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EX-31.1 - EXHIBIT 31.1 - CTI INDUSTRIES CORPv409691_ex31-1.htm
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EX-32 - EXHIBIT 32 - CTI INDUSTRIES CORPv409691_ex32.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended March 31, 2015
 
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 o

 

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 o

 

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 o     Accelerated filer o    Non-accelerated filer o Smaller Reporting Company þ

 

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 May 1, 2015 was 3,301,116.

 

 
 

 

INDEX

 

Part I – Financial Information  
     
Item No. 1. Financial Statements  
  Condensed Consolidated Balance Sheet at March 31, 2015 (unaudited) and December 31, 2014 1
  Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2015 and March 31, 2014 2
  Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and March 31, 2014 3
  Condensed Consolidated Earnings per Share (unaudited) for the three months ended March 31, 2015 and March 31, 2014 4
  Notes to Condensed Consolidated Financial Statements (unaudited) 5
Item No. 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item No. 3 Quantitative and Qualitative Disclosures Regarding Market Risk 22
Item No. 4 Controls and Procedures 22
     
PART II – OTHER INFORMATION  
     
Item No. 1 Legal Proceedings 22
Item No. 1A Risk Factors 22
Item No. 2 Unregistered Sales of Equity Securities and Use of Proceeds 22
Item No. 3 Defaults Upon Senior Securities 22
Item No. 4 Submission of Matters to a Vote of Security Holders 22
Item No. 5 Other Information 23
Item No. 6 Exhibits 23
  Signatures 24
  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

 

   March 31, 2015   December 31, 2014 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents (VIE $36,000 and $14,000, respectively)  $210,915   $150,332 
Accounts receivable, (less allowance for doubtful accounts of $236,000 and $230,000, respectively) (VIE $16,000 and $9,000, respectively)   10,856,049    11,286,797 
Inventories, net (VIE $738,000 and $699,000, respectively)   17,988,105    17,755,300 
Net deferred income tax asset   736,393    718,694 
Prepaid expenses (VIE $22,000 and $22,000, respectively)   1,339,617    1,983,915 
Other current assets (VIE $44,000 and $46,000, respectively)   644,597    578,888 
           
Total current assets   31,775,676    32,473,926 
           
Property, plant and equipment:          
Machinery and equipment (VIE $620,000 and $640,000, respectively)   26,710,617    26,739,353 
Building   3,360,017    3,360,017 
Office furniture and equipment (VIE $46,000 and $46,000, respectively)   3,469,850    3,473,009 
Intellectual property   482,088    482,088 
Land   250,000    250,000 
Leasehold improvements   633,978    640,166 
Fixtures and equipment at customer locations   3,160,191    3,013,747 
Projects under construction   697,839    859,631 
    38,764,580    38,818,011 
Less : accumulated depreciation and amortization (VIE $136,000 and $129,000, respectively)   (31,450,333)   (31,062,484)
           
Total property, plant and equipment, net   7,314,247    7,755,527 
           
Other assets:          
Deferred financing costs, net   143,793    157,061 
Goodwill (VIE $440,000 and $440,000, respectively)   1,473,176    1,473,176 
Net deferred income tax asset   974,101    1,013,392 
Other assets (due from related party $44,000 and $47,000, respectively)   167,572    173,828 
           
Total other assets   2,758,642    2,817,457 
           
TOTAL ASSETS  $41,848,565   $43,046,910 
           
LIABILITIES AND EQUITY          
Current liabilities:          
Checks written in excess of bank balance (VIE $6,000and $0, respectively)  $1,092,915   $1,432,212 
Trade payables (VIE $136,000 and $74,000, respectively)   4,766,197    4,468,859 
Line of credit (VIE $492,000 and $494,000, respectively)   11,202,327    12,158,300 
Notes payable - current portion (net discount of $152,000 and $146,000, repectively)  (VIE $116,000 and $114,000, respectively)   324,912    328,942 
Notes payable affiliates - current portion   9,019    9,034 
Capital Lease - current portion   39,231    38,595 
Accrued liabilities (VIE $74,000 and $60,000, respectively)   2,375,095    2,493,435 
           
Total current liabilities   19,809,696    20,929,377 
           
Long-term liabilities:          
Notes payable - affiliates   279,441    284,547 
Notes payable, net of current portion (net discount of $243,000 and $284,000, repectively) (VIE $292,000 and $322,000, respectively)   7,097,694    7,177,406 
Notes payable - officers, subordinated   1,257,573    1,236,476 
Capital Lease   76,505    86,555 
           
Total long-term debt, net of current portion   8,711,213    8,784,984 
           
Warrants Payable   565,794    525,180 
           
Total long-term liabilities   9,277,007    9,310,164 
           
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, 3,376,743 shares issued and 3,301,116 shares outstanding   13,775,994    13,775,994 
Paid-in-capital   1,552,571    1,542,718 
Accumulated earnings   727,034    623,455 
Accumulated other comprehensive loss   (3,285,354)   (2,901,212)
Less:  Treasury stock, 75,627 shares   (160,784)   (160,784)
           
Total CTI Industries Corporation stockholders' equity   12,609,461    12,880,171 
           
Noncontrolling interest   152,401    (72,802)
           
Total Equity   12,761,862    12,807,369 
           
TOTAL LIABILITIES AND EQUITY  $41,848,565   $43,046,910 

 

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 March 31, 
   2015   2014 
         
Net Sales  $14,975,329   $14,920,330 
           
Cost of Sales   10,986,933    11,422,921 
           
Gross profit   3,988,396    3,497,409 
           
Operating expenses:          
General and administrative   1,687,528    1,907,709 
Selling   735,408    761,876 
Advertising and marketing   646,251    501,874 
           
Total operating expenses   3,069,187    3,171,459 
           
Income from operations   919,209    325,950 
           
Other (expense) income:          
Interest expense   (408,889)   (307,023)
Interest income   5,535    5,536 
Foreign currency loss   (4,012)   (5,179)
           
Total other expense, net   (407,366)   (306,666)
           
Net income before taxes   511,843    19,284 
           
Income tax expense (benefit)   173,062    (2,177)
           
Net income   338,781    21,461 
           
Less: Net income (loss) attributable to noncontrolling interest   54,166    (23,962)
           
Net income attributable to CTI Industries Corporation  $284,615   $45,423 
           
Other Comprehensive Loss          
Foreign currency adjustment   (384,142)   (188,092)
Comprehensive loss  $(99,527)  $(142,669)
           
Basic income per common share  $0.09   $0.01 
           
Diluted income per common share  $0.08   $0.01 
           
Weighted average number of shares and equivalent shares of common stock outstanding:          
Basic   3,301,116    3,249,268 
           
Diluted   3,448,689    3,413,800 

 

See accompanying notes to condensed consolidated unaudited financial statements

 

2
 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   For the Three Months Ended March 31, 
   2015   2014 
         
Cash flows from operating activities:          
Net income  $338,781   $21,461 
Adjustment to reconcile net income to cash provided by operating activities:          
Depreciation and amortization   471,371    542,573 
Amortization of debt discount   34,515    29,570 
Change in value of swap agreement   -    (19,132)
Stock based compensation   9,853    22,695 
Provision for losses on accounts receivable   7,158    35,480 
Provision for losses on inventories   86,413    24,160 
Deferred income taxes   20,307    (134,870)
Change in assets and liabilities:          
Accounts receivable   279,235    (375,098)
Inventories   (516,476)   (432,763)
Prepaid expenses and other assets   553,590    411,858 
Trade payables   382,607    2,077,911 
Accrued liabilities   (81,161)   (180,272)
           
Net cash provided by operating activities   1,586,193    2,023,573 
           
Cash used in investing activities - purchases of property, plant and equipment   (88,628)   (304,096)
           
Cash flows from financing activities:          
Change in checks written in excess of bank balance   (338,802)   (271,986)
Net change in revolving line of credit   (955,973)   (1,887,980)
Proceeds from issuance of long-term debt   4,238    34,664 
Repayment of long-term debt (related parties $2,000 and $12,000)   (131,326)   (123,427)
Dividends paid   (10,000)   (14,299)
Proceeds from issuance of stock, net   -    300,000 
           
Net cash used in financing activities   (1,431,863)   (1,963,028)
           
Effect of exchange rate changes on cash   (5,119)   4,536 
           
Net decrease in cash and cash equivalents   60,583    (239,015)
           
Cash and cash equivalents at beginning of period   150,332    666,616 
           
Cash and cash equivalents at end of period  $210,915   $427,601 
           
Supplemental disclosure of cash flow information:          
Cash payments for interest  $315,628   $314,724 
           
Cash payments for taxes  $-   $55,466 
           
Supplemental Disclosure of non-cash investing and financing activity Property, Plant & Equipment acquisitions funded by liabilities  $44,617   $135,498 

 

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 March 31, 
   2015   2014 
Basic          
Average shares outstanding:          
Weighted average number of common shares  outstanding   3,301,116    3,249,268 
           
Net income:          
Net income attributable to CTI Industries Corporation  $284,615   $45,423 
           
Per share amount  $0.09   $0.01 
           
Diluted          
Average shares outstanding:          
Weighted average number of common shares  outstanding   3,301,116    3,249,268 
           
Effect of dilutive shares   147,573    164,532 
           
Weighted average number of shares and equivalent shares of common stock outstanding   3,448,689    3,413,800 
           
Net income:          
Net income attributable to CTI Industries Corporation  $284,615   $45,423 
           
Per share amount  $0.08   $0.01 

 

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, 2014, 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 March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. 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, 2014.

 

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, CTI Helium, Inc. and CTF International S.A. de C.V., its majority-owned subsidiaries CTI Mexico S.A. de C.V., Flexo Universal, S.A. 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. Clever Container Company, L.L.C. has been consolidated since the beginning of the fourth quarter of 2013. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon products throughout the world and (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.

 

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 March 31, 2015 and 2014, shares to be issued upon the exercise of options and warrants aggregated 354,048 and 368,548, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three months ended March 31, 2015 and 2014, were 185,000 and 90,000, respectively, all of which were represented by options.

 

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, 2014. There were no significant changes to these accounting policies during the three months ended March 31, 2015.

 

Recent Accounting Pronouncements:

 

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going Concern (Topic 205-40)” (“ASU 2014-15”). Under the standard, management is required to evaluate for each annual and interim reporting period whether it is a probable that the entity will not be able to meet its obligations as they become due within one year after the date that financial statements are issued, or are available to be issued, where applicable. ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. Accordingly, the standard is effective for the Company on January 1, 2017. The Company does not believe that the pronouncement will have an impact on the Company's financial statements.

 

6
 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2018 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.

 

Note 2 - 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 2015 and 2014. The expected volatility is based on historical volatility of the Company’s common stock.

 

The Company’s net income for the three months ended March 31, 2015 and 2014 includes approximately $10,000 and $23,000, respectively of compensation costs related to share based payments. As of March 31, 2015 there is $34,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $20,000 of additional stock-based compensation expense to be recognized over the remainder of 2015, $11,000 to be recognized during 2016, and $3,000 to be recognized during 2017.

 

As of March 31, 2015, 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 12, 2001, the Board of Directors approved for adoption, effective December 27, 2001, the 2001 Stock Option Plan (“2001 Plan”). The 2001 Plan authorizes the grant of options to purchase up to an aggregate of 119,050, shares of the Company’s Common Stock. As of March 31, 2015, options for 139,958 shares (including cancelled shares re-issued under the Plan) have been granted and were fully vested at the time of grant and options for 2,000 shares remain outstanding.

 

7
 

 

On April 24, 2002, the Board of Directors approved for adoption, effective October 12, 2002, the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan authorizes the grant of options to purchase up to an aggregate of 142,860 shares of the Company’s Common Stock. As of March 31, 2015, options for 123,430 shares have been granted and were fully vested at the time of grant and options for 27,500 shares remain outstanding.

 

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. As of March 31, 2015, options for 201,000 shares had been granted and options for 184,500 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, 2014   214,500   $5.20    2.1   $25,960 
Granted   -    -           
Cancelled   (500)  $5.97           
Exercised   -    -           
Outstanding at March 31, 2015   214,000   $5.20    1.8   $34,515 
                     
Exercisable at March 31, 2015   133,600   $5.08    1.4   $34,515 

 

On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Private Equity (U.S.), Inc. (“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.

 

On April 12, 2013, the Company entered into Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendment, non-compliance with financial covenants prior to the date of the Amendment were waived and the Note and Warrant Purchase Agreement was amended (i) to modify the Senior Leverage Ratio and Total Leverage Ratio requirements for the fiscal quarter ending June 30, 2013 and each quarter thereafter during the term of the Note and Warrant Purchase Agreement and (ii) to modify the definitions of EBITDA and Total Funded Debt.

 

8
 

 

On December 23, 2014, the Company entered into Amendment No. 5 to the Credit Agreement among the Company and BMO Harris Bank N.A. (“BMO Harris”), and Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, BMO Harris and BMO Equity waived certain anticipated events of default as of December 31, 2014 by the Company with respect the amount of capital expenditures and the change of name of the subsidiary CTI Helium Inc., and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to exclude from the definition of Senior Funded Debt and Total Funded Debt certain indebtedness of a variable interest entity, (ii) to require the Company to provide financial reports and variance reports to the Bank within 45 days after the end of each calendar month, (iii) to change the Senior Leverage Ratio and Total Leverage Ratio requirements for fiscal quarters ending December 31, 2014 and for each fiscal quarter thereafter to the maturity of the loans, and (iv) to provide for the engagement by the Company of a financial consultant to provide business financial planning and advisory services to the Company.

 

As of March 31, 2015, the Company was in compliance with the financial covenants provided in the Credit Agreement and in the Note and Warrant Purchase Agreement, as amended.

 

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, 2014   140,048   $0.01    7.5   $525,180 
Granted                    
Cancelled   -    -           
Exercised   -    -           
Outstanding at March 31, 2015   140,048   $0.01    7.25   $565,794 
                     
Exercisable at March 31, 2015   -    -    -    - 

 

A summary of the Company’s stock option activity by grant date as of March 31, 2015 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   29,500   $2.88    0.8   $34,515    29,500   $2.88    0.8   $34,515 
Dec 2010   64,500    6.16    0.8    -    54,500    6.08    0.8    - 
Jan 2011   6,000    5.96    0.8    -    6,000    5.96    0.8    - 
Nov 2012   104,000    5.17    2.7    -    41,600    5.17    2.7    - 
Nov 2013   10,000    5.75    3.6    -    2,000    5.75    3.6    - 
TOTAL   214,000   $5.20    1.8   $34,515    133,600   $5.08    1.4   $34,515 

 

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 March 31, 2015 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 March 31, 2015.

 

As of March 31, 2015, there was $834,000 available to advance under the Company’s revolving line of credit.

 

9
 

 

Note 3 - 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.

 

Note 4 - Other Comprehensive Loss

 

In the three months ended March 31, 2015 the company had a comprehensive loss of $384,000, all from foreign currency translation adjustments.

 

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

 

   Foreign Currency Items   Total
Accumulated Other
Comprehensive Loss
 
         
Beginning balance as of January 1, 2015  $(2,901,212)  $(2,901,212)
           
Current period change, net of tax   (384,142)   (384,142)
           
Ending Balance as of March 31, 2015  $(3,285,354)  $(3,285,354)

 

Note 5 - Inventories, Net

 

   March 31,
2015
   December 31,
2014
 
Raw materials  $3,218,504   $3,294,030 
Work in process   1,805,568    1,657,164 
Finished goods   13,694,490    13,448,796 
Allowance for excess quantities   (730,457)   (644,690)
Total inventories  $17,988,105   $17,755,300 
           

 

10
 

 

Note 6 - Geographic Segment Data

 

The Company has determined that it operates primarily in one business segment which 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 areas is as follows:

 

   Net Sales to Outside Customers         
   For the Three Months Ended   Total Assets at 
   March 31,   March 31,   December 31, 
   2015   2014   2015   2014 
                 
United States  $11,717,000   $10,770,000   $31,831,000   $33,026,000 
Europe   436,000    394,000    1,425,000    1,457,000 
Mexico   2,173,000    2,830,000    7,477,000    7,516,000 
United Kingdom   649,000    926,000    1,249,000    1,048,000 
                     
                     
   $14,975,000   $14,920,000   $41,982,000   $43,047,000 

 

Note 7 - 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 months ended March 31, 2015 and 2014, 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 March 31, 2015 and 2014 are as follows:

 

   Three Months Ended   Three Months Ended 
   March 31, 2015   March 31, 2014 
Customer  Net Sales   % of Net
Sales
   Net Sales   % of Net
Sales
 
Customer A  $4,364,000    29.1%  $4,227,000    28.3%
Customer B  $1,851,000    12.4%  $1,784,000    12.0%
                     

 

As of March 31, 2015, the total amounts owed to the Company by these customers were approximately $3,036,000 or 28.0%, and $1,769,000 or 16.3%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at March 31, 2014 by these customers were approximately $3,318,000 or 35.9%, and $1,655,000 or 17.9% of the Company’s consolidated net accounts receivable, respectively.

 

11
 

 

Note 8 - 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 March 31, 2015 and 2014, respectively, were $38,000 and $25,000.

 

Interest payments have been made or accrued to John H. Schwan for loans made to the Company. During the three months ended March 31, 2015 and 2014 these interest payments totaled $21,000 and $20,000, respectively.

 

On July 1, 2011, Flexo Universal, S.A. de C.V. (“Flexo”) entered into a lease agreement with Venture Leasing S.A. de R.L. (“Venture Leasing Mexico”) for the lease of balloon production equipment financed and owned by Venture Leasing Mexico and used by Flexo for the production of latex balloons. Venture Leasing Mexico is wholly owned by entities owned by John H. Schwan, Chief Executive Officer of the Company and Stephen M. Merrick, President of the Company. Venture Leasing Mexico and Venture Leasing L.L.C., also owned by entities owned by Mr. Schwan and Mr. Merrick, are deemed variable interest entities and are consolidated with the accounts of the Company. During the three months ended March 31, 2015, Flexo made lease payments to Venture Leasing Mexico totaling $36,000. During the three months ended March 31, 2014, Flexo made lease payments to Venture Leasing Mexico totaling $36,000.

 

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. During the three months ended March 31, 2015 and 2014, Clever Container purchased various products from the Company in the amount of $7,000 and $100,000, respectively. As of March 31, 2015 and 2014, the balance of accounts receivable from Clever Container to the Company were $333,000 and $0, respectively.

 

12
 

 

Note 9 - 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 March 31, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

   Amount as of             
Description  3/31/2015   Level 1   Level 2   Level 3 
                 
Warrant Liability   566,000    -    566,000      
                     
   $566,000   $-   $566,000   $- 

 

   Amount as of             
Description  12/31/2014   Level 1   Level 2   Level 3 
                 
Warrant Liability   525,000    -    525,000    - 
                     
   $525,000        $525,000      

 

The Company is exposed to certain market risks including the effect of changes in interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business. It does not hold or issue derivatives for speculative trading purposes. The Company is exposed to non-performance risk from the counterparties in its derivative instruments. This risk would be limited to any unrealized gains on current positions. To help mitigate this risk, the Company transacts only with counterparties that are rated as investment grade or higher and all counterparties are monitored on a continuous basis. The fair value of the Company’s derivatives reflects this credit risk.

 

On July 1, 2011, the Company entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with BMO Harris Bank N.A. This swap agreement limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap agreement has the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap agreement is a derivative financial instrument and we determine and record the fair market value of the swap agreement each quarter. The value is recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period is recorded as interest income or expense. The swap agreement has expired as of September 30, 2014.

 

13
 

 

The Effect of Derivative Instruments on the Statement of Financial Performance

 

   For the three months ended
   March 31, 2015  March 31, 2014
Derivatives not Designated as Hedging
Instruments under Statement 133
  Location of
Gain (Loss)
Recognized
in Income on
Derivative
  Amount of
Gain (Loss)
Recognized
in Income on
Derivative
   Location of
Gain (Loss)
Recognized in
Income on
Derivative
  Amount of
Gain (Loss)
Recognized in
Income on
Derivative
 
 Interest Rate Contracts  Interest Expense  $-   Interest Expense  $1,000 
Interest on fixed/variable rate variances     $-      $21,000 

 

14
 

 

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.

 

Results of Operations

 

Net Sales. For the three months ended March 31, 2015, net sales were $14,975,000 compared to net sales of $14,920,000 for the same period of 2014, an increase of 0.4%. For the quarters ended March 31, 2015 and 2014, net sales by product category were as follows:

 

   Three Months Ended 
   March 31, 2015   March 31, 2014 
   $   % of   $   % of 
Product Category  (000) Omitted   Net Sales   (000) Omitted   Net Sales 
                 
Foil Balloons   7,094    47%   7,273    49%
                     
Latex Balloons   2,320    16%   2,876    19%
                     
Vacuum Sealing Products   2,810    19%   2,781    19%
                     
Film Products   783    5%   851    6%
                     
Other Sales   1,968    13%   1,139    7%
                     
Total   14,975    100%   14,920    100%

 

15
 

 

Foil Balloons. During the three months ended March 31, 2015 revenues from the sale of foil balloons decreased by 2.5% compared to the prior year period from $7,273,000 to $7,094,000. During the three months ended March 31, 2015, foil balloon sales to our largest customer increased to $4,276,000 from $4,125,000 in the three months ended 2014. Sales of foil balloons to other customers decreased to $2,818,000 from $3,148,000 for the same period last year. These included sales to various customers in the United States, Mexico, the United Kingdom and Europe. The decrease in sales to other customers is attributable to various customers in the United Kingdom and the United States.

 

Latex Balloons. During the three months ended March 31, 2015 revenues from the sale of latex balloons decreased by 19.3% compared to the prior year period from $2,876,000 to $2,320,000. The difference reflects (i) a single large sale in the first quarter of 2014 in excess of $465,000 and (ii) the lower Dollar value of Peso denominated sales by our Mexico subsidiary, Flexo Universal, for 2015 compared to 2014 due to the decline in the value of the Peso.

 

Vacuum Sealing Products. During the three months ended March 31, 2015 revenues from the sale of pouches and vacuum sealing machines increased by 1.0% compared to the prior year from $2,781,000 to $2,810,000. Our sales in this product line in 2015 and 2014 have been in two product categories: (i) zippered pouches and (ii) vacuum sealing systems incorporating vacuum sealing machines and associated pouches and rolls of film. For the three months ended 2015 and 2014, sales of pouch products (and vacuum sealing machines) in these categories have been as follows:

 

  

Three Months Ended

March 31,

 
   2015   2014 
         
Zippered Pouches  $680,000   $806,000 
           
Vacuum Sealing Systems   2,130,000    1,975,000 
           
Total  $2,810,000   $2,781,000 

 

Zippered Pouches. Most of our sales of zippered pouches have been of branded products to a principal customer, although we have had limited sales of our ZipVac® pouch line as well. Sales of the zippered pouch products declined during the three months ended March 31, 2015 from $806,000 in the first three months of 2014 to $680,000 during the same period in 2015.

 

Vacuum Sealing Systems. Since 2012, we have offered a line of vacuum sealing systems which include vacuum sealing machines and associated pouches and rolls of film.

 

In December 2011, we entered into a Trademark License Agreement with S. C. Johnson & Son, Inc. pursuant to which we received a license to market and sell vacuum sealing machines as well as pouches and rolls of film for use with those machines, under the Ziploc brand name. In the first quarter 2012, we introduced and began to market and sell that branded line of vacuum sealing machines and associated open-top bags and rolls. Since that time, we have offered our branded vacuum sealing system lines of product principally to chain stores in the United States, including several major chains.

 

16
 

 

Our sales of our branded vacuum sealing systems increased from $1,975,000 during the three months ended March 31, 2014 to $2,130,000 during the same period this year, principally as the result of sales to several retail chain stores.

 

Films. During the three months ended March 31, 2015 revenues from the sale of laminated film products decreased by 8% compared to the prior year period from $851,000 to $783,000. The decrease is attributable to a decrease in sales to a principal customer. All of the sales of laminated film products during the three months ended March 31, 2015 were to one principal customer.

 

Other Revenues. During the three months ended March 31, 2015, we had revenues from the sale of various other products totaling $1,968,000 compared to revenues from other products in the same period during 2014 of $1,139,000. The revenues from the sale of other products during 2015 include (i) sales of home container products by a variable interest entity which we now consolidate with our financial results in the amount of $718,000, (ii) $1,028,000 in sales of a line of “Candy Blossoms” and “Candy Loons” consisting of candy and small inflated balloons sold in small containers, and (iii) the sale of accessories and supply items related to balloon products.

 

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 months ended March 31, 2015 and 2014.

 

   Three Months Ended March 31, 
   % of Sales 
   2015   2014 
         
Top 3 Customers   46.7%   45.9%
           
Top 10 Customers   65.5%   64.3%

 

During the three months ended March 31, 2015, 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 March 31, 2015 were $4,364,000 or 29.1%, and $1,851,000 or 12.4%, of consolidated net sales, respectively. Sales to these customers for the three months ended March 31, 2014, were $4,227,000 or 28.3%, and $1,784,000 or 12.0% of consolidated net sales, respectively. The amount owed at March 31, 2015 by these customers were $3,036,000 or 28.0%, and $1,769,000 or 16.3%, of the Company’s consolidated net accounts receivable, respectively. As of March 31, 2014, the total amounts owed to the Company by these customers were $3,318,000 or 35.9%, and $1,655,000 or 17.9%, of the Company’s consolidated net accounts receivable, respectively.

 

Cost of Sales. During the three months ended March 31, 2015, the cost of sales represented 73.4% of net sales compared to 76.6% for the three months ended March 31, 2014. The improvement in gross margins is attributable principally to an increase in the gross margins at our Mexico subsidiary and higher margins achieved on the sales of home container products and Candyloons. The improvement in gross margins at our Mexico subsidiary is attributable principally to (i) a decline in the price of natural latex, (ii) an increase in sales of higher margin products, and (iii) improvement in manufacturing efficiencies.

 

17
 

 

General and Administrative. During the three months ended March 31, 2015, general and administrative expenses were $1,688,000 or 11.3% of net sales, compared to $1,908,000 or 12.8% of net sales for the same period in 2014. The decrease in general and administrative expenses is attributable principally to (i) a decrease in administrative expenses of $148,000 of a variable interest entity consolidated with our financial statements and (ii) a decrease in administrative expenses of $72,000 at our subsidiary in Mexico, Flexo Universal.

 

Selling. During the three months ended March 31, 2015, selling expenses were $735,000 or 4.9% of net sales, compared to $762,000 or 5.1% of net sales for the same period in 2014.

 

Advertising and Marketing. During the three months ended March 31, 2015, advertising and marketing expenses were $646,000 or 4.3% of net sales for the period, compared to $502,000 or 3.4% of net sales for the same period of 2014. The increase in advertising and marketing expense is attributable to deductions for credit charges of $99,000 related to consumer returns of vacuum sealing system products.

 

Other Income (Expense). During the three months ended March 31, 2015, the Company incurred net interest expense of $403,000, compared to net interest expense during the same period of 2014 in the amount of $301,000. This interest expense includes (i) interest paid on the BMO Equity Note, (ii) a charge for the amount of the debt discount attributable to the warrants used in the transaction and (iii) a variable charge relating to the change in value of the warrants by reason of change in market price of our common stock.

 

For the three months ended March 31, 2015, the Company had a foreign currency transaction loss of $4,000 compared to a foreign currency transaction loss of $5,000 during the same period of 2014.

 

Income Taxes. For the three months ended March 31, 2015, the Company reported a consolidated income tax expense of $173,000, compared to a consolidated income tax benefit of $2,000 for the same period of 2014. For the three months ended March 31, 2015, this income tax expense was composed of an income tax expense 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 March 31, 2015, the Company had net income of $285,000 or $0.09 per share basic and $0.08 per share diluted, compared to net income of $45,000 for the same period of 2014 or $0.01 per share (basic and diluted). For the three months ended March 31, 2015, the Company had income from operations of $919,000 compared to income from operations during the same period in 2014 of $326,000.

 

18
 

 

Financial Condition, Liquidity and Capital Resources

 

Cash Flow Items.

 

Operating Activities. During the three months ended March 31, 2015, net cash provided by operations was $1,586,000, compared to net cash provided by operations during the three months ended March 31, 2014 of $2,024,000.

 

Significant changes in working capital items during the three months ended March 31, 2015 consisted of (i) a decrease in accounts receivable of $279,000, (ii) an increase in inventories of $516,000, (iii) depreciation and amortization in the amount of $471,000, (iv) an increase in trade payables of $383,000, and (v) a decrease in prepaid expenses and other assets of $554,000.

 

Investing Activity. During the three months ended March 31, 2015, cash used in investing activity was $89,000, compared to $304,000 in the same period of 2014. Substantially all of this expense is related to equipment acquisitions and capitalized maintenance, leasehold improvements, tooling and related expense.

 

Financing Activities. During the three months ended March 31, 2015, cash used in financing activities was $1,432,000 compared to cash used in financing activities for the same period of 2014 in the amount of $1,963,000. During the three months ended March 31, 2015, financing activities included payment of $131,000 on long-term debt obligations and an increase in the amount outstanding under our revolving line of credit of $956,000.

 

Liquidity and Capital Resources. At March 31, 2015, the Company had cash balances of $211,000 compared to cash balances of $428,000 for the same period in 2014 and there was $834,000 available to advance under the Company’s revolving line of credit.

 

At March 31, 2015, the Company had a working capital balance of $11,966,000 compared to a working capital balance of $11,545,000 at December 31, 2014.

 

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.

 

19
 

 

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

 

In connection with the Credit Agreement, the Company executed and delivered to BMO Harris, a Term Loan Note, a Mortgage Loan Note, an Equipment Note and a Revolving Note, as well as a form of Mortgage, Security Agreement, Pledge Agreement (pursuant to which shares of capital stock of the Registrant’s Mexico subsidiary were pledged as security for the loans), Patent Security Agreement and Trademark Security Agreement. Two officers and principal shareholders of the Company, John H. Schwan and Stephen M. Merrick each executed Limited Guaranties of the loans and also executed Subordination Agreements with respect to obligations of the Company to them.

 

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 March 31, 2015, the effective rate on the outstanding loan balances was 4.0%.

 

As of March 31, 2015, the outstanding balances on the loans with BMO Harris were: (i) revolving line of credit, $10,710,000, (ii) mortgage loan, $1,874,000, and (iii) equipment loan, $536,000.

 

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.

 

Also, 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. 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.

 

The Note and Warrant Purchase Agreement included provisions for:

 

(i)          a closing fee of $100,000

 

(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;

 

20
 

 

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

 

On April 12, 2013, the Company entered into Amendment No. 4 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, non-compliance with financial covenants prior to the date of the Amendments was waived and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to modify the Senior Leverage Ratio and Total Leverage Ratio requirements for the fiscal quarter ending June 30, 2013 and each quarter thereafter during the term of the Credit Agreement and the Note and Warrant Purchase Agreement and (ii) to modify the definitions of EBITDA and Total Funded Debt in the Credit Agreement and the Note and Warrant Purchase Agreement.

 

On December 23, 2014, the Company entered into Amendment No. 5 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, BMO Harris and BMO Equity waived certain anticipated events of default as of December 31, 2014 by the Company with respect the amount of capital expenditures and the change of name of a subsidiary, and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to exclude from the definition of Senior Funded Debt and Total Funded Debt certain indebtedness of a variable interest entity, (ii) to require the Company to provide financial reports and variance reports to the Bank within 45 days after the end of each calendar month, (iii) to change the Senior Leverage Ratio and Total Leverage Ratio requirements for fiscal quarters ending December 31, 2014 and for each fiscal quarter thereafter to the maturity of the loans, and (iv) to provide for the engagement by the Company of a financial consultant to provide business financial planning and advisory services to the Company.

 

Management believes that the funds available under the Credit Agreement, as amended, as well as internally generated funds will be sufficient for the Company to meet its working capital needs for at least the next 12 months.

 

As of March 31, 2015, the Company was in compliance with all the financial covenants under the Credit Agreement and the Note and Warrant Purchase Agreement.

 

Seasonality

 

In recent years, sales in the foil balloon product line have historically been seasonal with approximately 40% occurring in the period from December through March and 24% being generated in the period from July through October. The sales of latex balloons and laminated film products have not historically been seasonal.

 

Critical Accounting Policies

 

Please see pages 26-29 of our Annual Report on Form 10-K for the year ended December 31, 2014 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 March 31, 2015.

 

21
 

 

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of March 31, 2015, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the three months ended March 31, 2015 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 

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.

 

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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:

 

Exhibit Number   Description
     
3.1   Third Restated Certificate of Incorporation of CTI Industries Corporation (incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with Commission on October 25, 1999).
3.2   By-laws of CTI Industries Corporation (incorporated by reference to Exhibit 3.1 contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997).
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 March 31, 2015, 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.

 

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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: May 14, 2015 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

 

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Exhibit Index

 

Exhibit Number   Description
3.1   Third Restated Certificate of Incorporation of CTI Industries Corporation (incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with Commission on October 25, 1999).
3.2   By-laws of CTI Industries Corporation (incorporated by reference to Exhibit 3.1  contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997).
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 March 31, 2015, 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.

 

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