Business context and reporting period
CTI Industries Corporation and subsidiaries filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company designs, manufactures and sells novelty balloons, packaging films and pouches, and related products. The filing identifies the registrant as CTI Industries Corporation, not YUNHONG GREEN CTI LTD.; investors should verify the issuer identity.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $13.345 million | $13.807 million |
| Gross profit / margin | $2.974 million / 22.3% | $3.095 million / 22.4% |
| Operating income / margin | $530,000 / 4.0% | $843,000 / 6.1% |
| Net income attributable to CTI | $130,000; $0.04 per share | $389,000; $0.12 per share |
| Operating cash flow | $115,000 | $136,000 |
| Capital expenditures | $460,000 | $213,000 |
At March 31, 2013, cash was $448,000, working capital was $11.547 million, total assets were $38.142 million, and current liabilities were $16.091 million. The company reported $6.321 million of line-of-credit debt on the balance sheet; MD&A separately reports a $6.144 million Harris revolver balance. Long-term liabilities included $9.004 million of long-term debt and an $837,000 warrant liability. The company reported $3.720 million available to borrow under its revolving line of credit.
Material changes versus prior comparable period
- Sales declined 3.3%; net income attributable to CTI fell approximately 66%. Gross margin was nearly flat, but higher general and administrative and selling expenses reduced operating income.
- Metalized balloon sales declined 2.4%; latex balloon sales rose 8.6%; pouch sales were essentially unchanged; laminated film sales fell 28.5%, primarily due to lower sales to a principal customer.
- Net interest expense increased to approximately $468,000 from $181,000, reflecting the BMO Equity loan and warrant-related costs. A $145,000 foreign-currency transaction gain compared with $2,000 in Q1 2012.
- Cash from operations was lower and capital spending more than doubled. Cash nevertheless increased by $97,000, supported primarily by financing activities.
- Customer concentration increased: the largest customer represented 36.5% of sales and 23.0% of accounts receivable; the top three customers accounted for 50.8% of sales.
Outlook, risks and unusual items
- Management expected the Ziploc-branded vacuum-sealing product line to expand from more than 2,700 retail outlets to approximately 6,000 by mid-2013. This is an expectation, not a guaranteed outcome.
- Management said available financing and internally generated funds should meet working-capital needs for at least 12 months and that the company expected to meet revised financial covenants.
- The company was out of compliance with certain financial covenants at December 31, 2012 and March 31, 2013. Amendments dated April 12, 2013 waived those violations, revised certain covenant requirements, and imposed fees of $20,000 and $12,500 under the respective agreements.
- The July 2012 BMO Equity financing provided a $5 million loan bearing 11.5% interest and included a warrant to purchase up to 4% of fully diluted shares at $0.01 per share. The filing reports a $837,000 warrant liability.
- The company relies significantly on bank financing. Its Harris credit agreement describes mortgage and equipment loan balances due April 29, 2013, while other financing disclosures describe an amended credit arrangement; investors should verify the applicable maturity and repayment terms.
- Related-party transactions included payments to an entity affiliated with the CEO for packaging materials, rent and temporary staff, and lease payments to consolidated entities owned by company executives. Management said ordinary-course legal claims were not expected to materially affect financial position or results.
Important facts for investors to verify
- Whether this CTI Industries filing is the intended issuer filing, given the different company name in the request.
- The current status of covenant compliance, waiver conditions, and amended debt maturities and availability.
- The largest customer’s ongoing contribution to sales and receivables, and the effect of any customer losses or reduced orders.
- Whether the retail rollout occurred as expected and whether it generated sustained sales and cash flow.
- How higher interest costs, the warrant liability, working-capital demands, and capital spending affect liquidity.