UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________to_________

 

Commission File Number

000-23115

 

CTI INDUSTRIES CORPORATION

(Exact name of Registrant as specified in its charter)

 

Illinois   36-2848943
(State or other jurisdiction of   (I.R.S. Employer Identification Number)
incorporation or organization)    
     
22160 N. Pepper Road    
Lake Barrington, Illinois   60010
(Address of principal executive offices)   (Zip Code)

 

(847) 382-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company þ
            Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of shares outstanding of the Registrant’s common stock as of August 1, 2017 was 3,525,227.

 

 

 

 

 

 

INDEX

 

Part I – Financial Information  
   
Item No. 1. Financial Statements  
  Condensed Consolidated Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016 1
  Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months ended June 30, 2017 and June 30, 2016 2
  Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended June 30, 2017 and June 30, 2016 3
  Condensed Consolidated Earnings per Share (unaudited) for the three months ended June 30, 2017 and June 30, 2016 4
  Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item No. 2   Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item No. 3 Quantitative and Qualitative Disclosures Regarding Market Risk 23
Item No. 4 Controls and Procedures 23
   
Part II – Other Information  
   
Item No. 1 Legal Proceedings 24
Item No. 1A Risk Factors 24
Item No. 2 Unregistered Sales of Equity Securities and Use of Proceeds 24
Item No. 3 Defaults Upon Senior Securities 24
Item No. 4 Submission of Matters to a Vote of Security Holders 24
Item No. 5 Other Information 24
Item No. 6 Exhibits 24
  Signatures 26
  Exhibit 31.1  
  Exhibit 31.2  
  Exhibit 32  

 

 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

   June 30, 2017   December 31, 2016 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents (VIE $12,000 and $51,000, respectively)  $456,426   $563,043 
Accounts receivable, (less allowance for doubtful accounts of $152,000 and $137,000, respectively) (VIE $11,000 and $6,000, respectively)   10,020,280    14,838,978 
Inventories, net (VIE $583,000 and $719,000, respectively)   18,947,606    18,348,011 
Prepaid expenses (VIE $35,000 and $18,000, respectively)   750,586    678,689 
Other current assets (VIE $1,000 and $0, respectively)   854,936    530,669 
           
Total current assets   31,029,834    34,959,390 
           
Property, plant and equipment:          
Machinery and equipment (VIE $0 and $0, respectively)   26,877,412    26,348,443 
Building   3,387,323    3,379,636 
Office furniture and equipment (VIE $217,000 and $154,000, respectively)   3,440,515    3,597,158 
Intellectual property   752,044    482,088 
Land   250,000    250,000 
Leasehold improvements   418,073    395,603 
Fixtures and equipment at customer locations   3,302,868    3,302,868 
Projects under construction   169,274    493,859 
    38,597,509    38,249,655 
Less : accumulated depreciation and amortization (VIE $33,000 and $29,000, respectively)   (33,478,495)   (32,938,267)
           
Total property, plant and equipment, net   5,119,014    5,311,388 
           
Other assets:          
Goodwill (VIE $440,000 and $440,000, respectively)   1,473,176    1,473,176 
Net deferred income tax asset   1,868,561    1,696,690 
Other assets (due from related party $49,000 and $47,000, respectively)   428,953    473,095 
           
Total other assets   3,770,690    3,642,961 
           
TOTAL ASSETS  $39,919,538   $43,913,739 
           
LIABILITIES AND EQUITY          
Current liabilities:          
Checks written in excess of bank balance  $1,074,901   $1,688,675 
Trade payables (VIE $10,000 and $92,000, respectively)   4,926,507    5,861,932 
Line of credit (VIE $373,000 and $408,000, respectively)   9,545,148    11,263,531 
Notes payable - current portion (net discount of $17,000 and $113,000, respectively) (VIE $0 and $0, respectively)   6,659,095    1,709,220 
Notes payable officers - current portion   0    180,000 
Notes payable affiliates - current portion   9,967    8,141 
Capital Lease - current portion   23,714    40,660 
Accrued liabilities (VIE $149,000 and $140,000, respectively)   2,551,157    3,127,425 
           
Total current liabilities   24,790,489    23,879,584 
           
Long-term liabilities:          
Notes payable - affiliates   213,677    218,858 
Notes payable, net of current portion (net discount of $0 and $0, respectively) (VIE $206,000 and $301,000, respectively)   205,978    5,301,491 
Notes payable - officers, subordinated   1,465,162    1,416,138 
Capital Lease   0    4,690 
Deferred gain (non current)   286,858    297,521 
           
Total long-term debt, net of current portion   2,171,675    7,238,698 
           
Warrants Payable   794,072    817,880 
           
Total long-term liabilities   2,965,747    8,056,578 
           
Equity:          
CTI Industries Corporation stockholders' equity:          
Preferred Stock — no par value, 2,000,000 shares authorized, 0 shares issued and outstanding        - 
Common stock - no par value, 5,000,000 shares authorized, 3,568,885 shares issued and 3,525,227 shares outstanding   13,898,494    13,898,494 
Paid-in-capital   2,227,880    2,250,235 
Accumulated earnings   1,855,668    2,323,326 
Accumulated other comprehensive loss   (4,840,509)   (5,593,878)
Less: Treasury stock, 43,658 shares   (160,784)   (160,784)
Total CTI Industries Corporation stockholders' equity   12,980,749    12,717,393 
           
Noncontrolling interest   (817,447)   (739,816)
           
Total Equity   12,163,302    11,977,577 
           
TOTAL LIABILITIES AND EQUITY  $39,919,538   $43,913,739 

 

See accompanying notes to condensed consolidated unaudited financial statements

 

1 

 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2017   2016   2017   2016 
                 
Net Sales  $12,811,697   $14,150,504   $28,171,335   $29,355,498 
                     
Cost of Sales   9,694,288    10,313,825    21,436,477    21,596,973 
                     
Gross profit   3,117,409    3,836,679    6,734,858    7,758,525 
                     
Operating expenses:                    
General and administrative   1,866,615    1,904,874    3,767,871    3,662,224 
Selling   1,187,904    1,192,794    1,909,294    2,184,155 
Advertising and marketing   537,372    536,631    1,093,781    1,062,709 
Gain on sale of assets   (22,401)   -    (91,701)   - 
Other operating income   (1,416)   -    (1,416)   - 
                     
Total operating expenses   3,568,074    3,634,299    6,677,829    6,909,088 
                     
(Loss) Income from operations   (450,665)   202,380    57,029    849,437 
                     
Other (expense) income:                    
Interest expense   (359,782)   (357,192)   (732,646)   (715,652)
Change in fair value of warrants   4,202    (39,214)   23,808    (226,878)
Foreign currency loss   (50,428)   78,161    (80,954)   67,677 
                     
Total other expense, net   (406,008)   (318,245)   (789,792)   (874,853)
                     
Net income before taxes   (856,673)   (115,865)   (732,763)   (25,416)
                     
Income tax expense   (263,110)   4,865    (187,473)   11,851 
                     
Net income   (593,563)   (120,730)   (545,290)   (37,267)
                     
Less: Net (loss) income attributable to noncontrolling interest   (67,435)   (37,800)   (77,632)   38,900 
                     
Net loss attributable to CTI Industries Corporation  $(526,128)  $(82,930)  $(467,658)  $(76,167)
                     
Other Comprehensive Income (Loss)                    
Foreign currency adjustment   442,057    (536,409)   753,369    (604,011)
Comprehensive Income (Loss)  $(84,071)  $(619,339)  $285,711   $(680,178)
                     
Basic loss per common share  $(0.15)  $(0.02)  $(0.13)  $(0.02)
                     
Diluted loss per common share  $(0.14)  $(0.02)  $(0.12)  $(0.02)
                     
Weighted average number of shares and equivalent shares of common stock outstanding:                    
Basic   3,616,693    3,363,986    3,616,693    3,363,986 
                     
Diluted   3,771,581    3,535,075    3,772,236    3,519,906 

 

See accompanying notes to condensed consolidated unaudited financial statements

 

2 

 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   For the Six Months Ended June 30, 
   2017   2016 
         
Cash flows from operating activities:          
Net (loss) income  $(545,290)  $(37,267)
Adjustment to reconcile net income to cash provided by operating activities:          
Depreciation and amortization   781,042    784,399 
Amortization of debt discount   95,906    82,163 
Change in fair value of warrants   (23,808)   226,878 
Stock based compensation   0    23,334 
Amortization of deferred gain on sale/leaseback   (53,258)   0 
Provision for losses on accounts receivable   4,117    8,039 
Provision for losses on inventories   42,366    (48,935)
Deferred income taxes   (254,401)   (106,619)
Change in assets and liabilities:          
Accounts receivable   5,311,938    1,404,314 
Inventories   137,620    (1,416,051)
Prepaid expenses and other assets   (268,403)   (1,809,612)
Trade payables   (1,236,877)   654,759 
Accrued liabilities   (788,625)   (150,018)
           
Net cash provided by (used in) operating activities  $3,202,327   $(384,616)
           
Cash flows from investing activities:          
Proceeds from equipment sale-leaseback   0    783,134 
Cash used in investment in subsidiary   0    (43,750)
Purchases of property, plant and equipment   (526,565)   (433,304)
           
Net cash (used in) provided by investing activities  $(526,565)  $306,080 
           
Cash flows from financing activities:          
Change in checks written in excess of bank balance   (613,774)   70,171 
Net change in revolving line of credit   (1,780,835)   883,940 
Proceeds from issuance of long-term debt   0    492 
Repayment of long-term debt (related parties $0 and $0)   (423,627)   (557,655)
Contributions received by Variable Interest Entity   0    288,750 
Redemption of Variable Interest Entity members   0    (455,000)
           
Net cash (used in) provided by financing activities  $(2,818,236)  $230,698 
           
Effect of exchange rate changes on cash   35,857    (23,525)
           
Net decrease in cash and cash equivalents   (106,617)   128,637 
           
Cash and cash equivalents at beginning of period   563,043    346,404 
           
Cash and cash equivalents at end of period  $456,426   $475,041 
           
Supplemental disclosure of cash flow information:          
Cash payments for interest   627,586    608,758 
Cash payments for taxes   300,000    0 
           
Supplemental Disclosure of non-cash investing and financing activity          
Property, Plant & Equipment acquisitions funded by liabilities  $8,704   $30,721 
Contributed Capital to Clever Container          
Stock   0   $122,500 
Debt   0   $43,750 
Accounts Receivable   0   $183,750 

 

See accompanying notes to condensed consolidated unaudited financial statements

 

3 

 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Earnings per Share (unaudited)

 

   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2017   2016   2017   2016 
Basic                    
Average shares outstanding:                    
Weighted average number of common shares outstanding   3,616,693    3,363,986    3,616,693    3,363,986 
                     
Net loss:                    
Net loss attributable to CTI Industries Corporation  $(526,128)  $(82,930)  $(467,658)  $(76,167)
                     
Per share amount  $(0.15)  $(0.02)  $(0.13)  $(0.02)
                     
Diluted                    
Average shares outstanding:                    
Weighted average number of common shares outstanding   3,616,693    3,363,986    3,616,693    3,363,986 
                     
Effect of dilutive shares   154,888    171,089    155,543    155,920 
                     
Weighted average number of shares and equivalent shares of common stock outstanding   3,771,581    3,535,075    3,772,236    3,519,906 
                     
Net loss:                    
Net loss attributable to CTI Industries Corporation  $(526,128)  $(82,930)  $(467,658)  $(76,167)
                     
Per share amount  $(0.14)  $(0.02)  $(0.12)  $(0.02)

 

See accompanying notes to condensed consolidated unaudited financial statements

 

4 

 

 

CTI Industries Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 - Basis of Presentation

 

The accompanying condensed (a) consolidated balance sheet as of December 31, 2016, which has been derived from audited consolidated financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2016.

 

Principles of consolidation and nature of operations:

 

The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon products throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States.

 

Variable Interest Entities (“VIE’s”):

 

The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. There are three entities that have been consolidated as variable interest entities.

 

5 

 

 

Use of estimates:

 

In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill.

 

Earnings per share:

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.

 

Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.

 

As of June 30, 2017 and 2016, shares to be issued upon the exercise of options and warrants aggregated 359,817 and 288,048, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three and six months ended June 30, 2017 and 2016 were 153,350 and 0, respectively.

 

Significant Accounting Policies:

 

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2016. There were no significant changes to these accounting policies during the three and six months ended June 30, 2017.

 

Reclassification:

 

Certain 2016 amounts have been reclassified to conform to the 2017 presentation. (See footnote regarding ASU 2015-17.)

 

Recent Accounting Pronouncements:

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance amended the existing requirements for disclosing information about an entity’s ability to continue as a going concern, requires management to assess an entity’s ability to continue as a going concern and then to provide related disclosure in certain circumstances. This guidance is effective for annual reporting periods ending after December 2016 and for annual and interim reporting periods thereafter. See Note 2 for management’s assessment of its ability to continue as a going concern.

 

6 

 

 

In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, to eliminate the current requirements to classify deferred income tax assets and liabilities between current and noncurrent. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company has adopted the standard and the impact to our consolidated financial statements for the period ending June 30, 2017 is a reclassification of $761,000 in deferred tax assets to noncurrent, and a reclassification of $773,000 in deferred tax assets to noncurrent for the period ending December 31, 2016.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. When the standard becomes effective, we expect that our property, plant and equipment will increase significantly due to the addition of assets under lease and the lease liabilities will correspondingly increase. There is not expected to be a significant impact on the income statement.

 

 7 

 

 

On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2018. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

 

Note 2 - Liquidity and Going Concern

The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the Credit Agreement with BMO Harris. The Company has historically used availability under this revolving credit facility to fund operations.

For the six months ended June 30, 2017, the Company generated net cash from operating activities in the amount of $3,202,237, although the Company did incur a loss for the quarter ended June 30, 2017 of $526,000 and for the six months ended June 30, 2017 of $468,000.

Assuming a continuation of the revolving credit under the Credit Agreement, the Company has forecast a profit for the second half of the year, which is expected to generate sufficient cash flow for the Company to meet its current obligations.

As of June 30, 2017, the Company had total borrowings outstanding under the Credit Agreement including $9,172,000 on the revolving credit loan and $1,664,000 on the mortgage facility. As of June 30, 2017, the Company had cash balances of $456,000.

Also, the Company owes $5 million on its outstanding subordinated loan with BMO Equity, which matures on January 17, 2018.

As of June 30, 2017, we met the debt covenants of the BMO Harris loan and the BMO Equity loan.

The obligations of the Credit Agreement (revolving credit loan and mortgage) were to mature on July 17, 2017 under the terms. By amendment to the Credit Agreement, BMO Harris has agreed to extend the maturity of these obligations to October 18, 2017. BMO Equity consented to this extension in exchange for a fee and for the right to exercise at any time its put of warrants issued under the Note and Warrant Agreement, with payment deferred to the maturity date of the BMO Equity loan.

The extension provides for the retention by the Company of a consultant to advise as to financial planning, forecasting, cost management and financing.

Management’s plans include

(1)Acting to reduce operating expense to achieve a higher level of profitability,
(2)Working with our consultant to reduce operating expenses, negotiate financing terms, identify financing sources,
(3)Contacts and negotiations with our current lenders and with additional financing sources to extend our present loan facilities or to provide alternative sources for one or both of our current lenders, and
(4)Maintaining active contact and a loan process with several potential lenders, as well as our current lenders, and receipt of non-binding proposals for our financing.

Management Assessment

Based upon our historical ability to obtain necessary financing and our current expectations, we believe that we are likely to obtain necessary financing to continue operating as a going concern. However, we do not have firm commitments at this time for alternative financing or loan extensions.

 

 8 

 

 

Note 3 - Stock-Based Compensation; Changes in Equity

 

The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.

 

The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2017 and 2016. The expected volatility is based on historical volatility of the Company’s common stock.

 

The Company’s net loss for the three months ended June 30, 2017 and 2016 includes approximately $5,000 and $11,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the six months ended June 30, 2017 and 2016 includes approximately $10,000 and $23,000, respectively, of compensation costs related to share based payments. As of June 30, 2017, there is $16,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $5,000 of additional stock-based compensation expense to be recognized over the remainder of 2017, $7,000 to be recognized during 2018, $3,000 to be recognized during 2019 and $1,000 to be recognized during 2020.

 

 9 

 

 

As of June 30, 2017, the Company had three stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code, as well as for stock grants.

 

On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the

Company (including cancelled shares reissued under the plan.) As of June 30, 2017, options for 250,000 shares had been granted and options for 143,094 shares remain outstanding.

 

A summary of the Company’s stock option activity and related information is as follows:

 

   Shares
under
Option		   Weighted
Average
Exercise
Price		   Weighted
Average
Remaining
Contractual
Life		   Aggregate
Intrinsic
Value		 
Balance at December 31, 2016   143,094   $5.22    2.9   $89,494 
Granted   -    -    -    - 
Cancelled/Expired   -    -    -    - 
Exercised   -    -    -    - 
Outstanding at June 30, 2017   143,094   $5.22    1.5   $65,518 
                     
Exercisable at June 30, 2017   113,238   $5.21    1.0   $53,748 

 

On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“BMO Equity”) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. As of June 30, 2017, the Company was in compliance with all of the financial covenants under the Note and Warrant Purchase Agreement.

 

On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement wherein the investors purchased 152,850 shares of common stock of the Company at a price of $6.00 per share. As additional consideration for the purchases of the shares in the offering, each investor received, with each share of common stock purchased, one-half of a warrant, with one warrant entitling the investor to purchase one share of the Company’s common stock at the price of $7.00. The warrants are exercisable between six months and three years from the investment date. As a result of the completion of the sale under the Purchase Agreement, warrants to purchase 76,675 shares of common stock at $7.00 per share were issued.

 

 10 

 

 

In addition to the Purchase Agreement, the Company and each of the investors entered into a Registration Rights Agreement pursuant to which the Company agreed to file a Registration Statement with the SEC to register the common stock sold to the investors.

 

A summary of the Company’s stock warrant activity and related information is as follows:

 

   Shares
under
Warrant		   Weighted
Average
Exercise
Price		   Weighted
Average
Remaining
Contractual
Life		   Aggregate
Intrinsic
Value		 
Balance at December 31, 2016   216,723   $2.48    4.49   $817,880 
Granted   -    -    -    - 
Cancelled   -    -    -    - 
Exercised   -    -    -    - 
Outstanding at June 30, 2017   216,723   $2.48    4.00   $794,072 
                     
Exercisable at June 30, 2017   76,675   $7.00    2.08    - 

 

A summary of the Company’s stock option activity by grant date as of June 30, 2017 is as follows:

 

   Options Outstanding   Options Vested 
Options by Grant Date  Shares   Weighted
Avg.		   Remain.
Life		   Intrinsic
Val		   Shares   Weighted
Avg.		   Remain.
Life		   Intrinsic Val 
Dec 2005   -    -    -    -    -    -    -    - 
Dec 2010   -    -    -    -    -    -    -    - 
Jan 2011   -    -    -    -    -    -    -    - 
Nov 2012   90,000   $5.17    0.4   $45,900    90,000   $5.17    0.4   $45,900 
Nov 2013   5,000   $5.75    1.4   $0    4,000   $5.75    1.4   $0 
Dec 2015   48,094   $5.27    3.5   $19,618    19,238   $5.27    3.5   $7,848 
TOTAL   143,094   $5.22    1.5   $65,518    113,238   $5.21    1.0   $53,748 

 

The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended June 30, 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on June 30, 2017.

 

Note 4 - Legal Proceedings

 

The Company is party to certain claims or actions arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolution of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company.

 

 11 

 

 

Note 5 - Other Comprehensive Income

 

In the three and six months ended June 30, 2017, the Company incurred other comprehensive income of approximately $442,000 and $753,000, respectively, all from foreign currency translation adjustments.

 

The following table sets forth the accumulated balance of other comprehensive income and each component.

 

   Foreign Currency Items   Total
Accumulated Other
Comprehensive Income		 
           
Beginning balance as of January 1, 2017  $(5,593,878)  $(5,593,878)
           
Current period change, net of tax   753,369    753,369 
           
Ending Balance as of June 30, 2017   (4,840,509)   (4,840,509)

 

Note 6 - Inventories, Net

 

   June 30,
2017		   December 31,
2016		 
Raw materials  $3,516,267   $3,310,310 
Work in process   2,508,025    1,942,600 
Finished goods   13,760,317    13,889,328 
Allowance for excess quantities   (837,003)   (794,227)
Total inventories  $18,947,606   $18,348,011 

 

Note 7 - Geographic Segment Data

 

The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's operations by geographic area is as follows:

 

 12 

 

 

   Net Sales to Outside Customers   Net Sales to Outside Customers 
   For the Three Months Ended   For the Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
                 
United States  $9,478,000   $11,050,000   $21,125,000   $23,135,000 
Europe   917,000    618,000    1,864,000    1,166,000 
Mexico   1,956,000    1,852,000    3,979,000    3,715,000 
United Kingdom   459,000    631,000    1,203,000    1,339,000 
                     
   $12,810,000   $14,151,000   $28,171,000   $29,355,000 

 

   Total Assets at 
   June 30,   December 31, 
   2017   2016 
         
United States  $27,180,000   $33,108,000 
Europe   2,910,000    2,418,000 
Mexico   8,817,000    7,064,000 
United Kingdom   1,013,000    1,324,000 
           
   $39,920,000   $43,914,000 

 

Note 8 - Concentration of Credit Risk

 

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the three and six months ended June 30, 2017 and 2016, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively. Sales to these customers for the three months ended June 30, 2017 and 2016 are as follows:

 

   Three Months Ended   Three Months Ended 
   June 30, 2017   June 30, 2016 
Customer  Net Sales   % of Net
Sales		   Net Sales   % of Net
Sales		 
Customer A  $3,867,000    30.2%  $3,607,000    25.5%
Customer B  $1,565,000    12.2%  $2,460,000    17.4%

 

 13 

 

 

   Six Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016 
Customer  Net Sales   % of Net
Sales		   Net Sales   % of Net
Sales		 
Customer A  $8,294,000    29.4%  $8,772,000    29.9%
Customer B  $4,174,000    14.8%  $4,800,000    16.4%
                     

 

As of June 30, 2017, the total amounts owed to the Company by these customers were approximately $2,104,000 or 21.2%, and $1,606,000 or 16.2%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at June 30, 2016 by these customers were approximately $2,018,000 or 20.2%, and $2,112,000 or 21.2% of the Company’s consolidated net accounts receivable, respectively.

 

Note 9 - Related Party Transactions

 

Stephen M. Merrick, President of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which provides legal services to the Company. Legal fees paid by the Company to this firm for the three months ended June 30, 2017 and 2016, respectively, were $38,000 and $33,000. Legal fees paid by the Company to this firm for the six months ended June 30, 2017 and 2016, respectively, were $64,000 and $71,000.

 

Interest payments have been made or accrued to John H. Schwan, Chief Executive Officer of the Company, for loans made to the Company. During the three months ended June 30, 2017 and 2016, these interest accruals totaled $25,000 and $23,000, respectively. During the six months ended June 30, 2017 and 2016, these interest accruals totaled $49,000 and $46,000, respectively.

 

John H. Schwan, Chief Executive Officer of the Company, through an investment entity, and Stephen M. Merrick, President of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). During the three months ended June 30, 2017 and 2016, Clever Container purchased various products from the Company in the amount of $250,000 and $293,000, respectively. During the six months ended June 30, 2017 and 2016, Clever Container purchased various products from the Company in the amount of $454,000 and $478,000, respectively. As of June 30, 2017 and 2016, the balance of accounts receivable from Clever Container to the Company were $831,000 and $397,000, respectively. The Company owns a 28.5% interest in Clever Container.

 

Note 10 - Derivative Instruments; Fair Value

 

The following tables represents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

 14 

 

 

   Amount as of             
Description  6/30/2017   Level 1   Level 2   Level 3 
                 
Warrant Liability  $794,000    -   $794,000    - 
                     
   $794,000    -   $794,000    - 

 

   Amount as of             
Description  12/31/2016   Level 1   Level 2   Level 3 
                 
Warrant Liability  $818,000    -   $818,000    - 
                     
   $818,000        $818,000      

 

 15 

 

 

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.

 

Overview

 

We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related latex toy products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and foil balloons at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe. We also market and sell vacuum sealing machines which we purchase from a supplier and we market and sell home organizing and container products.

 

Results of Operations

 

Net Sales. For the three months ended June 30, 2017, net sales were $12,812,000 compared to net sales of $14,151,000 for the same period of 2016, a decrease of 9.5%. For the quarters ended June 30, 2017 and 2016, net sales by product category were as follows:

 

 16 

 

 

   Three Months Ended 
   June 30, 2017   June 30, 2016 
   $   % of   $   % of 
Product Category  (000) Omitted   Net Sales   (000) Omitted   Net Sales 
                 
Foil Balloons   6,788    53%   6,350    44%
                     
Latex Balloons   2,244    18%   2,263    16%
                     
Vacuum Sealing Products   1,563    12%   2,444    17%
                     
Film Products   699    5%   1,350    10%
                     
Other Sales   1,518    12%   1,744    13%
                     
Total   12,812    100%   14,151    100%

 

For the six months ended June 30, 2017, net sales were $28,171,000 compared to net sales of $29,355,000 for the same period of 2016, a decrease of 4%. For the six months ended June 30, 2017 and 2016, net sales by product category were as follows:

 

   Six Months Ended 
   June 30, 2017   June 30, 2016 
   $   % of   $   % of 
Product Category  (000) Omitted   Net Sales   (000) Omitted   Net Sales 
                 
Foil Balloons   15,680    57%   14,362    49%
                     
Latex Balloons   4,349    15%   4,308    15%
                     
Vacuum Sealing Products   3,271    12%   4,768    16%
                     
Film Products   1,536    5%   2,370    8%
                     
Other Sales   3,335    11%   3,547    12%
                     
Total   28,171    100%   29,355    100%

 

Foil Balloons. During the three months ended June 30, 2017, revenues from the sale of foil balloons increased by 6.9% compared to the prior year period from $6,350,000 to $6,788,000. During the six months ended June 30, 2017, revenues from the sale of foil balloons increased by 9.2% compared to the prior year period from $14,362,000 to $15,680,000. During the first half of 2017, foil balloon sales to our largest customer increased to $8,293,000 from $8,287,000 in the first half of 2016. Sales of foil balloons to other customers increased to $7,387,000 from $6,075,000 for the same period last year. These increased sales represent certain new customers but principally increases in sales to significant existing customers in each of the United States, Mexico, the United Kingdom and Europe.

 

Latex Balloons. During the three months ended June 30, 2017, revenues from the sale of latex balloons decreased by 0.8% compared to the prior year period from $2,263,000 to $2,244,000. During the six months ended June 30, 2017, revenues from the sale of latex balloons increased by 1% compared to the prior year period from $4,308,000 to $4,349,000.

 

 17 

 

 

Vacuum Sealing Products. During the three months ended June 30, 2017, revenues from the sale of pouches and vacuum sealing machines decreased by 36.1% compared to the prior year from $2,444,000 to $1,563,000. During the six months ended June 30, 2017, revenues from the sale of pouches and vacuum sealing machines decreased by 31.4% compared to the prior year from $4,768,000 to $3,271,000. We believe that sales were affected during both the first and second quarters by the selloff of excess inventory of vacuum sealing machines held by a principal customer due to a sales promotion the customer implemented during the fourth quarter of 2016 for which a large quantity of machines were purchased. We believe such excess inventory has now been sold and anticipate increased orders for machines during the third and fourth quarters this year.

 

Films. During the three months ended June 30, 2017, revenues from the sale of laminated film products decreased by 48.2% compared to the prior year period from $1,350,000 to $699,000. During the six months ended June 30, 2017, revenues from the sale of laminated film products decreased by 35.2% compared to the prior year period from $2,370,000 to $1,536,000. Virtually all of the sales of this product line were to a single long-term customer. This customer has reduced the volume of film product purchased from our Company this year to date but we continue to maintain a long-term relationship with the customer.

 

Other Revenues. During the three months ended June 30, 2017, revenues from the sale of various other products decreased by 13% to $1,518,000 compared to revenues from other products in the same period in 2016 of $1,744,000. During the six months ended June 30, 2017, revenues from the sale of various other products decreased by 6% to $3,335,000 compared to revenues from other products in the same period in 2016 of $3,547,000. The revenues from the sale of other products during 2017 include (i) sales of a line of “Candy Blossoms” and “Candy Loons” consisting of candy and small inflated balloons sold in small containers, (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors and (iv) sales of party goods in Mexico by Flexo Universal.

 

Sales to a limited number of customers continue to represent a large percentage of our net sales.

The table below illustrates the impact on sales of our top three and ten customers for the three and six months ended June 30, 2017 and 2016.

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   % of Sales   % of Sales 
   2017   2016   2017   2016 
                 
Top 3 Customers   47.7%   52.3%   49.5%   54.1%
                     
Top 10 Customers   65.3%   69.6%   65.8%   68.5%

 

 18 

 

 

During the three and six months ended June 30, 2017, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three months ended June 30, 2017 were $3,867,000 or 30.2%, and $1,565,000 or 12.2%, of consolidated net sales, respectively. Sales to these customers for the three months ended June 30, 2016 were $3,607,000 or 25.5%, and $2,460,000 or 17.4%, of consolidated net sales, respectively. Sales to these customers for the six months ended June 30, 2017 were $8,294,000 or 29.4%, and $4,174,000 or 14.8%, of consolidated net sales, respectively. Sales to these customers for the six months ended June 30, 2016 were $8,772,000 or 29.9%, and $4,800,000 or 16.4%, of consolidated net sales, respectively. The amounts owed at June 30, 2017 by these customers were $2,104,000 or 21.2%, and $1,606,000 or 16.2%, of the Company’s consolidated net accounts receivable, respectively. As of June 30, 2016, the total amounts owed to the Company by these customers were $2,018,000 or 20.2%, and $2,112,000 or 21.2% of the Company’s consolidated net accounts receivable, respectively.

 

Cost of Sales. During the three months ended June 30, 2017, the cost of sales represented 75.7% of net sales compared to 72.9% for the three months ended June 30, 2016. During the six months ended June 30, 2017, the cost of sales represented 76.1% of net sales compared to 73.6% for the six months ended June 30, 2016. The increase in cost of sales was the result of changes in the mix of products sold. We did not experience significant changes in the cost of raw materials or direct labor during the period.

 

General and Administrative. During the three months ended June 30, 2017, general and administrative expenses were $1,867,000 or 14.6% of net sales, compared to $1,905,000 or 13.5% of net sales for the same period in 2016. During the six months ended June 30, 2017, general and administrative expenses were $3,768,000 or 13.4% of net sales, compared to $3,662,000 or 12.5% of net sales for the same period in 2016. We have undertaken a program to reduce administrative and selling costs for the balance of the year and beyond in order to establish better profitability. We are expecting to reduce administration, selling and marketing expenses by an annual rate of at least $1.5 million.

 

Selling. During the three months ended June 30, 2017, selling expenses were $1,188,000 or 9.3% of net sales, compared to $1,193,000 or 8.4% of net sales for the same period in 2016. During the six months ended June 30, 2017, selling expenses were $1,909,000 or 6.8% of net sales, compared to $2,184,000 or 7.4% of net sales for the same period in 2016.

 

Advertising and Marketing. During the three months ended June 30, 2017, advertising and marketing expenses were $537,000 or 4.2% of net sales for the period, compared to $537,000 or 3.8% of net sales for the same period of 2016. During the six months ended June 30, 2017, advertising and marketing expenses were $1,094,000 or 3.9% of net sales for the period, compared to $1,063,000 or 3.6% of net sales for the same period of 2016.

 

Other Income (Expense). During the three months ended June 30, 2017, the Company incurred interest expense of $360,000, compared to interest expense during the same period of 2016 in the amount of $357,000. During the six months ended June 30, 2017, the Company incurred interest expense of $733,000, compared to interest expense during the same period of 2016 in the amount of $716,000. In addition to interest expense, there is a variable charge relating to the change in value of our outstanding warrants issued in connection with our mezzanine loan by reason of change in market price of our common stock. The amount of that change was ($4,000) in the second quarter of 2017, compared to $39,000 in the second quarter of 2016.

 

For the three months ended June 30, 2017, the Company had a foreign currency transaction loss of $50,000 compared to a foreign currency transaction gain of $78,000 during the same period of 2016. For the six months ended June 30, 2017, the Company had a foreign currency transaction loss of $81,000 compared to a foreign currency transaction gain of $68,000 during the same period of 2016.

 

 19 

 

 

Income Taxes. For the three months ended June 30, 2017, the Company reported a consolidated income tax benefit of $263,000, compared to a consolidated income tax expense of $5,000 for the same period of 2016. For the six months ended June 30, 2017, the Company reported a consolidated income tax benefit of $187,000, compared to a consolidated income tax expense of $12,000 for the same period of 2016. For the six months ended June 30, 2017, this income tax expense was composed of an income tax benefit in the United States, income tax expense in Mexico of Flexo Universal, our Mexican subsidiary, an income tax benefit in the United Kingdom of CTI Balloons Limited, our United Kingdom subsidiary and income tax expense in Europe of CTI Europe gmbH, our Germany subsidiary.

 

Net Income. For the three months ended June 30, 2017, the Company had net loss of ($526,000) or ($0.15) per share (basic) and ($0.14) per share (diluted,) compared to net loss of ($83,000) for the same period of 2016 or ($0.02) per share (basic and diluted.) For the six months ended June 30, 2017, the Company had net loss of ($468,000) or ($0.13) per share (basic) and ($0.12) per share (diluted,) compared to net loss of ($76,000) for the same period of 2016 or ($0.02) per share (basic and diluted.) For the six months ended June 30, 2017, the Company had income from operations of $57,000 compared to income from operations during the same period in 2016 of $849,000.

 

Financial Condition, Liquidity and Capital Resources

 

Cash Flow Items.

 

Operating Activities. During the six months ended June 30, 2017, net cash provided by operations was $3,202,000, compared to net cash used in operations during the six months ended June 30, 2016 of $385,000.

 

Significant changes in working capital items during the six months ended June 30, 2017 included:

 

·A decrease in accounts receivable of $5,312,000 compared to a decrease in accounts receivable of $1,404,000 in the same period of 2016.
·A decrease in inventory of $138,000 compared to an increase in inventory of $1,416,000 in 2016.
·A decrease in trade payables of $1,237,000 compared to an increase in trade payables of $655,000 in 2016.
·A decrease in accrued liabilities of $789,000 compared to a decrease in accrued liabilities of $150,000 in 2016.

 

Investing Activity. During the six months ended June 30, 2017, cash used in investing activity was $527,000, compared to cash provided by investing activity for the same period of 2016 in the amount of $306,000. Investing activity consisted principally of investment in equipment and equipment maintenance.

 

Financing Activities. During the six months ended June 30, 2017, cash used in financing activities was $2,818,000 compared to cash provided by financing activities for the same period of 2016 in the amount of $231,000. Financing activity consisted principally of reduction in the balances of revolving and long term debt.

 

 20 

 

 

Liquidity, Capital Resources and Going Concern. The Company’s liquidity is dependent significantly on its bank financing and the Company relies on its revolving line of credit to maintain liquidity. On April 29, 2010, the Company entered into a Credit Agreement with BMO Harris Bank N.A. (“BMO Harris”). Under the Credit Agreement, BMO Harris agreed to provide loans and credits to the Company in the aggregate maximum amount of $14,417,000. The arrangement included:

 

i.A revolving credit line up to a maximum amount of $9,000,000 based upon a borrowing base of 85% of eligible receivables and 60% of eligible inventory (up to a maximum of $5,000,000);
ii.A mortgage loan in the principal amount of $2,333,350, amortized over 25 years;
iii.A term loan in the principal amount of $583,333 maturing in monthly principal installments of $58,333; and
iv.An equipment loan commitment in the amount of up to $2,500,000 providing for loan advances from time to time until April 29, 2012 based upon 100% of the purchase price of equipment purchased, the loans to be amortized on a five year basis commencing April 29, 2012.

 

The Credit Agreement included various representations, warranties and covenants of the Company, including various financial covenants.

 

The Credit Agreement, as amended, provides that the outstanding balance of all loans under the agreement will bear interest with reference to a base rate or, at the option of the Company, with reference to an adjusted LIBOR. At June 30, 2017, the effective rate on the outstanding loan balances was 4.5%.

 

As of June 30, 2017, the outstanding balances on the loans with BMO Harris were: (i) revolving line of credit, $9,172,000, (ii) mortgage loan, $1,664,000, and (iii) equipment loan, $0.

 

On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Private Equity (U.S.), Inc. (“BMO Equity”) and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017. The loans subject to the Credit Agreement mature on July 17, 2017.

 

On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. The loan matures on January 17, 2018.

 

The Note and Warrant Purchase Agreement included provisions for:

 

(i)          a closing fee of $100,000

 

 21 

 

 

(ii)         payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;

 

(iii)        security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;

 

(iv)        various representations and warranties and covenants of the Company;

 

(v)         financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.

 

On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement in which the investors purchased 152,850 shares of common stock at the price of $6.00 per share. As additional consideration for the purchase of shares in the Company, each investor received one-half of a warrant, with one warrant entitling the investor to purchase one share of common stock at the price of $7.00 per share. The warrants are exercisable between six months and three years from the investment date. In addition to the Purchase Agreement, the Company and the investors entered into a Registration Rights Agreement under which the Company agreed to file a Registration Statement with the SEC on or before August 29, 2016 to register the common stock purchased by the investors.

 

The issuance of shares in this placement resulted in gross proceeds to the Company of $917,000, and after commissions and fees, net proceeds to the Company of approximately $638,328. The Company used these proceeds for general working capital purposes.

 

At June 30, 2017, the Company had cash balances of $456,000 compared to cash balances of $475,000 for the same period of 2016, and there was ($109,000) available to advance on the Company’s revolving line of credit.

 

Also at June 30, 2017, the Company had a working capital balance of $6,239,000 compared to a working capital balance of $11,080,000 on December 31, 2016.

 

Further, as of June 30, 2017, the Company was in compliance with all of the financial covenants under the Credit Agreement and the Note and Warrant Purchase Agreement.

 

The Credit Agreement with BMO Harris, and all loans under that agreement, including the revolving loan and the mortgage loan matured on July 17, 2017. Pursuant to an amendment to the Credit Agreement, the maturity of these loans was extended to October 18, 2017. In consideration of its consent to this extension, BMO Equity became entitled to exercise the put of its warrants to the Company.

 

Further, the loan of $5 million in principal amount to the Company from BMO Equity matures on January 17, 2018.

 

We are actively engaged in negotiating and efforts to address the maturities of our loans with BMO Harris and BMO Equity. Those actions include:

 

(1)Actions to reduce our operating expenses in an effort to achieve a higher level of profitability,

 

 22 

 

 

(2)Engagement of a consultant to advise in our efforts to reduce operating expenses, negotiate financing terms, identify financing sources and improve operating performance,

 

(3)Contacts and negotiations with our current lenders and with additional sources of loans and capital to extend our present loan facilities or to provide alternative sources for one or both of our current lenders, and

 

(4)We have received non-binding proposals from two potential financing sources to provide the needed re-financing we require and have engaged in a diligence process with several potential lenders. However, we have not received a firm commitment for financing.

 

Seasonality

 

In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years. Vacuum sealing product sales are also seasonal; approximately 60% of sales in this product line occur in the period from July through December.

 

Critical Accounting Policies

 

Please see pages 25-28 of our Annual Report on Form 10-K for the year ended December 31, 2016 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three months ended June 30, 2017.

 

Item 3.Quantitative and Qualitative Disclosures Regarding Market Risk

 

Not applicable.

 

Item 4.Controls and Procedures

 

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017, the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017, to ensure that the information required to be disclosed by us in the reports that we file or submit under Security Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including officers, as appropriate, to allow for timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the three months ended June 30, 2017 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

 23 

 

 

Part II. OTHER INFORMATION

 

Item 1.Legal Proceedings

 

The Company is party to certain claims or actions arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolution of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company.

 

Item 1A.Risk Factors

 

Not applicable.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3.Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.Submission of Matters to a Vote of Security Holders

 

Not applicable.

 

Item 5.Other Information

 

The Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.

 

Item 6.Exhibits

 

The following are being filed as exhibits to this report:

 

 24 

 

 

Exhibit
Number		   Description
     
3.1   Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015).
3.2   Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017).
10.1   Amendment No. 10 to Credit Agreement between BMO Harris Bank, N.A., BMO Private Equity (U.S.) Inc. and the Company dated July 28, 2017.
10.2   Consent and Acknowledgment among BMO Harris Bank, N.A. and the Company dated July 28, 2017.
10.3   Amendment No. 5 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 28, 2017.
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101  

Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

 

 25 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: August 14, 2017   CTI INDUSTRIES CORPORATION
     
  By: /s/ John H. Schwan
    John H. Schwan
    Chief Executive Officer
     
  By: /s/ Stephen M. Merrick
    Stephen M. Merrick
   

President

     
  By: /s/ Timothy S. Patterson
    Timothy S. Patterson
    Chief Financial Officer
   

Senior Vice President Finance

 

 26 

 

 

Exhibit Index

 

Exhibit Number   Description
3.1   Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015.)
3.2   Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017)
10.1   Amendment No. 10 to Credit Agreement between BMO Harris Bank, N.A., BMO Private Equity (U.S.) Inc. and the Company dated July 28, 2017.
10.2   Consent and Acknowledgment among BMO Harris Bank, N.A. and the Company dated July 28, 2017.
10.3   Amendment No. 5 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 28, 2017.
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101   Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

 

 27