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EXCEL - IDEA: XBRL DOCUMENT - CTI INDUSTRIES CORPFinancial_Report.xls
EX-32 - EXHIBIT 32 - CTI INDUSTRIES CORPv325926_ex32.htm
EX-10.6 - EXHIBIT 10.6 - CTI INDUSTRIES CORPv325926_ex10-6.htm
EX-10.7 - EXHIBIT 10.7 - CTI INDUSTRIES CORPv325926_ex10-7.htm
EX-31.1 - EXHIBIT 31.1 - CTI INDUSTRIES CORPv325926_ex31-1.htm
EX-10.8 - EXHIBIT 10.8 - CTI INDUSTRIES CORPv325926_ex10-8.htm
EX-31.2 - EXHIBIT 31.2 - CTI INDUSTRIES CORPv325926_ex31-2.htm

 

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 September 30, 2012

 

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

 

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 November 1, 2012 was 3,231,646.

 

 
 

 

INDEX

 

Part I – Financial Information  
     
Item No. 1 Financial Statements  
  Condensed Consolidated Interim Balance Sheet at September 30, 2012  (unaudited) and December 31, 2011 1
  Condensed Consolidated Interim Statements of Operations and  Comprehensive Income (unaudited) for the three and nine months ended  September 30, 2012 and September 30, 2011 2
  Condensed Consolidated Interim Statements of Cash Flows (unaudited) for  the three and nine months ended September 30, 2012 and September 30, 2011 3
  Condensed Consolidated Interim Earnings per Share (unaudited)  for the three and nine months ended September 30, 2012  and September 30, 2011 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 23
Item No. 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item No. 3 Defaults Upon Senior Securities 23
Item No. 4 Submission of Matters to a Vote of Security Holders 23
Item No. 5 Other Information 23
Item No. 6 Exhibits 24
  Signatures  
  Exhibit 10.6  
  Exhibit 10.7  
  Exhibit 10.8  
  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

 

   September 30, 2012   December 31, 2011 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents (VIE $19,000 and $11,000, respectively)  $363,511   $338,523 
Accounts receivable, (less allowance for doubtful accounts of $80,000 and $70,000, respectively)   7,330,051    7,091,194 
Inventories, net   15,045,063    13,338,317 
Net deferred income tax asset   812,255    760,241 
Prepaid expenses (VIE $0 and $10,000)   1,321,385    1,345,223 
Other current assets (VIE $91,000 and $83,000)   658,410    427,471 
           
Total current assets   25,530,675    23,300,969 
           
Property, plant and equipment:          
Machinery and equipment   25,089,327    24,333,989 
Building   3,329,174    3,329,174 
Office furniture and equipment   3,080,508    3,022,719 
Intellectual property   432,070    432,070 
Land   250,000    250,000 
Leasehold improvements   434,257    415,663 
Fixtures and equipment at customer locations   2,784,419    2,629,902 
Projects under construction   550,086    502,021 
    35,949,841    34,915,538 
Less : accumulated depreciation and amortization   (27,448,195)   (26,071,629)
           
Total property, plant and equipment, net   8,501,646    8,843,909 
           
Other assets:          
Deferred financing costs, net   204,670    42,986 
Goodwill   1,033,077    1,033,077 
Net deferred income tax asset   127,954    197,243 
Other assets, due from related party $82,000 and $79,000, respectively   242,018    197,338 
           
Total other assets   1,607,719    1,470,644 
           
TOTAL ASSETS  $35,640,040   $33,615,522 
           
LIABILITIES AND EQUITY          
Current liabilities:          
Checks written in excess of bank balance  $821,404   $154,501 
Trade payables   4,556,722    6,359,757 
Line of credit   5,410,470    7,298,363 
Notes payable - current portion (VIE $94,000 and $91,000, respectively)   351,859    362,927 
Notes payable - officers, current portion   1,123,742    1,424,923 
Notes Payable Affiliates - current portion   7,968    6,718 
Accrued liabilities   2,299,285    2,081,805 
           
Total current liabilities   14,571,450    17,688,994 
           
Long-term liabilities:          
Notes Payable - Affiliates   138,420    134,919 
Notes payable, net of current portion (VIE $614,000 and $687,000, respectively)   7,981,559    3,932,032 
Capital Lease   -    426 
Warrants Payable   680,633    - 
Notes payable - officers, subordinated   -    103,656 
Total long-term liabilities   8,800,612    4,171,033 
           
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, 3,303,773 and 3,276,633 shares issued and 3,231,646 and 3,137,348 outstanding, respectively   13,704,890    13,704,890 
Paid-in-capital   1,054,826    950,968 
Accumulated deficit   (51,003)   (368,122)
Accumulated other comprehensive loss   (2,197,597)   (2,285,679)
Less:  Treasury stock, 72,127 shares   (141,289)   (141,289)
           
Total CTI Industries Corporation stockholders' equity   12,369,827    11,860,768 
           
Noncontrolling interest   (101,849)   (105,273)
           
Total Equity   12,267,978    11,755,495 
           
TOTAL LIABILITIES AND EQUITY  $35,640,040   $33,615,522 

 

See accompanying notes to condensed consolidated unaudited financial statements

 

1
 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

 

   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2012   2011   2012   2011 
                 
Net Sales  $11,786,226   $11,730,972   $37,409,817   $36,393,391 
                     
Cost of Sales   9,114,918    9,461,457    29,290,188    29,583,262 
                     
Gross profit   2,671,308    2,269,515    8,119,629    6,810,129 
                     
Operating expenses:                    
General and administrative   1,570,380    1,295,317    4,441,458    3,974,997 
Selling   482,544    233,756    1,304,783    654,531 
Advertising and marketing   349,581    416,916    1,249,078    1,108,932 
                     
Total operating expenses   2,402,505    1,945,989    6,995,319    5,738,460 
                     
Income from operations   268,803    323,526    1,124,310    1,071,669 
                     
Other (expense) income:                    
Interest expense   (270,793)   (326,177)   (629,854)   (615,370)
Interest income   5,536    7,576    16,607    13,528 
Foreign currency gain   5,301    8,630    13,206    34,896 
                     
Total other expense, net   (259,956)   (309,971)   (600,041)   (566,946)
                     
Net income before taxes   8,847    13,555    524,269    504,723 
                     
Income tax expense   1,451    12,907    203,726    253,807 
                     
Net income   7,396    648    320,543    250,916 
                     
Less: Net income (loss) attributable to noncontrolling interest   1,359    (17,471)   3,425    (77,666)
                     
Net income attributable to CTI Industries Corporation  $6,037   $18,119   $317,118   $328,582 
                     
Other Comprehensive Income (loss)                    
Foreign currency adjustment   387,275   $(718,290)  $88,082   $(323,582)
Comprehensive income (loss)  $393,312   $(700,171)  $405,200   $5,000 
                     
Basic income per common share  $0.00   $0.01   $0.10   $0.10 
                     
Diluted income per common share  $0.00   $0.01   $0.10   $0.10 
                     
Dividends per share  $-   $0.05   $-   $0.05 
                     
Weighted average number of shares and equivalent shares of common stock outstanding:                    
Basic   3,214,771    3,138,848    3,208,862    3,138,181 
                     
Diluted   3,353,267    3,178,444    3,269,941    3,187,871 

 

See accompanying notes to condensed consolidated unaudited financial statements

 

2
 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   For the Nine Months Ended September 30, 
   2012   2011 
         
Cash flows from operating activities:          
Net income  $320,543   $250,916 
Adjustment to reconcile net income to cash used in operating activities:          
Depreciation and amortization   1,261,064    1,383,459 
Amortization of debt discount   -    5,042 
Change in value of swap agreement   158,090    158,090 
Stock based compensation   65,826    105,009 
Provision for losses on accounts receivable   9,930    9,001 
Provision for losses on inventories   223,877    61,465 
Deferred income taxes   17,276    (100,865)
Change in assets and liabilities:          
Accounts receivable   (51,976)   1,044,070 
Inventories   (1,676,156)   (2,533,593)
Prepaid expenses and other assets   (190,274)   (539,135)
Trade payables   (1,952,903)   368,200 
Accrued liabilities   (336,174)   (455,233)
           
Net cash used in operating activities   (2,150,877)   (243,574)
           
Cash used in investing activities - purchases of property, plant and equipment   (760,084)   (796,222)
           
Cash flows from financing activities:          
Change in checks written in excess of bank balance   664,787    523,414 
Net change in revolving line of credit   (1,900,868)   99,055 
Proceeds from issuance of long-term debt   5,000,000    730,615 
Repayment of long-term debt (related parties $297,000 and $268,000)   (696,274)   (481,233)
Proceeds from exercise of stock options and warrants   34,160    5,550 
Dividends paid   -    (158,381)
Cash paid for deferred financing fees   (184,795)   (7,510)
           
Net cash provided by financing activities   2,917,010    711,510 
           
Effect of exchange rate changes on cash   18,939    4,049 
           
Net increase in cash and cash equivalents   24,988    (324,237)
           
Cash and cash equivalents at beginning of period   338,523    761,874 
           
Cash and cash equivalents at end of period  $363,511   $437,637 
           
Supplemental disclosure of cash flow information:          
Cash payments for interest  $637,181   $397,218 
           
Cash payments for taxes  $5,000   $42,250 
           
Supplemental Disclosure of non-cash investing and financing activity          
Property, Plant & Equipment acquisitions funded by liabilities  $79,647   $43,524 
           
Reclassification of line of credit to long-term debt  $-   $700,000 
           
Exercise warrants and payments of subordinated debt  $(3,872)  $- 

 

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 September 30,   For the Nine Months Ended September 30, 
   2012   2011   2012   2011 
Basic                    
Average shares outstanding:                    
Weighted average number of common shares outstanding   3,214,771    3,138,848    3,208,862    3,138,181 
                     
Net income:                    
Net income attributable to CTI Industries Corporation  $6,037   $18,119   $317,118   $328,582 
                     
Per share amount  $0.00   $0.01   $0.10   $0.10 
                     
Diluted                    
Average shares outstanding:                    
Weighted average number of common shares outstanding   3,214,771    3,138,848    3,208,862    3,138,181 
                     
Effect of dilutive shares   138,496    39,596    61,079    49,690 
                     
Weighted average number of shares and equivalent shares of common stock outstanding   3,353,267    3,178,444    3,269,941    3,187,871 
                     
Net income:                    
Net income attributable to CTI Industries Corporation  $6,037   $18,119   $317,118   $328,582 
                     
Per share amount  $0.00   $0.01   $0.10   $0.10 

 

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 consolidated financial statements are unaudited but 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 results of operations 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 and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. 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, 2011.

 

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. and Venture Leasing L.L.C (the “Company”). The last two 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 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. Upon the adoption of amended accounting guidance applicable to variable interest entities on January 1, 2010, management continually reconsiders whether the Company is deemed to be a variable interest entity’s primary beneficiary who consolidates such entity. There are two 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 September 30, 2012 and 2011, shares to be issued upon the exercise of options and warrants aggregated 267,000 and 205,000, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three and nine months ended September 30, 2012, was 80,500, all of which were represented by options. The number of anti-dilutive shares for the three and nine months ended September 30, 2011, were 124,000 and 81,500, respectively, all of which were represented by options.

 

New Accounting Pronouncements:

 

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2011. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2012. 

6
 

 

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 recently issued warrants related to notes. 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 1.14%. The expected volatility is based on historical volatility of the Company’s common stock.

 

The Company, at the discretion of the board, may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.

 

7
 

 

The Company’s net income for the three months ended September 30, 2012 and 2011 includes approximately $22,000 and $34,000, respectively of compensation costs related to share based payments. The Company’s net income for the nine months ended September 30, 2012 and 2011 includes approximately $66,000 and $104,000, respectively of compensation costs related to share based payments. As of September 30, 2012 there is $131,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $22,000 of additional stock-based compensation expense to be recognized over the remainder of 2012, $59,000 to be recognized during 2013, and $41,000 to be recognized during 2014, and $9,000 to be recognized during 2015.

 

As of September 30, 2012, the Company had four 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 September 30, 2012, 139,958 shares (including cancelled shares re-issued under the Plan) have been granted and were fully vested at the time of grant and 4,500 remain outstanding. During the third quarter 2012, 3,000 options were exercised.

 

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 September 30, 2012, 123,430 shares have been granted and were fully vested at the time of grant and 27,500 remain outstanding.

 

On April 30, 2007, the Board of Directors approved for adoption, effective October 1, 2007, the 2007 Stock Option Plan (“2007 Plan”). The 2007 Plan authorizes the grant of options to purchase up to an aggregate of 150,000 shares of the Company’s Common Stock. As of September 30, 2012, 165,750 options (including cancelled shares re-issued under the Plan) had been granted and 14,500 remain outstanding. During the third quarter 2012, 2,500 options were expired and 15,500 options were exercised.

 

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 September 30, 2012, 82,000 options had been granted and 80,500 remain outstanding.

 

8
 

 

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

 

   Shares 
under
Option
   Weighted
Average
Exercise
Price
   Weighted
Average
Contractual
Life
   Aggregate
Intrinsic
Value
 
Balance at December 31, 2011   162,500   $4.25           
Granted   -    -           
Cancelled   (3,500)   5.26           
Exercised   (32,000)   1.94           
Outstanding at September 30, 2012   127,000   $4.81    2.90   $108,423 
                     
Exercisable at September  30, 2012   51,875   $2.89    2.40   $108,423 

 

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.

 

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

 

   Shares
under
Warrant
   Weighted
Average
Exercise
Price
   Weighted
Average
Contractual
Life
   Aggregate
Intrinsic
Value
 
Balance at December 31, 2011   -    -           
Granted   140,048   $0.01           
Cancelled   -    -           
Exercised   -    -           
Outstanding at September 30, 2012   140,048   $0.01    9.80   $680,633 
                     
Exercisable at September  30, 2012   -    -    -    - 

 

A summary of the Company’s stock option activity by grant date as of September 30, 2012 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   32,000   $2.88    3.2   $63,680    32,000   $2.88    3.2   $63,680 
Nov 2008   14,500    1.78    0.1    44,743    14,500    1.78    0.1    44,743 
Dec 2010   72,500    6.14    3.2    -    5,375    5.97    3.2    - 
Jan 2011   8,000    5.96    3.3    -    -    -    -    - 
TOTAL   127,000   $4.81    2.9   $108,423    51,875   $2.89    2.4   $108,423 

 

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 September 30, 2012 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 September 30, 2012.

 

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 Income

 

In the three and nine months ended September 30, 2012 the company had comprehensive income of $387,000 and $88,000, all from foreign currency translation adjustments.

 

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

   Foreign
Currency Items
   Accumulated 
Other 
Comprehensive
(Loss)
 
         
Beginning balance as of January 1, 2012  $(2,286,000)  $(2,286,000)
           
Current period change, net of tax   88,000    88,000 
           
Ending Balance as of September 30, 2012  $(2,198,000)  $(2,198,000)

 

Note 5 - Inventories, Net

   September 30,
2012
   December 31,
2011
 
Raw materials  $3,469,000   $3,027,000 
Work in process   1,330,000    1,503,000 
Finished goods   10,855,000    9,192,000 
Allowance for excess quantities   (609,000)   (384,000)
Total inventories  $15,045,000   $13,338,000 

 

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:

 

10
 

 

   Net Sales   Net Sales 
   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
                 
United States  $8,419,000   $8,545,000   $26,965,000   $26,695,000 
Europe   316,000    124,000    631,000    326,000 
Mexico   2,546,000    2,778,000    8,193,000    7,842,000 
United Kingdom   505,000    284,000    1,621,000    1,530,000 
                     
   $11,786,000   $11,731,000   $37,410,000   $36,393,000 

 

   Total Assets at 
   September 30,   December 31, 
   2012   2011 
         
United States  $25,652,000   $25,302,000 
Europe   1,084,000    464,000 
Mexico   7,862,000    7,116,000 
United Kingdom   1,042,000    734,000 
           
   $35,640,000   $33,616,000 

 

Note 7 - Concentration of Credit Risk

 

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the 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 nine months ended September 30, 2012, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. During the nine months ended September 30, 2011, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to the top customers for the three and nine months ended September 30, 2012 and 2011 are as follows:

 

11
 

 

   Three Months Ended   Three Months Ended 
   September 30, 2012   September 30, 2011 
Customer  Net Sales   % of Net 
Sales
   Net Sales   % of Net 
Sales
 
Customer A   2,251,000    19.1%   2,839,000    24.2%
Customer B   1,478,000    12.5%   1,204,000    10.3%
Customer C   886,000    7.5%   1,640,000    14.0%

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2012   September 30, 2011 
Customer  Net Sales   % of Net 
Sales
   Net Sales   % of Net 
Sales
 
Customer A   9,586,000    25.6%   10,272,000    28.2%
Customer B   3,341,000    8.9%   4,836,000    13.3%

 

As of September 30, 2012, the total amount owed to the Company by our two largest customers was $1,467,000 or 20.0% and $204,000 or 2.8% of the Company’s consolidated accounts receivables, respectively. The amounts owed at September 30, 2011 by the largest customers were $1,552,000 or 21.4% and $1,082,000 or 14.9% of the Company’s consolidated net accounts receivables, respectively. There was nothing owed to the Company by the third customer as of September 30, 2011.

 

Note 8 - Related Party Transactions

 

Stephen M. Merrick, President and Chief Financial Officer 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 with this firm for the three months ended September 30, 2012 and 2011, respectively, were $52,000 and $14,000. Legal fees paid by the Company with this firm for the nine months ended September 30, 2012 and 2011, respectively, were $123,000 and $100,000.

 

John H. Schwan, Chief Executive Officer and Chairman of the Company, is a principal of Shamrock Specialty Packaging and affiliated companies. The Company made payments for packaging materials, rent and temporary employees supplied by Shamrock of approximately $813,000 during the three months ended September 30, 2012 and $643,000 during the three months ended September 30, 2011. The Company made payments for packaging materials, rent and temporary employees supplied by Shamrock of approximately $2,373,000 during the nine months ended September 30, 2012 and $1,694,000 during the nine months ended September 30, 2011. At September 30, 2012 and 2011, outstanding accounts payable balances were $498,000 and $330,000, respectively.

 

12
 

 

John H. Schwan, Chief Executive Officer and Chairman of the Company, and Howard W. Schwan, Executive Vice President of the Company, are the brothers of Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance and remodeling services to the Company. The Company made payments to Schwan Incorporated of approximately $11,000 during the three months ended September 30, 2012 and $13,000 during the three months ended September 30, 2011. The Company made payments to Schwan Incorporated of approximately $20,000 during the nine months ended September 30, 2012 and $23,000 during the nine months ended September 30, 2011.

 

Interest payments have been made to John H. Schwan and Stephen M. Merrick for loans made to the Company. During the three months ended September 30, 2012 and 2011 these interest payments totaled $21,000 and $26,000, respectively. During the nine months ended September 30, 2012 and 2011 these interest payments totaled $66,000 and $86,000, 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 and Chairman of the Company and Stephen M. Merrick, President and Chief Financial Officer 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 and nine months ended September 30, 2012, Flexo made lease payments to Venture Leasing Mexico totaling $36,000 and $72,000, respectively.

 

Note 9 - Derivative Instruments; Fair Value

 

The following table represents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2012, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

 

   Amount as of             
Description  9/30/2012   Level 1   Level 2   Level 3 
                 
Interest Rate Swap  $142,000   $-   $142,000   $- 
                     
   $142,000   $-   $142,000   $- 

 

   Amount as of             
Description  9/30/2011   Level 1   Level 2   Level 3 
                 
Interest Rate Swap  $158,000   $-   $158,000   $- 
                     
   $158,000   $-   $158,000   $- 

 

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.

 

13
 

 

On July 1, 2011, we entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with Harris. 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.

 

Fair Values of Derivative Instruments in the Statement of Financial Position

 

       Liability Derivatives
As of   September 30  2012  2011
          
    Derivatives not designated as hedging instruments under Statement 133  Balance Sheet Location  Fair Value   Balance Sheet Location  Fair Value 
    Interest Rate Contracts  Accrued Liabilities  $142,000   Accrued Liabilities  $158,000 

 

The Effect of Derivative Instruments on the Statement of Financial Performance

 

for the 3 month                 
period ending  September 30  2012  2011
          
  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  $*(10,000)  Interest Expense  $(179,000)
*Interest on fixed/variable rate variances     $20,000         

 

for the 9 months                 
period ending  September 30  2012  2011
          
  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 Income/ (Expense)  $*(61,000)  Interest Income/ (Expense)  $(179,000)
*Interest on fixed/variable rate variances     $59,000         

 

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 metalized 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 and container applications 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.

 

Results of Operations

 

Net Sales. For the three months ended September 30, 2012, net sales were $11,786,000 compared to net sales of $11,731,000 for the same period of 2011, an increase of 0.5%. For the quarters ended September 30, 2012 and 2011, net sales by product category were as follows:

 

   Three Months Ended 
   September 30, 2012   September 30, 2011 
   $   % of   $   % of 
Product Category  (000) Omitted   Net Sales   (000) Omitted   Net Sales 
                 
Metalized Balloons   4,092    35%   4,173    36%
                     
Pouches   3,625    31%   2,424    21%
                     
Latex Balloons   2,641    22%   2,961    25%
                     
Film Products   1,033    9%   1,907    16%
                     
Other   395    3%   266    2%
                     
Total   11,786    100%   11,731    100%

 

15
 

 

For the nine months ended September 30, 2012, net sales were $37,410,000 compared to net sales of $36,393,000 for the same period of 2011, an increase of 2.8%. For the nine months ended September 30, 2012 and 2011, net sales by product category were as follows:

 

   Nine Months Ended 
   September 30, 2012   September 30, 2011 
   $   % of   $   % of 
Product Category  (000) Omitted   Net Sales   (000) Omitted   Net Sales 
                 
Metalized Balloons   16,557    44%    16,150    44%
                     
Pouches   7,237    19%   6,284    17%
                     
Latex Balloons   8,232    22%   7,782    21%
                     
Film Products   3,876    11%   5,258    15%
                     
Other   1,508    4%   919    3%
                     
Total   37,410    100%   36,393    100%

 

Metalized Balloons. During the three months ended September 30, 2012 revenues from the sale of metalized balloons decreased by 1.9% compared to the prior year period from $4,173,000 to $4,092,000. During the nine months ended September 30, 2012 revenues from the sale of metalized balloons increased by 2.5% compared to the prior year period from $16,150,000 to $16,557,000. During the nine months ended September 30, 2012 sales of metalized balloons sales to our largest customer decreased to $9,219,000 from $9,984,000, while sales of metalized balloons to other customers increased in this period. For the nine months ended September 30, 2012, sales of metalized balloons to other customers were $7,338,000 compared to $6,166,000 for the same period last year. These included sales to customers in the United States, Mexico, the United Kingdom and Europe.

 

Pouches. During the three months ended September 30, 2012 revenues from the sale of pouches increased by 49.5% compared to the prior year period from $2,424,000 to $3,625,000. During the nine months ended September 30, 2012 revenues from the sale of pouches increased by 15.2% compared to the prior year period from $6,284,000 to $7,237,000. Virtually all of our pouch sales in 2011 and 2012 have been of vacuumable pouches in two categories: (i) zippered pouches and (ii) open-top pouches or rolls. For the three and nine months ended 2012 and 2011, sales of pouch products in these categories have been as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended 
September 30,
 
Pouches  2012   2011   2012   2011 
                 
Zippered  $1,611,000   $1,326,000   $3,452,000   $3,788,000 
                     
Open-Top or Rolls   2,014,000    1,098,000    3,785,000    2,496,000 
                     
Total  $3,625,000   $2,424,000   $7,237,000   $6,284,000 

 

16
 

 

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.

 

During 2010, we introduced a line of open-top pouches and rolls for use with existing vacuum sealing machines which we have sold under the ZipVac® label as well as on a private label basis.

 

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. During the third quarter, sales of this branded line of products increased significantly as we began to install the product line in a number of retail outlets. As of September 30, 2012, we had installed this line of products for sale in approximately 2,700 stores throughout the United States.

 

As the chart indicates, our sales of open-top pouches and rolls increased from just over $1 million in the third quarter 2011 to more than $2 million in the third quarter this year. These sales amounts for the third quarter 2012 include sales of vacuum sealing machines as well as of the open-top pouches and rolls. Also, while most of the sales shown for the third quarter 2012 relate to sales of our branded line, they also include some sales of our Universal or private label lines of pouches.

  

Latex Balloons. During the three months ended September 30, 2012 revenues from the sale of latex balloons decreased by 10.8% compared to the prior year period from $2,961,000 to $2,641,000. During the nine months ended September 30, 2012 revenues from the sale of latex balloons increased by 5.8% compared to the prior year period from $7,782,000 to $8,232,000. The decrease in the third quarter 2012 is attributable to a decline in the value of the peso and a slight decrease in sales in Mexico by Flexo Universal, our subsidiary there. The increase for the nine months ended September 30, 2012, is attributable to increased sales in Mexico as well as increased sales to various customers in the United States.

 

Films. During the three months ended September 30, 2012 revenues from the sale of laminated film products decreased by 45.8% compared to the prior year period from $1,907,000 to $1,033,000. During the nine months ended September 30, 2012 revenues from the sale of laminated film products decreased by 26.3% compared to the prior year period from $5,258,000 to $3,876,000. The decrease is attributable to a decrease in sales to a principal customer. Approximately 86.2% of the sales of laminated film products during the nine months ended September 30, 2012 were to a principal customer.

 

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 nine months ended September 30, 2012 and 2011.

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   % of Sales   % of Sales 
   2012   2011   2012   2011 
                 
Top 3 Customers   39.2%   48.4%   43.1%   50.9%
                     
Top 10 Customers   67.1%   72.7%   63.8%   70.9%

 

During the three months ended September 30, 2012, 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 September 30, 2012 were $2,251,000 or 19.1%, and $1,478,000 or 12.5% of consolidated net sales, respectively. Sales to the top three customers in the same period of 2011 were $2,839,000 or 24.2%, $1,204,000 or 10.3%, and $1,640,000 or 14.0% of consolidated net sales, respectively. During the nine months ended September 30, 2012, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to this customer for the nine months ended September 30, 2012 were $9,586,000 or 25.6% of consolidated net sales. Sales to the top two customers in the same period of 2011 were $10,272,000 or 28.2% and $4,836,000 or 13.3% of consolidated net sales, respectively. As of September 30, 2012, the total amount owed to the Company by our two largest customers were $1,467,000 or 20.0% and $204,000 or 2.8% of the Company’s consolidated net accounts receivables, respectively. The amounts owed at September 30, 2011 by our two largest customers were $1,552,000 or 21.4%, and $1,082,000 or 14.9% of the Company’s consolidated net accounts receivables, respectively.

 

17
 

 

Cost of Sales. During the three months ended September 30, 2012, the cost of sales represented 77.3% of net sales compared to 80.7% for the three months ended September 30, 2011. During the nine months ended September 30, 2012, the cost of sales represented 78.3% of net sales compared to 81.3% for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, cost of sales declined compared to the same period last year as the result of several factors including: (i) moderation in the cost of certain raw materials, particularly latex, (ii) increases in the selling prices of certain of our products and (iii) a shift in the mix of products sold to products having higher margin.

 

General and Administrative. During the three months ended September 30, 2012, general and administrative expenses were $1,570,000 or 13.3% of net sales, compared to $1,295,000 or 11.0% of net sales for the same period in 2011. During the nine months ended September 30, 2012, general and administrative expenses were $4,441,000 or 11.9% of net sales, compared to $3,975,000 or 10.9% of net sales for the same period in 2011. The increase in general and administrative expenses is attributable to (i) an increase in salary expense of $116,000, (ii) an increase in consulting expense of $58,000, and (iii) an increase in legal expense of $65,000.

 

Selling. During the three months ended September 30, 2012, selling expenses were $483,000 or 4.1% of net sales, compared to $234,000 or 2.0% of net sales for the same period in 2011. During the nine months ended September 30, 2012, selling expenses were $1,305,000 or 3.5% of net sales, compared to $655,000 or 1.8% of net sales for the same period in 2011. The increase in selling expenses is attributable principally to (i) an increase in salary expense of $152,000, (ii) an increase in travel expenses of $75,000, (iii) an increase in outside services of $305,000, (iv) an increase in engineering and testing services related to the vacuum sealer machines of $67,000 and (v) an increase in royalty expenses of $63,000.

 

Advertising and Marketing. During the three months ended September 30, 2012, advertising and marketing expenses were $350,000 or 3.0% of net sales for the period, compared to $417,000 or 3.6% of net sales for the same period of 2011. During the nine months ended September 30, 2012, advertising and marketing expenses were $1,249,000 or 3.3% of net sales for the period, compared to $1,109,000 or 3.0% of net sales for the same period of 2011. The increase in advertising and marketing expense is attributable to (i) an increase in commission expense of $110,000 and (ii) an increase in artwork and films for creative designs of $65,000.

 

Other Income (Expense). During the three months ended September 30, 2012, the Company incurred net interest expense of $265,000, compared to net interest expense during the same period of 2011 in the amount of $319,000. During the nine months ended September 30, 2012, the Company incurred net interest expense of $613,000, compared to net interest expense during the same period of 2011 in the amount of $602,000.

 

18
 

 

For the three months ended September 30, 2012, the Company had a foreign currency transaction gain of $5,000 compared to a foreign currency transaction gain of $9,000 during the same period of 2011. For the nine months ended September 30, 2012, the Company had a foreign currency transaction gain of $13,000 compared to a foreign currency transaction gain of $35,000 during the same period of 2011.

 

Income Taxes. For the three months ended September 30, 2012, the Company reported a consolidated income tax expense of $1,000, compared to a consolidated income tax expense of $13,000 for the same period of 2011. For the nine months ended September 30, 2012, the Company reported a consolidated income tax expense of $204,000, compared to a consolidated income tax expense of $254,000 for the same period of 2011. For the three and nine months ended September 30, 2012, this income tax provision was composed of provisions for United States income tax on the Company, income tax in Mexico of Flexo Universal, our Mexican subsidiary, income tax in the United Kingdom of CTI Balloons Limited, our United Kingdom subsidiary, and income tax in Germany of CTI Europe, our Germany subsidiary.

 

Net Income. For the three months ended September 30, 2012, the Company had net income of $6,000 or $0.00 per share (basic and diluted), compared to net income of $18,000 for the same period of 2011 or $0.01 per share (basic and diluted). For the nine months ended September 30, 2012, the Company had net income of $317,000 or $0.10 per share (basic and diluted), compared to net income of $329,000 for the same period of 2011 or $0.10 per share (basic and diluted).

 

Financial Condition, Liquidity and Capital Resources

 

Cash Flow Items.

 

Operating Activities. During the nine months ended September 30, 2012, net cash used in operations was $2,151,000, compared to net cash used in operations during the nine months ended September 30, 2011 of $244,000.

 

Significant changes in working capital items during the nine months ended September 30, 2012 consisted of (i) an increase in accounts receivable of $52,000, (ii) an increase in inventories of $1,676,000, (iii) depreciation and amortization in the amount of $1,261,000 (iv) a decrease in trade payables of $1,952,000 and (v) an increase in prepaid expenses and other assets of $190,000.

 

Investing Activity. During the nine months ended September 30, 2012, cash used in investing activity for the purchase or improvement of equipment was $760,000, compared to $796,000 in the same period of 2011. Substantially all of this expense is related to equipment maintenance and upgrades, tooling and related expense.

 

Financing Activities. During the nine months ended September 30, 2012, cash provided by financing activities was $2,917,000 compared to cash provided by financing activities for the same period of 2011 in the amount of $712,000. During the nine months ended September 30, 2012, financing activities included proceeds from issuance of long-term debt of $5,000,000, payment of $696,000 on long-term debt obligations, and a reduction of $1,901,000 on the revolving line of credit.

 

19
 

 

Liquidity and Capital Resources. At September 30, 2012, the Company had cash balances of $364,000 compared to cash balances of $438,000 for the same period in 2011 and there was $3,383,000 available to advance under the Company’s revolving line of credit.

 

At September 30, 2012, the Company had a working capital balance of $10,959,000 compared to a working capital balance of $5,612,000 at December 31, 2011.

 

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 Harris N.A. (“Harris”) replacing and paying off the Company’s credit line with RBS Citizens N.A. (formerly Charter One Bank). Under the Credit Agreement, Harris agreed to provide loans and credits to the Company in the aggregate maximum amount of $14,417,000. The arrangement includes:

 

i.A revolving credit 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, the principal balance due on April 29, 2013;
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 balance due on April 29, 2013.

 

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

 

In connection with the Credit Agreement, the Company executed and delivered to 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.

 

On April 29, 2010, Harris advanced a total of $11,963,518 under these loans on behalf of the Company for the pay-off of all outstanding loan and lease financing balances of the Company to RBS Citizens N.A. and RBS Asset Finance.

 

Under the terms of the Credit Agreement, in order to obtain advances under the revolving line of credit and the equipment loan, the Company is required to meet various financial covenants including a senior leverage ratio, fixed charge coverage ratio and tangible net worth. As of September 30, 2012, we were in compliance with these covenants.

 

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The Credit Agreement 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 September 30, 2012, the effective rate on the outstanding loan balances was 4.0%.

 

As of September 30, 2012, the outstanding balances on the loans with Harris were: (i) revolving line of credit, $5,260,000, (ii) mortgage loan, $2,108,000, and (iii) equipment loan, $1,205,000.

 

On July 1, 2011, we entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with Harris. This swap agreement is designated as a cash flow hedge to hedge 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 will determine and record the fair market value of the swap agreement each quarter. This value will be recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period will be recorded as interest income or expense.

 

On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris Bank N.A. (“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 includes 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;

 

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

 

Management believes that the funds provided by this new financing arrangement 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.

 

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Seasonality

 

In recent years, sales in the metalized 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 24-26 of our Annual Report on Form 10-K for the year ended December 31, 2011 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 and nine months ended September 30, 2012.

 

New Accounting Pronouncements

 

See “New Accounting Pronouncements” in Note 1 to the Notes to Unaudited Condensed Consolidated Financial Statements which is here incorporated by reference.

 

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 September 30, 2012. 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 September 30, 2012, 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 third quarter of 2012 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


 

Commitment and Contingencies

 

In September 2012, the Company entered into a 54-month lease to expand its warehouse, fulfillment and operations functions. The facility, encompassing approximately 116,000 square feet of warehouse and office space is located in Lake Zurich, Illinois, approximately 6 miles from its principal plant and offices in Lake Barrington, Illinois. The facility will replace current warehouse locations comprising about 55,000 square feet with lease terms expiring on December 31, 2012.

 

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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 Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.

 

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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).
     
10.1   Third Amendment to Loan Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.2   Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.3   Note and Warrant Purchase Agreement between BMO Private Equity, Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.4   Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.5   Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.6   Employment Agreement between Howard W. Schwan and the Company dated September 24, 2012.
     
10.7   Consulting Agreement between Schwan Flexible Packaging, L.L.C, Howard W. Schwan, and the Company dated January 1, 2013.
     
10.8   Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012.
     
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 September 30, 2012, 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: November 14, 2012 CTI INDUSTRIES CORPORATION
     
  By: /s/ John H. Schwan
    John H. Schwan
    Chief Executive Officer
     
  By: /s/ Stephen M. Merrick
    Stephen M. Merrick
    President and Chief Financial Officer
     
  By: /s/ Timothy S. Patterson
    Timothy S. Patterson
    Senior Vice President Finance / Controller

 

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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).
     
10.1   Third Amendment to Loan Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.2   Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.3   Note and Warrant Purchase Agreement between BMO Private Equity, Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.4   Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.5   Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
     
10.6   Employment Agreement between Howard W. Schwan and the Company dated September 24, 2012.
     
10.7   Consulting Agreement between Schwan Flexible Packaging, L.L.C, Howard W. Schwan, and the Company dated January 1, 2013.
     
10.8   Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012.
     
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 September 30, 2012, 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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