Business context and reporting period
CTI Industries Corporation (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. It designs, manufactures and distributes balloons, packaging films and containers, and related consumer products. The filing’s reporting period and issuer differ from the request metadata.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $12.54 million | $13.98 million; down 10% |
| Gross profit / margin | $2.00 million / 15.9% | $2.87 million / 20.5% |
| Operating income (loss) | $(0.75) million | $(0.15) million |
| Net loss attributable to CTI | $(0.88) million; $(0.24) per share | $(0.46) million; $(0.13) per share |
| Operating cash flow | $0.23 million provided | $0.96 million used per cash flow statement |
| Cash and working capital | $0.18 million cash; $1.47 million working capital | Cash was $0.60 million at March 31, 2018; working capital was $2.80 million at December 31, 2018 |
Cost of sales fell 5%, less than the decline in sales, and gross margin contracted. Interest expense was $0.55 million. At March 31, 2019, the company had $15.35 million drawn on its revolving line, $4.41 million of current notes payable, and $3.00 million of long-term liabilities, including lease liabilities. Current liabilities totaled $32.21 million against current assets of $33.68 million.
Material changes and operating trends
- Foil balloon sales fell 17% to $6.48 million; latex balloon sales fell 8% to $1.99 million. Management cited helium supply constraints and higher prices as a headwind, while expecting the market to improve over the following 12 months.
- Vacuum sealing product sales rose 35% to $2.15 million, supported by a newer smaller-format machine and customer acceptance of tariff-related price pass-throughs. Film product sales rose 74% to $0.76 million.
- Other sales declined 43% to $1.15 million. Management attributed part of the decline to Clever Container’s shift to a lower-cost, lower-revenue business model and expected to divest the business during 2019.
- Selling, advertising and marketing expenses declined 38%, reflecting cost-reduction programs. General and administrative expense increased 9%, including a one-time $250,000 bank-forbearance fee.
- Two customers represented 48% of sales and approximately 49% of net receivables at quarter-end. The top ten customers accounted for 73% of quarterly sales.
Liquidity, risks and outlook
Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It cited prior-year losses, seasonal working-capital demands, higher financing and labor costs, and difficulty obtaining adequate funding. Management believes planned financing could fund operations through 2019 if executed; plans include a major capital event, resolving bank covenant issues, a possible facility sale-leaseback, and alternative funding. No specific financial forecast or quantified guidance is provided.
The company entered into a PNC forbearance agreement in March 2019 after covenant and financing-related compliance failures. It remained out of compliance with the amended credit facility at quarter-end; $3.3 million of long-term bank debt was reclassified as current. The agreement waived prior identified failures and excluded March 31 covenant calculations, with the next calculation due for June 30, 2019. The company paid a $250,000 fee and received a temporary $1.2 million over-advance that declined to zero over six weeks. Failure to regain compliance or secure replacement financing could threaten liquidity and continued operations.
In January 2019, Chairman John Schwan converted $600,000 of company notes into 180,723 common shares. The company adopted ASC 842 leases on January 1, 2019, recording approximately $2.4 million of right-of-use assets and corresponding lease liabilities; adoption did not affect cash flows. In April 2019, its independent accounting firm declined reappointment. The filing was prepared without auditor review, and the company said it intended to amend the filing after hiring a replacement firm.
Management reported disclosure controls were effective at March 31, 2019 after adding closing procedures to address a previously disclosed material weakness involving impairment analyses, inventory reserves and deferred-tax-asset valuation allowances. The quarter’s results may not indicate full-year results, and the filing gives no formal earnings guidance.
Investor verification priorities
- Confirm the status and terms of the PNC forbearance, covenant compliance, borrowing availability and any replacement financing.
- Assess the feasibility and timing of management’s funding plans and the going-concern uncertainty.
- Track cash, seasonal working-capital requirements, inventory levels and the effect of customer concentration.
- Verify appointment of a replacement auditor and whether the company amended this unaudited, unreviewed filing.
- Reconcile operating cash flow: the cash flow statement reports $0.96 million used in Q1 2018, while MD&A reports $0.90 million used.
- Confirm the planned Clever Container divestiture and its impact on consolidated results and related-party receivables.