Business Context and Reporting Period
This is CTI Industries Corporation’s unaudited Form 10-Q for the three months ended March 31, 2018. The filing identifies the registrant as CTI Industries Corporation, not Yunhong Green CTI Ltd.; verify the issuer identity before relying on this summary. CTI designs, manufactures and distributes balloons, packaging films, flexible containers, vacuum-sealing products and related goods.
Financial Performance and Position
- Revenue: Net sales were $13.98 million, down 9.0% from $15.36 million in Q1 2017. Foil balloon sales fell 12.7%, vacuum-sealing products fell 7%, and film products fell 47.7%; latex balloon sales rose 2.1%.
- Profit and margins: Gross profit was $2.87 million versus $3.62 million; gross margin was approximately 20.5%, compared with 23.6%. Operating loss was $147,000, versus operating income of $508,000. Net loss attributable to CTI was $463,000, compared with net income of $58,000; loss per basic and diluted share was $0.13, versus earnings per share of $0.02.
- Cash flow: Management reported $899,000 of cash used in operating activities, versus $3.08 million provided in Q1 2017. Cash at March 31 was $596,000. The cash flow statement’s displayed change and beginning/ending cash figures appear inconsistent; verify against the filed financial statements.
- Liquidity: Working capital was $4.98 million at March 31, down from $9.63 million at December 31, 2017. Current assets were $35.90 million and current liabilities $30.92 million.
- Debt: The revolving credit balance was $15.93 million. Current notes payable were $5.34 million; the company reclassified $4.4 million of long-term debt to current following covenant noncompliance. Long-term liabilities totaled $2.16 million.
- Other balance-sheet items: Inventories increased to $21.36 million from $18.87 million at year-end. Total assets were $43.53 million and total equity was $10.45 million.
Material Changes Versus the Prior Comparable Period
- Sales declined, while gross margin compressed and results shifted from modest operating and net income to losses.
- Interest expense increased to $564,000 from $377,000 in the financial statements; MD&A separately cites $353,000 for Q1 2017, an inconsistency to verify.
- Operating cash flow deteriorated substantially, with inventory and accounts receivable increases absorbing cash.
- Foreign-currency translation generated $433,000 of other comprehensive income, partly offsetting the reported net loss in comprehensive income.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method and reported no material impact.
Outlook, Risks and Unusual Items
- Management outlook: CTI attributed early-quarter order-flow issues to two large customers, said March was its largest sales month outside a specified prior promotion, and reported strong April and May sales. Management expected 2018 sales to exceed 2017 and stated it expected sufficient capital to fund operations through 2018 and beyond. These are forward-looking statements, not guarantees.
- Credit covenant breach: The company reported noncompliance with two financial covenants under its PNC facility at March 31 and was discussing next steps with the bank. The filing warns that breach consequences could include higher interest, penalties or reduced credit availability, potentially affecting its ability to continue as a going concern.
- Customer concentration: The two largest customers represented 31.8% and 17.7% of quarterly sales and together 57.7% of net accounts receivable. The top three customers represented 54.1% of sales.
- Legal contingency: An arbitration claim alleges breach of agreements, unpaid commissions, unjust enrichment and tortious interference. CTI denies the claims, recorded no accrual, and said it could not estimate any potential loss.
- Related parties: A company partly owned by the CEO and another investor purchased $237,000 of products during the quarter and owed CTI $1.10 million at quarter-end. The CEO’s affiliated law firm received $72,000 in legal fees.
- Seasonality: Balloon and vacuum-sealing product sales are seasonal, as described in the filing.
Most Important Facts for Investors to Verify
- Confirm the issuer and filing match the intended company: this document names CTI Industries Corporation.
- Check the status of the PNC covenant breach, any waiver or amendment, and the availability of the revolving facility.
- Reconcile the cash flow statement’s cash movement presentation and the conflicting Q1 2017 interest-expense figures.
- Track sales recovery, inventory levels, operating cash flow and exposure to the two major customers.
- Review developments in the arbitration and any subsequent disclosure of a possible loss.