue. Frank?

Thank you, Jonna. We've been presenting fabulous designs for 2023, Valentine's Day, Mother's Day, graduation, and yes, even Father's Day. Our customers like to look at that about a year in advance and then give us indications of what they're going to order, which gives us a lot of lead time to be ready. We're looking to add talent in our sales and marketing area later this year to support sales growth with our existing customers and also target some specific retailers that we'd like to add to our customer list. Our production is tight and becoming more efficient with the automation gains, I can say that, we discussed last time. We are actively engaged with our customers, getting the right products to them at the right time in the right way. It's the only way to win where we are, and we do well at it. There's ample headroom in the marketplace for our existing products, and we believe some natural extension areas to pursue. But in a measured way, we will not get ahead of ourselves again. In closing, we entered the first quarter of 2022 with a more sound financial and operational position and are confident in our ability to continue to execute against our transformational strategies. We look forward to building our progress throughout 2022 and beyond. And with that, Jenny, I'd ask you to check the Q&A queue.

Thank you, Frank. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset, if listening on a speakerphone, to provide optimum sound quality. Please hold while we poll for questions. Thank you. Our first question is coming from Mr. Glenn Hamilton, who's a private investor. Glenn, can you ask your question, please?

Frank and Johnna. Hey, Frank and Johnna. Thank you for the update. I just have two balance sheet questions. One has to do with the receivables of $3.3 million. It seems pretty much the same as last quarter's. Who is not paying money that you guys have to get? That's my question. That seems like a high receivable number.

It's not for us, actually. If you look at how that is a run rate against total revenue, it's very much in line. Remember, in retail, on average, terms are about 60 days, on average. There are 30, there are 60, there are longer, depending on what you're selling to whom. But $3.3 million, if anything, is a pretty good receivable position. Our collections are good. We've had negligible bad debt write-offs. So we've been fortunate in that area.

Okay, my last question is, how do you define notes payable officers subordination? 1.2 million this quarter, zero last quarter.

It was there last quarter, but you have to look at long-term versus short-term liabilities. So there have been issues in how you classify liabilities. I could get in accounting speak, but I'm going to try not to. But the answer is that same note was there last quarter, but you have to go – into current liabilities to see it.

Oh, okay. Yeah. Okay.

And it's been there forever. I mean, that predates me in 2017.

No more questions. Great job so far, and I look to meeting you guys sometime in the future. Thank you.

Very good. Thank you, Glenn.

Thank you. If there will be any final questions or comments, ladies and gentlemen, please press star 1 on your handset. Okay, there appears to be no more questions in the queue, and I'll now hand back over to Frank for any closing comments.

Thank you. It's not a surprise with the market as what it is that folks are a bit distracted. I hope that people enjoy this on the replay. What's most important is this is day one. This is our first report. You can see how the U.S. business does without being distorted by other elements that no longer exist. and from there we can launch into where we want to get to. So I thank everyone for being part of the story, and we're looking forward to the next chapter. Thank you so much.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.