Quarterly Report (10-q)

Date : 08/19/2019 @ 8:57PM
Source : Edgar (US Regulatory)
Stock : CTI Industries Corp (CTIB)
Quote : 1.59  0.04 (2.58%) @ 4:59AM
CTI Industries share price Chart

Quarterly Report (10-q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended June 30, 2019

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common

 CTIB

 NASDAQCM

 

 

 

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 ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒     No ☐

 

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

 

  Large accelerated filer Accelerated filer
  Non-accelerated filer Smaller Reporting Company
      Emerging Growth Company

          

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

 

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

 

The number of shares outstanding of the Registrant’s common stock as of August 1, 2019 was 3,835,950.

 

 

 

INDEX

 

P art I – Financial Information  
     

Item No. 1.

Financial Statements

 
 

Condensed Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018

1

 

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2019 and June 30, 2018

2
 

Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2019 and June 30, 2018

3

 

Condensed Consolidated Statements of Shareholders Equity (unaudited) for the six months ended June 30, 2019

4

 

Notes to Condensed Consolidated Financial Statements (unaudited)

5

Item No. 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item No. 3

Quantitative and Qualitative Disclosures Regarding Market Risk

22

Item No. 4

Controls and Procedures

23

     

Part II – Other Information

 
     

Item No. 1

Legal Proceedings

23

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

24

Item No. 6

Exhibits

24

 

Signatures

25
 

Exhibit 31.1

 
 

Exhibit 31.2

 
 

Exhibit 32

 

 

 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

   

June 30, 2019

   

December 31, 2018

 
            (unaudited)  
ASSETS                
Current assets:                

Cash and cash equivalents (VIE $2,000 and $57,000, respectively)

  $ 178,298     $ 428,150  

Accounts receivable, (less allowance for doubtful accounts of $94,000 and $85,000, respectively)

    8,884,291       10,830,555  

Inventories, net (VIE $269,000 and $340,000, respectively)

    20,519,240       20,007,488  

Prepaid expenses (VIE $106,000 and $127,000, respectively)

    394,797       858,158  

Other current assets

    1,342,896       886,383  
                 

Total current assets

    31,319,522       33,010,734  
                 
Property, plant and equipment:                

Machinery and equipment

    23,880,732       23,807,985  

Building

    3,374,334       3,367,082  

Office furniture and equipment (VIE $303,000 and $303,000, respectively)

    2,685,450       2,649,280  

Intellectual property

    783,179       783,179  

Land

    250,000       250,000  

Leasehold improvements

    413,053       409,188  

Fixtures and equipment at customer locations

    518,450       518,450  

Projects under construction

    180,955       150,272  
      32,086,153       31,935,436  

Less : accumulated depreciation and amortization (VIE $107,000 and $104,000, respectively)

    (28,657,592 )     (28,120,455 )
                 
Total property, plant and equipment, net     3,428,561       3,814,981  
                 
Other assets:                

Goodwill (VIE $440,000 and $440,000, respectively)

    1,473,176       1,473,176  

Net deferred income tax asset

    539,305       135,094  

Operating lease right-of-use

    1,872,470          

Other non-current assets

    (3,000,000 )        

Other assets

    15,274       326,849  
                 
Total other assets     900,225       1,935,119  
                 

TOTAL ASSETS

  $ 35,648,308     $ 38,760,834  
                 
LIABILITIES AND EQUITY                
Current liabilities:                

Checks written in excess of bank balance (VIE $2,000 and $7,000, respectively)

  $ 1,030,369     $ 636,142  

Trade payables (VIE $77,000 and $62,000, respectively)

    8,678,165       6,679,670  

Line of credit (VIE $232,000 and $267,000, respectively)

    12,429,643       16,582,963  

Notes payable - current portion

    4,522,104       4,432,320  

Notes payable affiliates - current portion

    11,727       10,821  

Operating Lease Liabilities

    1,005,650       0  

Accrued liabilities (VIE $35,000 and $89,000, respectively)

    1,705,380       1,866,796  
                 

Total current liabilities

    29,383,038       30,208,712  
                 
Long-term liabilities:                

Notes payable - affiliates

    222,408       199,122  

Notes payable, net of current portion (VIE $30,000 and $27,000, respectively)

    443,675       399,912  

Operating Lease Liabilities

    866,820          

Notes payable - officers, subordinated

    1,027,280       1,597,019  

Deferred gain (non current)

    257,348       100,340  

Deferred income tax liability

    -          
                 

Total long-term debt, net of current portion

    2,817,531       2,296,393  
                 

Total long-term liabilities

    2,817,531       2,296,393  
                 

Equity:

               
CTI Industries Corporation stockholders' equity:                

Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding

    -       -  

Common stock - no par value, 15,000,000 shares authorized, 3,879,608 shares issued and 3,835,950 shares outstanding

    13,898,494       13,898,494  

Paid-in-capital

    3,461,832       2,506,437  

Accumulated earnings

    (6,840,594 )     (2,865,486 )

Accumulated other comprehensive loss

    (5,753,138 )     (6,050,347 )

Less: Treasury stock, 43,658 shares

    (160,784 )     (160,784 )
                 

Total CTI Industries Corporation stockholders' equity

    4,605,810       7,328,314  
                 

Noncontrolling interest

    (1,158,071 )     (1,072,585 )
                 

Total Equity

    3,447,739       6,255,729  
                 

TOTAL LIABILITIES AND EQUITY

  $ 35,648,308     $ 38,760,834  

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net Sales

  $ 12,406,840     $ 15,984,726     $ 24,943,229     $ 29,963,903  
                                 

Cost of Sales

    9,869,107       12,189,204       20,409,325       23,299,990  
                                 

Gross profit

    2,537,733       3,795,522       4,533,904       6,663,913  
                                 

Operating expenses:

                               

General and administrative

    1,531,125       1,680,490       3,587,197       3,564,536  

Selling

    415,038       958,796       852,603       1,817,333  

Advertising and marketing

    270,355       331,609       544,235       628,489  

Gain on sale of assets

    (23,662 )     (22,998 )     (47,209 )     (47,413 )

Total operating expenses

    2,192,856       2,947,897       4,936,826       5,962,945  
                                 

Income from operations

    344,877       847,625       (402,922 )     700,968  
                                 

Other (expense) income:

                               

Interest expense

    (516,161 )     (550,780 )     (1,063,067 )     (1,114,840 )

Interest income

    335       11,389       336       11,043  

Other Expense

    (3,000,000 )     -       (3,000,000 )     -  

Foreign currency loss

    9,444       (13,246 )     849       17,783  
                                 

Total other expense, net

    (3,506,382 )     (552,637 )     (4,061,882 )     (1,086,014 )
                                 

Net income before taxes

    (3,161,505 )     294,988       (4,464,804 )     (385,046 )
                                 

Income tax expense

    (43,719 )     89,281       (404,210 )     (120,202 )
                                 

Net income

    (3,117,786 )     205,707       (4,060,594 )     (264,844 )
                                 

Less: Net (loss) income attributable to noncontrolling interest

    (23,099 )     (44,497 )     (85,486 )     (52,040 )
                                 

Net income attributable to CTI Industries Corporation

  $ (3,094,688 )   $ 250,204     $ (3,975,108 )   $ (212,804 )
                                 

Other Comprehensive Income (Loss)

                               

Foreign currency adjustment

    61,333       (775,497 )     297,209       (342,432 )

Comprehensive Income (Loss)

  $ (3,033,355 )   $ (525,293 )   $ (3,677,899 )   $ (555,236 )
                                 

Basic income per common share

  $ (0.81 )   $ 0.07     $ (1.04 )   $ (0.06 )
                                 

Diluted income per common share

  $ (0.81 )   $ 0.07     $ (1.04 )   $ (0.06 )
                                 

Weighted average number of shares and equivalent shares of common stock outstanding:

                               

Basic

    3,835,950       3,530,227       3,835,950       3,530,227  
                                 

Diluted

    3,835,950       3,567,315       3,835,950       3,530,227  

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

 

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

   

For the Six Months Ended June 30,

 
   

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net income

  $ (4,060,594 )   $ (264,844 )

Depreciation and amortization

    522,670       701,839  

Operating cash flows from operating leases

    487,239       -  

Amortization of deferred gain on sale/leaseback

    155,433       (55,320 )

Provision for losses on accounts receivable

    7,657       (10,471 )

Provision for losses on inventories

    25,415       (29,386 )

Deferred income taxes

    (404,210 )     (90,206 )

Loss on disposition of asset

    17,480          

Change in assets and liabilities:

               

Accounts receivable

    2,001,248       (671,380 )

Other non-current assets

    3,000,000          

Inventories

    (474,804 )     (483,573 )

Prepaid expenses and other assets

    (140,125 )     115,988  

Trade payables

    1,921,337       800,813  

Accrued liabilities

    (476,644 )     (285,976 )
                 

Net cash provided by (used in) operating activities

    2,582,102       (272,516 )
                 
                 

Cash flows from investing activities:

               

Purchases of property, plant and equipment

    (72,662 )     (18,193 )
                 

Net cash provided by (used in) investing activities

    (72,662 )     (18,193 )
                 

Cash flows from financing activities:

               

Change in checks written in excess of bank balance

    394,227       (445,854 )

Net change in revolving line of credit

    (4,160,724 )     1,699,201  

Repayment of long-term debt

    (554,768 )     (768,003 )

Proceeds from issuance of stock

    955,396       105,745  

Cash paid for deferred financing fees

    31,388       (59,530 )

Proceeds from issuance of long-term debt

    650,000          

Net cash provided by (used in) financing activities

    (2,684,481 )     531,559  
                 

Effect of exchange rate changes on cash

    (74,811 )     30,950  
                 

Net increase/(decrease) in cash and cash equivalents

    (249,852 )     271,800  
                 

Cash and cash equivalents at beginning of period

    428,150       181,026  
                 

Cash and cash equivalents at end of period

  $ 178,298     $ 452,826  
    $ -     $ -  
                 

Supplemental disclosure of cash flow information:

               

Cash payments for interest

    1,045,943     $ 934,231  
                 
                 
                 

Supplemental Disclosure of non-cash investing and financing activity

               

Property, Plant & Equipment acquisitions funded by liabilities

  $ 34,046     $ 82,231  

 

See accompanying notes to condensed consolidated unaudited financial statements

 

 

 

CTI Industries Corporation and Subsidiaries

Consolidated Statements of Stockholders' Equity

 

   

CTI Industries Corporation

                 
                                   

Accumulated

                                 
                                   

Other

   

Less

                 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Treasury Stock

   

Noncontrolling

         
   

Shares

   

Amount

   

Capital

   

(Deficit) Earnings

   

Loss

   

Shares

   

Amount

   

Interest

   

TOTAL

 

Balance December 31, 2018

    3,578,885     $ 13,898,494     $ 2,506,437     $ (2,865,486 )   $ (6,050,347 )   $ (43,658 )   $ (160,784 )   $ (1,072,585 )     6,255,729  
                                                                         
                                                                         
                                                                      -  

Note conversion - Schwan

    180,723               600,000                                               600,000  

Stock Issued

    120,000               303,000                                               303,000  

Stock Option Expense

                    52,396                                               52,396  

Net Income

                            (3,975,108 )                             (85,486 )     (4,060,594 )

Other comprehensive income, net of taxes

                                                                    -  

Foreign currency translation

                                    297,209                               297,209  

Balance June 30, 2019

    3,879,608     $ 13,898,494     $ 3,461,833     $ (6,840,594 )   $ (5,753,138 )   $ -     $ (160,784 )   $ (1,158,071 )     3,447,740  

 

See accompanying notes to consolidated financial statements

 

 

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, 2018, 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 and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. 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, 2018.

 

Principles of consolidation and nature of operations:

 

The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon and related novelty (candy and party related) products throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States. We have announced our intention to divest our interest in Clever Container and deconsolidate that entity from our group. As we held an equity interest in Clever Container as of June 30, 2019, it remains consolidated as a variable interest entity. During June 2019, we determined that this and the two European sales subsidiaries should no longer be a part of our group, have begun the active process to eliminate those entities from our group, and have thus recognized a non-cash charge of $3 million during June 2019 to reflect that determination and in anticipation of ultimate deconsolidation.

 

 

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.

 

Use of estimates:

 

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

 

Earnings per share:

 

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

 

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

 

As of June 30, 2019 and 2018, shares to be issued upon the exercise of options and warrants aggregated 471,144 for each period. The number of shares included in the determination of earnings on a diluted basis for the three months ended June 30, 2019 and 2018 were none, as doing so would have been anti-dilutive.

 

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, 2018. There were no significant changes to these accounting policies during the three or six months ended June 30, 2019, except for the adoption of Accounting Standards Codification (ASC) Topic 842, Leases .

 

On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

 

On January 1, 2018, we adopted ASC 606 (Revenue From Contracts With Customers) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.

 

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.

 

The Company provides for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

 

Auditor Replacement Process:

 

During April 2019, our independent registered accounting firm, Plante & Moran PLLC, resigned as auditor. This quarterly report on Form 10Q is being prepared without the benefit of auditor review, and we would look to amend this filing upon the hiring of a replacement independent registered accounting firm.

 

 

 

Note 2 – Liquidity and Going Concern

 

The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the Credit Agreement with PNC Bank, National Association (“PNC”) (see Note 3). As indicated in Note 3, twice during 2018 we violated covenants in our credit facility and as of March 2019 we entered into a forbearance agreement with PNC. Under the terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but we remain out of compliance with the terms of our credit facility, as amended, including the covenants as of June 30, 2019 calculated on or about July 31, 2019. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to the Company, in which PNC advised that line of credit advances would continue to be available to the Company at PNC’s sole discretion, and subject to its terms and conditions.

 

During 2019 we attempted to execute a major capital event with a partner that would infuse money, among other attributes. That effort was unsuccessful as envisioned. We are currently seeking to execute on one or more smaller transactions, as well as pursue other financing options. There is no assurance that any of these efforts will be successful.

 

 

In addition to the above, due to financial performance in 2016, 2017 and 2018, including net income/(losses) attributable to the Company of $0.7 million, ($1.6 million), and ($3.6 million), respectively, we believe that substantial doubt about our ability to continue as a going concern exists at June 30, 2019.

 

Additionally, we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs, along with a supply disruption in the helium market. These changes in cash flows have created very significant strain within our operations, and have therefore increased our desire to obtain additional funding resources.

 

Management’s plans include:

 

(1)     Pursuing a smaller strategically significant major capital event.

(2)     Working with our bank to resolve our compliance failure on a long-term basis.

(3)     Evaluating and potentially executing a sale/leaseback transaction of our facility in Lake Barrington, IL.

(4)     Simplifying our group structure, and

(5)     Exploring alternative funding sources.

 

Management Assessment

 

Considering both quantitative and qualitative information, we believe that our plans to obtain additional financing may provide us with an ability to finance our operations through 2019 and, if successfully executed, may mitigate the substantial doubt about our ability to continue as a going concern.

 

 

Note 3 - Debt

 

During December 2017, we terminated a prior credit arrangement and entered in new financing agreements with PNC Bank, National Association (“PNC”). The “PNC Agreements” include a $6 million term loan and an $18 million revolving credit facility, with a termination date of December 2022.

 

Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet two financial covenants as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (the “Amendment 1”) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in interest rate. During September 2018, we filed a preliminary prospectus on Form S-1 for a planned equity issuance. On October 8, 2018, we entered into Consent and Amendment No. 2 (the “Amendment 2”) to our PNC Agreements. Amendment 2 reduced the amount of new funding proceeds that must be used to repay the term loan from $5 million to $2 million and waived the calculation of financial ratios for the period ended September 30, 2018, in exchange for a new covenant committing to raise at least $7.5 million in gross proceeds from our equity issuance by November 15, 2018 and pay an amendment fee. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement.

 

 

We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures were waived and financial covenants as of March 31, 2019 were not considered, with the next calculation due July 31, 2019 for the period ended June 30, 2019. We received a temporary over-advance of $1.2 million, which declined to zero over a six-week period under the terms of this agreement and paid a fee of $250,000.

 

On August 1, 2019, PNC issued a Notice of Default and Reservation of Rights letter, indicating the end of the forbearance period and continued events of default with our credit agreement, as amended. We remain out of compliance with the terms of our facility and have thus reclassified long-term bank debt to current liabilities on our balance sheet.

 

Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).

 

Certain terms of the PNC Agreements include:

 

 

Restrictive Covenants : The Credit Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to:

 

o

Borrow money;

 

o

Pay dividends and make distributions;

 

o

Make certain investments;

 

o

Use assets as security in other transactions;

 

o

Create liens;

 

o

Enter into affiliate transactions;

 

o

Merge or consolidate; or

 

o

Transfer and sell assets.

 

 

 

Financial Covenants : The Credit Agreement includes a series of financial covenants we are required to meet including:

 

o

We are required to maintain a "Leverage Ratio", which is defined as the ratio of (a) Funded Debt (other than the Shareholder Subordinated Loan) as of such date of determination to (b) EBITDA (as defined in the PNC Agreements) for the applicable period then ended. The highest values for this ratio allowed by the PNC Agreements are:

 

Fiscal Quarter Ratio  
           
December 31, 2017   4.75 to 1.00  
June 30, 2018   4.50 to 1.00  
June 30, 2018   4.25 to 1.00  
September 30, 2018   not applicable  
December 31, 2018   3.50 to 1.00  
March 31, 2019   not applicable  
June 30, 2019   3.00 to 1.00  
September 30, 2019 and thereafter   2.75 to 1.00  

 

 

 

o

We are required to maintain a "Fixed Charge Coverage Ratio", which is defined as the ratio of (a) EBITDA for such fiscal period, minus Unfinanced Capital Expenditures made during such period, minus distributions (including tax distributions) and dividends made during such period, minus cash taxes paid during such period to (b) all Debt Payments made during such period. This ratio must not exceed 1.1 : 1.0 for any quarterly calculation.

 

The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We also entered into a swap agreement with PNC Bank to fix the rate of interest for $3 million of the notes over 3 years at 2.25%. This contract was made at market value upon December 14, 2017 execution and accounted for as a hedge. This contract is expected to terminate during 2019 at no cost or benefit to the Company under the terms of the forbearance agreement.

 

Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as well as in Note 2, we remain out of compliance with the terms of this facility.

 

As of December 2017, Mr. Schwan was owed a total of $1,099,000, with additional accrued interest of $400,000, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. During January 2019, Mr. Schwan converted $600,000 of his balance into approximately 181,000 shares of our common stock at the then market rate. No payments were issued to Mr. Schwan during 2018 or the three or six months ended June 30, 2019, with $15,000 and $30,000, respectively, of interest recorded as an expense.

 

 

Note 4 - 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 2019 and 2018. The expected volatility is based on historical volatility of the Company’s common stock.

 

 

The Company’s net loss for the three and six months ended June 30, 2019 and 2018 includes approximately $23,000 and $44,000, respectively, in 2019 and $52,000 and $172,000, respectively, of compensation costs related to share based payments. As of June 30, 2019, there was $140,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $40,000 of additional stock-based compensation expense to be recognized over the remainder of 2019, and $56,000 to be recognized during 2020.

 

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 and subsequent awards categorized as inducement of employment authorized the issuance of up to 510,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorizes the issuance of up to 300,000 shares of our common stock in the form of equity-based awards. Because no registration on Form S-8 was filed for these additional shares within 12 months of approval by our shareholders, those additional shares are not available for issuance in the normal course. As of June 30, 2019, options for 471,144 shares remain outstanding.

 

A summary of the Company’s stock option activity, which includes grants of restricted stock, non-qualified stock options, incentive stock options, warrants and related information, is as follows:

 

   

Shares under Option

   

Weighted Average Exercise Price

 

Balance at December 31, 2018

    471,144     $ 3.95  

Granted

    -       -  

Cancelled/Expired

    -       -  

Exercised/Issued

    -       -  

Outstanding at June 30, 2019

    471,144     $ 3.95  
                 

Exercisable at June 30, 2019

    165,264     $ 4.05  

 

 

The instruments above have an aggregate intrinsic value of $80,000, which represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended June 30, 2019 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on June 30, 2019.

 

 

As described in Note 5, we issued 20,000 shares of common stock to Gary Page in a legal settlement during January 2019. The value of those shares on the date of issuance was approximately $67,000. We issued 100,000 shares of common stock to a longtime sales representative during May 2019, which, at then market value, was in lieu of approximately $303,000 of earned cash compensation.

 

On January 11, 2019, the Company and its Chairman, Mr. John Schwan, completed an exchange debt for equity upon receipt of consent for the transaction from the Company’s lender. Mr. Schwan surrendered $600,000 in notes from the Company in exchange for 180,723 shares of the Company’s common stock. The value was set at the $3.32 per share closing price of the Company’s common stock on the NASDAQ stock market on December 20, 2018.

 

 

 

Note 5 - Legal Proceedings

 

The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.

 

In July 2017, God’s Little Gift, Inc. (dba) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company based on disputed compensation amounts over several years. This action was resolved by mutual agreement between the parties during January 2019. Mr. Page received 20,000 shares of CTI common stock, $5,000 in cash, and a minimum payout in his monthly royalty calculation of $7,667 beginning March 1, 2019 and ending August 1, 2021. The Company accrued the $0.3 million in committed costs under this settlement in its December 31, 2018 financial statements.

 

 

Note 6 - Other Comprehensive Income

 

In the three and six months ended June 30, 2019, the Company incurred other comprehensive income of approximately $297,000, all from foreign currency translation adjustments.

 

 

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

 

   

Foreign Currency Items

   

Total

Accumulated Other

Comprehensive Income

 
                 

Beginning balance as of January 1, 2019

  $ (6,050,347 )   $ (6,050,347 )
                 

Current period change, net of tax

    297,209       297,209  
                 

Ending Balance as of June 30, 2019

    (5,753,138 )     (5,753,138 )

 

 

 

Note 7 - Inventories, Net

 

   

June 30 ,

201 9

   

December 31,

201 8

 

Raw materials

  $ 2,085,908     $ 1,994,741  

Work in process

    3,057,682       3,052,224  

Finished goods

    15,508,804       14,934,581  

In Transit

    293,138       480,716  

Allowance for excess quantities

    (426,292 )     (454,774 )

Total inventories

  $ 20,519,240     $ 20,007,488  

 

 

Note 8 - Geographic Segment Data

 

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

 

   

Net Sales to Outside Customers

   

Net Sales to Outside Customers

 
   

For the Three Months Ended

   

For the Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

United States

  $ 9,095,000     $ 12,075,000     $ 17,855,000     $ 21,813,000  

Europe

  $ 1,083,000       1,275,000     $ 2,358,000       2,637,000  

Mexico

  $ 2,022,000       2,378,000     $ 4,103,000       4,564,000  

United Kingdom

  $ 207,000       257,0000     $ 627,000       950,000  
                                 
    $ 12,407,000     $ 15,985,000     $ 24,943,000     $ 29,964,000  

 

   

Total Assets at

 
    June 30,     December 31,  
   

2019

   

2018

 
                 

United States

  $ 22,907,000     $ 25,354,000  

Europe

  $ 3,105,000       3,052,000  

Mexico

  $ 11,490,000       9,476,000  

United Kingdom

  $ 1,146,000       879,000  

Reserve

  $ (3,000,000 )     -  
    $ 35,648,000     $ 38,761,000  

 

 

 

Not e 9 - Concentration of Credit Risk

 

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the three and six months ended June 30, 2019 and 2018, 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 ended June 30, 2019 and 2018 are as follows:

 

   

Three Months Ended

   

Three Months Ended

 
   

June 30 , 201 9

   

June 30 , 201 8

 

Customer

 

Net Sales

   

% of Net Sales

   

Net Sales

   

% of Net Sales

 

Customer A

  $ 4,179,000       34 %   $ 4,871,000       30 %

Customer B

  $ 2,769,000       22 %   $ 3,660,000       23 %

 

Sales to these customers for the six months ended June 30, 2019 and 2018 are as follows:

 

   

Six Months Ended

   

Six Months Ended

 
   

June 30, 2019

   

June 30, 2018

 

Customer

 

Net Sales

   

% of Net Sales

   

Net Sales

   

% of Net Sales

 

Customer A

  $ 6,337,000       25 %   $ 7.343,000       24 %

Customer B

  $ 6,630,000       27 %   $ 8,110,000       27 %

 

As of June 30, 2019, the total amounts owed to the Company by these customers were approximately $2,488,000 or 28%, and $1,044,000 or 12%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at June 30, 2018 by these customers were approximately $4,808,000 or 54%, and $1,524,000 or 17% of the Company’s consolidated net accounts receivable, respectively.

 

 

Note 10 - Related Party Transactions

 

Stephen M. Merrick, Chief Executive Officer of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which used to provide legal services to the Company. Legal fees paid by the Company to this firm for the three months ended June 30, 2019 and 2018, respectively, were none and $16,000. Legal fees paid by the Company to this firm for the six months ended June 30, 2019 and 2018, respectively, were none and $88,000.

 

John H. Schwan, through an investment entity, and Stephen M. Merrick, Chief Executive Officer of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). During the three months ended June 30, 2019 and 2018, Clever Container purchased various products from the Company in the amount of $1,000 and $259,000, respectively. During the six months ended June 30, 2019 and 2018, Clever Container purchased various products from the Company in the amount of $63,000 and $442,000, respectively. As of June 30, 2019 and 2018, the balance of accounts receivable from Clever Container to the Company were $1,379,000 and $1,199,000, respectively. The Company owns a 28.5% interest in Clever Container, though has announced the intention to divest its interest in Clever Container. This transaction has not been completed as of the filing of this report.

 

 

 

Note 1 1 - Derivative Instruments; Fair Value

 

The Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that all derivative instruments be recognized on the balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-one matching of the derivative instrument to our underlying transaction. As of June 30, 2019 and December 31, 2018, we had one derivative instrument accounted for as a hedge, with the same instrument accounted for as a hedge as of June 30, 2018. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in the consolidated statement of operations. We have no such derivative financial instruments as of December 31, 2018. Changes in fair value for the respective periods were recognized in the consolidated statement of operations.

 

The interest rate swap we entered into December 14, 2017 had a three year term (ending December 14, 2020) and a notional amount of $3 million. The Company purchased a 2.25% fixed rate in exchange for the variable rate on a portion of the notes payable under the PNC Agreements, which was 1.47% at time of execution. The fair value of the swap was insignificant as of June 30, 2018 and December 31, 2018 and June 30, 2019. It is expected that this instrument will be eliminated with no gain or loss to the Company as a result of the forbearance agreement entered into during March 2019.

 

 

 

Note 12 - Leases

 

We adopted ASC Topic 842 (Leases) on January 1, 2019. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. Results for periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations.

 

Upon adoption of ASC 842 we recorded a $2.4 million increase in other assets, a $1.0 million increase in current liabilities, and a $1.4 million increase in non-current liabilities. We did not record any cumulative effect adjustments in opening retained earnings, and adoption of ASC 842 had no impact on cash flows from operating, investing, or financing activities.

 

 

We determine if an arrangement is a lease at inception. Most of our operating leases do not provide an implicit rate of interest so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the course of ordinary business including: warehouses and manufacturing facilities, as well as vehicles and equipment used in our operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of assets and related improvements are limited by the expected lease term, unless there is a reasonably certain expected transfer or title or purchase option. Some lease agreements include renewal options at our sole discretion. Any guaranteed residual value is included in our lease liability.

 

The table below describes our lease position as of June 30, 2019:

 

 

Assets

   

As of June 30, 2019

 
 

Operating lease right-of-use assets

   

              2,360,000

 
 

Accumulated amortization

   

               (487,000)

 
 

Net lease assets

   

 1,873,000

 
 

 

   

 

 
 

Liabilities

   

 

 
 

Current

   

 

 
 

Operating

   

              1,006,000

 
 

Noncurrent

   

 

 
 

Operating

   

 867,000

 
 

Total lease liabilities

   

 1,872,000

 
 

 

   

 

 
 

Weighted average remaining term (years) – operating leases (in years)

   

3

 
 

 

   

 

 
 

Weighted average discount rate – operating leases

   

10%

 

 

 

During the three months ended June 30, 2019, we recorded expenses related to

 

 

  Operating right-of-use lease asset amortization     239,000  
           
 

Financing lease asset amortization

    -  
 

Related interest expense

    -  
           
 

Total expense during three months ended June 30, 2019

    239,000  

 

 

During the six months ended June 30, 2019, we recorded expenses related to

 

 

 

Operating right-of-use lease asset amortization

    487,000  
           
 

Financing lease asset amortization

    -  
 

Related interest expense

    -  
           
 

Total expense during six months ended June 30, 2019

    487,000  

 

 

 

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

 

Forward Looking S tatements

 

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 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 most of our 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, home organizing and container products, Candy Blossoms and party goods.

 

As of January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.

 

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606.

 

We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

 

 

As of January 1, 2019, we adopted ASC Topic 842, Leases (“ASC Topic 842”). Refer to Note 12 for additional information. Our primary leases relate to the facilities we use in Lake Zurich, IL (USA), Mexico, Germany and the UK. We also have ancillary leases for items ranging from forklifts to printers. The majority of our leases are classified as operating lease right-of-use (“ROU”) assets and related operating lease liabilities. Finance leases are included in property and equipment and related liabilities. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at the commencement date for leases that exceed 12 months. The expected lease term includes options to renew when it is reasonably certain that we will exercise such option.

 

Operating lease expense is recognized on a straight-line basis over the lease term and is included in the cost of sales or sales, general and administrative expense areas. Finance leases are amortized on a straight-line basis and included in similar areas of expense classification. Variable lease payments, non-lease component payments, and short-term rentals (leases less than 12 months in duration) are expensed as incurred.

 

Summary of Current Developments and Status  

 

For the quarter ended June 30, 2019, we have reported a loss of $3.1 million and, for the six- month period ended that date, a loss of $4.0 million.  The loss of those periods includes a non-cash charge of $3.0 million which we have recognized in the second quarter of 2019, in anticipation of the divestiture or liquidation of our European sales entities and Clever Container.  Our management and Board have engaged in a review of these subsidiaries and determined that they are not sufficiently productive to our Company overall, add complexity to our structure and utilize resources.  This action is being taken to focus our resources and efforts on our core business activities, particularly in the United States.  This charge is a reserve in connection with the divestiture or liquidation and resulting deconsolidation of those entities.

 

We have operated throughout 2019 out of compliance with the terms of our credit facility.  In March 2019, we entered into a forbearance agreement with our bank (the “Bank”) in which we acknowledged continuing violations on our part with respect to loan covenants and the Bank agreed to continue to provide funding to us and to forbear from action on the covenant violations until July 31, 2019 when our compliance with covenants as of June 30, 2019 would be determined.  As of that date, we determined that we did not comply with our bank covenants as of June 30, 2019 and, on August 1, 2019, the bank issued a Notice of Default and Reservation of Rights letter to us, under which the Bank communicated that it may, at its sole discretion, continue to provide advances to us under certain conditions.  We have no assurance of continued funding from the Bank and the costs and risks of continued financing with the Bank remain very high.

 

During 2019, we have attempted to complete a major capital event in which a new partner would infuse capital or otherwise provide financing to us. To date, we have not received a commitment for any capital or other funding, in part related to concerns expressed regarding complexity.  We continue to seek additional funding in various forms, including debt financing, but there can be no assurance that such efforts will be successful.  We are considering potential changes to our corporate structure, including but not limited to, whether to remain a publicly traded company.  No conclusions have yet been reached. 

 

During much of 2019 and currently, we have experienced difficulties in maintaining adequate working capital which has been exacerbated by reduced sales due to the helium shortage and excess labor costs.

 

In these circumstances, we believe that substantial doubt exists concerning our ability to continue as a going concern as of June 30, 2019 and on an ongoing basis, which may be mitigated by obtaining a additional financing and/or executing some form of transaction. 

 

Results of Operations

 

Net Sales . For the three and six month periods ended June 30, 2019, net sales were $12,407,000 and $24,943,000, compared to net sales of $15,985,000 and $29,964,000 for the same periods of 2018. For the three month period ended June 30, 2019 and 2018, net sales by product category were as follows:

 

   

Three Months Ended

 
   

June 30, 2019

   

June 30, 2018

 
   

$

   

% of

   

$

   

% of

 

Product Category

 

(000) Omitted

   

Net Sales

   

(000) Omitted

   

Net Sales

 
                                 

Foil Balloons

    4,927       41 %     6,508       41 %
                                 

Latex Balloons

    1,983       14 %     2,333       14 %
                                 

Vacuum Sealing Products

    1,912       12 %     1,865       12 %
                                 

Film Products

    478       4 %     609       4 %
                                 

Other Sales

    3,107       29 %     4,670       29 %
                                 

Total

    12,407       100 %     15,985       100 %

 

 

For the six month period ended June 30, 2019 and 2018, net sales by product category were as follows:

 

   

Six Months Ended

 
   

June 30, 2019

   

June 30, 2018

 
    $    

% of

    $    

% of

 

Product Category

 

(000) Omitted

   

Net Sales

   

(000) Omitted

   

Net Sales

 
                                 

Metalized Balloons

    11,408       45 %     14,274       48 %
                                 

Latex Balloons

    3,970       16 %     4,482       15 %
                                 

Vacuum Sealing Products

    4,064       16 %     3,453       11 %
                                 

Film Products

    1,239       5 %     1,047       3 %
                                 

Other

    4,262       18 %     6,708       23 %
                                 

Total

    24,943       100 %     29,964       100 %

 

Foil Balloons . During the three and six months ended June 30, 2019, revenues from the sale of foil balloons decreased by 24% and 20%, respectively compared to the prior year period, from $6,508,000 and $14,274,000 during 2018, respectively, to $4,927,000 and $11,408,000 during 2019. Sales to our largest balloon customer decreased from $8,110,000 during the first six months of 2018 to $6,630,000 during the first six months of 2019. As we and others in the industry have reported, the commercial supply of helium has been limited and pricing has increased, while availability has been reduced. We expect the helium market to improve during the next few months, but it remains a negative factor in the sale of helium-based products such as many foil balloons.

 

Latex Balloons. During the three and six months ended June 30, 2019, revenues from the sale of latex balloons decreased by 15% and 11%, respectively compared to the prior year period, from $2,333,000 and $4,482,000 during 2018, respectively, to $1.983,000 and $3,970,000 during 2019.

 

Vacuum Sealing Products . During the three and six months ended June 30, 2019, revenues from the sale of vacuum sealing products increased by 2% and 18%, respectively compared to the prior year period, from $1,865,000 and $3,453,000 during 2018, respectively, to $1,912,000 and $4,064,000 during 2019. The new, smaller format machine introduced late during 2018 has sold well, and customers have largely accepted the cost pass-throughs related to tariffs.

 

 

Films . During the three and six months ended June 30, 2019, revenues from the sale of commercial films decreased by 22% and increased 18%, respectively, compared to the prior year period, from $609,000 and $1,047,000 during 2018, respectively, to $478,000 and $1,239,000 during 2019.

 

Other Revenues . During the three and six months ended June 30, 2019, revenues from the sale of other products decreased by 33% and 36%, respectively compared to the prior year period, from $4,670,000 and $6,708,000 during 2018, respectively, to $3,107,000 and $4,262,000 during 2019. The revenues from the sale of other products during the first six months of 2019 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers in the amount of $2,217,000, (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors in the amount of $263,000 and (iv) sales of party goods in Mexico by Flexo Universal in the amount of $718,000. Clever Container changed its business model to one of both lower costs and revenues compared to its prior business model, reducing the revenues shown in Other Revenues. This business is expected to be divested during 2019.

 

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

The table below illustrates the impact on sales of our top three and ten customers for the three and six months ended June 30, 2019 and 2018.

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

% of Sales

   

% of Sales

 
   

201 9

   

2018

   

201 9

   

2018

 
                                 

Top 3 Customers

    61.3 %     57.5 %     57.3 %     55.1 %
                                 

Top 10 Customers

    76.9 %     72.5 %     75.0 %     69.1 %

 

During the three and six months ended June 30, 2019, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three months ended June 30, 2019 were $4,179,000 or 34%, and $2,769,000 or 22%, of consolidated net sales, respectively. Sales to these customers for the three months ended June 30, 2018 were $4,871,000 or 30%, and $3,660,000 or 23%, of consolidated net sales, respectively. The amounts owed at June 30, 2019 by these customers were $2,488,000 or 28%, and $1,044,000 or 12%, of the Company’s consolidated net accounts receivable, respectively. As of June 30, 2018, the total amounts owed to the Company by these customers were $4.808,000 or 54%, and $1,524,000 or 17% of the Company’s consolidated net accounts receivable, respectively.

 

Cost of Sales . During the three and six month periods ended June 30, 2019, the cost of sales was $9,869,000 and $20,409,000, respectively, compared to $12,189,000 and $23,300,000 for the same periods ended June 30, 2018. The reduction in cost of sales was largely due to lower sales volume, net of related inefficiencies.

 

 

General and Administrative . During the three and six months ended June 30, 2019, general and administrative expenses were $1,531,000 and $3,587,000, respectively, as compared to $1,680,000 and $3,565,000 for the same periods in 2018. A one-time fee associated with the forbearance agreement in the amount of $250,000 was included in the first three months of 2019 general and administrative expenses.

 

Selling , Advertising and Marketing . During the three and six months ended June 30, 2019, selling, advertising and marketing expenses were $685,000 and $1,397,000, respectively, as compared to $1,290,000 and $2,446,000, respectively for the same periods in 2018. This reduction was primarily due to the full year benefit of cost reduction programs implemented during 2018.

 

Other Income (Expense) . During the three and six months ended June 30, 2019, the Company incurred interest expense of $516,000 and $1,063,000, respectively, as compared to interest expense during the same periods of 2018 of $551,000 and $1,115,000. We recognized a $3 million charge during June 2019 in anticipation of deconsolidating Clever Container and our two European sales companies during 2019.

 

For the three and six months ended June 30, 2019, the Company had a foreign currency transaction gains of $61,000 and $297,000, respectively, as compared to foreign currency transaction losses of $775,000 and $342,000 during the same periods of 2018.

 

Financial Condition, Liquidity and Capital Resources

 

Cash Flow Items.

 

Operating Activities . During the six months ended June 30, 2019, net cash provided by operations was $2,582,000, compared to net cash used by operations during the six months ended June 30, 2018 of $273,000.

 

Significant changes in working capital items during the six months ended June 30, 2019 included:

 

 

A decrease in accounts receivable of $2,001,000 compared to an increase in accounts receivable of $671,000 in the same period of 2018.

 

An increase in inventory of $475,000 compared to an increase in inventory of $484,000 in 2018.

 

An increase in trade payables of $1,921,000 compared to an increase in trade payables of $801,000 in 2018.

 

A decrease in accrued liabilities of $477,000 compared to a decrease in accrued liabilities of $286,000 in 2018.

 

Investing Activity. During the six months ended June 30, 2019, cash used in investing activity was $73,000, compared to cash used in investing activity for the same period of 2018 in the amount of $18,000.

 

 

Financing Activities . During the six months ended June 30, 2019, cash used in financing activities was $2,684,000 compared to cash provided by financing activities for the same period of 2018 in the amount of $532,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt.

 

Liquidity and Capital Resources .

 

At June 30, 2019, the Company had cash balances of $178,000 compared to cash balances of $453,000 for the same period of 2018.

 

Also, at June 30, 2019, the Company had a working capital balance of $1,936,000 compared to a working capital balance of $2,802,000 on December 31, 2018.

 

As of June 30, 2019, the Company was not in compliance with its credit facility, operating under a forbearance agreement. For this reason, $2.9 million of long-term debt was reclassified as current debt as of June 30, 2019. Failure to ultimately regain compliance with the terms of our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to carry on our business up to and including our ability to continue as a going concern. Additionally, we have encountered difficulties with seasonal cash flow needs, including increased costs associated with recruiting and retaining workers in the Chicago area. The failure to either regain compliance with the terms of our credit facility or properly manage seasonal cash needs could put a strain on the Company, up to and including our ability to continue as a going concern. See Note 2 for additional discussion.

 

Seasonality

 

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

 

Critical Accounting Policies

 

Please see pages 24-27 of our Annual Report on Form 10-K for the year ended December 31, 2018 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. Except for the adoption of ASC Topic 842 (Leases) as described herein, no material changes to such information have occurred during the three months ended June 30, 2019.

 

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

 

Not applicable.

 

 

Item 4. Controls and Procedures

 

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019, the end of the period covered by this report. This evaluation specifically considered the material weakness in our internal controls over financial reporting which we reported in our Annual Report on Form 10-K as of December 31, 2018. We determined at that time that certain subsequent events were not properly captured in our analyses of investment impairment, inventory reserves and deferred tax asset valuation allowances. Management adjusted its processes to include additional closing procedures designed to address this weakness. This evaluation of effectiveness and design specifically looked at the effectiveness of the new procedures on the identified material weakness in internal controls.

 

Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019, to ensure that the information required to be disclosed by us in the reports that we file or submit under Security Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including officers, as appropriate, to allow for timely decisions regarding required disclosure. Except as noted above, there were no material changes in our internal control over financial reporting during the three and six months ended June 30, 2019 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 may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.

 

 

Item 1A. Risk Factors

 

Not applicable.

 

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

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

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

 

Not applicable.

 

 

Item 5.  Other Information

 

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

 

Item 6. Exhibits

 

The following are being filed as exhibits to this report:

 

Exhibit

Number

Description

   

3.1

Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015).

3.2

Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017).

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101

Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, 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.

 

 

SIGNATURES

 

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

 

Dated: August 19, 2019

CTI INDUSTRIES CORPORATION

 

     

 

 

 

 

 

 

 

 

 

By:

/s/  Jeffrey S. Hyland

 

 

 

Jeffrey S. Hyland

 

 

 

President and Chief Executive Officer

 

       
       
       
  By: /s/ Frank J. Cesario  
    Frank J. Cesario  
    Chief Financial Officer  

               

 

Exhibit Index

 

Exhibit

Number

Description

3.1

Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015).

3.2

Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017).

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101

Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, 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.

 

26

CTI Industries (NASDAQ:CTIB)
Historical Stock Chart

1 Year : From Jan 2019 to Jan 2020

Click Here for more CTI Industries Charts.

CTI Industries (NASDAQ:CTIB)
Intraday Stock Chart

Today : Wednesday 29 January 2020

Click Here for more CTI Industries Charts.

Latest CTIB Messages

{{bbMessage.M_Alias}} {{bbMessage.MSG_Date}} {{bbMessage.HowLongAgo}} {{bbMessage.MSG_ID}} {{bbMessage.MSG_Subject}}

Loading Messages....


No posts yet, be the first! No {{symbol}} Message Board. Create One! See More Posts on {{symbol}} Message Board See More Message Board Posts
Your Recent History
LSE
GKP
Gulf Keyst..
LSE
QPP
Quindell
FTSE
UKX
FTSE 100
LSE
IOF
Iofina
FX
GBPUSD
UK Sterlin..
Stocks you've viewed will appear in this box, letting you easily return to quotes you've seen previously.

Register now to create your own custom streaming stock watchlist.

NYSE, AMEX, and ASX quotes are delayed by at least 20 minutes.
All other quotes are delayed by at least 15 minutes unless otherwise stated.

By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions

P: V:us D:20200129 06:00:32