Business context and reporting period
CTI Industries Corporation (NASDAQ: CTIB) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company makes and distributes balloons, novelty products, films and flexible packaging, and vacuum-sealing and home-organization products. The filing identifies CTI Industries Corporation as the registrant; this differs from the company name in the request metadata, which investors should verify.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $8.54 million | $11.53 million | $33.48 million | $41.49 million |
| Gross profit / margin | $0.81 million / 9.5% | $2.19 million / 19.0% | $5.34 million / 16.0% | $8.85 million / 21.3% |
| Operating income (loss) | $(1.24) million | $(0.33) million | $(1.64) million | $0.37 million |
| Net income (loss), consolidated | $(1.24) million | $(0.55) million | $(5.30) million | $(0.81) million |
| Net income (loss) attributable to CTI | $(1.17) million | $(0.56) million | $(5.14) million | $(0.77) million |
- Cash flow: Nine-month operating cash flow was $4.59 million, versus cash used of $48,000 in 2018. The 2019 result included working-capital changes, including reductions in receivables and inventory, higher trade payables, and a $3.0 million cash-flow adjustment related to other non-current assets. Investing activities used $144,000; financing activities used $4.10 million. Cash declined to $127,000 from $428,000 at year-end 2018.
- Liquidity: Working capital was $297,000 at September 30, down from $2.80 million at December 31, 2018. Current assets were $28.46 million and current liabilities $28.16 million.
- Debt and leases: The revolving credit balance was $12.77 million; current notes payable were $3.79 million. The company also reported $1.71 million in operating lease liabilities. Because of credit-facility noncompliance, long-term bank debt was reclassified as current; the filing cites $2.6 million reclassified.
Changes versus the prior comparable period
- Q3 sales fell 26%; nine-month sales fell 19%. Lower balloon sales were a major factor: nine-month foil balloon revenue decreased 23%, with management citing the helium shortage and a decline in sales to the largest foil-balloon customer.
- Q3 gross margin fell to 9.5% from 19.0%, and the company recorded operating losses in both the quarter and nine-month period.
- Nine-month net loss included a $3.0 million non-cash charge recorded in June for estimated costs associated with the anticipated divestiture or liquidation and deconsolidation of Clever Container and two European sales entities.
- Sales and marketing costs declined, primarily reflecting savings from cost-reduction programs. Vacuum-sealing sales were nearly flat for the nine months, but declined 22% in Q3.
Outlook, risks and unusual items
- Going concern and financing: Management said substantial doubt exists about the company’s ability to continue as a going concern. The company remained out of compliance with PNC Bank covenants. PNC issued a default and reservation-of-rights notice in August; an October 18, 2019 forbearance agreement waived specified defaults for CTI Industries through January 10, 2020, but not for its Mexican subsidiary, Flexo. Continued funding is not assured, and management’s financing efforts had not secured a commitment.
- Operating continuity: On October 21, the company issued WARN notices stating its Lake Barrington facility might close in late December 2019 or early January 2020 absent an appropriate financing solution. Management planned cost reductions, potential asset and business divestitures, a facility transaction, and other financing and restructuring measures. No assurance was provided that these plans would succeed.
- Contingencies: Four vendor claims totaling more than $0.7 million were disclosed in the notes; the balance sheet included the claimed amounts as liabilities. Separately, a landlord filed a possession and rent action seeking $111,390 plus additional rent. The cases were ongoing.
- Customer and market concentration: The top three customers represented 49% of Q3 sales and 55% of nine-month sales. Helium supply disruption weighed on balloon sales; tariffs affecting China-sourced vacuum-sealing products and Clever Container goods were also identified as risks. The vacuum-sealing product license agreement was due to expire December 31, 2019 and had not been extended.
- Reporting and governance: The independent accounting firm resigned in April 2019. The filing states it was prepared without auditor review and that the company would seek to amend it after hiring a replacement firm. The CEO and a long-serving director announced plans to retire, with the CEO’s departure date dependent on a successor or December 31, 2019.
The filing provides no specific revenue or earnings guidance. Management described a focus on core operations, financing stabilization, and expense reductions.
Important facts for investors to verify
- Confirm the registrant identity and ticker, given the mismatch between the request metadata and the filing’s CTI Industries Corporation identification.
- Check the status and terms of PNC forbearance, covenant compliance, borrowing availability, and any replacement financing.
- Verify whether the company secured funding sufficient to avoid the threatened facility closure and address its going-concern uncertainty.
- Track auditor replacement and whether the company filed an amended, auditor-reviewed 10-Q.
- Review the accounting, timing, and cash consequences of the $3.0 million divestiture-related charge, and the progress of the proposed divestitures.
- Monitor vendor and landlord litigation, customer concentration, helium-related demand, and the vacuum-sealing license renewal.