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 | ||
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 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 ☑☒ 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 | ☑ | ||||
Emerging | ☐ |
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 NovemberAugust 1, 20182019 was 3,530,227.3,835,950.
Item No. 1. | ||
1 | ||
2 | ||
3 | ||
4 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) |
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Item No. 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item No. 3 | Quantitative and Qualitative Disclosures Regarding Market Risk |
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Item No. 4 |
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Item No. 1 |
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Item No. 1A |
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Item No. 2 |
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Item No. 3 |
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Item No. 4 |
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Item No. 5 |
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Item No. 6 |
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25 | ||
Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 32 |
Condensed Consolidated Balance Sheets |
September 30, 2018 | December 31, 2017 | June 30, 2019 | December 31, 2018 | |||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents (VIE $2,000 and $2,000, respectively) | $ | 273,839 | $ | 181,026 | ||||||||||||
Accounts receivable, (less allowance for doubtful accounts of $76,000 and $114,000, respectively) | 9,676,660 | 11,235,834 | ||||||||||||||
Inventories, net (VIE $459,000 and $498,000, respectively) | 19,831,819 | 18,865,932 | ||||||||||||||
Prepaid expenses (VIE $162,000 and $80,000, respectively) | 1,458,860 | 887,885 | ||||||||||||||
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 | 1,397,204 | 1,120,808 | 1,342,896 | 886,383 | ||||||||||||
Total current assets | 32,638,382 | 32,291,485 | 31,319,522 | 33,010,734 | ||||||||||||
Property, plant and equipment: | ||||||||||||||||
Machinery and equipment | 23,582,048 | 23,439,781 | 23,880,732 | 23,807,985 | ||||||||||||
Building | 3,367,082 | 3,367,082 | 3,374,334 | 3,367,082 | ||||||||||||
Office furniture and equipment (VIE $303,000 and $268,000, respectively) | 2,662,556 | 2,591,159 | ||||||||||||||
Office furniture and equipment (VIE $303,000 and $303,000, respectively) | 2,685,450 | 2,649,280 | ||||||||||||||
Intellectual property | 752,044 | 752,044 | 783,179 | 783,179 | ||||||||||||
Land | 250,000 | 250,000 | 250,000 | 250,000 | ||||||||||||
Leasehold improvements | 410,683 | 402,963 | 413,053 | 409,188 | ||||||||||||
Fixtures and equipment at customer locations | 518,450 | 518,450 | 518,450 | 518,450 | ||||||||||||
Projects under construction | 360,827 | 121,241 | 180,955 | 150,272 | ||||||||||||
31,903,690 | 31,442,720 | 32,086,153 | 31,935,436 | |||||||||||||
Less : accumulated depreciation and amortization (VIE $91,000 and $36,000, respectively) | (27,925,082 | ) | (26,886,139 | ) | ||||||||||||
Less : accumulated depreciation and amortization (VIE $107,000 and $104,000, respectively) | (28,657,592 | ) | (28,120,455 | ) | ||||||||||||
Total property, plant and equipment, net | 3,978,608 | 4,556,581 | 3,428,561 | 3,814,981 | ||||||||||||
Other assets: | ||||||||||||||||
Goodwill (VIE $440,000 and $440,000, respectively) | 1,473,176 | 1,473,176 | 1,473,176 | 1,473,176 | ||||||||||||
Net deferred income tax asset (VIE $105,000 and $52,000, respectively) | 1,431,634 | 1,102,467 | ||||||||||||||
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 | 537,806 | 560,329 | 15,274 | 326,849 | ||||||||||||
Total other assets | 3,442,616 | 3,135,972 | 900,225 | 1,935,119 | ||||||||||||
TOTAL ASSETS | $ | 40,059,606 | $ | 39,984,038 | $ | 35,648,308 | $ | 38,760,834 | ||||||||
LIABILITIES AND EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Checks written in excess of bank balance (VIE $11,000 and $16,000, respectively) | $ | 604,297 | $ | 454,850 | ||||||||||||
Trade payables (VIE $258,000 and $144,000, respectively) | 5,925,071 | 5,414,497 | ||||||||||||||
Line of credit (VIE $285,000 and $338,000, respectively) | 14,616,666 | 13,783,930 | ||||||||||||||
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 | 4,867,924 | 942,533 | 4,522,104 | 4,432,320 | ||||||||||||
Notes payable affiliates - current portion | 11,028 | 9,615 | 11,727 | 10,821 | ||||||||||||
Capital Lease - current portion | - | 7,562 | ||||||||||||||
Accrued liabilities (VIE $91,000 and $92,000, respectively) | 2,116,742 | 2,047,893 | ||||||||||||||
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 | 28,141,728 | 22,660,880 | 29,383,038 | 30,208,712 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Notes payable - affiliates | 192,737 | 212,545 | 222,408 | 199,122 | ||||||||||||
Notes payable, net of current portion (VIE $38,000 and $83,000, respectively) | 356,356 | 4,951,581 | ||||||||||||||
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 | 1,573,302 | 1,507,362 | 1,027,280 | 1,597,019 | ||||||||||||
Deferred gain (non current) | 133,447 | 207,410 | 257,348 | 100,340 | ||||||||||||
Deferred income tax liability | - | - | - | |||||||||||||
Total long-term debt, net of current portion | 2,255,842 | 6,878,898 | 2,817,531 | 2,296,393 | ||||||||||||
Total long-term liabilities | 2,255,842 | 6,878,898 | 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, 3,573,885 shares issued and 3,530,227 shares outstanding | 13,898,494 | 13,898,494 | ||||||||||||||
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 | 2,410,711 | 2,271,261 | 3,461,832 | 2,506,437 | ||||||||||||
Accumulated earnings | (51,877 | ) | 720,223 | (6,840,594 | ) | (2,865,486 | ) | |||||||||
Accumulated other comprehensive loss | (5,475,969 | ) | (5,365,364 | ) | (5,753,138 | ) | (6,050,347 | ) | ||||||||
Less: Treasury stock, 43,658 shares | (160,784 | ) | (160,784 | ) | (160,784 | ) | (160,784 | ) | ||||||||
Total CTI Industries Corporation stockholders' equity | 10,620,575 | 11,363,830 | 4,605,810 | 7,328,314 | ||||||||||||
Noncontrolling interest | (958,539 | ) | (919,570 | ) | (1,158,071 | ) | (1,072,585 | ) | ||||||||
Total Equity | 9,662,036 | 10,444,260 | 3,447,739 | 6,255,729 | ||||||||||||
TOTAL LIABILITIES AND EQUITY | $ | 40,059,606 | $ | 39,984,038 | $ | 35,648,308 | $ | 38,760,834 |
See accompanying notes to condensed consolidated unaudited financial statements |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net Sales | $ | 11,525,469 | $ | 13,225,954 | $ | 41,489,372 | $ | 41,397,288 | $ | 12,406,840 | $ | 15,984,726 | $ | 24,943,229 | $ | 29,963,903 | ||||||||||||||||
Cost of Sales | 9,336,935 | 10,039,044 | 32,636,925 | 31,475,520 | 9,869,107 | 12,189,204 | 20,409,325 | 23,299,990 | ||||||||||||||||||||||||
Gross profit | 2,188,534 | 3,186,910 | 8,852,447 | 9,921,768 | 2,537,733 | 3,795,522 | 4,533,904 | 6,663,913 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
General and administrative | 1,509,804 | 1,923,315 | 5,074,340 | 5,691,186 | 1,531,125 | 1,680,490 | 3,587,197 | 3,564,536 | ||||||||||||||||||||||||
Selling | 728,303 | 861,856 | 2,545,635 | 2,771,150 | 415,038 | 958,796 | 852,603 | 1,817,333 | ||||||||||||||||||||||||
Advertising and marketing | 302,985 | 454,927 | 931,475 | 1,548,709 | 270,355 | 331,609 | 544,235 | 628,489 | ||||||||||||||||||||||||
Gain on sale of assets | (24,061 | ) | (27,426 | ) | (71,474 | ) | (119,127 | ) | (23,662 | ) | (22,998 | ) | (47,209 | ) | (47,413 | ) | ||||||||||||||||
Other operating income | - | (1,416 | ) | |||||||||||||||||||||||||||||
Total operating expenses | 2,517,031 | 3,212,672 | 8,479,976 | 9,890,502 | 2,192,856 | 2,947,897 | 4,936,826 | 5,962,945 | ||||||||||||||||||||||||
(Loss) Income from operations | (328,497 | ) | (25,762 | ) | 372,471 | 31,266 | ||||||||||||||||||||||||||
Income from operations | 344,877 | 847,625 | (402,922 | ) | 700,968 | |||||||||||||||||||||||||||
Other (expense) income: | ||||||||||||||||||||||||||||||||
Interest expense | (471,268 | ) | (367,391 | ) | (1,586,108 | ) | (1,100,038 | ) | (516,161 | ) | (550,780 | ) | (1,063,067 | ) | (1,114,840 | ) | ||||||||||||||||
Interest income | 5,423 | 16,467 | 335 | 11,389 | 336 | 11,043 | ||||||||||||||||||||||||||
Change in fair value of warrants | (3,809 | ) | 19,999 | |||||||||||||||||||||||||||||
Other Expense | (3,000,000 | ) | - | (3,000,000 | ) | - | ||||||||||||||||||||||||||
Foreign currency loss | 35,528 | (11,430 | ) | 53,311 | (92,382 | ) | 9,444 | (13,246 | ) | 849 | 17,783 | |||||||||||||||||||||
Total other expense, net | (430,317 | ) | (382,630 | ) | (1,516,330 | ) | (1,172,421 | ) | (3,506,382 | ) | (552,637 | ) | (4,061,882 | ) | (1,086,014 | ) | ||||||||||||||||
Net (loss) before taxes | (758,814 | ) | (408,392 | ) | (1,143,859 | ) | (1,141,155 | ) | ||||||||||||||||||||||||
Net income before taxes | (3,161,505 | ) | 294,988 | (4,464,804 | ) | (385,046 | ) | |||||||||||||||||||||||||
Income tax expense | (212,589 | ) | (125,678 | ) | (332,791 | ) | (313,151 | ) | (43,719 | ) | 89,281 | (404,210 | ) | (120,202 | ) | |||||||||||||||||
Net (loss) | (546,225 | ) | (282,714 | ) | (811,068 | ) | (828,004 | ) | ||||||||||||||||||||||||
Net income | (3,117,786 | ) | 205,707 | (4,060,594 | ) | (264,844 | ) | |||||||||||||||||||||||||
Less: Net (loss) income attributable to noncontrolling interest | 13,072 | (8,014 | ) | (38,968 | ) | (85,645 | ) | (23,099 | ) | (44,497 | ) | (85,486 | ) | (52,040 | ) | |||||||||||||||||
Net loss attributable to CTI Industries Corporation | $ | (559,297 | ) | $ | (274,700 | ) | $ | (772,100 | ) | $ | (742,359 | ) | ||||||||||||||||||||
Net income attributable to CTI Industries Corporation | $ | (3,094,688 | ) | $ | 250,204 | $ | (3,975,108 | ) | $ | (212,804 | ) | |||||||||||||||||||||
Other Comprehensive Income (Loss) | ||||||||||||||||||||||||||||||||
Foreign currency adjustment | 231,827 | (260,469 | ) | (110,605 | ) | 492,900 | 61,333 | (775,497 | ) | 297,209 | (342,432 | ) | ||||||||||||||||||||
Comprehensive Income (Loss) | $ | (327,470 | ) | $ | (535,169 | ) | $ | (882,705 | ) | $ | (249,459 | ) | $ | (3,033,355 | ) | $ | (525,293 | ) | $ | (3,677,899 | ) | $ | (555,236 | ) | ||||||||
Basic loss per common share | $ | (0.16 | ) | $ | (0.08 | ) | $ | (0.22 | ) | $ | (0.20 | ) | ||||||||||||||||||||
Basic income per common share | $ | (0.81 | ) | $ | 0.07 | $ | (1.04 | ) | $ | (0.06 | ) | |||||||||||||||||||||
Diluted loss per common share | $ | (0.16 | ) | $ | (0.08 | ) | $ | (0.22 | ) | $ | (0.20 | ) | ||||||||||||||||||||
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 | 3,530,227 | 3,641,439 | 3,530,227 | 3,641,439 | 3,835,950 | 3,530,227 | 3,835,950 | 3,530,227 | ||||||||||||||||||||||||
Diluted | 3,530,227 | 3,641,439 | 3,530,227 | 3,789,081 | 3,835,950 | 3,567,315 | 3,835,950 | 3,530,227 |
See accompanying notes to condensed consolidated unaudited financial statements |
Condensed Consolidated Statements of Cash Flows (Unaudited) |
For the Nine Months Ended September 30, | For the Six Months Ended June 30, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net (loss) income | $ | (811,068 | ) | $ | (828,004 | ) | ||||||||||
Net income | $ | (4,060,594 | ) | $ | (264,844 | ) | ||||||||||
Depreciation and amortization | 981,449 | 1,163,736 | 522,670 | 701,839 | ||||||||||||
Amortization of debt discount | - | 112,622 | ||||||||||||||
Change in fair value of warrants | - | (19,999 | ) | |||||||||||||
Stock based compensation | 139,450 | - | ||||||||||||||
Operating cash flows from operating leases | 487,239 | - | ||||||||||||||
Amortization of deferred gain on sale/leaseback | (83,394 | ) | (84,759 | ) | 155,433 | (55,320 | ) | |||||||||
Provision for losses on accounts receivable | (40,924 | ) | (20,882 | ) | 7,657 | (10,471 | ) | |||||||||
Provision for losses on inventories | 14,250 | 94,518 | 25,415 | (29,386 | ) | |||||||||||
Deferred income taxes | (347,725 | ) | (409,621 | ) | (404,210 | ) | (90,206 | ) | ||||||||
Loss on disposition of asset | 17,480 | |||||||||||||||
Change in assets and liabilities: | ||||||||||||||||
Accounts receivable | 1,717,018 | 5,864,010 | 2,001,248 | (671,380 | ) | |||||||||||
Other non-current assets | 3,000,000 | |||||||||||||||
Inventories | (819,293 | ) | (324,813 | ) | (474,804 | ) | (483,573 | ) | ||||||||
Prepaid expenses and other assets | (776,294 | ) | 16,362 | (140,125 | ) | 115,988 | ||||||||||
Trade payables | 385,715 | (60,770 | ) | 1,921,337 | 800,813 | |||||||||||
Accrued liabilities | (267,938 | ) | (272,183 | ) | (476,644 | ) | (285,976 | ) | ||||||||
Net cash provided by operating activities | $ | 91,246 | $ | 5,230,217 | ||||||||||||
Net cash provided by (used in) operating activities | 2,582,102 | (272,516 | ) | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property, plant and equipment | (323,785 | ) | (735,567 | ) | (72,662 | ) | (18,193 | ) | ||||||||
Net cash used in investing activities | $ | (323,785 | ) | $ | (735,567 | ) | ||||||||||
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 | 149,447 | (1,170,599 | ) | 394,227 | (445,854 | ) | ||||||||||
Net change in revolving line of credit | 821,390 | (2,758,809 | ) | (4,160,724 | ) | 1,699,201 | ||||||||||
Repayment of long-term debt (related parties $17,000 and $0) | (697,040 | ) | (466,638 | ) | ||||||||||||
Repayment of long-term debt | (554,768 | ) | (768,003 | ) | ||||||||||||
Proceeds from issuance of stock | 955,396 | 105,745 | ||||||||||||||
Cash paid for deferred financing fees | (32,805 | ) | (20,298 | ) | 31,388 | (59,530 | ) | |||||||||
Net cash (used in) provided by financing activities | $ | 240,992 | $ | (4,416,344 | ) | |||||||||||
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 | 84,360 | (316,637 | ) | (74,811 | ) | 30,950 | ||||||||||
Net increase (decrease) in cash and cash equivalents | 92,813 | (238,331 | ) | |||||||||||||
Net increase/(decrease) in cash and cash equivalents | (249,852 | ) | 271,800 | |||||||||||||
Cash and cash equivalents at beginning of period | 181,026 | 563,043 | 428,150 | 181,026 | ||||||||||||
Cash and cash equivalents at end of period | $ | 273,839 | $ | 324,712 | $ | 178,298 | $ | 452,826 | ||||||||
$ | - | $ | - | |||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash payments for interest | 1,381,149 | 934,057 | 1,045,943 | $ | 934,231 | |||||||||||
Cash payments for taxes | - | 300,000 | ||||||||||||||
Supplemental Disclosure of non-cash investing and financing activity | ||||||||||||||||
Exchange of Note Payable for Warrants | 797,881 | |||||||||||||||
Property, Plant & Equipment acquisitions funded by liabilities | $ | 39,319 | $ | 19,580 | $ | 34,046 | $ | 82,231 |
See accompanying notes to condensed consolidated unaudited financial statements |
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, 2017,2018, 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 SeptemberJune 30, 20182019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.2019. 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, 2017.2018.
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 SeptemberJune 30, 20182019 and 2017,2018, shares to be issued upon the exercise of options and warrants aggregated 471,000 and 205,000, respectively.471,144 for each period. The number of shares included in the determination of earnings on a diluted basis for the three months ended SeptemberJune 30, 2019 and 2018 and 2017 were 25,000 and 282,000, respectively. For the nine months ended September 30, 2018 and 2017, the same share disclosure was 25,000 and 178,000, respectively. 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, 2017.2018. There were no significant changes to these accounting policies during the three or ninesix months ended SeptemberJune 30, 2018, respectively,2019, except for the adoption of Accounting Standards Codification (ASC) Topic 606,842, Revenue from ContractsLeases.
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 Customers. 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.
Recent Accounting Pronouncements: 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 Februaryaddition to the above, due to financial performance in 2016, 2017 and 2018, including net income/(losses) attributable to the FASB issued ASU 2016-02, Leases (Topic 842)Company of $0.7 million, ($1.6 million), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet($3.6 million), respectively, we believe that substantial doubt about our ability to continue as a right-of-use assetgoing 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 corresponding lease liability, including today’s operating leases. For public business entities,labor costs, along with a supply disruption in the standard is effective for fiscal years beginning after December 15, 2018, including interim periodshelium market. These changes in cash flows have created very significant strain within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15,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, interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. While we are currently evaluatingif successfully executed, may mitigate the potential impact of this new standard, we expect thatsubstantial doubt about our property, plant and equipment will increase significantly dueability to the addition of assets currently under lease, and the lease liabilities will correspondingly increase.continue as a going concern.
Note 23 - Debt
Until December 2017, we had in place a series of credit facility and related agreements with BMO Harris Bank, N.A. and BMO Private Equity (U.S.), (collectively, “BMO”), in the aggregate amount of approximately $17 million. During December 2017, we terminated those agreementsa prior credit arrangement and fully repaid all amounts owed BMO under those agreements, including associated fees and costs related to termination, as we 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. As of the date of this filing marketMarket conditions haveultimately forced us to postpone the offering, and thus any ultimateno proceeds would occur afterwere received by the November 15, 2018. 2018 requirement.
We intend to engage our bankengaged PNC to resolve this impending failure to meet our amended covenant. As we expectcovenant, 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 bezero 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 this requirement, wethe terms of our facility and have thus reclassified long-term bank debt to current liabilities on our balance sheet. See Note 3 for a related discussion of the impact of this event.
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 as amended, 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 |
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 |
Fiscal Quarter Ratio | Fiscal Quarter Ratio | ||||||||||
December 31, 2017 | 4.75 | to | 1.00 | 4.75 | to | 1.00 | |||||
March 31, 2018 | 4.50 | to | 1.00 | ||||||||
June 30, 2018 | 4.50 | to | 1.00 | ||||||||
June 30, 2018 | 4.50 | to | 1.00 | 4.25 | to | 1.00 | |||||
September 30, 2018 | not applicable | not applicable | |||||||||
December 31, 2018 | 3.50 | to | 1.00 | 3.50 | to | 1.00 | |||||
March 31, 2019 | 3.25 | to | 1.00 | not applicable | |||||||
June 30, 2019 | 3.00 | to | 1.00 | 3.00 | to | 1.00 | |||||
September 30, 2019 and thereafter | 2.75 | to | 1.00 | 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, |
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Meeting the above covenants are stipulated as a condition of the PNC Agreements. Failing to meet them could result in increased costs, and potentially, the loss of the credit facility. Any such failure could add financial stress to the Company, up to and including its ability to continue as a going concern.
The Amendment 1 fee was a one-time payment of $58,750. Additionally, the rate of interest increased by 2% until such time as the Fixed Charge Coverage Ratio for a twelve month period is greater than or equal to 1.10 to 1.00. The Amendment 2 fee was $34,500.
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.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. John Schwan was owed a total of approximately $1.1 million,$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 SeptemberJune 30, 2018,2019, with $23,000$15,000 and $30,000, respectively, of interest recorded as an expense.
Note 3 – Going Concern
The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the Credit Agreement with PNC (see Note 2). As noted in Note 2, we initiated an equity issuance process and entered into an amendment with PNC that would have allowed us more flexibility in the use of any equity proceeds, and committed us to raise at least $7.5 million by November 15, 2018. As we believe that condition will not be met, we expect to be in violation of our Agreement, as amended.
Management’s plans include:
(1) Working with our bank to resolve this anticipated compliance failure,
(2) Exploring alternative funding sources,
(3) Evaluating and potentially executing a sale/leaseback transaction of our facility in Lake Barrington, IL, and
(4) Continuing with the equity raise at the first opportunity that we think it likely to be successful.
Management Assessment
Based upon our historical ability to obtain necessary financing and our current expectations of future cash flow from operations, we believe we are likely to obtain necessary amendments and/or financing that will allow us to meet current obligations and to continue operating as a going concern. We do not have firm commitments from lenders or other investors at this time for a resolution.
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 20182019 and 2017.2018. 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 SeptemberJune 30, 20182019 and net loss for the three months ended September 30, 20172018 includes approximately $34,000$23,000 and $2,000,$44,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 2018in 2019 and 2017 includes approximately $139,000$52,000 and $12,000$172,000, respectively, of compensation costs related to share based payments. As of SeptemberJune 30, 2018,2019, there is $225,000was $140,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $32,000$40,000 of additional stock-based compensation expense to be recognized over the remainder of 2018, $92,000 to be recognized during 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.) As of September 30, 2018, all underlying awards under the 2009 Plan had been granted and options for 471,144 shares remain outstanding.
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.
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 | Shares under Option | Weighted Average Exercise Price | |||||||||||||
Balance at December 31, 2017 | 476,144 | $ | 3.97 | |||||||||||||
Balance at December 31, 2018 | 471,144 | $ | 3.95 | |||||||||||||
Granted | - | - | - | - | ||||||||||||
Cancelled/Expired | - | - | - | - | ||||||||||||
Exercised/Issued | (5,000 | ) | - | - | - | |||||||||||
Outstanding at September 30, 2018 | 471,144 | $ | 4.01 | |||||||||||||
Outstanding at June 30, 2019 | 471,144 | $ | 3.95 | |||||||||||||
Exercisable at September 30, 2018 | 157,639 | $ | 4.84 | |||||||||||||
Exercisable at June 30, 2019 | 165,264 | $ | 4.05 |
The instruments above have an aggregate intrinsic value of $83,000,$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 SeptemberJune 30, 20182019 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 SeptemberJune 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. (d\b\a) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company in the North Carolina State Court.based on disputed compensation amounts over several years. This action was removed toresolved by mutual agreement between the United States District Courtparties during January 2019. Mr. Page received 20,000 shares of CTI common stock, $5,000 in North Carolina.cash, and a minimum payout in his monthly royalty calculation of $7,667 beginning March 1, 2019 and ending August 1, 2021. The Company filed an answer and motion to dismissaccrued the $0.3 million in committed costs under this action. The Court stayed the action based upon an arbitration clausesettlement in the agreement on which part of the action was based. Onits December 18, 2017, Claimants filed an arbitration claim against the Company before the American Arbitration Association in Chicago, Illinois. The Statement of Claim includes claims for alleged breach of two agreements among the parties, essentially for alleged failure by the Company to pay disputed commission amounts. Claimants also included counts for alleged unjust enrichment and tortious interference with contract. The Company has filed a response to the Statement of Claim denying all of the claims. The Company believes the claims are without merit and intends to defend all of the claims vigorously. The Company has not accrued any amounts in respect of this matter and cannot estimate the possible loss, if any, that the Company many incur with respect to it.31, 2018 financial statements.
Note 6 - Other Comprehensive Income
In the ninethree and six months ended SeptemberJune 30, 2018,2019, the Company incurred other comprehensive lossincome of approximately $111,000,$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, 2018 | $ | (5,365,364 | ) | $ | (5,365,364 | ) | ||
Current period change, net of tax | (110,605 | ) | (110,605 | ) | ||||
Ending Balance as of September 30, 2018 | (5,475,969 | ) | (5,475,969 | ) |
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
September 30, 2018 | December 31, 2017 | |||||||
Raw materials | $ | 2,300,859 | $ | 2,632,415 | ||||
Work in process | 3,038,275 | 3,386,078 | ||||||
Finished goods | 15,006,551 | 13,347,620 | ||||||
Allowance for excess quantities | (513,866 | ) | (500,181 | ) | ||||
Total inventories | $ | 19,831,819 | $ | 18,865,932 |
June 30, 2019 | December 31, 2018 | |||||||
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 | Net Sales to Outside Customers | Net Sales to Outside Customers | |||||||||||||||||||||||||||||
For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
United States | $ | 7,736,000 | $ | 9,039,000 | $ | 29,549,000 | $ | 30,165,000 | $ | 9,095,000 | $ | 12,075,000 | $ | 17,855,000 | $ | 21,813,000 | ||||||||||||||||
Europe | 1,158,000 | 1,261,000 | 3,795,000 | 3,125,000 | $ | 1,083,000 | 1,275,000 | $ | 2,358,000 | 2,637,000 | ||||||||||||||||||||||
Mexico | 2,396,000 | 2,627,000 | 6,959,000 | 6,605,000 | $ | 2,022,000 | 2,378,000 | $ | 4,103,000 | 4,564,000 | ||||||||||||||||||||||
United Kingdom | 236,000 | 299,000 | 1,186,000 | 1,502,000 | $ | 207,000 | 257,0000 | $ | 627,000 | 950,000 | ||||||||||||||||||||||
$ | 11,526,000 | $ | 13,226,000 | $ | 41,489,000 | $ | 41,397,000 | $ | 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 |
| Total Assets at | |||||||
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
United States | $ | 25,644,000 | $ | 27,784,000 | ||||
Europe | 3,043,000 | 2,989,000 | ||||||
Mexico | 10,283,000 | 8,288,000 | ||||||
United Kingdom | 1,089,000 | 923,000 | ||||||
$ | 40,059,000 | $ | 39,984,000 |
Note 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 ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, 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 months ended SeptemberJune 30, 20182019 and 20172018 are as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 2,686,030 | 23.3 | % | 3,195,486 | 24.2 | % | |||||||||
Customer B | 2,395,460 | 20.8 | % | 2,283,424 | 17.3 | % |
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||
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 ninesix months ended SeptemberJune 30, 20182019 and 20172018 are as follows:
Nine Months Ended | Nine Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||||||||||||||
Customer A | $ | 10,796,452 | 26.0 | % | $ | 11,489,409 | 27.8 | % | $ | 6,337,000 | 25 | % | $ | 7.343,000 | 24 | % | ||||||||||||||||
Customer B | 9,737,989 | 23.5 | % | 6,457,251 | 15.6 | % | $ | 6,630,000 | 27 | % | $ | 8,110,000 | 27 | % |
As of SeptemberJune 30, 2018,2019, the total amounts owed to the Company by these customers were approximately $1,702,000$2,488,000 or 17.6%28%, and $2,241,000$1,044,000 or 23.2%12%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at SeptemberJune 30, 20172018 by these customers were approximately $1,491,000$4,808,000 or 19.6%54%, and $1,631,000$1,524,000 or 21.5%17% of the Company’s consolidated net accounts receivable, respectively.
Note 10 - Related Party Transactions
Until March 31, 2018, Stephen M. Merrick, Chief Executive Officer of the Company, wasis of counsel to the law firm of Vanasco Genelly and Miller PC which providedused to provide legal services to the Company. Legal fees paid by the Company to this firm for the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, were $0none and $29,000.$16,000. Legal fees paid by the Company to this firm for the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, were $88,000none and $93,000.$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 SeptemberJune 30, 20182019 and 2017,2018, Clever Container purchased various products from the Company in the amount of $198,000$1,000 and $262,000,$259,000, respectively. During the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, Clever Container purchased various products from the Company in the amount of $640,000$63,000 and $716,000,$442,000, respectively. As of SeptemberJune 30, 20182019 and 2017,2018, the balance of accounts receivable from Clever Container to the Company were $1,278,000$1,379,000 and $924,000,$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 11- 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 SeptemberJune 30, 20182019 and December 31, 2017,2018, we had one derivative instrument accounted for as a hedge, compared to no suchwith the same instrument accounted for as a hedge as of SeptemberJune 30, 2017.2018. 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, 2017.2018. 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 SeptemberJune 30, 2018 and December 31, 2017.2018 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 StatementsStatements
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 monthsand six month periods ended SeptemberJune 30, 2018,2019, net sales were $11,525,000$12,407,000 and $24,943,000, compared to net sales of $13,226,000$15,985,000 and $29,964,000 for the same periodperiods of 2017, a decrease of 12%.2018. For the quartersthree month period ended SeptemberJune 30, 20182019 and 2017,2018, net sales by product category were as follows:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||||||||
$ | % of | $ | % of | $ | % of | $ | % of | |||||||||||||||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||||||||||||||
Foil Balloons | 4,576 | 40 | % | 5,767 | 44 | % | 4,927 | 41 | % | 6,508 | 41 | % | ||||||||||||||||||||
Latex Balloons | 2,466 | 21 | % | 2,620 | 20 | % | 1,983 | 14 | % | 2,333 | 14 | % | ||||||||||||||||||||
Vacuum Sealing Products | 2,517 | 22 | % | 2,397 | 18 | % | 1,912 | 12 | % | 1,865 | 12 | % | ||||||||||||||||||||
Film Products | 320 | 3 | % | 658 | 5 | % | 478 | 4 | % | 609 | 4 | % | ||||||||||||||||||||
Other Sales | 1,646 | 14 | % | 1,784 | 13 | % | 3,107 | 29 | % | 4,670 | 29 | % | ||||||||||||||||||||
Total | 11,525 | 100 | % | 13,226 | 100 | % | 12,407 | 100 | % | 15,985 | 100 | % |
For the nine monthssix month period ended SeptemberJune 30, 2018, net sales were $41,489,000 compared to net sales of $41,397,000 for the same period of 2017. For the nine months ended September 30, 20182019 and 2017,2018, net sales by product category were as follows:
Nine Months Ended | ||||||||||||||||
September 30, 2018 | September 30, 2017 | |||||||||||||||
$ | % of | $ | % of | |||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
Foil Balloons | 18,850 | 46 | % | 21,447 | 52 | % | ||||||||||
Latex Balloons | 6,949 | 17 | % | 6,969 | 17 | % | ||||||||||
Vacuum Sealing Products | 5,970 | 14 | % | 5,668 | 14 | % | ||||||||||
Film Products | 1,367 | 3 | % | 2,194 | 5 | % | ||||||||||
Other Sales | 8,353 | 20 | % | 5,119 | 12 | % | ||||||||||
Total | 41,489 | 100 | % | 41,397 | 100 | % |
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 | % |
FoilBalloons. During the three and six months ended SeptemberJune 30, 2018,2019, revenues from the sale of foil balloons decreased by 24% and 20%, respectively compared to the prior year period, from $5,767,000$6,508,000 and $14,274,000 during 2018, respectively, to $4,576,000. During$4,927,000 and $11,408,000 during 2019. Sales to our largest balloon customer decreased from $8,110,000 during the ninefirst six months ended September 30,of 2018 revenues fromto $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 decreased by 12% compared to the prior year period from $21,447,000 to $18,850,000. During the first nine months of 2018, foil balloon sales to our largest customer decreased to $11,030,000 from $11,712,000 in the first nine months of 2017.balloons.
Latex Balloons. During the three and six months ended SeptemberJune 30, 2018,2019, revenues from the sale of latex balloons decreased by 6%15% and 11%, respectively compared to the prior year period, from $2,620,000$2,333,000 and $4,482,000 during 2018, respectively, to $2,466,000.$1.983,000 and $3,970,000 during 2019.
Vacuum SealingProducts. During the ninethree and six months ended SeptemberJune 30, 2018,2019, revenues from the sale of latex balloons slightly decreasedvacuum sealing products increased by 2% and 18%, respectively compared to the prior year period, from $6,969,000$1,865,000 and $3,453,000 during 2018, respectively, to $6,949,000.$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.
Vacuum Sealing Products. During the three months ended September 30, 2018, revenues from the sale
Films. During the three and six months ended SeptemberJune 30, 2018,2019, revenues from the sale of laminated film productscommercial films decreased by 51%22% and increased 18%, respectively, compared to the prior year period, from $658,000$609,000 and $1,047,000 during 2018, respectively, to $320,000. During the nine months ended September 30, 2018, revenues from the sale of laminated film products decreased by 38% compared to the prior year period from $2,194,000 to $1,367,000.$478,000 and $1,239,000 during 2019.
Other Revenues. During the three and six months ended SeptemberJune 30, 2018,2019, revenues from the sale of various other products decreased by 8% to $1,646,00033% and 36%, respectively compared to revenuesthe prior year period, from other products in the same period in 2017 of $1,784,000. During the nine months ended September 30,$4,670,000 and $6,708,000 during 2018, revenues from the sale of various other products increased by 63%respectively, to $8,353,000 compared to revenues from other products in the same period in 2017 of $5,119,000.$3,107,000 and $4,262,000 during 2019. The revenues from the sale of other products during the first ninesix months of 20182019 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 approximately $3,500,000,$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. We believe that changesUniversal in tariffs between the United States and China may negatively impact the costamount of products sold by$718,000. Clever Container Company, L.L.C., which may negatively impact profitability. 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 SeptemberJune 30, 20182019 and 2017.2018.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
% of Sales | % of Sales | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Top 3 Customers | 50 | % | 47 | % | 60 | % | 50 | % | ||||||||
Top 10 Customers | 67 | % | 66 | % | 74 | % | 65 | % |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
% of Sales | % of Sales | |||||||||||||||
2019 | 2018 | 2019 | 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 ninesix months ended SeptemberJune 30, 2018,2019, 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 SeptemberJune 30, 20182019 were $2,686,000$4,179,000 or 23%34%, and $2,395,000$2,769,000 or 21%22%, of consolidated net sales, respectively. Sales to these customers for the three months ended September 30, 2017 were $3,195,000 or 24%, and $2,283,000 or 17%, of consolidated net sales, respectively. Sales to these customers for the nine months ended SeptemberJune 30, 2018 were $10,796,000$4,871,000 or 26%30%, and $9,738,000$3,660,000 or 24%, of consolidated net sales, respectively. Sales to these customers for the nine months ended September 30, 2017 were $11,489,000 or 28%, and $6,457,000 or 16%23%, of consolidated net sales, respectively. The amounts owed at SeptemberJune 30, 20182019 by these customers were $1,702,000$2,488,000 or 18%28%, and 2,241,000$1,044,000 or 23%12%, of the Company’s consolidated net accounts receivable, respectively. As of SeptemberJune 30, 2017,2018, the total amounts owed to the Company by these customers were $1,491,000$4.808,000 or 20%54%, and $1,631,000$1,524,000 or 22%17% of the Company’s consolidated net accounts receivable, respectively.
Cost of Sales. During the three monthsand six month periods ended SeptemberJune 30, 2018,2019, the cost of sales was $9,337,000, a 7% decrease from $10,039,000$9,869,000 and $20,409,000, respectively, compared to $12,189,000 and $23,300,000 for the three monthssame periods ended SeptemberJune 30, 2017. During the nine months ended September 30, 2018, the2018. The reduction in cost of sales was $32,637,000, a 4% increase from $31,476,000 for the nine months ended September 30, 2017. largely due to lower sales volume, net of related inefficiencies.
General and Administrative. During the three and six months ended SeptemberJune 30, 2018,2019, general and administrative expenses were $1,510,000, a decrease of 21%$1,531,000 and $3,587,000, respectively, as compared to $1,923,000$1,680,000 and $3,565,000 for the same periodperiods in 2017. During2018. A one-time fee associated with the nineforbearance agreement in the amount of $250,000 was included in the first three months ended September 30, 2018, general and administrative expenses were $5,074,000, a decrease of 11% compared to $5,691,000 for the same period in 2017. We implemented cost reduction programs during 2017 and 2018, resulting in this decrease of2019 general and administrative expenses.
Selling, Advertising and Marketing. During the three and six months ended SeptemberJune 30, 2018,2019, selling, advertising and marketing expenses were $1,031,000, a 22% decrease$685,000 and $1,397,000, respectively, as compared to $1,317,000$1,290,000 and $2,446,000, respectively for the same periodperiods in 2017. During2018. This reduction was primarily due to the nine months ended September 30, 2018, selling, advertising and marketing expenses were $3,477,000, a 25% decrease compared to $4,320,000 for the same period in 2017. Costfull year benefit of cost reduction programs implemented during 2017 and 2018 resulted in the decrease in selling, advertising and marketing expenses. 2018.
Other Income (Expense). During the three and six months ended SeptemberJune 30, 2018,2019, the Company incurred interest expense of $471,000,$516,000 and $1,063,000, respectively, as compared to interest expense during the same periodperiods of 20172018 of $551,000 and $1,115,000. We recognized a $3 million charge during June 2019 in the amountanticipation of $367,000. During the nine months ended September 30, 2018, the Company incurred interest expense of $1,586,000, compared to interest expensedeconsolidating Clever Container and our two European sales companies during the same period of 2017 in the amount of $1,100,000.2019.
For the three and six months ended SeptemberJune 30, 2018,2019, the Company had a foreign currency transaction gaingains of $232,000$61,000 and $297,000, respectively, as compared to a foreign currency transaction losslosses of $260,000$775,000 and $342,000 during the same periodperiods of 2017. For the nine months ended September 30, 2018, the Company had a foreign currency transaction loss of $111,000 compared to a foreign currency transaction gain of $493,000 during the same period of 2017. 2018.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the ninesix months ended SeptemberJune 30, 2018,2019, net cash provided by operations was $91,000,$2,582,000, compared to net cash providedused by operations during the ninesix months ended SeptemberJune 30, 20172018 of $5,230,000.$273,000.
Significant changes in working capital items during the ninesix months ended SeptemberJune 30, 20182019 included:
● | A decrease in accounts receivable of |
● | An increase in inventory of |
● | An increase in trade payables of |
● | A decrease in accrued liabilities of |
Investing Activity. During the ninesix months ended SeptemberJune 30, 2018,2019, cash used in investing activity was $324,000,$73,000, compared to cash used in investing activity for the same period of 20172018 in the amount of $736,000.$18,000.
Financing Activities. During the ninesix months ended SeptemberJune 30, 2018,2019, cash provided byused in financing activities was $241,000$2,684,000 compared to cash used inprovided by financing activities for the same period of 20172018 in the amount of $4,416,000.$532,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt.
Liquidity andCapital Resources.
At SeptemberJune 30, 2018,2019, the Company had cash balances of $274,000$178,000 compared to cash balances of $325,000$453,000 for the same period of 2017.2018.
Also, as of Septemberat June 30, 2018,2019, the Company had a working capital balance of $4,497,000$1,936,000 compared to a working capital balance of $9,631,000$2,802,000 on December 31, 2017. This reduction2018.
As of June 30, 2019, the Company was primarily the result of reclassifying approximately $4not 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 SeptemberJune 30, 2018.
As of September 30, 2018, the Company believes that it was in2019. Failure to ultimately regain compliance with all covenants under itsthe terms of our credit facility as of that time, but as described below, anticipates failingagreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to meet two obligations as of November 15, 2018. The Company previously reported being out of compliance with two covenants as of March 31, 2018. The credit facility was subsequently amended,carry on our business up to and incident of compliance failure waived. Such amendment and waiver included a reset of covenants, two new covenant terms, a one-time modification payment and a temporarily higher rate of interest.
During October 2018 the Company entered into Consent and Amendment No. 2 (“Amendment 2”) with PNC, in anticipation of an equity issuance. Amendment 2 provided the Company more flexibility in the use of proceeds and waived financial covenant calculations as of September 30, 2018. In exchange, the Company paid an amendment fee and committedincluding our ability to raise at least $7.5 million in proceeds by November 15, 2018. We believed, and continue to believe, that a successful offering would raise at least $7.5 million in net proceeds. As of the date of this filing, that effort has been deferred due to market conditions, and thus we expect to fail to meet our obligations under Amendment 2. We have therefore reclassified our long-term debt as current on the balance sheet and discuss our presumption of operating as a going concernconcern. Additionally, we have encountered difficulties with seasonal cash flow needs, including increased costs associated with recruiting and retaining workers in the footnotesChicago area. The failure to either regain compliance with the terms of our financial statements.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. This traditional seasonality may be impacted by ongoing developments in tariffs between the United States and other parties, particularly China.
Critical Accounting Policies
Please see pages 23-2624-27 of our Annual Report on Form 10-K for the year ended December 31, 20172018 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. NoExcept for the adoption of ASC Topic 842 (Leases) as described herein, no material changes to such information have occurred during the three months ended SeptemberJune 30, 2018.2019.
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 SeptemberJune 30, 2018,2019, 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 SeptemberJune 30, 2018,2019, 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. ThereExcept as noted above, there were no material changes in our internal control over financial reporting during the three and six months ended SeptemberJune 30, 20182019 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
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. (d\b\a) Helium and Balloons Across America and Gary Page (“Claimants”) filed an action against the Company in the North Carolina State Court. This action was removed to the United States District Court in North Carolina. The Company filed an answer and motion to dismiss this action. The Court stayed the action based upon an arbitration clause in the agreement on which part of the action was based. On December 18, 2017, Claimants filed an arbitration claim against the Company before the American Arbitration Association in Chicago, Illinois. The Statement of Claim includes claims for alleged breach of two agreements among the parties, essentially for alleged failure by the Company to pay disputed commission amounts. Claimants also included counts for alleged unjust enrichment and tortious interference with contract. The Company has filed a response to the Statement of Claim denying all of the claims. The Company believes the claims are without merit and intends to defend all of the claims vigorously. The Company has not accrued any amounts in respect of this matter and cannot estimate the possible loss, if any, that the Company many incur with respect to it.
Ongoing developments in tariffs between the United States and other parties, primarily China, may have a negative impact on the Company. Vacuum Sealing machines are manufactured in China, and many of the products sold by Clever Container are also sourced from China. Added costs related to new tariffs would likely create negative pressure in related product areas. Other products may benefit from any reduced competition as a result of these changes.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.
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.
The following are being filed as exhibits to this report:
Exhibit Number | Description |
3.1 | |
3.2 | |
31.1 | |
31.2 | |
32 | |
101 | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
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: | 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 |
2326