UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
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) |
Registrant’s telephone number, including area code: (847) 382-1000
Securities Registered pursuant to sections 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, No Par | NASDAQ Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer ¨ Smaller Reporting Company þ
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Based upon the closing price of $4.57 per share of the Registrant’s Common Stock as reported on NASDAQ Capital Market tier of The NASDAQ Stock Market on June 30, 2014, the aggregate market value of the voting common stock held by non-affiliates of the Registrant was then approximately $7,961,000. (The determination of stock ownership by non-affiliates was made solely for the purpose of responding to the requirements of the Form and the Registrant is not bound by this determination for any other purpose.)
The number of shares outstanding of the Registrant’s Common Stock as of March 1, 2015 was 3,301,116 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
| Part of Form 10-K into Which | ||
| Document | Document Is Incorporated | |
| Sections of the registrant’s Proxy Statement | Part III | |
| To be filed on or before April 30, 2015 for the | ||
| Annual Meeting of Stockholders |
TABLE OF CONTENTS
This annual 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 annual report. We disclaim any intent or obligation to update any forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, our participation in highly competitive markets, potential changes in the cost or availability of raw materials, our dependence on a limited number of suppliers, the possible inability to obtain an adequate supply of raw materials, our reliance on a limited number of key customers, the loss of one or more of our key customers, changing consumer demands, developments or changes in technology, risks of international operations and political environments, dependence on our intellectual property, compliance with federal, state or local regulations, restrictions included in the Company’s credit facility, the availability of funds under the Company’s credit facility, damage to or destruction of one or both of the Company’s principal plants, our ability to service our indebtedness, our ability to invest in needed plant or equipment.
Item No. 1 – Description of Business
Business Overview
We are a leading developer, manufacturer and supplier of innovative flexible film products. We provide value-added design, engineering and production for flexible film products. We have developed, designed, and produced a number of innovative products utilizing flexible films including: novelty foil balloons, pouches and rolls of film for vacuum sealing of food and household items, food and home storage products and specialty films for packaging.
We produce, market and sell three principal lines of products:
| · | Novelty Products, principally balloons, including foil balloons, latex balloons and other inflatable toy items, |
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| · | Flexible Containers and Film, and Sealing Devices for home and consumer use to vacuum seal, store and preserve food and personal items, including devices for evacuating air from, and sealing, such containers, and |
| · | Flexible Films for food and other packaging and commercial applications. |
We leverage our technology to design and develop proprietary products which we market and sell and which we develop for our customers. We have been engaged in the business of developing flexible film products for over 38 years and have acquired significant technology and know-how in that time. We currently hold seven patents, and have patent applications pending, relating to flexible film products including specific films, zipper closures, valves and other features of these products.
We print, process and convert flexible film into finished products and we produce latex balloons and novelty items. Our principal manufacturing processes include:
| · | Coating and laminating rolls of flexible film. Generally, we adhere polyethylene film to another film such as nylon or polyester. |
| · | Printing film and latex balloons. We print films, both plastic and latex with a variety of graphics for use as packaging film or for balloons. |
| · | Converting printed film to balloons. |
| · | Converting film to flexible containers. |
| · | Producing latex balloons and other latex novelty items. |
In 1978, we began manufacturing metalized balloons (sometimes referred to as "foil" balloons), which are balloons made of a base material (usually nylon or polyester) often having vacuum deposited aluminum and polyethylene coatings. These balloons remain buoyant when filled with helium for much longer periods than latex balloons and permit the printing of graphic designs on the surface. In 1985, we began marketing latex balloons and, in 1988, we began manufacturing latex balloons. In 1999, we acquired an extrusion coating and laminating machine and began production of coated and laminated films, which we have produced since that time.
During the period from 1976 to 1986 and from 1999 to the present, we have produced flexible containers for the storage of liquids, food products, household goods and other items. From 1996 to the present, we have been engaged in the coating, laminating and printing of flexible films for our novelty and container products and for the production of laminated and printed films we supply to others.
We market and sell our foil and latex balloons and related novelty items throughout the United States and in a number of other countries in Latin America and Europe. We supply directly to retail stores and chains and through distributors, who in turn sell to retail stores and chains. Our balloon and novelty products are sold to consumers through a wide variety of retail outlets including general merchandise, discount and drugstore chains, grocery chains, card and gift shops, and party goods stores, as well as through florists and balloon decorators.
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Most of our foil balloons contain printed characters, designs and social expression messages, such as “Happy Birthday,” “Get Well” and similar items. For a number of our balloon designs, we obtain licenses for well-known characters and print those characters and messages on our balloons.
We produce flexible containers and rolls of film for use as flexible containers in a variety of applications, including (i) zippered pouches with valves for vacuum sealing of food and household products and (ii) pouches and rolls of film for use with vacuum sealing machines to vacuum seal, store and protect food and household items. We market and sell flexible containers and rolls of film for consumer storage uses through retail chains and outlets throughout the United States, and we provide flexible containers to others for resale. We market and sell vacuum sealing machines for use with pouches and rolls of film for the vacuum storage of food and household products.
We provide laminated films and printed films to a number of customers who utilize the film to produce bags or pouches for the packaging of food, liquids and other items.
Commencing in 2014, we began assembling and producing Candyloons and Candy Blossoms - containers including candy items and air-inflated balloons - which we market to food store chains.
In 2014, our revenues from our product lines, as a percent of total revenues were:
| · Novelty Products | 69% of revenues | |
| · Flexible Containers and Devices | 23% of revenues | |
| · Film Products | 8% of revenues |
We are an Illinois corporation with our principal offices and plant at 22160 N. Pepper Road, Lake Barrington, Illinois.
Business Strategies
Our essential business strategies are as follows:
| · | Focus on our Core Assets and Expertise. We have been engaged in the development, production and sale of film products for 38 years and have developed assets, technology and expertise which, we believe, enable us to develop, manufacture, market and sell innovative products of high quality within our areas of knowledge and expertise. We plan to focus our efforts on these core assets and areas of expertise – film novelty products, consumer storage vacuum storage systems, specialty film products, laminated films and printed films – to develop new products, to market and sell our products and to build our revenues. |
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| · | Maintain a Focus on Margin Levels and Operating Costs in Order to Establish and Maintain Profitability. We consistently monitor, evaluate and manage our cost of goods sold, and our selling, general and administrative, expenses in order to establish and enhance profitability. |
| · | Develop New Products, Product Improvements and Technologies. We engage in research, design, innovation and development for the purpose of developing, and improving, products, materials, methods and technologies within our core product categories. We work to develop new products, to improve existing products and to develop new technologies within our core product areas in order to enhance our competitive position and increase our sales. We seek to leverage our technology to develop innovative and proprietary products. In our novelty product lines, our development work includes new designs, new character licenses, new product developments, new materials and improved production methods. In our consumer storage product lines, we have developed new pouch closure systems and valves and new film methods for packaging applications. We have received seven patents for these developments and have patent applications pending. We developed and introduced a line of resealable pouches with a valve and pump system for household storage and vacuum sealing of food items. We introduced a line of vacuum sealing equipment for the vacuum sealing of pouches for food and household items and are engaged in development efforts to create new and enhanced vacuum sealing machines, accessories and related products. We work with customers to develop custom film products which serve the unique needs or requirements of the customer. |
| · | Develop New Channels of Distribution and New Sales Relationships. In order to increase sales, we seek to develop new channels of distribution and new sales relationships, both for existing and new products. Over the past several years, we have developed new distributors and customers for our pouch and novelty products, in the United States and in Europe, Mexico, Latin America, Australia and New Zealand, expanding the scope and level of our international sales and activities. We established an office and warehouse in Germany to support the extension of our sales and fulfillment activities in Europe. During 2011, we entered into a Trademark License Agreement with SC Johnson under which SC Johnson licensed our company to use the Ziploc® Brand Vacuum Sealer System for home use with vacuum sealing machines to seal and store food and household items. This Agreement was renewed and extended for an additional three year term in December 2014. We market and sell these machines and pouches throughout the United States, Canada and Mexico. |
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| · | Enhance Our Productive Capacity. We invest in new plant and equipment when appropriate to expand the range and volume of products we produce. During 2008 and 2009, we acquired, installed and commenced operation of equipment which enabled us to produce the pouches and rolls of film for our vacuum sealing storage business we developed. During 2010 and 2011, we designed, assembled and installed latex balloon production equipment which significantly enhanced our production capacity for latex balloons to support our growing sales of this product line. We have significantly expanded our warehouse, packaging and fulfillment facilities and operations during 2013. Most recently, during the first quarter of 2014, we acquired printing equipment which almost doubled printing capacity to support our growing sales of foil balloons. |
Products
Foil Balloons. We have designed, produced and sold foil balloons since 1979 and, we believe, are the second largest manufacturer of foil balloons in the United States. Currently, we produce about 900 foil balloon designs, in different shapes and sizes, including the following:
| · | Superloons® - 17" and 18" foil balloons in round or heart shape, generally made to be filled with helium and remain buoyant for long periods. This is our predominant foil balloon size. |
| · | Ultraloons® - 31" jumbo foil balloons made to be filled with helium and remain buoyant for an extended time. |
| · | Miniloon®- 9" foil balloons made to be air-filled and sold on holder-sticks or for use in decorations. |
| · | Card-B-Loons®- 4 ½" air-filled foil balloons, often sold on a stick, used in floral arrangements or with a container of candy. |
| · | Shape-A-Loons® - 18" to 48" shaped foil balloons made to be filled with helium. |
| · | Minishapes - 11" to 16" small shaped foil balloons designed to be air filled and sold on sticks as toys or inflated characters. |
In addition to size and shape, a principal element of the Company's foil balloon products is the printed design or message contained on the balloon. These designs include figures and licensed characters many of which are well known. We maintain licenses for several well-known characters.
During 2014, we began assembling small containers of with candy items and air-filled balloons – Candy Blossoms and Candyloons – which we market and sell to chain stores.
Latex Balloons. Through our subsidiary in Guadalajara, Mexico, Flexo Universal, S.A. de C.V. (“Flexo Universal”), we manufacture latex balloons in 7 sizes and 40 colors. Many of these balloons are marketed under the name Partyloons® and balloons are also marketed on a private label basis. We also manufacture toy balloon products including punch balls, water bombs and "Animal Twisties."
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Vacuum Sealing Pouches and Systems. We produce, market and sell consumer vacuum storage pouches and systems for the vacuum storage of food and other household items. We produce (i) vacuum sealable bags and rolls of film for use with vacuum sealing devices for household storage and (ii) valved, resealable bags also for vacuum storage uses. Since 2012, we have produced and marketed vacuum sealable bags and rolls of film under the Ziploc® brand. We also market vacuum sealing machines, produced for us, under the Ziploc® Brand Vacuum Sealer System. Our valved, resealable bags function with a small hand or battery-powered pump to evacuate air from the bag when it is sealed.
Packaging Films and Custom Film Products. We produce and sell films that are utilized for the packaging of various products, principally food products. We laminate, extrusion coat and print films and sell them to customers who utilize the films for packaging applications. Our customers generally use these film products to convert them to bags or pouches for the packaging of food and other products. We develop and produce for customers unique products composed of flexible film.
Markets
Foil Balloons
The foil balloon came into existence in the late 1970s. During the 1980s, the market for foil balloons grew rapidly. Initially, the product was sold principally to individual vendors, small retail outlets and at fairs, amusement parks, shopping centers and other outdoor facilities and functions. Foil balloons remain buoyant when filled with helium for extended periods of time and they permit the printing and display of graphics and messages. As a result, the product has significant appeal as a novelty and message item. Foil balloons became part of the "social expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, we and other participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of the balloons to retail outlets including grocery, general merchandise, discount and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators. These outlets now represent the principal means for the sale of foil balloons throughout the United States and in a number of other countries, although individual “vendors” remain a significant means of distribution in a number of areas.
Foil balloons are now sold in virtually every region of the world. The United States, however, remains the largest market for these products.
Foil balloons are sold in the United States and foreign countries directly by producers to retail outlets and through distributors and wholesalers. Often the sale of foil balloons by the wholesalers/distributors is accompanied by related products including latex balloons, floral supplies, candy containers, mugs, plush toys, baskets and a variety of party goods.
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Latex Balloons
For a number of years, latex balloons and related novelty/toy latex items have been marketed and sold throughout the United States and in many other countries. Latex balloons are sold as novelty/toy items, for decorative purposes, as part of floral designs and as party goods and favors. In addition to standard size and shape balloons, inflatable latex items include punch balls, water bombs, balloons to be twisted into shapes, and other specialty designs. Often, latex balloons include printed messages or designs.
Latex balloons are sold principally in retail outlets, including party goods stores, general merchandise stores, discount chains, gift stores and drugstore chains. Latex balloons are also purchased by balloon decorators and floral outlets for use in decorative or floral designs. Printed latex balloons are sold both in retail outlets and for balloon decoration purposes including floral designs.
Latex balloons are sold both through distributors and directly to retail outlets by the producers.
Flexible Containers/Pouches
The market for flexible containers and pouches is large and diverse. Many companies engaged in the production of food items package their products in flexible containers or pouches, and, therefore, represent a market for these containers.
Flexible containers and pouches are sold and utilized in the consumer market in numerous forms. They include simple open-top plastic bags, resealable bags and zippered bags. The market also includes containers and pouches of special design or purpose, including vacuumable bags for storage of food or household items or commercial uses.
We participate in a segment of the market for vacuum sealing and storage of food and household items. These products generally are sold in retail chain stores, and to some degree, in grocery stores. The product lines sold include (i) zippered, resealable bags, incorporating a valve through which air can be evacuated by a hand pump or other device; (ii) pouches or rolls of film which can be sealed by vacuum sealing devices and (iii) vacuum sealing devices.
Printed and Specialty Films
The industry and market for printed and specialty films are fragmented and include many participants. There are hundreds of manufacturers of printed and specialty film products in the United States and in other markets. In many cases, companies who provide food and other products in film packages also produce or process the films used for their packages. The market for the Company's film products consists principally of companies who utilize the films for the packaging of their products, including food products and other items, usually by converting the film to a flexible container. In addition to the packaging of food products, film products are used to produce containers for medical purposes (such as colostomy bags, containers for saline solution and other items), "dunnage" (to cushion products being packaged), storage of personal and household items and other purposes.
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Marketing, Sales and Distribution
Balloon Products
We market and sell our foil balloon, latex balloon and related novelty products throughout the United States and in a number of other countries. We maintain marketing, sales and support staff and a customer service department in the United States. Sales in the United Kingdom are conducted by CTI Balloons Ltd. (“CTI Balloons”), the Company's subsidiary located in Rugby, England. Sales in Europe are conducted by CTI Europe GmbH (“CTI Europe”), the Company’s subsidiary located in Heusenstamm, Germany. Flexo Universal, our subsidiary in Mexico, conducts sales and marketing activities for the sale of balloon products in Mexico, Latin America, and certain other markets. Sales in other foreign countries are made generally to distributors in those countries and are managed at the Company's principal offices.
We sell and distribute our balloon products (i) by our employed staff of sales and customer service personnel in the United States, Mexico, the UK and Germany, (ii) through a network of distributors and wholesalers in the United States, Mexico, the UK and Europe, (iii) through several groups of independent sales representatives, and (iv) to selected retail chains. The distributors and wholesalers are generally engaged principally in the sale of balloons and related products (including such items as plush toys, mugs, containers, floral supplies and other items) and sell balloons and related products to retail outlets including grocery, general merchandise and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators.
We engage in a variety of advertising and promotional activities to promote the sale of our balloon products. We produce a complete catalog of our balloon products, and also prepare various flyers and brochures for special or seasonal products, which we disseminate to thousands of customers, potential customers and others. We participate in several trade shows for the gift, novelty, balloon and other industries and advertise in several trade and other publications.
Flexible Containers/Pouches
We market several lines of flexible containers or pouches for household use to vacuum seal, store and preserve food and other household items.
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We developed, and for several years, we have produced and sold a line of pouches and rolls of film for use with vacuum sealing machines to vacuum seal food and household items. Initially, we marketed these products through various retail channels under our brand or on a private label basis. On December 14, 2011, the Company entered into a Trademark License Agreement with SC Johnson under which the Company is licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The agreement was initially for a three year term expiring on December 31, 2014 and was extended for a term commencing on January 1, 2015 and extending to December 31, 2017. The licensed product line includes vacuum sealing machines manufactured for the Company and pouches and rolls manufactured by the Company for use in the home to vacuum seal food items to preserve freshness and help prevent freezer burn.
During 2007, we introduced a line of re-sealable pouches incorporating a valve permitting the evacuation of air from the sealed pouch by use of a hand pump supplied with the pouches. This line of products is marketed under the brand name ZipVac®. We market this line of products principally to a direct sales company.
We also produce a line of re-sealable pouches for a customer who sells these products under a brand name.
Printed and Specialty Films
We market and sell printed and laminated films directly and through independent sales representatives throughout the United States. We sell laminated and printed films to companies that utilize these films to produce packaging for a variety of products, including food products, in both solid and liquid form, such as cola syrup, coffee, juices and other items. We seek to identify and maintain customer relationships in which we provide added value in the form of technology or systems.
Production and Operations
We conduct our operations at our facilities including: (i) our 68,000 square feet facility in Lake Barrington, Illinois, incorporating our headquarters office, production and warehouse space, (ii) our 118,000 square foot facility in Lake Zurich, Illinois consisting of warehouse, packaging and office space (iii) a 73,000 square foot facility in Guadalajara, Mexico, consisting of office, warehouse and production space, (iv) a 9,000 square foot facility in Rugby, England consisting of office and warehouse space, and (v) a 3,000 square foot facility in Heusenstamm, Germany, consisting of office and warehouse space.
We conduct production operations at our plants in Lake Barrington, Illinois and Guadalajara, Mexico. At our plants, our production operations include (i) lamination and extrusion coating of films, (ii) slitting of film rolls, (iii) printing on film and on latex balloons, (iv) converting film to completed products including balloons, flexible containers and pouches, and (v) production of latex balloon products. We perform all of the lamination, extrusion coating and slitting activities in our Lake Barrington, Illinois plant and produce all of our latex balloon products at our Guadalajara, Mexico plant. We print on films in Lake Barrington, Illinois and we print on latex balloons in Guadalajara, Mexico.
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We warehouse raw materials at our plants in Lake Barrington, Illinois and Guadalajara, Mexico and we warehouse finished goods at our facilities in Lake Barrington, Illinois; Lake Zurich, Illinois; Guadalajara, Mexico; Rugby, England and Heusenstamm, Germany. We maintain customer service and fulfillment operations at each of our warehouse locations. We conduct sales operations for the United States and for all other markets, except those handled by our Mexico, Germany and England facilities, at the Lake Barrington, Illinois facility. Sales for Mexico and Latin America are handled at our Guadalajara, Mexico facility; sales for the United Kingdom are handled at our Rugby, England facility; sales for Europe are conducted from our facility in Heusenstamm, Germany.
We maintain a graphic arts and development department at our Lake Barrington, Illinois facility which designs our balloon products and graphics. Our creative department operates a networked, computerized graphic arts system for the production of these designs and of printed materials including catalogues, advertisements and other promotional materials.
We conduct administrative and accounting functions at our headquarters in Lake Barrington, Illinois and at our facilities in Guadalajara, Mexico, Rugby, England and Heusenstamm, Germany.
Raw Materials
The principal raw materials we use in manufacturing our products are (i) petroleum or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii) latex, and (iv) printing inks. The cost of raw materials represents a significant portion of the total cost of our products, with the result that fluctuations in the cost of raw materials has a material effect on our profitability. The cost of our raw materials represented approximately 41.7% of our net revenues in 2014 compared to 45.3% in 2013. During the past several years, we have experienced significant fluctuations in the cost of these raw materials. We do not have any long-term agreements for the supply of raw materials (other than one agreement for the supply of metalized polyester for a term expiring on December 31, 2015) and may experience wide fluctuations in the cost of raw materials in the future. Further, although we have been able to obtain adequate supplies of raw materials in the past, there can be no assurance that we will be able to obtain adequate supplies of one or more of our raw materials in the future.
A principal raw material for our latex balloon is natural latex. Over the past five years, the price of natural latex has been highly volatile, ranging from a low of approximately $2.99 per kilo to a high of over $5.64 per kilo. During a portion of that time, when the price of latex rose rapidly, we were unable to increase the selling price of our latex balloons sufficiently to compensate for the increase in the cost of latex with the result that our margins on the sale of latex balloons declined significantly for a period of time. Over the past 3 years, the market price of natural latex has declined and our margins on the sale of latex balloon products have improved. However, the price of natural latex remains volatile and changes in the cost of latex may have a material effect on our gross margins for latex balloon products in the future.
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Many of the foil balloons we produce and sell are intended to be filled with helium in order to be buoyant. Over the past several years, the price of helium has increased substantially and the availability of helium has declined. In some cases, certain of our customers have been unable to obtain a consistent supply of helium for their balloon products. We believe that the lack of availability, and the increase in the cost, of helium has affected our sales of foil balloon products and may adversely affect our sales of foil balloons in the future. We do monitor the market and sources of supply for helium, however, and we believe that, in recent months, helium has become more generally available for use with balloon products.
Information Technology Systems
Our corporate headquarters in Lake Barrington, Illinois and our warehouse / customer service facility in Lake Zurich, Illinois are serviced by PC-based local area networks. We interconnect the facilities via redundant voice and data services. Access to the network is available to all appropriate employees and is secured through nine Microsoft servers running Active Directory authentication. The network allows us to leverage printing resources, create shared file areas for cross-departmental functions and allows for a single source backup of critical business files. On the network we run Macola financial system software. Macola is a modular software system. We presently use the general ledger, order entry, inventory management, purchase order, manufacturing costing, controls and inventory controls, electronic data exchange and custom report writing modules of that system. Internal and external employee communications are handled by industry standard Microsoft Exchange email, allowing us to communicate with customers and vendors all over the world. We also provide secure, firewall protected, load balanced and redundant internet connections allowing employees to use e-mail, research issues, support customers and securely move data. Secure VPN connectivity is provided to our mobile and remote employees. A phone system located in Lake Barrington, and a phone system located in Lake Zurich, operate together to provide unified voice communications between both sites as well as for outside calls. These two phone systems are capable of operating independently should there be a failure at either site.
At each of our Mexico, England and Germany facilities, we operate server computers and local area networks, accessible to employees at those facilities. At each of those facilities, we operate separate integrated financial, order entry and inventory management systems.
Competition
The balloon and novelty industry is highly competitive, with numerous competitors. We believe there are presently five principal manufacturers of foil balloons whose products are sold in the United States including Anagram International, Inc., Pioneer Balloon Company, Convertidora International S.A. de C.V., and Betallic, LLC. Several companies market and sell foil balloons designed by them and manufactured by others for them.
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We believe there are approximately five manufacturers of latex balloons whose products are sold in the United States (including Pioneer Balloon and Globos Occidental) and numerous others whose products are sold in other countries.
We also compete with other manufacturers of foil and latex balloons in Europe, Latin America and Asia.
The market for films, packaging, flexible containers and custom products is fragmented, and competition in this area is difficult to gauge. However, there are numerous participants in this market and the Company can expect to experience intense quality and price competition. The market for consumer storage bags and pouches exceeds $4 billion in sales and includes a number of major company participants. Vacuumable pouches represent a small component of this large market.
Many of the companies in these markets offer products and services that are the same or similar to those offered by us and our ability to compete depends on many factors within and outside our control. There are a number of well-established competitors in each of our product lines, several of which possess substantially greater financial, marketing and technical resources and have established extensive, direct and indirect channels of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and services than we can. Competitive pressures include, among other things, price competition, new designs and product development and copyright licensing.
Patents, Trademarks and Copyrights
We have developed or acquired a number of intellectual property rights which we believe are significant to our business.
Copyright Licenses. We maintain licenses on certain popular characters and designs for our balloon products. We presently maintain a number of licenses and produce balloon designs utilizing the characters or designs covered by the licenses. Licenses are generally maintained for a one or two-year term.
Trademarks. We own eight registered trademarks in the United States relating to our balloon products. Many of these trademarks are registered in foreign countries, principally in the European Union.
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Patent Rights. We own, or have license rights under, or have applied for, patents related to our balloon products, certain film products and certain flexible container products. These include (i) ownership of two patents, relating to self-sealing valves for foil balloons and methods of making balloons with such valves, (ii) several foil balloon design patents, (iii) patents and applications related to the design and structure of, and method of, inserting and affixing, zipper-closure systems in a bag, (iv) patents related to one-way valves for pouches, (v) a patent related to methods of embossing film and utilizing such film to produce pouches with fitments, (vi) a patent related to vacuumable storage bags with fitments, and (vii) a patent application related to vacuum sealing equipment.
Research and Development
We maintain a product development and research group for the development or identification of new products, product designs, product components and sources of supply. Research and development includes (i) creative product development and design, (ii) creative marketing, and (iii) engineering development. During each of the fiscal years ended December 31, 2014 and 2013, we estimate that the total amount spent on research and development activities was approximately $633,000 and $838,000, respectively.
Employees
As of December 31, 2014, the Company had 104 full-time employees in the United States, of whom 19 are executive or supervisory, 5 are in sales, 60 are in manufacturing or warehouse functions and 20 are clerical. As of that same date, we had 18 full-time employees in England, of whom 4 are executive or supervisory, 2 are in sales, 10 in warehousing and 2 clerical. At Flexo Universal, our Mexico subsidiary, as of December 31, 2014, we had 275 full-time employees, of whom 5 are executive or supervisory, 3 are in sales, 258 are in manufacturing and 9 are clerical. As of December 31, 2014, the Company had 7 full-time employees in Germany, of whom 2 are executive or supervisory, 2 are in warehousing, 2 are clerical, and one in sales. The Company is not a party to any collective bargaining agreement in the United States, has not experienced any work stoppages, and believes that its relationship with its employees is satisfactory.
Regulatory Matters
Our manufacturing operations in the United States are subject to the U.S. Occupational Safety and Health Act ("OSHA"). We believe we are in material compliance with OSHA. The Company generates liquid, gaseous and solid waste materials in its operations in Lake Barrington, Illinois and the generation, emission or disposal of such waste materials are, or may be, subject to various federal, state and local laws and regulations regarding the generation, emission or disposal of waste materials. We believe we are in material compliance with applicable environmental rules and regulations. Several states have enacted laws limiting or restricting the release of helium filled foil balloons. We do not believe such legislation will have any material effect on our operations.
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In August 2012, the U.S. Securities and Exchange Commission (SEC) issued a rule under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country. Under the rule, issuers are required to conduct a reasonable country of origin inquiry and, if necessary, exercise due diligence process to ascertain the source of conflict minerals, defined as tantalum, tin, gold or tungsten, that are necessary to the functionality or production of their manufactured or contracted to be manufactured products. Companies are required to provide this disclosure on a new form to be filed with the SEC called Form SD. Companies were required to file Form SD on May 31, 2014 for the 2013 calendar period and annually on May 31 every year thereafter. The Company filed Form SD on May 30, 2014. We anticipate additional, new compliance costs may be incurred since one or more of the minerals specified in the rule are incorporated in products manufactured for us. We are unable to quantify the cost of implementing this new regulation at this time.
International Operations
We conduct operations in three locations outside of the United States:
| · | Flexo Universal, a 99%-owned subsidiary in Guadalajara, Mexico. Flexo Universal maintains a plant, offices and warehouse in Guadalajara, Mexico where we produce latex and foil balloons and print latex balloons. Flexo Universal conducts sales, warehousing and fulfillment operations, servicing principally the Company and other customers in the United States, our subsidiaries in the United Kingdom and Europe, customers in Mexico and Latin America and certain customers in Europe. |
| · | CTI Balloons, a wholly-owned subsidiary located in Rugby, England. CTI Balloons maintains offices and a warehouse in Rugby, conducts certain packaging and inflation activities there and conducts sales, warehousing and fulfillment activities for customers principally in the United Kingdom. |
| · | CTI Europe, a majority-owned subsidiary located in Heusenstamm, Germany. CTI Europe maintains offices and a warehouse in Heusenstamm, Germany (near Frankfurt), conducts certain packaging and inflation activities there and conducts sales, warehousing and fulfillment activities for customers principally in Europe. |
We rely, and are dependent, on our operations in Mexico for the supply of latex balloons in the United States, Mexico, Europe and other markets. Interruption of that supply would have a materially adverse effect on the business of the Company.
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Our domestic and international sales to outside customers and assets by area over the period 2013-2014 have been as follows:
| United States | United Kingdom (UK) | Europe (Excluding UK) | Mexico | Consolidated | ||||||||||||||||
| Year ended 12/31/14 | ||||||||||||||||||||
| Sales to outside customers | $ | 42,896,000 | $ | 2,497,000 | $ | 1,592,000 | $ | 10,843,000 | $ | 57,828,000 | ||||||||||
| Total Assets | $ | 33,026,000 | $ | 1,048,000 | $ | 1,457,000 | $ | 7,516,000 | $ | 43,047,000 | ||||||||||
| United States | United Kingdom (UK) | Europe (Excluding UK) | Mexico | Consolidated | ||||||||||||||||
| Year ended 12/31/13 | ||||||||||||||||||||
| Sales to outside customers | $ | 41,956,000 | $ | 2,032,000 | $ | 1,001,000 | $ | 11,070,000 | $ | 56,059,000 | ||||||||||
| Total Assets | $ | 28,758,000 | $ | 1,025,000 | $ | 1,145,000 | $ | 8,144,000 | $ | 39,072,000 | ||||||||||
Item No. 1B – Unresolved Staff Comments
As of the filing of this Annual report on Form 10-K, we had no unresolved comments from the staff of the Securities and Exchange Commission that were received not less than 180 days before the end of our 2014 fiscal year.
We own our principal plant and offices located in Lake Barrington, Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility includes approximately 68,000 square feet of office, manufacturing and warehouse space. This facility is subject to a mortgage loan with an initial principal of $2,300,000 as of April 29, 2010, having a term of approximately 7 years, with payments amortized over 25 years. The balance due on this loan on July 18, 2017 will be $1,664,000.
In September 2012, we entered into a lease agreement, expiring on February 28, 2017 to rent approximately 117,000 square feet of warehouse and office space in Lake Zurich, Illinois at a cost per month as follows:
| Lease period | Amount per month | |||
| March 1, 2013 – October 31, 2013 | $ | 25,000 | ||
| November 1, 2013 – October 31, 2014 | 28,000 | |||
| November 1, 2014 – October 31, 2015 | 30,000 | |||
| November 1, 2015 – October 31, 2016 | 33,000 | |||
| November 1, 2016 – February 28, 2017 | 36,000 | |||
In December 2011, CTI Balloons, entered into a 3-year lease agreement for approximately 9,000 square feet of office and warehouse space in Rugby, England at a cost of $5,000 per month. This facility is utilized to warehouse balloon products and to manage and service the Company's operations in England. In July 2013, CTI Balloons, entered into a 1-year lease agreement for an additional 3,000 square feet of office and warehouse space at a cost of $2,000 per month.
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In August 2011, Flexo Universal entered into a 5-year lease agreement, expiring July 31, 2016, for the lease of approximately 73,000 square feet of manufacturing, warehouse and office space in Guadalajara, Mexico at a cost of $30,000 per month.
In September 2012, CTI Europe entered into a 3-year lease agreement for a facility located in Heusenstamm, Germany located approximately 15 miles from Frankfurt International Airport. The facility includes approximately 3,000 square feet of office and warehouse space at a cost of $2,000 per month. The lease automatically renews each September for an additional year.
We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our existing facilities provide sufficient production capacity for our present needs and for our presently anticipated needs in the foreseeable future. We also believe that, with respect to leased properties, upon the expiration of our current leases, we will be able to either secure renewal terms or to enter into leases for alternative locations at market terms.
Item No. 3 – Legal Proceedings
On September 2, 2014, Amada Gonzalez and Leticia Ocampo, individually, and purportedly on behalf of a class of other persons similarly situated, filed and action in the United States District Court for the Northern District of Illinois against the Company, Ron’s Temporary Help Services, Inc., Prime Staffing, Inc. and Extreme Staffing Solution Corp. The individual plaintiffs are alleged to be persons who were employed by one of the temporary staffing companies named as defendants in the action and who worked at the Company’s facilities. The complaint includes claims of alleged violations of The Fair Labor Standards Act, the Illinois Wage Payment and Collection Act, The Illinois Minimum Wage Law and the Illinois Day and Temporary Labor Services Act, for alleged failure to pay minimum wages, overtime wages or vacation pay. Liability was asserted against the Company as an alleged “joint employer.” The complaint requested judgment for the amount of alleged unpaid wages, unspecified liquidated damages, attorney’s fees and injunctive relief. The Company filed a Motion to Dismiss this action and, on January 7, 2015, the action was voluntarily dismissed with prejudice.
In addition to the foregoing, the Company is 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.
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Item No. 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company's Common Stock was admitted to trading on the NASDAQ SmallCap Market (now the NASDAQ Capital Market) under the symbol CTIB on November 5, 1997.
The high and low sales prices for the last eight fiscal quarters according to the NASDAQ Stock Market's Stock Price History Report, were:
| High | Low | |||||||
| January 1, 2013 to March 31, 2013 | $ | 6.60 | $ | 4.85 | ||||
| April 1, 2013 to June 30, 2013 | 5.50 | 4.17 | ||||||
| July 1, 2013 to September 30, 2013 | 5.75 | 4.32 | ||||||
| October 1, 2013 to December 31, 2013 | 5.90 | 4.92 | ||||||
| January 1, 2014 to March 31, 2014 | 5.99 | 5.35 | ||||||
| April 1, 2014 to June 30, 2014 | 5.71 | 4.57 | ||||||
| July 1, 2014 to September 30, 2014 | 4.70 | 3.70 | ||||||
| October 1, 2014 to December 31, 2014 | 4.30 | 3.52 | ||||||
As of December 31, 2014 there were approximately 32 holders of record of the Company’s Common Stock. The Company’s total number of beneficial owners of common stock of the Company is 518.
The Company did not pay any cash dividends on its Common Stock during 2014 or 2013. Under the terms of the Company’s current loan agreements, the amount of dividends the Company may pay is limited by the terms of the financial covenants.
Item No. 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company produces film products for novelty, packaging container and custom film product applications. These products include foil balloons, latex balloons and related latex toy products, films for packaging applications, flexible containers for packaging and storage applications and custom film products. We produce all of our film products for packaging and container applications at our facilities 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 applications and flexible containers for packaging and storage are sold to customers in the United States. We market and sell our novelty items – principally foil balloons and latex balloons – in the United States, Mexico, the United Kingdom and a number of additional countries.
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Our revenues from each of our product categories in each of the past two years have been as follows:
| (000 Omitted) | ||||||||||||||||
| $ | % of | $ | % of | |||||||||||||
| Product Category | 2014 | Net Sales | 2013 | Net Sales | ||||||||||||
| Foil Balloons | 24,932 | 43.1 | % | 23,034 | 41.1 | % | ||||||||||
| Latex Balloons | 11,576 | 20.0 | % | 12,242 | 21.8 | % | ||||||||||
| Vacuum Sealing Products | 13,106 | 22.7 | % | 12,543 | 22.4 | % | ||||||||||
| Film Products | 4,806 | 8.3 | % | 5,074 | 9.1 | % | ||||||||||
| Other | 3,408 | 5.9 | % | 3,166 | 5.6 | % | ||||||||||
| Total | 57,828 | 100.0 | % | 56,059 | 100.0 | % | ||||||||||
Our primary expenses include the cost of products sold and selling, general and administrative expenses.
Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead expenses such as supervisory labor, depreciation, utilities expense and facilities expense directly associated with production of our products, warehousing and fulfillment expenses and shipping costs relating to the shipment of products to customers. Cost of products sold is impacted by the cost of the raw materials used in our products, the cost of shipping, along with our efficiency in managing the production of our products.
Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation of equipment and facilities utilized in administration, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits, the cost of regulatory compliance and other administrative costs.
Purchases by a limited number of customers represent a significant portion of our total revenues. In 2014, sales to our top 10 customers represented 65.7% of net revenues. During 2014, there were two customers to whom our sales represented more than 10% of net revenues. Our principal customer sales for 2014 and 2013 were:
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| Customer | Product | 2014 Sales | % of 2014 Revenues | 2013 Sales | % of 2013 Revenues | |||||||||||||
| Dollar Tree Stores | Balloons | $ | 15,131,000 | 26.2 | % | $ | 15,467,000 | 27.6 | % | |||||||||
| Wal-Mart | Vacuum Sealing Products | $ | 7,947,000 | 13.7 | % | $ | 6,984,000 | 12.5 | % | |||||||||
The loss of one or both of these principal customers, or a significant reduction in purchases by one or both of them, could have a material adverse effect on our business.
We generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum amount of product from us.
Results of Operations
The following table sets forth selected results of our operations expressed as a percentage of net sales for the years ended December 31, 2014 and 2013. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.
| Year ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Net sales | 100.0 | % | 100.0 | % | ||||
| Costs and expenses: | ||||||||
| Cost of products sold | 75.4 | 77.5 | ||||||
| Operating Expenses | 21.8 | 18.8 | ||||||
| Income from operations | 2.8 | 3.7 | ||||||
| Interest expense | (1.9 | ) | (2.6 | ) | ||||
| Other income | 0.0 | 0.0 | ||||||
| Income before income taxes | 0.9 | 1.2 | ||||||
| Provision for income taxes | 0.3 | 0.5 | ||||||
| Net profit | 0.9 | % | 0.7 | % | ||||
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales
For the fiscal year ended December 31, 2014, consolidated net sales from the sale of all products were $57,828,000 compared to consolidated net sales of $56,059,000 for the year ended December 31, 2013, an increase of 3.2%.
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Sales of foil balloons were $23,034,000 in 2013 and $24,932,000 in 2014, an increase of 8.2%. Our largest customer for foil balloons was Dollar Tree Stores. The remaining sales were made to nearly 900 customers including distributors and retail stores or chains in the United States, Mexico, the United Kingdom, Europe and Latin America. Sales to these other customers increased by 19% from $8,538,000 in 2013 to $10,184,000 in 2014.
Sales of latex balloons were $12,242,000 in 2013 and $11,576,000 in 2014, a decrease of 5.4%. Most of the decline is attributable to a decline in sales to one customer. There was no material change in sales to other customers during 2014. Sales of latex balloons were made through the Company and each of its subsidiaries to approximately 300 customers in the United States, Mexico, Latin America and Europe.
Sales of vacuum sealing products including pouch and related products and vacuum sealing machines were $12,543,000 in 2013 and $13,106,000 in 2014, an increase of 4.5%. Sales in this line during 2013 and 2014 consisted of two categories: (i) vacuum sealing systems including open-top pouches or rolls and vacuum sealing machines and (ii) zippered, resealable vacuum pouches. For 2014 and 2013, sales of products in these categories have been as follows:
| (000 Omitted) | ||||||||
| 2014 | 2013 | |||||||
| Vacuum Sealing Systems | $ | 10,325 | $ | 9,835 | ||||
| Zippered | 2,781 | 2,708 | ||||||
| Total | $ | 13,106 | $ | 12,543 | ||||
Sales of film products were $5,074,000 in 2013 and $4,806,000 in 2014, a decrease of 5.3%. Approximately 98.0% of these sales were to Rapak, L.L.C. but includes sales to three other customers.
Sales of other products increased from $3,166,000 in 2013 to $3,408,000 in 2014. This category includes (i) sales of accessory items for our balloon products, (ii) sales of Candy Blossoms and Candyloons and (iii) sales to and by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors.
Cost of Sales
Cost of sales decreased from 77.5% of sales in 2013 to 75.4% of sales in 2014. Several factors affecting this improvement in our margin rates included: (i) the relative increase in sales of higher margin products including vacuum sealing systems, (ii) sales by Clever Container Company L.L.C., a variable interest entity which was consolidated with our financial statements for the fourth quarter of 2013 and in 2014, and (iii) increased gross margins of Flexo Universal with respect to the sale of latex balloon products, resulting in part from a decline in the cost of latex.
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General and Administrative Expenses
General and administrative expenses increased from $6,564,000 in 2013 or 11.7% of net sales to $7,231,000 or 12.5% of net sales in 2014. The increase in general and administrative expenses is attributable principally to (i) the inclusion of the general and administrative expenses of Clever Container Company L.L.C. due to the consolidation of its results with the Company during 2014 which increased general and administrative expenses by $248,000, (ii) an increase in consulting expenses of $320,000 and (iii) an increase in administrative expenses at CTI Balloons of $101,000.
Selling
Selling expenses increased from $2,225,000 or 4.0% of sales in 2013 to $3,042,000 or 5.3% of sales in 2014. The increase in selling expenses is attributable principally to (i) an increase in commission expense of $225,000 which relates primarily to commissions on the sale of vacuum sealing system products and (ii) the inclusion of selling expenses of Clever Container Company L.L.C. due to the consolidation of its results with the Company during 2014 which increased selling expenses by $733,000.
Advertising and Marketing
Advertising and marketing expenses increased from $1,734,000 or 3.1% of sales in 2013 to $2,322,000 or 4.0% of sales in 2014. The increase in advertising and marketing expenses is attributable principally to (i) payments for outside services related to our vacuum sealing system products of $528,000 and (ii) deductions for credit charges of $217,000 related to consumer returns of vacuum sealing system products. The services expense relates to personnel, facilities and operating cost of a consulting and services firm which provided services to us in connection with planning, start-up, sourcing, product development, marketing and selling activities for our line of branded vacuum machines and pouches.
Other Income or Expense
During 2014, we incurred net interest expense of $1,109,000 compared to net interest expense of $1,440,000 during 2013. In addition to interest expense on our bank debt obligations in the amount of $501,000, we incurred interest expense aggregating $508,000 attributable to interest accrued on a Note and Warrant Purchase Agreement among the Company and BMO Private Equity (U.S.), Inc. (“BMO Equity”) under which BMO Equity loaned the sum of $5 million to the Company in July, 2012. This interest expense includes (i) interest paid on the BMO Equity Note, (ii) a charge for the amount of the debt discount attributable to the warrants used in the transaction and (iii) a variable charge relating to the change in value of the warrants by reason of change in market price of our common stock.
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During 2014, we realized a foreign currency gain in the amount of $39,000 compared to foreign currency gain in 2013 of $27,000.
Net Income or Loss
During 2014, the Company had income from operations of $1,609,000 compared to income from operations of $2,090,000 in 2013. During 2014, we had net income after provisions for interest and taxes of $514,000 on a consolidated basis compared to net income after provisions for interest and taxes of $376,000 in 2013.
Income Taxes
In 2014, the Company recognized income tax expense, on a consolidated basis, of $190,000. This income tax benefit is composed of an income tax benefit in the United States of $526,000, an income tax benefit realized by CTI Balloons, our United Kingdom subsidiary, in the amount of $11,000, an income tax expense realized by CTI Europe, our Germany subsidiary, in the amount of $7,000 and an income tax expense by Flexo Universal, CTI Mexico, and CTF International, our Mexico subsidiaries, in the amount of $720,000. In 2013, the Company recognized income tax expense, on a consolidated basis, of $270,000. This income tax expense is composed of an income tax benefit in the United States of $18,000, an income tax benefit realized by CTI Balloons, our United Kingdom subsidiary, in the amount of $77,000, an income tax benefit realized by CTI Europe, our Germany subsidiary, in the amount of $48,000 and an income tax expense by Flexo Universal, our Mexico subsidiary, in the amount of $413,000.
Financial Condition, Liquidity and Capital Resources
Cash Used In Operating Activities During fiscal 2014, cash used in operating activities amounted to $3,355,000, compared to cash provided by operating activities during fiscal 2013 of $170,000. We anticipate that cash used in operating activities will decline significantly in 2015 as we moderate the increase in inventory and reduce payables. Significant changes in working capital items affecting cash flow provided by operating activities were:
| · | Depreciation and amortization of $2,075,000 compared to depreciation and amortization for 2013 of $1,910,000. |
| · | An increase in net inventory of $2,768,000. The increases included planned purchase or production of (i) balloon raw materials and finished product to support anticipated sales in the Unites States, the United Kingdom, and Europe, (ii) product components for anticipated sales of Candyloons and Candy Blossoms, (iii) container products for anticipated direct consumer sales and (iv) vacuum sealing machines to support anticipated sales. We do not anticipate increases in inventory levels at the same rate in 2015 as in 2014 and expect that any increase in inventory during 2015 will be significantly lower than during 2014. |
| · | An increase in accounts receivable of $2,885,000. The increase in accounts receivable is attributable principally to timing of sales to three principal customers close to year-end all of which have been paid. We expect levels of accounts receivable to fluctuate during 2015, to decline during the first nine months of the year and increase in the fourth quarter. Overall, for the year 2015, we do not anticipate a significant increase in accounts receivable. |
| · | An increase in prepaid expenses and other assets of $279,000. |
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| · | An increase in trade payables of $997,000. We anticipate a decline in trade payables during the first half of 2015, and through the course of the year. |
| · | A decrease in accrued liabilities of $557,000. |
Cash Used in Investing Activities During fiscal 2014, cash used in investing activities amounted to $1,174,000 compared to cash used in investing activities during fiscal 2013 of $1,948,000. We anticipate a reduction during 2015 in cash used for investing activities compared to 2014. Cash used in investing activities was principally for the purchase of production equipment and for maintenance expenditures.
Cash Provided by Financing Activities During fiscal 2014, cash provided by financing activities amounted to $3,975,000, compared to cash provided by financing activities of $2,099,000 during fiscal 2013. During 2014, financing activities included proceeds from short-term and revolving indebtedness of $4,122,000, proceeds from the issuance of stock of $300,000, and net payments on long-term debt of $505,000.
On April 29, 2010, the Company entered into a Credit Agreement and associated documents with Harris N.A., now BMO Harris Bank, N.A. (“BMO Harris”) under which BMO Harris agreed to extend to the Company a credit facility in the aggregate amount of $14,417,000. The facility included (i) a Revolving Credit providing for maximum advances to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables and inventory of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of equipment, (iii) a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount the Company can borrow on the Revolving Credit includes 85% of eligible accounts and 60% of eligible inventory. The Mortgage Loan is amortized over a term of 25 years. The maturity date of the facility was April 30, 2013, which was subsequently extended to July 17, 2017.
Certain terms of the credit agreement, 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 includes a series of financial covenants we are required to meet including: |
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| o | We are required to maintain a tangible net worth (plus Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010; |
| o | We are required to maintain specified ratios of senior debt to EBITDA on an annual basis and determined quarterly; and, |
| o | We are required to maintain a level of adjusted EBITDA to fixed charges on an annual basis determined quarterly of not less than 1.1 to 1. Adjusted EBITDA is EBITDA minus (i) taxes paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures. |
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. The initial interest rate under the agreement was 4.00% per annum. On a quarterly basis, this ratio will be measured and the interest rate changed in accordance to the table below.
| When Senior Debt to EBITDA is: | The Premium to the Prime Rate is: | |||
| Greater than or equal to 3.25 to 1.00 | 1.25 | % | ||
| Greater than or equal to 2.25 to 1.00; Less than 3.25 to 1.00 | 0.75 | % | ||
| Less than or equal to 2.25 to 1.00 | 0.50 | % | ||
At December 31, 2014 the Company was paying a premium of 0.75% over prime.
On July 1, 2011, we entered into an interest rate swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with BMO Harris. This swap agreement limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap agreement had the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap agreement was not designated as a hedge for accounting purposes and we determined and recorded the fair value of the swap agreement each quarter. This value is recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period is recorded as interest income or expense on the statement of operations. The swap agreement expired on September 30, 2014.
On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Equity and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017.
Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.) (“BMO Equity”) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.
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The Note and Warrant Purchase Agreement includes provisions for:
| (i) | a closing fee of $100,000 |
| (ii) | payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums; |
| (iii) | security for the note obligations in all assets of the Company junior to the security interest of BMO Harris; |
| (iv) | various representations and warranties and covenants of the Company; |
| (v) | financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount. |
On April 12, 2013, the Company entered into Amendment No. 4 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, non-compliance with financial covenants prior to the date of the Amendments was waived and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to modify the Senior Leverage Ratio and Total Leverage Ratio requirements for the fiscal quarter ending June 30, 2013 and each quarter thereafter during the term of the Credit Agreement and the Note and Warrant Purchase Agreement and (ii) to modify the definitions of EBITDA and Total Funded Debt in the Credit Agreement and the Note and Warrant Purchase Agreement.
On December 23, 2014, the Company entered into Amendment No. 5 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, BMO Harris and BMO Equity waived certain anticipated events of default as of December 31, 2014 by the Company with respect the amount of capital expenditures and the change of name of a subsidiary, and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to exclude from the definition of Senior Funded Debt and Total Funded Debt certain indebtedness of a variable interest entity, (ii) to require Registrant to provide financial reports and variance reports to the Bank within 45 days after the end of each calendar month, (iii) to change the Senior Leverage Ratio and Total Leverage Ratio requirements for fiscal quarters ending December 31, 2014 and for each fiscal quarter thereafter to the maturity of the loans, and (iv) to provide for the engagement by the Company of a financial consultant to provide business financial planning and advisory services to the Company.
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Management believes that the funds available under the new financing arrangement as well as internally generated funds will be sufficient for the Company to meet its working capital needs for at least the next 12 months.
As of December 31, 2014, the Company was in compliance with the financial covenants provided in the Credit Agreement and in the Note and Warrant Purchase Agreement, as amended.
Current Assets. As of December 31, 2014, the total current assets of the Company were $32,474,000, compared to total current assets of $28,171,000 at December 31, 2013. The change in current assets reflects, principally, (i) an increase in net inventories of $2,327,000, (ii) an increase in accounts receivable of $2,404,000, (iii) a decrease in the net deferred income tax asset of $213,000, (iv) an increase in prepaid expenses and other current assets of $302,000 and (v) a decrease in cash and cash equivalents of $516,000.
Current Liabilities. Total current liabilities increased from $16,433,000 as of December 31, 2013 to $20,929,000 as of December 31, 2014. Changes in current liabilities included, principally, (i) an increase in $896,000 in trade payables, (ii) an increase of the line of credit of $3,389,000, and (iii) an increase in accrued and other liabilities in the amount of $211,000. Accrued other liabilities includes $188,000 in payroll accruals. The increase in the line of credit was due to the increases in inventory and accounts receivable.
Liquidity and Capital Resources; Working Capital. As of December 31, 2014, our current assets exceeded our current liabilities by $11,546,000, we had cash and cash equivalents of $150,000 and there was available under our line of credit up to $200,000 in additional funds. Management believes that these available funds, our internally generated funds and the borrowing capacity under our revolving line of credit facility will be sufficient to meet working capital requirements for the remainder of 2015.
CTI Industries Corporation Stockholders’ Equity. Stockholders’ equity was $12,880,000 as of December 31, 2014 compared to $12,656,000 as of December 31, 2013.
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. The sale of latex balloons, pouches and laminated film products have not historically been seasonal, and as sales in these products lines have increased as a percentage of total sales, the seasonality of the Company's total net sales has decreased.
Critical Accounting Policies
The financial statements of the Company are based on the selection and application of significant accounting policies which require management to make various estimates and assumptions. The following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operation.
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Revenue Recognition. Substantially all of the Company's revenues are derived from the sale of products. With respect to the sale of products, revenue from a transaction is recognized when (i) a definitive arrangement exists for the sale of the product, (ii) delivery of the product has occurred, (iii) the price to the buyer has been fixed or is determinable, and (iv) collectibility is reasonably assured. The Company generally recognizes revenue for the sale of products when the products have been shipped and invoiced. In some cases, product is provided on consignment to customers. In those cases, revenue is recognized when the customer reports a sale of the product.
Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment and write-off histories. Our credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts. However, unexpected changes in the financial condition of customers or changes in the state of the economy could result in write-offs which exceed estimates and negatively impact our financial results.
Inventory Valuation. Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted at the time of introduction of a new product or design, periodically and at year-end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As of December 31, 2014, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of $645,000. As of December 31, 2013, the amount of the reserve was $738,000. In addition, on a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, records an expense for the value of such inventory. We record freight income as a component of net sales and record freight costs as a component of cost of goods sold.
Valuation of Long-Lived Assets. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property and equipment and goodwill) may be impaired or not recoverable. Significant factors which may trigger an impairment review include: changes in business strategy, market conditions, the manner of use of an asset, underperformance relative to historical or expected future operating results, and negative industry or economic trends. We apply the provisions of GAAP USA under which goodwill is evaluated at least annually for impairment. We conducted a qualitative assessment of our goodwill in our consolidated balance sheet for the year ended December 31, 2014. We performed a quantitative assessment for the year ended December 31, 2013 in which we considered the assets and liabilities of the subsidiary, both recognized and unrecognized, as well as the cash flows necessary to operate the business relating to the assets and liabilities. From this quantitative assessment and from the qualitative assessment for December 31, 2014, we determined the fair value of the subsidiary exceeds the carrying amount initially recorded on December 31, 2006, and was therefore not impaired.
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Foreign Currency Translation. All balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts are translated using the average exchange rates for the year-to-date periods. The gains and losses resulting from the changes in exchange rates during the period have been reported in other comprehensive income or loss, except that, on November 30, 2012, the Company determined that it does have an expectation of receiving payment with respect to indebtedness of Flexo Universal to the Company, and accordingly, as of and after that date foreign currency gains and losses with respect to such indebtedness will be reported in the statement of operations.
Stock-Based Compensation. We follow GAAP USA which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values.
We use the Black-Scholes option pricing model to determine the fair value of stock options which requires us to estimate certain key assumptions. In accordance with the application of GAAP USA, we incurred employee stock-based compensation cost of $77,000 for the year ended December 31, 2014. At December 31, 2014, we had $43,000 of unrecognized compensation cost relating to stock options.
On July 17, 2012, the Company issued detachable warrants in connection with the Note and Warrant Purchase Agreement with BMO Equity. The fair value of the detachable warrants was estimated on the date of the grant using the Black-Scholes option-pricing model. Changes in the fair value of the warrants have been recognized in the consolidated statement of operations.
Income Taxes and Deferred Tax Assets. Income taxes are accounted for as prescribed in GAAP USA. Under the asset and liability method of GAAP USA, the Company recognizes the amount of income taxes currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years these temporary differences are expected to be recovered or settled.
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We evaluate all available positive and negative evidence in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before what we have estimated in our current forecasts, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period.
As of December 31, 2014, the Company had net deferred tax assets of $1,732,000 representing the amount the Company may recover in future years from future taxable income. As of December 31, 2013, the amount of the net deferred tax asset was $1,249,000. Each quarter and year-end, management makes a judgment to determine the extent to which the deferred tax asset will be recovered from future taxable income.
Fair Value Measurements. In September 2006, the FASB issued GAAP USA which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. GAAP USA clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. GAAP USA also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available. In February 2008, the FASB issued guidance now codified in GAAP USA which provides for delayed application of certain guidance related to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
In February 2007, the FASB issued GAAP USA which permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. GAAP USA was effective for us on January 1, 2008. We did not elect the fair value option for any assets or liabilities that were not previously carried at fair value. Accordingly, the adoption of GAAP USA had no impact on our consolidated financial statements.
In October 2008, the FASB issued clarification to GAAP USA which clarifies the application of GAAP USA in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. GAAP USA is effective for all periods presented. The adoption of GAAP USA did not have a significant impact on our consolidated financial statements.
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Item No. 7A – Qualitative and Quantitative Disclosures Regarding Market Risk
Not applicable.
Item No. 8 – Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements contained in Part IV hereof.
Item No. 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item No. 9A – Controls and Procedures
Disclosure 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 December 31, 2014, the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated, as appropriate, to allow for timely decisions regarding required disclosure as of December 31, 2014. There were no material changes in our internal control over financial reporting during the fourth quarter of 2014 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements.
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Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operation effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting, based on our evaluation, management has concluded our internal controls over financial reporting were effective as of December 31, 2014.
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
None
Item No. 10 – Directors and Executive Officers of the Registrant
Information called for by Item 9 of Part III is incorporated by reference to the definitive Proxy Statement for the 2015 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2014.
Item No. 11 – Executive Compensation
Information called for by Item 10 of Part III is incorporated by reference to the definitive Proxy Statement for the 2015 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2014.
Item No. 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information called for by Item 11 of Part III is incorporated by reference to the definitive Proxy Statement for the 2015 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2014.
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Item No. 13 – Certain Relationships and Related Transactions
Information called for by Item 12 of Part III is incorporated by reference to the definitive Proxy Statement for the 2015 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2014.
Item No. 14 – Principal Accountant Fees and Services
Information called for by Item 13 of Part III is incorporated by reference to the definitive Proxy Statement for the 2015 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2014.
Item No. 15 – Exhibits and Financial Statement Schedules
| 1. | The Consolidated Financial Statements filed as part of this report on Form 10-K are listed on the accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules. |
| 2. | Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below: |
Schedule II Valuation and qualifying accounts
All other financial schedules are not required under the related instructions or are inapplicable and therefore have been omitted.
| 3. | Exhibits: |
| Exhibit | ||
| Number | Document | |
| 3.1 | Third Restated Certificate of Incorporation of CTI Industries Corporation (Incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with the Commission on October 25, 1999) | |
| 3.2 | By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997) | |
| 4.1 | Form of CTI Industries Corporation’s common stock certificate (Incorporated by reference to Exhibit 4.1, contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997) |
| 32 |
| 10.1 | CTI Industries Corporation 2001 Stock Option Plan (Incorporated by reference to Appendix E contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on May 21, 2001) | |
| 10.2 | CTI Industries Corporation 2002 Stock Option Plan (Incorporated by reference to Appendix A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on May 15, 2002) | |
| 10.3 | CTI Industries Corporation 2009 Stock Incentive Plan (Incorporated by reference to Schedule A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on April 30, 2009) | |
| 10.4 | Credit Agreement between Harris N.A. and CTI Industries Corporation dated April 29, 2010 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.5 | Mortgage and Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.6 | Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.7 | Pledge Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.8 | Trademark License Agreement between S.C. Johnson & Son, Inc. and the Company dated December 14, 2011 (Incorporated by reference to Exhibit 10.14 contained in Registrant’s Report on Form 10-K dated March 29, 2012) | |
| 10.9 | Third Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.10 | Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.11 | Note and Warrant Purchase Agreement between BMO Private Equity, Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.12 | Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). |
| 33 |
| 10.13 | Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.14 | Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012 (Incorporated by reference to Exhibit 10.8 contained in Registrant’s Report on Form 10-Q dated November 14, 2012). | |
| 10.15 | Fourth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated May 15, 2013). | |
| 10.16 | First Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 15, 2013). | |
| 10.17 | Supply Agreement between Toray Plastics (America), Inc. and the Company dated December 30, 2013 (Incorporated by reference to Exhibit 10.20 contained in Registrant’s Report on Form 10-K dated March 31, 2014). | |
| 10.18 | Consignment and Pay by Scan Agreement between Food Lion L.L.C. and CTI Supply, Inc. dated December 10, 2014. | |
| 10.19 | Fifth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated December 23, 2014. | |
| 10.20 | Second Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated December 23, 2014. | |
| 14 | Code of Ethics (Incorporated by reference to Exhibit contained in the Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on October 8, 2004) | |
| 21 | Subsidiaries (description incorporated in Form 10-K under Item No. 1) | |
| 23.1 | Consent of Independent Registered Public Accounting Firm, Plante & Moran, PLLC. | |
| 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) | |
| 99 | Audited financial statements of the Company’s subsidiary, Flexo Universal, S.A. de C.V. for the year ended December 31, 2014. |
| 34 |
| 101 |
Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.
|
| (a) | The Exhibits listed in subparagraph (a)(3) of this Item 15 are attached hereto unless incorporated by reference to a previous filing. |
| (b) | The Schedule listed in subparagraph (a)(2) of this Item 15 is attached hereto. |
| 35 |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 30, 2015.
| CTI INDUSTRIES CORPORATION | ||
| By: | /s/ Stephen M. Merrick | |
| Stephen M. Merrick, President | ||
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
| Signatures | Title | Date | ||
| /s/ John H. Schwan | Chief Executive Officer and | March 30, 2015 | ||
| John H. Schwan | Director | |||
| /s/ Stephen M. Merrick | President, Secretary, and | March 30, 2015 | ||
| Stephen M. Merrick | Director | |||
| /s/ Timothy S. Patterson | Chief Financial Officer and | March 30, 2015 | ||
| Timothy S. Patterson | Senior Vice President of Finance | |||
| /s/ Stanley M. Brown | Director | March 30, 2015 | ||
| Stanley M. Brown | ||||
| /s/ Bret Tayne | Director | March 30, 2015 | ||
| Bret Tayne | ||||
| /s/ John I. Collins | Director | March 30, 2015 | ||
| John I. Collins | ||||
| /s/ John Klimek | Director | March 30, 2015 | ||
| John Klimek | ||||
| /s/ Howard Eirinberg | Director | March 30, 2015 | ||
| Howard Eirinberg |
| 36 |
EXHIBIT INDEX
| Exhibit | ||
| Number | Document | |
| 3.1 | Third Restated Certificate of Incorporation of CTI Industries Corporation (Incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with the Commission on October 25, 1999) | |
| 3.2 | By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997) | |
| 4.1 | Form of CTI Industries Corporation’s common stock certificate (Incorporated by reference to Exhibit 4.1, contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997) | |
| 10.1 | CTI Industries Corporation 2001 Stock Option Plan (Incorporated by reference to Appendix E contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on May 21, 2001) | |
| 10.2 | CTI Industries Corporation 2002 Stock Option Plan (Incorporated by reference to Appendix A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on May 15, 2002) | |
| 10.3 | CTI Industries Corporation 2009 Stock Incentive Plan (Incorporated by reference to Schedule A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on April 30, 2009) | |
| 10.4 | Credit Agreement between Harris N.A. and CTI Industries Corporation dated April 29, 2010 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.5 | Mortgage and Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.6 | Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) | |
| 10.7 | Pledge Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated May 14, 2010) |
| 37 |
| 10.8 | Trademark License Agreement between S.C. Johnson & Son, Inc. and the Company dated December 14, 2011 (Incorporated by reference to Exhibit 10.14 contained in Registrant’s Report on Form 10-K dated March 29, 2012) | |
| 10.9 | Third Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.10 | Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.11 | Note and Warrant Purchase Agreement between BMO Private Equity, Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.12 | Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.13 | Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 14, 2012). | |
| 10.14 | Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012 (Incorporated by reference to Exhibit 10.8 contained in Registrant’s Report on Form 10-Q dated November 14, 2012). | |
| 10.15 | Fourth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated May 15, 2013). | |
| 10.16 | First Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 15, 2013). | |
| 10.17 | Supply Agreement between Toray Plastics (America), Inc. and the Company dated December 30, 2013 (Incorporated by reference to Exhibit 10.20 contained in Registrant’s Report on Form 10-K dated March 31, 2014). | |
| 10.18 | Consignment and Pay by Scan Agreement between Food Lion L.L.C. and CTI Supply, Inc. dated December 10, 2014. | |
| 10.19 | Fifth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated December 23, 2014. |
| 38 |
| 10.20 | Second Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated December 23, 2014. | |
| 14 | Code of Ethics (Incorporated by reference to Exhibit 14 contained in the Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on October 8, 2004) | |
| 21 | Subsidiaries (description incorporated in Form 10-K under Item No. 1) | |
| 23.1 | Consent of Independent Registered Public Accounting Firm, Plante & Moran, PLLC. | |
| 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) | |
| 99 | Audited financial statements of the Company’s subsidiary, Flexo Universal, S.A. de C.V. for the year ended December 31, 2014. | |
| 101 |
Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.
|
| 39 |
CTI Industries Corporation
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2014 and 2013
Contents
All other schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
CTI Industries Corporation and Subsidiaries
Lake Barrington, Illinois
We have audited the accompanying consolidated balance sheet of CTI Industries Corporation and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for the years then ended. Our audits of the consolidated financial statements included the financial statement schedule appearing under Schedule II. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 2014 or 2013 financial statements of Flexo Universal S.A. de C.V., a 99.82 percent owned subsidiary, whose statements reflect total assets and revenues constituting 17 percent and 19 percent of the related consolidated totals respectively as of and for the year ended December 31, 2014 and total assets and revenues constituting 21 percent and 22 percent of the related consolidated totals respectively as of and for the year ended December 31, 2013. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Flexo Universal S.A. de C.V., is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.
In our opinion, based on our report and the 2014 and 2013 reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CTI Industries Corporation and Subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule for the years ended December 31, 2014 and 2013, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Plante & Moran, PLLC
March 30, 2015
Chicago, Illinois
| F-1 |
CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets
| December 31, 2014 | December 31, 2013 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents (VIE $14,000 and $54,000, respectively) | $ | 150,332 | $ | 666,616 | ||||
| Accounts receivable, (less allowance for doubtful accounts of $230,000 and $217,000 respectively) (VIE $9,000 and $0, respectively) | 11,286,797 | 8,883,106 | ||||||
| Inventories, net (VIE $699,000 and $390,000, respectively) | 17,755,300 | 15,428,413 | ||||||
| Net deferred income tax asset | 718,694 | 931,245 | ||||||
| Prepaid expenses (VIE $22,000 and $3,000, respectively) | 1,983,915 | 1,315,384 | ||||||
| Other current assets (VIE $46,000 and $76,000, respectively) | 578,888 | 945,914 | ||||||
| Total current assets | 32,473,926 | 28,170,678 | ||||||
| Property, plant and equipment: | ||||||||
| Machinery and equipment (VIE $640,000 and $723,000, respectively) | 26,739,353 | 26,639,722 | ||||||
| Building | 3,360,017 | 3,360,017 | ||||||
| Office furniture and equipment (VIE $46,000 and $39,000, respectively) | 3,473,009 | 3,287,951 | ||||||
| Intellectual property | 482,088 | 482,088 | ||||||
| Land | 250,000 | 250,000 | ||||||
| Leasehold improvements | 640,166 | 586,515 | ||||||
| Fixtures and equipment at customer locations | 3,013,747 | 2,784,419 | ||||||
| Projects under construction | 859,631 | 1,009,623 | ||||||
| 38,818,011 | 38,400,335 | |||||||
| Less : accumulated depreciation and amortization (VIE $129,000 and $92,000, respectively) | (31,062,484 | ) | (29,718,564 | ) | ||||
| Total property, plant and equipment, net | 7,755,527 | 8,681,771 | ||||||
| Other assets: | ||||||||
| Deferred financing costs, net | 157,061 | 197,585 | ||||||
| Goodwill (VIE $440,000 and $440,000, respectively) | 1,473,176 | 1,473,176 | ||||||
| Net deferred income tax asset | 1,013,392 | 317,639 | ||||||
| Other assets (due from related party $47,000 and $24,000, respectively) | 173,828 | 230,651 | ||||||
| Total other assets | 2,817,457 | 2,219,051 | ||||||
| TOTAL ASSETS | $ | 43,046,910 | $ | 39,071,500 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Checks written in excess of bank balance | $ | 1,432,212 | $ | 704,757 | ||||
| Trade payables (VIE $74,000 and $94,000, respectively) | 4,468,859 | 3,573,007 | ||||||
| Line of credit (VIE $494,000 and $219,000, respectively) | 12,158,300 | 8,769,024 | ||||||
| Notes payable - current portion (net discount of $146,000 and $125,000, respectively) (VIE $114,000 and $107,000, respectively) | 328,942 | 342,931 | ||||||
| Notes Payable Affiliates - current portion | 9,034 | 9,079 | ||||||
| Capital Lease - current portion | 38,595 | 30,487 | ||||||
| Accrued liabilities (VIE $60,000 and $73,000, respectively) | 2,493,435 | 3,003,704 | ||||||
| Total current liabilities | 20,929,377 | 16,432,989 | ||||||
| Long-term liabilities: | ||||||||
| Notes Payable - Affiliates | 284,547 | 281,148 | ||||||
| Notes payable, net of current portion (net discount of $284,000 and $430,000, respectively) (VIE $322,000 and $441,000, respectively) | 7,177,406 | 7,511,383 | ||||||
| Notes payable - officer, subordinated | 1,236,476 | 1,155,705 | ||||||
| Capital Lease | 86,555 | 109,670 | ||||||
| Total long-term debt, net of current portion | 8,784,984 | 9,057,906 | ||||||
| Warrants Payable | 525,180 | 816,480 | ||||||
| Total long-term liabilities | 9,310,164 | 9,874,386 | ||||||
| Equity: | ||||||||
| CTI Industries Corporation stockholders' equity: | ||||||||
| Preferred Stock — no par value 2,000,000 shares authorized 0 shares issued and outstanding | - | - | ||||||
| Common stock - no par value, 5,000,000 shares authorized, 3,376,743 and 3,320,773 shares issued and 3,301,116 and 3,248,646 outstanding, respectively | 13,775,994 | 13,775,994 | ||||||
| Paid-in-capital | 1,542,718 | 1,165,549 | ||||||
| Accumulated earnings | 623,455 | 109,137 | ||||||
| Accumulated other comprehensive loss | (2,901,212 | ) | (2,253,501 | ) | ||||
| Less: Treasury stock - 75,627 shares and 72,127 shares, respectively | (160,784 | ) | (141,289 | ) | ||||
| Total CTI Industries Corporation stockholders' equity | 12,880,171 | 12,655,890 | ||||||
| Noncontrolling interest | (72,802 | ) | 108,235 | |||||
| Total Equity | 12,807,369 | 12,764,125 | ||||||
| TOTAL LIABILITIES AND EQUITY | $ | 43,046,910 | $ | 39,071,500 | ||||
See accompanying notes to consolidated financial statements
| F-2 |
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| For the Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Net Sales | $ | 57,828,200 | $ | 56,059,477 | ||||
| Cost of Sales | 43,623,666 | 43,446,618 | ||||||
| Gross profit | 14,204,534 | 12,612,859 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 7,231,243 | 6,564,355 | ||||||
| Selling | 3,041,937 | 2,224,551 | ||||||
| Advertising and marketing | 2,322,172 | 1,733,609 | ||||||
| Total operating expenses | 12,595,352 | 10,522,515 | ||||||
| Income from operations | 1,609,182 | 2,090,344 | ||||||
| Other (expense) income: | ||||||||
| Interest expense | (1,131,441 | ) | (1,461,855 | ) | ||||
| Interest income | 22,140 | 22,143 | ||||||
| Foreign currency gain | 39,367 | 27,232 | ||||||
| Total other expense, net | (1,069,934 | ) | (1,412,480 | ) | ||||
| Income before taxes | 539,248 | 677,864 | ||||||
| Income tax expense | 189,967 | 269,836 | ||||||
| Net Income | 349,281 | 408,028 | ||||||
| Less: Net (loss) income attributable to noncontrolling interest | (165,037 | ) | 32,519 | |||||
| Net income attributable to CTI Industries Corporation | $ | 514,318 | $ | 375,509 | ||||
| Other Comprehensive (Loss) Income | ||||||||
| Foreign currency adjustment | (647,711 | ) | (81,919 | ) | ||||
| Comprehensive (loss) income attributable to CTI Industries Corporation | $ | (133,393 | ) | $ | 293,590 | |||
| Basic income per common share | $ | 0.16 | $ | 0.12 | ||||
| Diluted income per common share | $ | 0.15 | $ | 0.11 | ||||
| Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||
| Basic | 3,288,332 | 3,248,646 | ||||||
| Diluted | 3,439,427 | 3,404,804 | ||||||
See accompanying notes to consolidated financial statements
| F-3 |
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
| CTI Industries Corporation | ||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Other | Less | |||||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Treasury Stock | Noncontrolling | |||||||||||||||||||||||||||||||
| Shares | Amount | Capital | (Deficit) Earnings | Loss | Shares | Amount | Interest | TOTAL | ||||||||||||||||||||||||||||
| Balance, December 31, 2012 | 3,320,773 | 13,775,994 | 1,045,987 | (266,372 | ) | (2,171,582 | ) | (72,127 | ) | (141,289 | ) | (160,692 | ) | $ | 12,082,046 | |||||||||||||||||||||
| Compensation relating to Option Issuance | $ | 119,562 | $ | 119,562 | ||||||||||||||||||||||||||||||||
| Noncontrolling interest in variable interest entity | $ | 250,408 | $ | 250,408 | ||||||||||||||||||||||||||||||||
| Dividends Declared | $ | (14,000 | ) | $ | (14,000 | ) | ||||||||||||||||||||||||||||||
| Net Income | $ | 375,509 | $ | 32,519 | $ | 408,028 | ||||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes Foreign currency translation | $ | (81,919 | ) | $ | (81,919 | ) | ||||||||||||||||||||||||||||||
| Balance, December 31, 2013 | 3,320,773 | $ | 13,775,994 | $ | 1,165,549 | $ | 109,137 | $ | (2,253,501 | ) | (72,127 | ) | $ | (141,289 | ) | 108,235 | 12,764,125 | |||||||||||||||||||
| Stock Purchase | 55,970 | $ | 300,000 | $ | 300,000 | |||||||||||||||||||||||||||||||
| Compensation relating to Option Issuance | $ | 77,169 | $ | 77,169 | ||||||||||||||||||||||||||||||||
| Stock Redemption | (3,500 | ) | $ | (19,495 | ) | $ | (19,495 | ) | ||||||||||||||||||||||||||||
| Dividends Declared | $ | (16,000 | ) | $ | (16,000 | ) | ||||||||||||||||||||||||||||||
| Net Income | $ | 514,318 | $ | (165,037 | ) | $ | 349,281 | |||||||||||||||||||||||||||||
| Other comprehensive income, net of taxes Foreign currency translation | $ | (647,711 | ) | $ | (647,711 | ) | ||||||||||||||||||||||||||||||
| Balance, December 31, 2014 | 3,376,743 | $ | 13,775,994 | $ | 1,542,718 | $ | 623,455 | $ | (2,901,212 | ) | (75,627 | ) | $ | (160,784 | ) | (72,802 | ) | 12,807,369 | ||||||||||||||||||
See accompanying notes to consolidated financial statements
| F-4 |
CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| For the Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 349,281 | $ | 408,028 | ||||
| Adjustment to reconcile net income to cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 2,074,701 | 1,909,845 | ||||||
| Amortization of debt discount | 125,459 | 107,483 | ||||||
| Change in value of swap agreement | (59,859 | ) | (67,734 | ) | ||||
| Stock based compensation | 77,169 | 119,562 | ||||||
| Provision for losses on accounts receivable | 67,195 | 137,566 | ||||||
| Provision for losses on inventories | (92,100 | ) | 101,282 | |||||
| Deferred income taxes | (483,202 | ) | 133,442 | |||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable | (2,884,838 | ) | (1,242,753 | ) | ||||
| Inventories | (2,768,021 | ) | 757,124 | |||||
| Prepaid expenses and other assets | (278,540 | ) | 18,704 | |||||
| Trade payables | 996,802 | (2,262,353 | ) | |||||
| Accrued liabilities | (479,159 | ) | 49,441 | |||||
| Net cash (used in) provided by operating activities | (3,355,112 | ) | 169,637 | |||||
| Cash flows from investing activities: | ||||||||
| Cash effect from consolidation of variable interest entity | - | 111,104 | ||||||
| Purchases of property, plant and equipment | (1,174,191 | ) | (2,058,901 | ) | ||||
| Net cash used in investing activities | (1,174,191 | ) | (1,947,797 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Change in checks written in excess of bank balance | 728,751 | 176,780 | ||||||
| Net change in revolving line of credit | 3,392,860 | 2,311,173 | ||||||
| Repayment of long-term debt (related parties $49,000 and $40,000) | (505,484 | ) | (547,331 | ) | ||||
| Proceeds from issuance of debt | 115,803 | 233,996 | ||||||
| Proceeds from issuance of stock, net | 300,000 | - | ||||||
| Proceeds from issuance of notes receivable | - | (26,220 | ) | |||||
| Dividends paid | (16,000 | ) | (14,000 | ) | ||||
| Purchase of treasury stock | (19,495 | ) | - | |||||
| Cash paid for deferred financing fees | (21,500 | ) | (35,397 | ) | ||||
| Net cash provided by financing activities | 3,974,935 | 2,099,001 | ||||||
| Effect of exchange rate changes on cash | 38,084 | (5,289 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (516,284 | ) | 315,552 | |||||
| Cash and cash equivalents at beginning of year | 666,616 | 351,064 | ||||||
| Cash and cash equivalents at end of year | $ | 150,332 | $ | 666,616 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash payments for interest | $ | 1,155,461 | $ | 1,303,368 | ||||
| Cash payments for taxes | $ | 215,000 | $ | 25,000 | ||||
| Supplemental Disclosure of non-cash investing and financing activity | ||||||||
| Property, plant & equipment acquisitions funded by liabilities | $ | 80,765 | $ | 26,433 | ||||
| Interest accrued not paid | $ | 80,772 | $ | 76,072 | ||||
See accompanying notes to consolidated financial statements
| F-5 |
Notes to Consolidated Financial Statements Years Ended
December 31, 2014 and 2013
1. Nature of Business
Nature of Operations
CTI Industries Corporation, its United Kingdom subsidiary (CTI Balloons Limited), its Mexican subsidiaries (Flexo Universal, S.A. de C.V., CTI Mexico Corporation, S.A. de C.V. and CTF International S.A. de C.V.), its German subsidiary (CTI Europe GmbH) and CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CTI Industries Corporation, its wholly owned subsidiaries CTI Balloons Limited, CTF International S.A. de C.V., and CTI Supply, Inc. and its majority owned subsidiaries, Flexo Universal, CTI Mexico Corporation and CTI Europe, 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. (Clever Container). The last three entities have been consolidated as variable interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation.
Variable Interest Entities
The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. Upon the adoption of amended accounting guidance applicable to variable interest entities on January 1, 2010, management continually reconsiders whether the Company is deemed to be a variable interest entity’s primary beneficiary who consolidates such entity. The Company has three entities that have been consolidated as variable interest entities. (See Note 13)
| F-6 |
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical exchange rate for stockholders’ equity, and a weighted average exchange rate for each period for revenues and expenses. Translation adjustments are recorded in accumulated other comprehensive income (loss) as the local currencies of the subsidiaries are the functional currencies. Foreign currency transaction gains and losses are recognized in the period incurred and are included in the consolidated statements of operations, except that, on November 30, 2012, the Company determined that it does have an expectation of receiving payment with respect to indebtedness of Flexo to the Company, and accordingly, as of and after that date foreign currency gains and losses with respect to such indebtedness are reported in the statement of operations.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts, lower of cost or market of inventory, slow moving inventory, deferred tax assets, recovery value of goodwill, and assumptions used as inputs in the Black-Scholes option-pricing model.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short term investments with original maturities of three months or less.
Accounts Receivable
Trade receivables are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts, evaluating the individual customer receivables through consideration of the customer’s financial condition, credit history and current economic conditions and use of historical experience applied to an aging of accounts. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for a period over the customer’s normal terms. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
| F-7 |
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis, to reflect the actual cost of production of inventories.
Production costs of work in process and finished goods include material, labor and overhead. Work in process and finished goods are not recorded in excess of net realizable value.
Property, Plant and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line method over the lesser of the estimated useful life or the lease term. The estimated useful lives range as follows:
| Building | 25 - 30 years | |
| Machinery and equipment | 3 - 15 years | |
| Projects that prolong the life and increase efficiency of machinery | 3 - 5 years | |
| Light Machinery | 5 - 10 years | |
| Heavy Machinery | 10 - 15 years | |
| Office furniture and equipment | 5 - 8 years | |
| Intellectual Property | 9 - 15 years | |
| Leasehold improvements | 5 - 8 years | |
| Furniture and equipment at customer locations | 1 - 3 years |
Light machinery consists of forklifts, scissor lifts, and other warehouse machinery. Heavy machinery consists of production equipment including laminating, printing and converting equipment. Projects in process represent those costs capitalized in connection with construction of new assets and/or improvements to existing assets including a factor for interest on funds committed to projects in process of $35,000 and $29,000 for the years ended December 31, 2014 and 2013, respectively. Upon completion, these costs are reclassified to the appropriate asset class.
Stock-Based Compensation
The Company has stock-based incentive plans which may grant stock option, restricted stock, and unrestricted stock awards. The Company recognizes stock-based compensation expense based on the grant date fair value of the award and the related vesting terms. The fair value of stock-based awards is determined using the Black-Scholes model, which incorporates assumptions regarding the risk-free interest rate, expected volatility, expected option life, and dividend yield. See Note 16 for additional information.
| F-8 |
Fair Value Measurements
GAAP USA defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements required under other accounting pronouncements. See Note 4 for further discussion.
The Company accounts for derivative instruments in accordance with GAAP USA, which requires that all derivative instruments be recognized on the balance sheet at fair value. We 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. 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 derivative financial instruments designated as hedges. Therefore, changes in fair value for the respective periods were recognized in the consolidated statement of operations.
Goodwill
The Company applies the provisions of GAAP USA, under which goodwill is tested at least annually for impairment. Goodwill on the accompanying balance sheets relates to the Company’s acquisition of Flexo Universal in a prior year as well as the investment in CTI Europe in a prior year and the goodwill related to Clever Container, a variable interest entity in which CTI is the primary beneficiary. It is the Company’s policy to perform impairment testing for Flexo Universal and Clever Container annually as of December 31, or as circumstances change. An annual impairment review was completed and no impairment was noted for the years ended December 31, 2014 and 2013 (see Note 14). While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect these evaluations.
Valuation of Long Lived Assets
The Company evaluates whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property, plant and equipment) may be impaired or not recoverable. The significant factors that are considered that could trigger an impairment review include: changes in business strategy, market conditions, or the manner of use of an asset; underperformance relative to historical or expected future operating results; and negative industry or economic trends. In evaluating an asset for possible impairment, management estimates that asset’s future undiscounted cash flows and appraised values to measure whether the asset is recoverable. The Company measures the impairment based on the projected discounted cash flows of the asset over its remaining life.
| F-9 |
Deferred Financing Costs
Deferred financing costs are amortized on a straight line basis over the term of the loan. Upon a refinancing, existing unamortized deferred financing costs are expensed.
Income Taxes
The Company accounts for income taxes using the liability method. As such, deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation allowance when management cannot determine, in its opinion, that it is more likely than not that the Company will recover that recorded value of the deferred tax asset. The Company is subject to U.S. Federal, state and local taxes as well as foreign taxes in the United Kingdom, Germany and Mexico. U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested.
Unrecognized tax benefits are accounted for as required by GAAP USA which prescribes a more likely than not threshold for financial statement presentation and measurement of a tax position taken or expected to be taken in a tax return. See Note 10 for further discussion.
Revenue Recognition
The Company recognizes revenue when title transfers upon shipment. Revenue from a transaction is not recognized until (i) a definitive arrangement exists, (ii) delivery of the product has occurred or the services have been performed and legal title and risk are transferred to the customer, (iii) the price to the buyer has been fixed or is determinable, and (iv) collectability is reasonably assured. In some cases, product is provided on consignment to customers. For these cases, revenue is recognized when the customer reports a sale of the product.
Research and Development
The Company conducts product development and research activities which include (i) creative product development and (ii) engineering. During the years ended December 31, 2014 and 2013, research and development activities totaled $633,000 and $838,000, respectively.
| F-10 |
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses amounted to $220,000 and $170,000 for the years ended December 31, 2014 and 2013, respectively.
3. New Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going Concern (Topic 205-40)” (“ASU 2014-15”). Under the standard, management is required to evaluate for each annual and interim reporting period whether it is a probable that the entity will not be able to meet its obligations as they become due within one year after the date that financial statements are issued, or are available to be issued, where applicable. ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. Accordingly, the standard is effective for the Company on January 1, 2017. The Company does not believe that the pronouncement will have an impact on the Company's financial statements.
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers. Revenue recognition will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The company is currently evaluating the impact of the new guidance and the method of adoption in the consolidated financial results.
In July 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The new guidance requires that unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2013. We adopted the provisions of this new guidance in 2014. The adoption of this guidance did not have a material effect on our financial condition or results of operation.
4. Fair Value Disclosures; Derivative Instruments
GAAP USA clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. GAAP USA also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available.
| F-11 |
GAAP USA establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:
| · | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| · | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, or unobservable but corroborated by market data, for substantially the full term of the financial instrument. |
| · | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of the input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The following table presents information about the Company’s liabilities measured at fair value on a recurring basis as of December 31, 2014 and 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
| Amount as of | ||||||||||||||||
| Description | 12/31/2014 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Warrant Liability | $ | 525,000 | - | $ | 525,000 | - | ||||||||||
| $ | 525,000 | $ | 525,000 | |||||||||||||
| Amount as of | ||||||||||||||||
| Description | 12/31/2013 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Interest Rate Swap | $ | 60,000 | $ | - | $ | 60,000 | $ | - | ||||||||
| Warrant Liability | 816,000 | - | 816,000 | - | ||||||||||||
| $ | 876,000 | $ | 876,000 | |||||||||||||
The fair value of the detachable warrants was estimated on the date of the grant using the Black-Scholes option-pricing model. This model uses the assumptions listed in the table below as of July 17, 2012 (initial valuation date of the warrants). In the valuation of the warrants, it was determined that the warrants were required to be carried as a derivative liability at fair value. Changes in the fair value of the warrants have been recognized in the consolidated statement of operations.
The Company’s interest rate swap agreements were valued using the counterparty’s mark-to-market statement, which were validated using modeling techniques that include market inputs such as publically available interest rate yield curves, and were designated as Level 2 within the valuation hierarchy.
| F-12 |
GAAP USA requires an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Under certain conditions, a derivative may be specifically designated as a fair value hedge or a cash flow hedge.
As a result of the use of derivative instruments, the Company was exposed to risk that the counterparty might fail to meet their contractual obligations. Recent adverse developments in the global financial and credit markets could have negatively impacted the creditworthiness of our counterparty and caused them to fail to perform as expected. To mitigate the counterparty credit risk, we only entered into contracts with a major financial institution based upon their credit ratings and other factors, and continually assessed the creditworthiness of the counterparty. The counterparty performed in accordance with their contractual obligations.
On July 1, 2011, we entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with BMO Harris. This swap agreement limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap agreement had the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap agreement was not designated as a hedge for accounting purposes and we determined and recorded the fair value of the swap agreement each quarter. This value is recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period is recorded as interest income or expense on the statement of operations. The swap agreement expired on September 30, 2014.
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
| Liability Derivatives | ||||||||||||
| As of December 31, | 2014 | 2013 | ||||||||||
| Derivatives not designated as hedging instruments under Statement 133 | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
| Interest Rate Contracts | Accrued Liabilities | $ | - | Accrued Liabilities | $ | 60,000 | ||||||
| F-13 |
The Effect of Derivative Instruments on the Consolidated Statements of Operations
| December 31, | 2014 | 2013 | ||||||||||
| Derivatives not Designated as Hedging Instruments under Statement 133 | Location of Gain Recognized in Income on Derivative | Amount of Gain Recognized in Income on Derivative | Location of Gain Recognized in Income on Derivative | Amount of Gain Recognized in Income on Derivative | ||||||||
| Interest Rate Contracts | Interest Expense | $ - | Interest Expense | $14,000 | ||||||||
| Interest on fixed/variable rate variances | $ | 63,000 | $ | 82,000 | ||||||||
5. Other Comprehensive Loss
The following table sets forth the tax effects of components of other comprehensive loss and the accumulated balance of other comprehensive loss and each component.
Tax Effects Allocated to Each Component of Other Comprehensive Loss
for the years ended December 31, 2014 and 2013
| Tax | ||||||||||||
| Before-Tax | (Expense) | Net-of-Tax | ||||||||||
| Amount | or Benefit | Amount | ||||||||||
| 2014 | ||||||||||||
| Foreign currency translation adjustments | $ | (647,711 | ) | $ | - | $ | (647,711 | ) | ||||
| Other comprehensive loss | $ | (647,711 | ) | $ | - | $ | (647,711 | ) | ||||
| Tax | ||||||||||||
| Before-Tax | (Expense) | Net-of-Tax | ||||||||||
| Amount | or Benefit | Amount | ||||||||||
| 2013 | ||||||||||||
| Foreign currency translation adjustments | $ | (81,919 | ) | $ | - | $ | (81,919 | ) | ||||
| Other comprehensive loss | $ | (81,919 | ) | $ | - | $ | (81,919 | ) | ||||
Accumulated Other Comprehensive Loss Balances as of December 31, 2014
| Accumulated | ||||||||
| Foreign | Other | |||||||
| Currency | Comprehensive | |||||||
| Items | Loss | |||||||
| Beginning balance | $ | (2,253,501 | ) | $ | (2,253,501 | ) | ||
| Current period change | (647,711 | ) | (647,711 | ) | ||||
| Ending balance | $ | (2,901,212 | ) | $ | (2,901,212 | ) | ||
| F-14 |
Accumulated Other Comprehensive Loss Balances as of December 31, 2013
| Accumulated | ||||||||
| Foreign | Other | |||||||
| Currency | Comprehensive | |||||||
| Items | Loss | |||||||
| Beginning balance | $ | (2,171,582 | ) | $ | (2,171,582 | ) | ||
| Current period change | (81,919 | ) | (81,919 | ) | ||||
| Ending balance | $ | (2,253,501 | ) | $ | (2,253,501 | ) | ||
For the years ended December 31, 2014 and 2013, no tax benefit has been recorded on the foreign currency translation adjustments; as such amounts would result in a deferred tax asset and are not expected to reverse in the foreseeable future.
6. Major Customers
For the year ended December 31, 2014, the Company had two customers that accounted for approximately 26.2% and 13.7% of consolidated net sales. For the year ended December 31, 2013, the Company had two customers that accounted for approximately 27.6% and 12.5% of consolidated net sales. At December 31, 2014, the outstanding accounts receivable balances due from these customers were $2,951,000 and $2,422,000, respectively. At December 31, 2013, the outstanding accounts receivable balances due from these customers were $1,523,000 and $2,085,000 respectively.
7. Inventories
Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted periodically and at year end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory for estimated obsolescence or unmarketable items, primarily by reviewing future demand requirements and shelf life of the product.
Inventories are comprised of the following:
| December 31, 2014 | December 31, 2013 | |||||||
| Raw materials | $ | 3,294,030 | $ | 3,342,528 | ||||
| Work in Process | 1,657,164 | 1,149,704 | ||||||
| Finished Goods | 13,448,796 | 11,673,872 | ||||||
| Allowance for excess quantities | (644,690 | ) | (737,691 | ) | ||||
| Total inventories | $ | 17,755,300 | $ | 15,428,413 | ||||
| F-15 |
| 8. | Notes Payable and Capital Leases |
Long term debt consists of:
| Dec. 31, 2014 | Dec. 31, 2013 | |||||||
| Mezzanine Note Payable BMO Private Equity, balance due January 18, 2018, interest at 11.50% (effective rate of 15.56%) | $ | 5,000,000 | $ | 5,000,000 | ||||
| Less: Remaining debt discount to be amortized | (430,000 | ) | (555,000 | ) | ||||
| Term Loan with Barrington Bank, payable in monthly installments of $11,000 amortized over 7 years, interest at 6.25%, balance due May 2016, which uses balloon production and related equipment as collateral. | 426,000 | 533,000 | ||||||
| Mortgage Loan with BMO Harris, payable in monthly installments of $7,778 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.75% (4.00%) at December 31, 2014 and 2013, (amortized over 25 years), balance due July 18, 2017. | 1,898,000 | 1,979,000 | ||||||
| Promissory Note with John J. Blaser and Stephanie M. Blaser (Related Party) due on demand, interest at 4.25%. | 10,000 | 15,000 | ||||||
| Equipment Loan with BMO Harris, payable in monthly installments of $22,323 beginning April 2012 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.75% (4.00%) at December 31, 2014 and 2013, (amortized over 60 months), balance due March 31, 2017. | 603,000 | 871,000 | ||||||
| Capital Lease with First American Equipment Finance, payable in monthly installments of $2,890 (amortized over 5 years). | 96,000 | 122,000 | ||||||
| Capital Lease with Wells Fargo, payable in monthly installments of $367 (amortized over 5 years). | 14,000 | 18,000 | ||||||
| Capital Lease with Wells Fargo, payable in monthly installments of $550 (amortized over 3 years). | 15,000 | - | ||||||
| Subordinated Notes (Officer) due on demand, interest at 9% (see Notes 9, 12). | 4,000 | 4,000 | ||||||
| Subordinated Notes (Officer) due on demand, interest at 8% (see Notes 9, 12). | 684,000 | 632,000 | ||||||
| Subordinated Notes (Officer) due on demand, interest at prime (3.25%) plus 2% (5.25%) at December 31, 2014 and 2013 (see Note 9). | 548,000 | 520,000 | ||||||
| Notes Payable (Affiliates) due 2015, interest at prime (3.25%) plus 0.25% (3.50%) at December 31, 2014 and 2013 (see Note 12) (Related Party). | 29,000 | 32,000 | ||||||
| Promissory Note with Merrick Company due on demand, interest at 4.25% (Related Party). | 109,000 | 94,000 | ||||||
| Promissory Note with Schwan Leasing due on demand, interest at 4.25% (Related Party). | 70,000 | 70,000 | ||||||
| Notes Payable (Affiliates) due 2021, interest at 11.75% (see Note 12) (Related Party). | 85,000 | 105,000 | ||||||
| Total long-term debt | 9,161,000 | 9,440,000 | ||||||
| Less current portion | (376,000 | ) | (382,000 | ) | ||||
| Total Long-term debt, net of current portion | $ | 8,785,000 | $ | 9,058,000 | ||||
| F-16 |
On April 29, 2010, the Company entered into a Credit Agreement and associated documents with BMO Harris under which BMO Harris agreed to extend to the Company a credit facility in the aggregate amount of $14,417,000. The facility includes (i) a Revolving Credit providing for maximum advances to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables and inventory of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of equipment, (iii) a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount the Company can borrow on the Revolving Credit includes 85% of eligible accounts and 60% of eligible inventory up to the maximum amount of the Revolving Credit which was amended to $12,000,000 in July 2012. The Mortgage Loan is amortized over a term of 25 years. The maturity date of the facility was April 30, 2013, which was subsequently extended to July 17, 2017. As of December 31, 2014 the balance outstanding on the Revolving Line of credit with BMO Harris was $11,664,000 and there was $200,000 available to borrow.
Certain terms of the loan agreement, as amended, include:
| · | Restrictive Covenants: The Loan 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 Loan Agreement includes a series of financial covenants we are required to meet including: |
| o | We are required to maintain a tangible net worth (plus Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010; |
| o | We are required to maintain specified ratios of senior debt to EBITDA on an annual basis and determined quarterly; and, |
| o | We are required to maintain a level of adjusted EBITDA to fixed charges on an annual basis determined quarterly of not less than 1.1 to 1. Adjusted EBITDA is EBITDA minus (i) taxes paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures. |
As of December 31, 2014, the Company was in compliance with these covenants.
| F-17 |
On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Equity and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017.
Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a detachable warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. An initial value of $703,000 was allocated to the detachable warrant. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.
The Note and Warrant Purchase Agreement includes provisions for:
| (i) | a closing fee of $100,000 |
| (ii) | payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums; |
| (iii) | security for the note obligations in all assets of the Company junior to the security interest of BMO Harris; |
| (iv) | various representations and warranties and covenants of the Company; |
| (v) | financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount. |
On April 12, 2013, the Company entered into Amendment No. 4 to the Credit Agreement among the Company and BMO Harris Bank N.A. (the “Bank”) (the “Credit Agreement Amendment”) and also entered into Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Private Equity (U.S.) (the “NWPA Agreement Amendment”). In the Credit Agreement Amendment, the Bank, and in the NWPA Agreement Amendment, BMO Equity, waives defaults by the Company as of December 31, 2012 and March 31, 2013 with respect to certain financial covenants in the agreement relating to the Senior Leverage Ratio and Total Leverage Ratio. In addition, the levels of these financial covenants for June 30, 2013 and subsequent quarters during the term of the agreements are revised.
| F-18 |
On December 23, 2014, the Company entered into Amendment No. 5 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, BMO Harris and BMO Equity waived certain anticipated events of default as of December 31, 2014 by the Company with respect the amount of capital expenditures and the change of name of a subsidiary, and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to exclude from the definition of Senior Funded Debt and Total Funded Debt certain indebtedness of a variable interest entity, (ii) to require Registrant to provide financial reports and variance reports to the Bank within 45 days after the end of each calendar month, (iii) to change the Senior Leverage Ratio and Total Leverage Ratio requirements for fiscal quarters ending December 31, 2014 and for each fiscal quarter thereafter to the maturity of the loans, and (iv) to provide for the engagement by the Company of a financial consultant to provide business financial planning and advisory services to the Company.
The amortization of the debt discount will result in the Company’s recognition of additional interest expense based on the effective interest method over the term of the underlying notes payable. Additional interest expense and accretion of $110,000 and $107,000 was recognized during 2014 and 2013, respectively.
Future minimum principal payments for amounts outstanding under these long-term debt agreements for each of the years ended December 31 are:
| 2015 | $ | 376,000 | ||
| 2016 | 553,000 | |||
| 2017 | 1,718,000 | |||
| 2018 | 5,018,000 | |||
| 2019 | 14,000 | |||
| Thereafter | 1,482,000 | |||
| Total | $ | 9,161,000 |
| 9. | Subordinated Debt |
In February 2003, the Company received $1,630,000 from certain shareholders in exchange for (i) 9% subordinated notes and (ii) five year warrants to purchase 163,000 common shares at $4.87 per share. The proceeds were to (i) re-finance a bank loan for CTI Mexico in the amount of $880,000 and (ii) to provide financing for CTI Mexico and Flexo Universal. The value of the warrants was $460,000 calculated using Black-Scholes option pricing formula. The Company applied the discount against the subordinated debt. The discount was amortized using the effective interest method to interest expense over the term of the debt. These loans are subordinated to the bank debt of the Company. On February 8, 2008 those shareholders exercised these warrants in exchange for a reduction on these notes of $794,000. The remaining balance of $4,000 is due on demand.
In February 2006, the Company received $1,000,000 from certain shareholders in exchange for (i) five year subordinated notes bearing interest at 2% over the prime rate determined on a quarterly basis and (ii) five year warrants to purchase an aggregate of 303,030 shares of common stock of the Company at the price of $3.30 per share. The proceeds were to fund capital improvements and give additional liquidity to the Company. The value of the warrants was $443,000 using the Black-Scholes option pricing formula. The Company applied the discount against the subordinated debt. The discount was amortized using the effective interest method to interest expense over the term of the debt. These loans are subordinated to the bank debt of the Company. On May 28, 2010, these shareholders exercised all of these warrants in exchange for note indebtedness. The remaining balance of $548,000 is due on demand.
| F-19 |
At various times from 2003 to 2005, certain shareholders loaned an aggregate of $814,000 to the Company in exchange for notes bearing interest at an annual rate of 8%. These notes are subordinated to the bank loan of the Company. The remaining balance of $684,000 is due on demand.
| 10. | Income Taxes |
The income tax provisions are comprised of the following:
| Dec. 31 2014 | Dec. 31 2013 | |||||||
| Current: | ||||||||
| Federal | $ | - | $ | - | ||||
| State | 94,371 | 43,751 | ||||||
| Foreign | 578,798 | 92,643 | ||||||
| $ | 673,169 | $ | 136,394 | |||||
| Deferred | ||||||||
| Federal | $ | (550,089 | ) | $ | (62,192 | ) | ||
| State | - | - | ||||||
| Foreign | 66,887 | 195,634 | ||||||
| (483,202 | ) | 133,442 | ||||||
| Total Income Tax Provision | $ | 189,967 | $ | 269,836 | ||||
The components of the net deferred tax asset at December 31 are as follows:
| 2012 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 69,898 | $ | 54,352 | ||||
| Inventory allowances | 246,425 | 283,193 | ||||||
| Accrued liabilities | 282,055 | 200,395 | ||||||
| Unicap 263A adjustment | 157,240 | 186,611 | ||||||
| Net operating loss carryforwards | 685,322 | 690,846 | ||||||
| Alternative minimum tax credit carryforwards | 398,162 | 398,162 | ||||||
| State investment tax credit carryforward | 10,912 | 76,668 | ||||||
| Foreign tax credit carryforward | 696,509 | 615,080 | ||||||
| Other foreign tax items | 50,747 | - | ||||||
| Foreign net operating loss carryforwards | 466,053 | 461,965 | ||||||
| Total deferred tax assets | 3,063,323 | 2,967,272 | ||||||
| Deferred tax liabilities: | ||||||||
| Tax over book basis of capital assets | (1,083,852 | ) | (1,354,409 | ) | ||||
| Undistributed Earnings from Subsidiaries | (247,385 | ) | (211,274 | ) | ||||
| Other foreign tax items | - | (152,705 | ) | |||||
| Net deferred tax assets | $ | 1,732,086 | $ | 1,248,884 | ||||
| F-20 |
The Company has net operating loss carryforwards of approximately $2,270,000 expiring in various years through 2025. In addition, the Company has approximately $398,000 of alternative minimum tax credits as of December 31, 2014, which have no expiration date.
Income tax provisions differed from the taxes calculated at the statutory federal tax rate as follows:
| Years Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Taxes at statutory rate | $ | 183,344 | $ | 230,474 | ||||
| State income taxes | 27,583 | 42,502 | ||||||
| Nondeductible expenses | 59,129 | 40,565 | ||||||
| Foreign taxes and other | (80,089 | ) | (43,705 | ) | ||||
| Income tax provision | $ | 189,967 | $ | 269,836 | ||||
The Company files tax returns in the U.S., and in the U.K, Germany and Mexico foreign tax jurisdictions and also in various state jurisdictions in the U.S. The tax years 2011 through 2014 remain open to examination. Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the twelve months ended December 31, 2014 and 2013, the Company did not recognize expense for interest or penalties, and do not have any amounts accrued at December 31, 2014 and 2013, as the Company does not believe it has taken any uncertain tax positions.
| 11. | Employee Benefit Plan |
The Company has a defined contribution plan for substantially all employees. Profit sharing contributions may be made at the discretion of the Board of Directors. Effective January 1, 2006, the Company amended its defined contribution plan. Under the amended plan, the maximum contribution for the Company is 4% of gross wages. Employer contributions to the plan totaled $98,000 and $90,000 for the years ended December 31, 2014 and 2013, respectively.
| 12. | Related Party Transactions |
Stephen M. Merrick, President of the Company, is of counsel to a law firm from which we received legal services during the year. Mr. Merrick is both a director and a shareholder of the Company. Legal fees paid to this firm were $175,000 and $117,000 for the years ended December 31, 2014 and 2013, respectively.
| F-21 |
John H. Schwan, Chief Executive Officer of the Company, was a principal of Shamrock Packaging and affiliated companies during a portion of 2013. The Company made payments for packaging materials from Shamrock of approximately $1,673,000 and $1,942,000 during the years ended December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, outstanding accounts payable balances were $312,000 and $402,000, respectively.
John H. Schwan, Chief Executive Officer of the Company, is the brother of Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance and remodeling services to the Company. The Company made payments to Schwan Incorporated of approximately $22,000 during the year ended December 31, 2014. During the year ended December 31, 2013, there was no payment made to Schwan Incorporated.
During the period from January 2003 to the present, John H. Schwan, Chief Executive Officer of the Company, has made loans to the Company which have outstanding balances, for the Company of $1,236,000 and $1,156,000 as of December 31, 2014 and 2013, respectively. During 2014 and 2013, interest expense to this individual on these outstanding loans was $81,000 and $76,000, respectively (see Notes 10 and 12).
During 2010, Schwan Leasing and Merrick Company, owned by John H. Schwan and Stephen M. Merrick, provided financing for the acquisition and construction of latex balloon production and related equipment (see Note 13).
Other Assets include amounts due to the Company from its employees. As of December 31, 2014 and 2013, the balance outstanding on these amounts was $47,000 and $24,000, respectively.
Items identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of December 31, 2014 and 2013 include loans by shareholders to Flexo Universal totaling $85,000 and $105,000, respectively, as well as a loan to CTI Europe totaling $29,000 and $32,000, respectively.
The transactions described in Note 13.
| 13. | Variable Interest Entities (“VIE”) and Transactions |
During 2010, two entities owned by officers and principal shareholders of the Company (John H. Schwan and Stephen M. Merrick) provided financing for Flexo Universal, the Company’s Mexico subsidiary, for the acquisition and construction of latex balloon production and related equipment. The entities included Venture Leasing L.L.C., (“VLUS”), an Illinois limited liability company which is 100% owned by an entity owned by Mr. Schwan and Mr. Merrick, and Venture Leasing Mexico S. A. de R. L (“VLM”), a Mexico company which is also owned 100% by entities owned by Mr. Schwan and Mr. Merrick. The Company is the primary beneficiary of VLUS & VLM and accordingly consolidated the result of the entities in its financial statements.
| F-22 |
Mr. Schwan and Mr. Merrick, through entities owned by them, arranged for a line of credit in the amount of $1,000,000 from Barrington Bank in order to loan monies to VLUS as needed. During 2010, VLUS received advances on this line totaling $700,000. VLUS loaned substantially all of these funds to VLM. VLM utilized the funds to purchase materials, parts, components and services for the acquisition and construction of balloon production and related equipment to be placed at the premises of Flexo Universal. Assembly and construction of this equipment was completed on or about December 31, 2010 and, in January 2011, the equipment was placed in service at Flexo Universal.
Title to the equipment remains in the name of VLM. VLM leases the equipment to Flexo Universal under a three-year lease under which Flexo Universal will pay to VLM rental payments at the rate of approximately $9,000 per month and will have the right to purchase the equipment from VLM at the expiration of the lease at fair market value. The Company has not provided any guarantees related to VLUS or VLM and no creditors of the variable interest entities have recourse to the general credit of the Company as a result of including VLUS & VLM in the consolidated financial statements.
The accounts of VLM and VLUS have been consolidated with the accounts of the Company.
Mr. Schwan and Mr. Merrick are 50% owners of Clever Container, an Illinois limited liability company engaged in the sale and distribution through a network of independent distributors, of household items including containers and organizing products. The Company produces and sells certain container products to Clever Container and also purchases and re-sells products to Clever Container. By reason of the level of ownership of Clever Container by two principal officers and shareholders of the Company and the transactions among the Company and Clever Container, the determination was made to consolidate the results of Clever Container in the consolidated financial statements of the Company commencing as of October 1, 2013 and going forward.
The following sets forth the condensed balance sheet of VLM, VLS and Clever Container for December 31, 2014 and 2013.
| Dec. 31, 2014 | Dec. 31, 2013 | |||||||
| Current Assets | $ | 790,000 | $ | 516,000 | ||||
| Property, plant and equipment, net | 557,000 | 670,000 | ||||||
| Other noncurrent assets | 879,000 | 958,000 | ||||||
| Total assets | $ | 2,226,000 | $ | 2,144,000 | ||||
| Mortgages and other long-term debt payable | $ | 2,142,000 | $ | 1,799,000 | ||||
| Total liabilities | $ | 2,142,000 | $ | 1,799,000 | ||||
| F-23 |
| 14. | Goodwill |
Under the provisions of GAAP USA, goodwill is subject to at least annual assessments for impairment by applying a fair-value based test. GAAP USA also requires that an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. The Company has no acquired intangible assets other than goodwill.
As of December 31, 2014 and 2013, we determined that the fair value of the Company’s interest in goodwill related to Flexo Universal as recorded was not impaired. The carrying amount of goodwill as of December 31, 2014 and 2013 was $989,000.
During 2010, the Company purchased an additional interest of $101,000 in its German subsidiary, CTI Europe, and recorded $44,000 of goodwill in the transaction. We have determined that the fair value of the Company's interest in the goodwill related to CTI Europe was not impaired as of December 31, 2014 and 2013.
As of October 1, 2013, the Company became the primary beneficiary of a variable interest entity, Clever Container, and as a result consolidated the operations of this entity in its consolidated financial statements, in which goodwill of approximately $440,000 was present. The Company has determined that the fair value of the goodwill related to Clever Container was not impaired as of December 31, 2014 and 2013.
| 15. | Commitments |
Operating Leases
The Company’s United Kingdom subsidiary maintains a lease for office and warehouse space which expires December 2014 at a cost of $5,000 per month and additional space that expires July 2014 at a cost of $2,000 per month. In September 2012, the Company’s German subsidiary entered into a 3-year lease to rent approximately 3,000 square feet of office and warehouse space in Heusenstamm, Germany at a cost of $2,000 per month. In August 2011, Flexo Universal entered into a 5-year lease to rent 73,000 square feet of warehouse and office space in Guadalajara, Mexico at the cost of $30,000 per month. In September 2012, we entered into a lease agreement, expiring on February 28, 2017 to rent approximately 117,000 square feet of warehouse and office space in Lake Zurich, Illinois at a cost per month as follows:
| Lease period | Amount per month | |||
| March 1, 2013 – October 31, 2013 | $ | 25,000 | ||
| November 1, 2013 – October 31, 2014 | 28,000 | |||
| November 1, 2014 – October 31, 2015 | 30,000 | |||
| November 1, 2015 – October 31, 2016 | 33,000 | |||
| November 1, 2016 – February 28, 2017 | 36,000 | |||
| F-24 |
All of the Company’s lease payments are recognized on a straight-line basis. The net lease expense was $954,000 and $963,000 for the years ended December 31, 2014 and 2013, respectively.
The future aggregate minimum net lease payments under existing agreements as of December 31, are as follows:
| 2015 | $ | 854,000 | ||
| 2016 | 661,000 | |||
| 2017 | 72,000 | |||
| Thereafter | - | |||
| Total | $ | 1,587,000 |
Licenses
The Company has certain merchandising license agreements that require royalty payments based upon the Company’s net sales of the respective products. The agreements call for guaranteed minimum commitments that are determined on a calendar year basis. Future guaranteed commitments due, as computed on a pro rata basis, as of December 31, are as follows:
| 2015 | $ | 400,000 | ||
| Thereafter | 950,000 | |||
| Total | $ | 1,350,000 |
| 16. | Stockholders’ Equity |
Stock Options
The Company has adopted GAAP USA which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values.
The Compensation Committee administers the stock-based plans. The exercise price for Incentive Stock Options (“ISO”) cannot be less than the fair value of the stock subject to the option on the grant date (110% of such fair value in the case of ISOs granted to a stockholder who owns more than 10% of the Company’s Common Stock). The exercise price of a Non-Qualified Stock Options (“NQSO”) shall be fixed by the Compensation Committee at whatever price the Committee may determine in good faith. Unless the Committee determines otherwise, options beginning with the 2007 Plan generally have a 4-year term with a 3-year vesting schedule. Unless the Committee provides otherwise, options terminate upon the termination of a participant’s employment, except that the participant may exercise an option to the extent it was exercisable on the date of termination and for a period of time after termination. Officers, directors and employees of, and consultants to the Company, or any parent or subsidiary corporation selected by the Committee, are eligible to receive options under the Plan. Subject to certain restrictions, the Committee is authorized to designate the number of shares to be covered by each award, the terms of the award, the date on which and the rates at which options or other awards may be exercised, the method of payment, vesting and other terms.
| F-25 |
The Company has applied the Black-Scholes model to value stock-based awards. 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 the Company’s Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company’s Common Stock.
The valuation assumptions we have applied to determine the value of stock-based awards were as follows:
Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility.
Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities in effect at the time of the grant.
Expected life: The expected life of the option represents the period of time options are expected to be outstanding. The Company uses an expected life of 3.75 years.
Dividend yield: The estimate for dividend yield is 0.0%, as the Company did not issue dividends during 2014.
Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.
The Company, at the discretion of the board, may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.
The Company’s pre-tax income for the fiscal year ended December 31, 2014 and 2013 includes approximately $77,000 and $120,000, respectively, of compensation costs related to share-based payments. As of December 31, 2014, there is $43,000 of unrecognized compensation expense related to non-vested stock option grants. We expect approximately $29,000, $11,000, and $3,000 to be recognized during 2015, 2016, and 2017 respectively.
On April 12, 2001, the Board of Directors approved for adoption, effective December 27, 2001, the 2001 Stock Option Plan (“2001 Plan”). The 2001 Plan authorizes the grant of options to purchase up to an aggregate of 119,050 shares of the Company’s Common Stock. As of December 31, 2014, 139,958 options (including cancelled shares re-issued under the Plan) have been granted and were fully vested at the time of grant; 2,000 remain outstanding. No options were exercised during 2014.
| F-26 |
On April 24, 2002, the Board of Directors approved for adoption, effective October 12, 2002, the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan authorizes the grant of options to purchase up to an aggregate of 142,860 shares of the Company’s Common Stock. As of December 31, 2014, 123,430 options have been granted and were fully vested at the time of grant; 27,500 remain outstanding. No options were exercised during 2014.
On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Company approved the 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company. As of December 31, 2014, 201,000 options have been granted; 185,000 remain outstanding of which 102,599 are vested and 82,401 are not vested. Of the total outstanding options, 20,000 have vesting schedule A, 21,000 have vesting schedule B, 20,000 have vesting schedule C, 114,000 have vesting schedule D and 10,000 were fully vested on December 31, 2012. Vesting schedules for the 2009 Plan are as follows:
| Vesting Schedule A | Vesting Schedule B | Vesting Schedule C | Vesting Schedule D | |||||||||||
| 25% | 12 months | 33% | 24 months | 50% | 48 months | 20% | 6 months | |||||||
| 50% | 24 months | 67% | 36 months | 100% | 57 months | 40% | 18 months | |||||||
| 75% | 36 months | 100% | 48 months | 60% | 30 months | |||||||||
| 100% | 48 months | 80% | 42 months | |||||||||||
| 100% | 54 months | |||||||||||||
No options were exercised during the years ended December 31, 2014 and December 31, 2013.
The following is a summary of the activity in the Company’s stock option plans and other options for the years ended December 31, 2014 and 2013, respectively:
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Weighted Avg. | Weighted Avg. | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
| Exercisable, beginning of period | 83,718 | $ | 4.67 | 47,000 | $ | 4.03 | ||||||||||
| Vested | 56,464 | 5.76 | 36,718 | 5.49 | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Cancelled | 8,083 | 5.77 | - | - | ||||||||||||
| Exercisable at the end of period | 132,099 | $ | 5.07 | 83,718 | $ | 4.67 | ||||||||||
| F-27 |
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Weighted Avg. | Weighted Avg. | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
| Outstanding, beginning of period | 228,500 | $ | 5.23 | 218,500 | $ | 5.21 | ||||||||||
| Granted | - | - | 10,000 | 5.75 | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Cancelled | (14,000 | ) | 5.68 | - | - | |||||||||||
| Outstanding at the end of period | 214,500 | $ | 5.20 | 228,500 | $ | 5.23 | ||||||||||
At December 31, 2014, available options to grant were 49,000 under the 2009 Plan.
Significant option groups remained outstanding at December 31, 2014 and related weighted average grant date fair value, remaining life and intrinsic value information are as follows:
| Options Outstanding | Options Vested | |||||||||||||||||||||||||||||||
| Options by Grant Date | Shares | Weighted Avg. | Remain. Life | Intrinsic Val | Shares | Weighted Avg. | Remain. Life | Intrinsic Val | ||||||||||||||||||||||||
| Dec 2005 | 29,500 | $ | 2.88 | 1.0 | $ | 25,960 | 29,500 | $ | 2.88 | 1.0 | $ | 25,960 | ||||||||||||||||||||
| Dec 2010 | 65,000 | 6.15 | 1.0 | - | 55,000 | 6.08 | 1.0 | - | ||||||||||||||||||||||||
| Jan 2011 | 6,000 | 5.96 | 1.0 | - | 3,999 | 5.96 | 1.0 | - | ||||||||||||||||||||||||
| Nov 2012 | 104,000 | 5.17 | 2.9 | - | 41,600 | 5.17 | 2.9 | - | ||||||||||||||||||||||||
| Nov 2013 | 10,000 | 5.75 | 3.9 | - | 2,000 | 5.75 | 3.9 | - | ||||||||||||||||||||||||
| TOTAL | 214,500 | $ | 5.20 | 2.1 | $ | 25,960 | 132,099 | $ | 5.07 | 1.6 | $ | 25,960 | ||||||||||||||||||||
Warrants
On July 17, 2012, the Company issued detachable warrants in connection with the Note and Warrant Purchase Agreement with BMO Equity (see Note 8). The warrants are exercisable at any time after July 17, 2012 and until July 17, 2022, or 18 months after full payment of the related $5,000,000 note payable, whichever is earlier, for up to 4% of the outstanding units of the Company (on a fully diluted basis) on the date of exercise. The warrants are exercisable at the purchase price of $0.01 per unit. At inception, the fair value allocated to the warrants of $703,000 was separately reflected as a noncurrent liability in the consolidated balance sheet.
The fair value of the detachable warrants was estimated on the date of the grant using the Black-Scholes option-pricing model. This model uses the assumptions listed in the table below as of July 17, 2012 (initial valuation date of the warrants). In the valuation of the warrants, it was determined that the warrants were required to be carried as a derivative liability at fair value. Changes in the fair value of the warrants have been recognized in the consolidated statement of operations.
| F-28 |
| December 31, 2014 | December 31, 2013 | December 31, 2012 | July 17, 2012 | |||||||||||||
| Weighted average fair value per warrant | $ | 3.76 | $ | 5.84 | $ | 4.87 | $ | 5.03 | ||||||||
| Risk-free interest rate | 2.47 | % | 2.45 | % | 1.18 | % | 0.99 | % | ||||||||
| Expected lives | 5.0 yrs. | 6.0 yrs. | 7.0 yrs. | 7.5 yrs. | ||||||||||||
| Expected volatility | 44.99 | % | 37.49 | % | 28.18 | % | 36.98 | % | ||||||||
The following is a summary of the activity of the Company’s warrants for the years ended December 2014 and 2013:
| December 31, 2014 | December 31, 2013 | |||||||||||||||
| Weighted Avg. | Weighted Avg. | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
| Outstanding and exercisable, beginning of period | 140,048 | $ | 0.01 | 140,048 | $ | 0.01 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Cancelled | - | - | - | - | ||||||||||||
| Outstanding and exercisable at the end of period | 140,048 | $ | 0.01 | 140,048 | $ | 0.01 | ||||||||||
The warrants outstanding and exercisable as of December 31, 2014 have a remaining life of 7.5 years and a fair value of $525,000.
| 17. | 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.
For the three and twelve months ended December 31, 2014, 185,000 shares were anti-dilutive (not included in the determination of earnings on a diluted basis), all of which were represented by options. For the three and twelve months ended December 31, 2013, 84,783 shares were anti-dilutive, all of which were represented by options.
| F-29 |
Consolidated Earnings per Share
| Year Ended December 31, | ||||||||
| 2014 | 2013 | |||||||
| Basic | ||||||||
| Average shares outstanding: | ||||||||
| Weighted average number of shares outstanding during the period | 3,288,332 | 3,248,646 | ||||||
| Earnings: | ||||||||
| Net income attributable to CTI Industries Corporation | $ | 514,318 | $ | 375,509 | ||||
| Amount for per share Computation | $ | 514,318 | $ | 375,509 | ||||
| Net earnings applicable to Common Shares | $ | 0.16 | $ | 0.12 | ||||
| Diluted | ||||||||
| Average shares outstanding: | 3,288,332 | 3,248,646 | ||||||
| Weighted averages shares Outstanding Common stock equivalents (options, warrants) | 151,095 | 156,158 | ||||||
| Weighted average number of shares outstanding during the period | 3,439,427 | 3,404,804 | ||||||
| Earnings: | ||||||||
| Net income attributable to CTI Industries Corporation | $ | 514,318 | $ | 375,509 | ||||
| Amount for per share computation | $ | 514,318 | $ | 375,509 | ||||
| Net income applicable to Common Shares | $ | 0.15 | $ | 0.11 | ||||
| F-30 |
| 18. | Geographic Segment Data |
The Company’s operations consist of a business segment which designs, manufactures, and distributes film products. Transfers between geographic areas were primarily at cost plus a standard markup. The Company’s subsidiaries have assets consisting primarily of trade accounts receivable, inventory and machinery and equipment. Sales and selected financial information by geographic area for the years ended December 31, 2014 and 2013, respectively, are:
| United States | United Kingdom (UK) | Europe (Excluding UK) | Mexico | Consolidated | ||||||||||||||||
| Year ended 12/31/14 | ||||||||||||||||||||
| Sales to outside customers | $ | 42,896,000 | $ | 2,497,000 | $ | 1,592,000 | $ | 10,843,000 | $ | 57,828,000 | ||||||||||
| Total Assets | $ | 33,026,000 | $ | 1,048,000 | $ | 1,457,000 | $ | 7,516,000 | $ | 43,047,000 | ||||||||||
| United States | United Kingdom (UK) | Europe (Excluding UK) | Mexico | Consolidated | ||||||||||||||||
| Year ended 12/31/13 | ||||||||||||||||||||
| Sales to outside customers | $ | 41,956,000 | $ | 2,032,000 | $ | 1,001,000 | $ | 11,070,000 | $ | 56,059,000 | ||||||||||
| Total Assets | $ | 28,758,000 | $ | 1,025,000 | $ | 1,145,000 | $ | 8,144,000 | $ | 39,072,000 | ||||||||||
| 19. | Contingencies |
In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations.
| F-31 |
Schedule II – Valuation and Qualifying Accounts:
The following is a summary of the allowance for doubtful accounts related to accounts receivable for the years ended December 31:
| 2014 | 2013 | |||||||
| Balance at beginning of year | $ | 217,000 | $ | 99,000 | ||||
| Charged to expenses | 67,000 | 138,000 | ||||||
| Uncollectible accounts written off | (54,000 | ) | (20,000 | ) | ||||
| Balance at end of year | $ | 230,000 | $ | 217,000 | ||||
The following is a summary of the allowance for excess inventory for the years ended December 31:
| 2014 | 2013 | |||||||
| Balance at beginning of year | $ | 738,000 | $ | 636,000 | ||||
| Charged to expenses | (92,000 | ) | 101,000 | |||||
| Obsolete inventory written off | (1,000 | ) | 1,000 | |||||
| Balance at end of year | $ | 645,000 | $ | 738,000 | ||||
The following is a summary of property and equipment and the related accounts of accumulated depreciation for the years ended December 31:
| 2014 | 2013 | |||||||
| Cost Basis | ||||||||
| Balance at beginning of year | $ | 38,400,335 | $ | 36,571,114 | ||||
| Additions | 817,636 | 1,829,221 | ||||||
| Disposals | (399,960 | ) | - | |||||
| Balance at end of year | $ | 38,818,011 | $ | 38,400,335 | ||||
| Accumulated depreciation | ||||||||
| Balance at beginning of year | $ | 29,718,564 | $ | 27,872,044 | ||||
| Depreciation | 1,743,880 | 1,847,520 | ||||||
| Disposals | (399,960 | ) | - | |||||
| Balance at end of year | $ | 31,062,484 | $ | 29,718,564 | ||||
| F-32 |
Exhibit 10.18
CONSIGNMENT AND PAY BY SCAN AGREEMENT
This Agreement is made and entered into this 10th day of December, 2014 by and among Food Lion Supply Chain Services, Inc. on behalf of itself and its affiliate Food Lion, LLC (“Food Lion”) and CTI Supply, Inc., an Illinois corporation on behalf of itself and its parent CTI Industries Corporation (“CTI Supply”).
WHEREAS, Food Lion owns and operates a number of retail stores in the United States;
WHEREAS, CTI Supply, is a wholly-owned subsidiary of CTI Industries Corporation, an Illinois corporation (“CTI”) engaged, among other things in the manufacture, sale and distribution of foil balloon products, latex balloon products and associated displays and supplies and, through CTI Supply, in the provision and distribution of helium;
WHEREAS, the parties desire to enter into an agreement pursuant to which (i) CTI Supply will supply to Food Lion stores balloons products and containers of helium, on a consignment basis, (ii) and Food Lion stores will sell such products to their customers, will record and report the sales on a Pay By Scan (“PBS”) basis and will remit payment to CTI Supply based upon the PBS sales.
NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows
1. Supply of Balloon and Helium Products.
1.1 Subject to and on the terms and conditions hereinafter contained, CTI Supply agrees to supply to Food Lion stores all of their requirements for balloon Consignment Products and Helium, and for Related Products, as defined herein, for the term hereof, and Food Lion agrees to receive, display, sell and make payment for such balloon Consignment Products and Helium, and Related Products, as provided herein. Notwithstanding the foregoing, Food Lion shall be entitled to purchase and sell balloon products from vendors other than CTI Supply with respect to products which are not available from CTI Supply.
1.2 The program terms and model (“Program Model”), for Consignment Products, shall be as set forth in Schedule A hereto.
1.3 Consignment Products (as defined in the Program Model) shall be provided by CTI Supply to Food Lion stores on a consignment basis on the following terms and in accordance with the Program Model:
1.3.1 Food Lion stores will take possession of Consignment Products delivered by CTI Supply and shall display and sell such products to its customers in Food Lion stores. Food Lion shall record and account to CTI Supply for the sales of all Consignment Products in accordance with the Pay By Scan program (“PBS”) as described and provided for herein.
| 1 |
1.3.2 Food Lion shall not sell, dispose of or use any of the Consignment Products except as provided in this paragraph or in the Program Model, or as shall otherwise expressly be authorized herein;
1.3.2 CTI Supply shall retain title to all Consignment Products until such products are sold to a third party customer. Upon sale of a Consignment Product to a customer, title will transfer from CTI Supply to the customer. Consignment Products, in the possession of Food Lion shall remain the property and inventory of CTI Supply until sold to a customer. Except as provided in Section 2 hereof with respect to inventory variances, CTI Supply shall retain all risk of loss for Consignment Product, including damage by fire, flooding, storm, water or other causes.
1.3.3 Food Lion shall provide to CTI Supply, or CTI as may be designated by CTI Supply, full information in EDI format with respect to the sale by Food Lion of any and all Consignment Products at such times and in such manner as the parties shall agree.
1.3.4 CTI Supply shall install and operate a system for maintenance and replenishment of inventory of Consignment Products at Food Lion stores. Such program will rely upon the timely provision by Food Lion of EDI information concerning the sale of Consignment Products at Food Lion stores. Utilizing such system, CTI Supply shall be authorized to, and shall, replenish Consignment Products at Food Lion stores based upon the inventory level and sales information maintained in its system. Such replenishment shall be accomplished by direct to store delivery of replenishment items by CTI Supply and store personnel shall display such items in accordance with the Program Model.
1.4 Food Lion may purchase Related Products from CTI Supply during the term of this Agreement on the following terms:
1.4.1 “Related Products” shall mean and include products, other than Consignment Products or Supplies, related to the Consignment Products or balloon program of Food Lion, which Food Lion may purchase from CTI Supply from time to time.
1.4.2 With respect to all Related Products, Food Lion shall place orders for such products for designated Food Lion stores through the customer service department of CTI Supply and CTI Supply shall deliver such items on a direct to store basis. CTI Supply shall be authorized to invoice shipments of Related Products to Food Lion, designated by store, at the time of shipment and payment for such items shall be due within thirty (30) days after the date of invoice. CTI Supply shall provide all Related Products at competitive prices.
1.4.3 For all Related Products, freight shall be paid by CTI Supply.
1.5 CTI Supply shall provide and deliver to Food Lion stores a sufficient supply of all Supply Items as set forth in the Program Model without charge to Food Lion.
| 2 |
2. Inventory Management for Consignment Products.
2.1 CTI Supply shall maintain records of inventory levels of all Consignment Products at Food Lion stores during the term of this Agreement.
2.2 The system and methods which CTI Supply shall utilize to perform inventory control and management of Consignment Products shall include the following:
2.2.1 CTI Supply shall maintain a computerized system for inventory management in which (i) inventory shall be increased by all shipments of product from CTI Supply to Food Lion and (ii) inventory shall be relieved by recording all sales of Consignment Product through EDI reports provided by Food Lion to CTI Supply. The CTI Supply system shall be designed to maintain and report inventory levels of Consignment Product in each store. CTI Supply shall provide reports of inventory levels on a store basis to Food Lion as Food Lion may request from time to time.
2.2.2 CTI Supply shall replenish Consignment Products in stores based upon the determination of store inventory levels from time to time. CTI Supply is authorized to determine store inventory levels and to provide for replenishment of Consignment Products at store levels by shipping direct to store (DSD).
2.2.3 Food Lion shall have responsibility for in-store maintenance of the balloon program and shall:
(a) Place all product on the spinner rack or display or display product in such manner as the store manager shall direct;
(b) Maintain and organize the display.
2.2.4 CTI Supply shall be authorized to, and shall, from time to time, have an authorized representative visit stores designated by CTI Supply and conduct a count of all Consignment Products at the store. .
2.2.5 Once each year during the term of the Agreement, the parties shall, through the use of an inventory service company authorized by Food Lion, conduct an inventory count of the Consignment Products at each Food Lion store for the purpose of reconciling inventory and determining the amount of shrink. CTI shall be responsible for the cost of the inventory service company services. The parties agree that they shall be bound by the inventory count of Consignment Products set forth in the report of such inventory service.
2.2.6 Utilizing the report of the inventory service company, CTI Supply shall compare the same to the inventory counts of Consignment Products shown on its inventory system to determine the amount of shrink, if any. “Shrink” shall mean, with respect to each item of Consignment Inventory at each Food Lion store, the difference between the unit amounts shown on the CTI inventory system for such item at such store and the unit amount shown on the report of the inventory service company.
| 3 |
2.2.7 CTI Supply shall adjust store inventory levels in its system based upon the report of the inventory service company.. In the event that the amount of Shrink for any item in any Food Lion store shall exceed Twelve Percent (12%) of the unit amount shown on the inventory of CTI Supply for such item, , CTI Supply shall be entitled to invoice Food Lion for an amount equal to one-half of the value (determined on the basis of the Remittance Amount provided in Schedule A) of the number of units of the item exceeding a Shrink of 12%.
2.3 CTI Supply shall manage, and maintain inventory control management with respect to, helium cylinders provided by it, or its vendor, to Food Lion stores. Food Lion shall cause all helium cylinders provided to it by parties other than CTI Supply, or its vendors, to be removed from Food Lion stores on a schedule which the parties shall determine.
3. Helium Supply.
3.1 In connection with the Program Model for Consignment Products to be provided by CTI Supply hereunder, CTI Supply shall undertake responsibility for, and shall, supply, or arrange for the supply through third parties, of helium cylinders to Food Lion Stores during the term hereof. The parties acknowledge that, at the effective date of this Agreement, certain Food Lion stores will have helium cylinders at their premises provided by suppliers other than the CTI Supply helium vendor with unused helium for which Food Lion shall have paid. In such cases, the Food Lion store shall be authorized to retain such cylinder(s) at their premises pending the use of all helium remaining in such cylinders and CTI Supply shall be responsible for payment of reasonable rental costs with respect to such cylinders. Food Lion shall cause all empty cylinders from vendors other than the CTI Supply helium vendor to be returned to the supplying vendor and, thereafter, shall utilize cylinders provided by CTI Supply or its vendor.
3.2 The parties contemplate and agree that balloon Consignment Product which utilize helium shall be supplied by CTI Supply to Food Lion on a “helium inclusive basis.” That is, the price paid to CTI Supply for balloon Consignment Products, which utilize helium and are sold by Food Lion shall include, and constitute payment both for the balloon itself and the helium contained and used in the balloon when inflated.
3.3 CTI Supply shall arrange for, and supply, helium cylinders to Food Lion stores as required during the term of this Agreement and shall be responsible for the cost and expenses of purchasing, acquiring and delivering helium cylinder to, and retrieving them from, the stores. Food Lion shall be responsible to maintain possession and control of all cylinders while situated in the stores and shall be responsible for loss of, or damage to, cylinders while in the possession and control of the stores, including, without limitation, charges from the supplier of the cylinders for loss or damage to cylinders. Food Lion and CTI Supply shall develop a program to monitor and account for helium cylinders delivered to, maintained at and removed from all Food Lion stores to their mutual satisfaction. Such program shall include a process in which, when a cylinder is delivered to, or picked up from, a store, the Store Manager will be required to sign a delivery/pick up slip as proof of delivery or pick up. Such tickets will be maintained and managed by CTI Supply and/or its vendor for tracking purposes.
| 4 |
3.4 The program under which CTI Supply shall undertake to supply, or have supplied, helium cylinders to Food Lion stores shall include:
3.4.1 Food Lion shall arrange and maintain proper space and facilities in each store to receive, store and use helium cylinders.
3.4.2 Food Lion shall be responsible for, and shall, acquire, at its expense, necessary supplies and materials for the storage and use of helium cylinders including but not limited to cylinder restraints, cylinder covers and regulators; CTI Supply shall make available to Food Lion all of such items, as Food Lion may, in its sole discretion, order from CTI Supply from time to time, at reasonable and competitive prices.
3.4.3 Except as otherwise expressly provided herein, Food Lion shall utilize the helium supplied by CTI Supply solely for the purpose of inflating balloon Consignment Products, and for no other purpose or use, shall not otherwise cause or permit the use or disposal of helium supplied by CTI Supply and shall undertake reasonable controls and precautions to prevent the unauthorized or inadvertent use or disposal of such helium.
3.4.4 The parties agree to establish a standard practice training under which the use of helium in the stores will be reviewed and monitored on a periodic basis and procedures instituted to limit the use of helium supplied by CTI Supply for purposes other than for the specific purposes authorized herein.
4. Pay By Scan Terms and Procedures.
4.1 Food Lion shall initiate, operate and maintain such programs, procedures and processes such that the sale in all Food Lion stores of Consignment Products shall be scanned and electronically recorded at the time of sale.
4.2 Food Lion will provide daily scan data electronically to CTI Supply on a timely and consistent basis. Data will be sent within one day after the scan date and will generally represent twenty-four (24) hours of scan data for the previous day. The EDI/Point of Sales 852 transaction set format will be utilized. The parties shall utilize AS2 or other secure protocol for direct data communications.
4.3 The parties agree to cooperate and work together to insure that item designation, pricing and other items are coordinated among the systems of both parties. Food Lion shall provide such authorization, information and data as may be necessary or appropriate for CTI Supply to be able to receive scan data information within thirty (30) days from the date of this Agreement.
4.4 Food Lion shall take any and all such commercially reasonable action to assure the accuracy and completeness of scan data, including:
(a) Preventing the scanning or recording of the sale of Consignment Products other than by electronic scanning of such items, or by other means properly and fully recording the sale;
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(b) Assigning PLU keys to properly record sales of Consignment Products or the sale or use of helium;
(c) Limit ‘Not on File’, ie “Bucket” sales;
(d) Appropriately processing customer returns;
(e) Limiting store level price changes;
(f) Accounting to CTI Supply for in-store transfers.
4.5 The parties agree that each item of Consignment Product shall be identified in a coordinated manner among Food Lion and CTI Supply and that the price payable to CTI Supply in connection with the sale of each such item shall be in accordance with the Program Model.
4.6 In the event that scan data shall be delayed, missing or unrecoverable, the parties shall employ to following procedures:
(a) With respect to data which is delayed or determined to be inaccurate, Food Lion will send a corrected 852 transmission at the earliest practicable date, but in any event within five days of discovery of the delay or inaccuracy.
(b) In the event that scan data for a period is missing and unrecoverable, the parties shall utilize eight weeks of historical scan data for each individual store and time frame to calculate the estimated scan quantities. If the parties cannot agree on a resolution, the matter shall be submitted to arbitration in accordance with the arbitration provisions of this Agreement.
4.7 Payment for all items sold by Food Lion on a pay by scan basis shall be made to CTI Supply with fifteen days from the Saturday of the scan week. All payments shall be made by Electronic Funds Transfer (EFT) which shall identify the amount paid, store, and time frame.
5. Warranty
5.1 CTI Supply represents that it has good and marketable title to all goods furnished to Food Lion hereunder and warrants that all products furnished hereunder (i) shall be free from latent and patent defects in workmanship, material, manufacture, and design; (ii) be free and clear of any lien, security interest or other adverse claim against title; (iii) not infringe, including without limitation their sale or use alone or in combination, any United States or foreign patents, trademarks, trade secrets, copyrights or proprietary rights of any third party.
5.2 The foregoing warranties shall survive any delivery, inspection, acceptance or payment by Food Lion and shall be effective for as long as the products are being sold in Food Lion stores; provided that, the warranty with respect to any specific item shall survive for a period of one year from the date of sale of the product to a consumer..
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5.3 The foregoing warranties are intended for the benefit of Food Lion only and are not made or given for the use or benefit of any third party and may not be utilized or relied upon by any third party.
5.4 Except as expressly provided herein, CTI Supply EXPRESSLY DISCLAIMS ALL WARRANTIES WITH RESPECT TO THE PRODUCTS FURNISHED HEREUNDER, EXPRESS OR IMPLIED, AND INCLUDING, WITHOUT LIMITATION, ANY AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
5.5 As a remedy for the breach of any warranty given hereunder CTI Supply shall provide credit to Food Lion with respect to the price of any product supplied hereunder as to which there shall be a breach of warranty or, at Food Lion’s option, CTI Supply shall replace the same.
6. Term and Termination.
6.1 The term of this Agreement shall commence on January 1, 2015 the date hereof and continue to December 31, 2016. At the expiration of the term, or any renewal term, of this Agreement, this Agreement shall be renewed for an additional term of one year, unless at least one hundred twenty (120) days prior to the expiration of such term or renewal term either party shall give notice to the other of the termination of the Agreement at the expiration of the term or renewal term.
6.2 Either party may terminate this Agreement without cause at any time upon at least one hundred twenty (120) calendar days prior written notice to the other party.
6.3 Either party may terminate this Agreement prior to the expiration of its term, on 30 days prior written notice to the other party, by reason of an Event of Default with respect to the other party. An “Event of Default” with respect to a party shall mean and include any failure or refusal of a the party to perform an obligation under this Agreement on its part to be performed, or any violation of a term of this Agreement by such party, and the failure of such party to cure such violation within 10 days after notice thereof, specifying the violation or failure to perform, shall have been given to the party.
6.4 In the event of termination of this Agreement:
6.4.1 Food Lion shall be obligated promptly upon notice of such termination being given as provided herein to make available to CTI Supply all Consignment Products in its possession and to permit authorized representatives of CTI to pick up, package and remove the same from all Food Lion stores. CTI Supply shall have the right to recover and remove from any and all Food Lion Stores all Consignment Product then situated in such stores.
6.4.2 Upon termination of the Agreement, all rights and obligations of the parties hereunder shall cease and terminate; provided, however, that (i) all rights and claims which shall have accrued to the date of termination shall continue and be enforceable and (ii) all obligations herein which, by their terms, extend beyond the date of termination shall continue in existence and be effective and enforceable.
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7. Indemnification
7.1 Indemnification by CTI Supply. CTI Supply will at all times be deemed to be performing as an independent contractor and not as an agent or employee of Food Lion. The acts and omissions of CTI Supply’s employees and agents and subcontractors of any tier will be deemed to be those of CTI Supply only. CTI will defend, indemnify and hold harmless Food Lion and its directors, officers, employees, agents, employees, successors and assigns from and against any and all liability, damages, losses, claims, demands, judgments, costs and expenses of every nature arising out of or incidental to or in any way resulting from (i) the negligent acts or omissions, or acts or omissions in violation of this Agreement, of CTI Supply, its employees, subcontractors or agents in performance under this Agreement or (ii) breach of warranty on the part of CTI Supply. CTI Supply will not be responsible for any such losses, liabilities, claims, judgments, costs, demands and expense caused by the sole negligence or willful misconduct of Food Lion, or its officers, employees or agents. If a claim is filed against Food Lion for which CTI Supply is to be responsible under this provision, Food Lion will promptly notify CTI Supply in writing of such claim.
7.2 Indemnification by Food Lion. Food Lion will at all times be deemed to be performing as an independent contractor and not as an agent or employee of CTI Supply. The acts and omissions of Food Lion’s employees and agents and subcontractors of any tier will be deemed to be those of Food Lion only. Food Lion will defend, indemnify and hold harmless CTI Supply, its directors, officers, employees, agents, employees, parents, successors and assigns from and against any and all liability, damages, losses claims, demands, judgments, costs and expenses of every nature and kind arising out of or incidental to or in any way resulting from the negligent acts or omissions, or acts or omissions in violation of this Agreement of Food Lion, its employees, subcontractors or agents in performance under this Agreement. Food Lion shall not be responsible for any such losses, liabilities, claims, judgments, costs, demands or expense caused by the sold negligence or willful misconduct of CTI Supply, or its officers, employees or agents. If a claim is filed against CTI Supply for which Food Lion is to be responsible under this provision, CTI Supply will promptly notify Food Lion in writing of such claim.
8. Limitation of Liability. Neither party shall be liable to the other for any special, indirect, incidental, consequential, punitive or exemplary damages, including, but not limited to, lost profits, even if such party has knowledge of the possibility of such damages, provided, however, that the limitations set forth in this Section shall not apply to, or in any way limit, a party’s indemnity obligations under this Agreement.
9. Binding Effect. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors in interest and, to the extent permitted herein, their assigns.
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10. Assignment. This Agreement, and the rights and obligations of a party, may not be assigned without the express written consent of the other party and any attempted assignment in violation of this Agreement shall be void. Notwithstanding the foregoing, either party may, without obtaining the prior written consent of the other party, assign any of its rights and obligations under this Agreement to an affiliate or to the surviving corporation with or into which the party may merge or consolidate or an entity to which the party transfers all, or substantially all, of its business and assets.
11. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. If any paragraph of this Agreement shall be unenforceable or invalid under applicable law, such provision shall be ineffective only to the extent and duration of such unenforceability or invalidity and the remaining substance of such provision and the remaining paragraphs of this Agreement shall in such event continue to be binding and in full force and effect.
12. Waivers. No failure by a party to exercise any of such party’s rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by any party to demand exact compliance with the terms hereof. Waiver by any party of any particular default by any other party shall not affect or impair such party’s rights in respect to any subsequent default of the same or of a different nature, nor shall any delay or omission of any party to exercise any right arising from any default by any other party affect or impair such party’s rights as to such default or any subsequent default.
13. Force Majeure. No party hereto shall be considered in breach or default in the performance of its obligations hereunder (other than its obligation to pay money hereunder), or be liable in damages, or otherwise for any failure or delay in performance which is due to strike, fire, explosion, flood or other natural catastrophe, civil disturbance, lock-out, concerted act of workers, riot or armed conflict, curtailment, shortage, rationing or allocation of normal sources of supply of labor, materials, transportation, energy or utilities, accident, act of God, delay of subcontractors or vendors, compliance with act of government regulations, embargo, machinery or equipment breakdown, or any other cause whether similar or dissimilar to any of the causes or categories of causes described above and which is beyond the reasonable control of the party claiming excuse hereunder.
14. Dispute Resolution. If the parties are unable to resolve a dispute arising out of or relating to this Agreement (a “Dispute”), including a claim based on or arising from an alleged tort, but excluding Disputes relating to a party’s confidentiality obligations under this Agreement, through good faith negotiation, then either party may request that such Dispute be referred to non-binding mediation conducted in the state in which the Services are provided before a mediator acceptable to both sides, according to mutually agreed procedures. For the avoidance of doubt, nothing in this section shall limit the right of either party to apply directly to a court having proper jurisdiction for relief (whether temporary, preliminary, injunctive or otherwise) in connection with any dispute.
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15. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, inducements, understandings, commitments, contracts or agreements. This Agreement may not be amended or modified except by a written instrument signed by the parties hereto.
16. Governing Law. This Agreement shall be governed by, and shall be construed and enforced in all respects in accordance with, the laws of the State of North Carolina.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
| FOOD LION SUPPLY CHAIN | CTI SUPPLY, INC. | |||
| SERVICES, INC. | ||||
| By: | /s/ Bob Matthews | By: | /s/ Stephen Merrick | |
| Category Manager | President | |||
| CTI INDUSTRIES CORPORATION | ||||
| By: | /s/ Samuel Komar | |||
| V.P. of Sales & Marketing | ||||
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Exhibit 10.19
Amendment
No. 5
to Credit Agreement
This Amendment No. 5 to Credit Agreement is dated as of December 23, 2014, and is between CTI Industries Corporation, an Illinois corporation (the “Borrower”); CTI Supply, Inc., an Illinois corporation f/k/a CTI Helium, Inc., and a Wholly-Owned Subsidiary of the Borrower, in its capacity as a guarantor (the “Subsidiary Guarantor”); and BMO Harris Bank N.A., a national banking association, successor to Harris N.A. (the “Bank”).
The Borrower and the Bank entered into a Credit Agreement dated as of April 29, 2010 (the “Credit Agreement”), under which the Bank has extended certain credit facilities to the Borrower.
In connection with the Credit Agreement, the Subsidiary Guarantor entered into a Guaranty dated as of April 29, 2010 (the “Subsidiary Guaranty”), under which, among other things, the Subsidiary Guarantor guarantees the prompt and complete payment and performance of the Obligations.
The parties now desire to amend the Credit Agreement in certain respects.
The parties therefore agree as follows:
1. Definitions. Defined terms used but not defined in this agreement are as defined in the Credit Agreement.
2. Limited Waiver. (a) The Borrower has informed the Bank of the following defaults in the observance or performance of certain provisions of the Loan Documents:
| (1) | that the Borrower and its Subsidiaries will make or will have made Capital Expenditures in the fiscal year of the Borrower ending on December 31, 2014, in excess of $700,000, the maximum permitted amount of Capital Expenditures set forth in section 8.23(d) of the Credit Agreement; and |
| (2) | that the Subsidiary Guarantor changed its legal name without first giving 30 days’ prior written notice of its intent to do so to the Bank. |
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(b) The Borrower acknowledges that an Event of Default has occurred or would occur as a result of each default described in section 2 (each such Event of Default, a “Subject Event of Default”). The Borrower further acknowledges that each Subject Event of Default entitles the Bank to exercise its rights and remedies under the Credit Agreement, applicable law, or otherwise. The Borrower has therefore requested that the Bank waive each Subject Event of Default. The Borrower acknowledges that but for the terms of this agreement all obligations under the Credit Agreement and each of the other Loan Documents would be immediately due and payable as the result of the occurrence of or upon the occurrence of a Subject Event of Default. In addition, the Borrower acknowledges that the Bank has incurred reasonable attorneys’ fees in connection with each Subject Event of Default and that those costs, fees, and expenses are recoverable by the Bank under the Credit Agreement.
(c) The Bank hereby waives each Subject Event of Default that has occurred or that would result from any of the defaults described in section 2 and the Bank’s remedies under the Credit Agreement with respect to each Subject Event of Default. The limited waivers set forth in this agreement are to be narrowly construed. Except as provided in this agreement, those limited waivers neither extend to any other violations under, or default of, the Credit Agreement nor prejudice any rights or remedies that the Bank might have or be entitled to with respect to any such other violations or defaults.
3. Amendments to Credit Agreement. (a) The definition of “Senior Funded Debt” in section 5.1 of the Credit Agreement is hereby amended by replacing “Excluded Flexo VIE Debt” with “Excluded VIE Debt.”
(b) The definition of “Total Funded Debt” in section 5.1 of the Credit Agreement is hereby amended by replacing “Excluded Flexo VIE Debt” with “Excluded VIE Debt.”
(c) Section 5.1 of the Credit Agreement is hereby further amended by inserting each of the following new definitions in the appropriate alphabetical order:
“ “Clever Container” means Clever Container Company LLC, an Illinois limited liability company and an Affiliate of the Borrower.
“Excluded Clever Container VIE Debt” means all Indebtedness for Borrowed Money of Clever Container, subject to satisfaction of the following conditions: (a) the aggregate amount of Clever Container’s liability for such indebtedness does not exceed $800,000 at any time; (b) none of the Borrower and its Subsidiaries has done any of the following: (i) directly or indirectly guaranteed such indebtedness; (ii) agreed (contingently or otherwise) to purchase or otherwise acquire such indebtedness; or (iii) otherwise assured any creditor of Clever Container against loss in respect of such indebtedness; and (c) no creditor of Clever Container has recourse to the general credit of the Borrower or any of its other Subsidiaries as a result of including Clever Container in the consolidated financial statements of the Borrower and its Subsidiaries.
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“Excluded VIE Debt” means, collectively, the Excluded Clever Container VIE Debt and the Excluded Flexo VIE Debt.
“Financial Consultant” is defined in Section 8.24 hereof.”
(d) Section 8.5(b) of the Credit Agreement is hereby amended to read in its entirety as follows:
“ (b) as soon as available, and in any event within forty-five (45) days after the last day of each calendar month, (i) a copy of the consolidated and consolidating balance sheet of the Borrower and its Subsidiaries as of the last day of such period and the consolidated and consolidating statements of income, retained earnings, and cash flows of the Borrower and its Subsidiaries for the calendar month and the fiscal year-to-date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Borrower in accordance with GAAP and certified to by its chief financial officer or such other officer acceptable to the Bank; and (ii) a variance-to-budget analysis, in reasonable detail and setting forth a description of variances, if any, in the figures for such period from the projected figures for such period presented in the applicable business plan delivered to the Bank in accordance with subsection (g) below and specifying the action, if any, taken by the Borrower to address the same;”
(e) Section 8.5(f) of the Credit Agreement is hereby amended by replacing “its independent public accountants” with “its independent public accountants or the Financial Consultant.”
(f) Section 8.6 of the Credit Agreement is hereby amended by replacing “and independent public accountants (and by this provision the Borrower hereby authorizes such accountants to discuss with the Bank the finances and affairs of the Borrower and of each Subsidiary)” with “and independent public accountants and the Financial Consultant (and by this provision the Borrower hereby authorizes such accountants and the Financial Consultant to discuss with the Bank the finances and affairs of the Borrower and of each Subsidiary).”
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(g) Section 8.23(a) of the Credit Agreement is hereby amended to read in its entirety as follows:
“ (a) Senior Leverage Ratio. As of the last day of each fiscal quarter of the Borrower (commencing June 30, 2010), the Borrower shall not permit the Senior Leverage Ratio for the four fiscal quarters of the Borrower then ended to be more than the amount set forth below for such fiscal quarter:
| Fiscal Quarter Ending | Level | ||
| March 31, 2010, June 30, 2010, September 30, 2010, and December 31, 2010 |
3.50 to 1.00 | ||
| March 31, 2011, and June 30, 2011 |
3.25 to 1.00 | ||
| September 30, 2011 | 3.00 to 1.00 | ||
| December 31, 2011, March 31, 2012, June 30, 2012, and September 30, 2012 |
3.25 to 1.00 | ||
| December 31, 2012, and March 31, 2013 |
3.00 to 1.00 | ||
| June 30, 2013, and September 30, 2013 |
3.25 to 1.00 | ||
| December 31, 2013 | 3.00 to 1.00 | ||
| March 31, 2014 | 2.75 to 1.00 | ||
| June 30, 2014, and September 30, 2014 |
2.50 to 1.00 | ||
| December 31, 2014 | 4.25 to 1.00 |
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| Fiscal Quarter Ending | Level | ||
| March 31, 2015 | 3.75 to 1.00 | ||
| June 30, 2015 | 3.50 to 1.00 | ||
| September 30, 2015, and December 31, 2015 |
3.25 to 1.00 | ||
| March 31, 2016, and each fiscal quarter thereafter |
3.00 to 1.00 | ” |
(h) Section 8.23(b) of the Credit Agreement is hereby amended to read in its entirety as follows:
“ (b) Total Leverage Ratio. As of the last day of each fiscal quarter of the Borrower (commencing June 30, 2012), the Borrower shall not permit the Total Leverage Ratio for the four fiscal quarters of the Borrower then ended to be more than the amount set forth below for such fiscal quarter:
| Fiscal Quarter Ending | Level | ||
| June 30, 2012 | 5.25 to 1.00 | ||
| September 30, 2012 | 4.85 to 1.00 | ||
| December 31, 2012, and March 31, 2013 |
4.60 to 1.00 | ||
| June 30, 2013, and September 30, 2013 |
5.00 to 1.00 | ||
| December 31, 2013 | 4.50 to 1.00 | ||
| March 31, 2014 | 4.25 to 1.00 | ||
| June 30, 2014, and September 30, 2014 |
4.10 to 1.00 | ||
| December 31, 2014 | 5.85 to 1.00 |
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| Fiscal Quarter Ending | Level | ||
| March 31, 2015 | 5.25 to 1.00 | ||
| June 30, 2015, September 30, 2015, and December 31, 2015 |
4.50 to 1.00 | ||
| March 31, 2016, and each fiscal quarter thereafter |
4.25 to 1.00 | ” |
(i) Section 8 of the Credit Agreement is hereby further amended by inserting after amended section 8.23 the following new section 8.24:
“ Section 8.24 Engagement of Financial Consultant. The Borrower shall engage, for the duration of the fiscal year of the Borrower ending December 31, 2015 (or any shorter period approved in writing by the Bank), at the Borrower’s expense, Capstone Advisory Group, LLC, or another independent consultant of recognized standing selected by the Borrower and reasonably acceptable to the Bank (the “Financial Consultant”) to provide business financial planning and other advisory services to the Borrower and its Subsidiaries. The Borrower shall cause the management of the Borrower and its Subsidiaries to meet with the Financial Consultant at such reasonable times and reasonable intervals as the Borrower may determine, but at least once per fiscal quarter during the fiscal year of the Borrower ending December 31, 2015 (or less frequently as approved in writing by the Bank).”
4. Reaffirmation of Subsidiary Guaranty. The Subsidiary Guarantor hereby expressly does each of the following:
| (1) | consents to the execution by the Borrower and the Bank of this agreement; |
| (2) | acknowledges that the “Indebtedness” (as defined in the Subsidiary Guaranty) includes all of the “Obligations” under and as defined in the Credit Agreement, as amended from time to time (including as amended by this agreement); |
| (3) | acknowledges that the Subsidiary Guarantor does not have any set-off, defense, or counterclaim to the payment or performance of any of the obligations of the Borrower under the Credit Agreement or the Subsidiary Guarantor under the Subsidiary Guaranty; |
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| (4) | reaffirms, assumes, and binds itself in all respects to all of the obligations, liabilities, duties, covenants, terms, and conditions contained in the Subsidiary Guaranty; |
| (5) | agrees that all such obligations and liabilities under the Subsidiary Guaranty continue in full force and that the execution and delivery of this agreement to, and its acceptance by, the Bank will not in any manner whatsoever do any of the following: |
| (A) | impair or affect the liability of the Subsidiary Guarantor to the Bank under the Subsidiary Guaranty; |
| (B) | prejudice, waive, or be construed to impair, affect, prejudice, or waive the rights and abilities of the Bank at law, in equity, or by statute against the Subsidiary Guarantor pursuant to the Subsidiary Guaranty; or |
| (C) | release or discharge, or be construed to release or discharge, any of the obligations and liabilities owing to the Bank by the Subsidiary Guarantor under the Subsidiary Guaranty; and |
| (6) | represents and warrants that each of the representations and warranties made by the Subsidiary Guarantor in any of the documents executed in connection with the Loans remain true and correct as of the date of this agreement. |
5. Representations and Warranties. To induce the Bank to enter into this agreement, the Borrower hereby represents to the Bank as follows:
| (1) | that the Borrower is duly authorized to execute and deliver this agreement and is and will continue to be duly authorized to borrow monies under the Credit Agreement, as amended by this agreement, and to perform its obligations under the Credit Agreement, as amended by this agreement; |
| (2) | that the execution and delivery of this agreement and the performance by the Borrower of its obligations under the Credit Agreement, as amended by this agreement, do not and will not conflict with any provision of law or of the articles of organization or operating agreement of the Borrower or of any agreement binding upon the Borrower; |
| (3) | that the Credit Agreement, as amended by this agreement, is a legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability might be limited by bankruptcy, insolvency, or other similar laws of general application affecting the enforcement of creditors’ rights or by general principles of equity limiting the availability of equitable remedies; |
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| (4) | that the representation and warranties set forth in section 6 of the Credit Agreement, as amended by this agreement, are true and correct with the same effect as if those representations and warranties had been made on the date hereof, except that all references to the financial statements mean the financial statements most recently delivered to the Bank and except for changes specifically permitted under the Credit Agreement, as amended by this agreement; |
| (5) | that the Borrower has complied with and is in compliance with all of the covenants set forth in the Credit Agreement, as amended by this agreement, including the covenants stated in section 8 of the Credit Agreement, other than in respect of the Subject Events of Default; and |
| (6) | that as of the date of this agreement no Default and no Event of Default under section 10 of the Credit Agreement, as amended by this agreement, has occurred or is continuing, other than the Subject Events of Default. |
6. Conditions. The effectiveness of this agreement is subject to satisfaction of the following conditions:
| (1) | that the Bank has received the following: |
| (A) | a copy of this agreement, duly executed by the parties; |
| (B) | a copy of an amendment to the BMO Mezzanine NWPA and each of the other documents required to be delivered in accordance with section 6 of that amendment, each in form and substance satisfactory to the Bank and duly executed by all applicable Persons; and |
| (C) | all other documents, certificates, resolutions, and opinions of counsel as the Bank requests; and |
| (2) | that all legal matters incident to the execution and delivery of this agreement are satisfactory to the Bank and its counsel. |
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7. General. (a) This agreement and the rights and duties of the parties hereto are governed by, and are to be construed in accordance with, the internal laws of State of Illinois without regard to principles of conflicts of laws. Wherever possible each provision of the Credit Agreement and this agreement is to be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Credit Agreement and this agreement is prohibited by or invalid under any such law, that provision will be deemed ineffective to the extent of that prohibition or invalidity, without invalidating the remainder of that provision or the remaining provisions of the Credit Agreement and this agreement.
(b) This agreement is a Loan Document.
(c) This agreement binds each party and their respective successors and assigns, and this agreement inures to the benefit of each party and the successors and assigns of the Bank.
(d) Except as specifically modified or amended by the terms of this agreement, the terms and provisions of the Credit Agreement, the Subsidiary Guaranty, and the other Loan Documents are incorporated by reference herein and in all respects continue in full force and effect. The Borrower, by execution of this agreement, hereby reaffirms, assumes, and binds itself to all of the obligations, duties, rights, covenants, terms, and conditions contained in the Credit Agreement and the other Loan Documents to which it is a party.
(e) Each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof,” or words of like import, and each reference to the Credit Agreement in any and all instruments or documents delivered in connection therewith, are deemed to refer to the Credit Agreement, as amended by this agreement.
(f) The Borrower shall pay all costs and expenses in connection with the preparation of this agreement and other related loan documents, including, without limitation, reasonable attorneys’ fees and time charges of attorneys who are employees of the Bank or any affiliate or parent of the Bank. The Borrower shall pay any and all stamp and other taxes, UCC search fees, filing fees, and other costs and expenses in connection with the execution and delivery of this agreement and the other instruments and documents to be delivered hereunder, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such costs and expenses.
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(g) The Borrower hereby waives and releases any and all current existing claims, counterclaims, defenses, or set-offs of every kind and nature which it has or might have against the Bank arising out of, pursuant to, or pertaining in any way to the Credit Agreement, any and all documents and instruments in connection with or relating to the foregoing, or this agreement. The Borrower hereby further covenants and agrees not to sue the Bank or assert any claims, defenses, demands, actions, or liabilities against the Bank arising out of, pursuant to, or pertaining in any way to the Credit Agreement, any and all documents and instruments in connection with or relating to the foregoing, or this agreement.
(h) The parties may sign this agreement in several counterparts, each of which will be deemed an original but all of which together will constitute one instrument.
[Signature pages follow]
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The parties are signing this Amendment No. 5 to Credit Agreement as of the date stated in the introductory clause.
| CTI Industries Corporation | ||
| By: | /s/ Stephen M. Merrick | |
| Name: | Stephen M. Merrick | |
| Title: | President | |
| CTI Supply, Inc. | ||
| (f/k/a CTI Helium, Inc.) | ||
| By: | /s/ Stephen M. Merrick | |
| Name: | Stephen M. Merrick | |
| Title: | President | |
| BMO Harris BANK N.A. | ||
| By: | /s/ Joseph C. Mikulskis | |
| Name: | Joseph C. Mikulskis | |
| Title: | Senior Vice President | |
Signature page to Amendment No. 5 to Credit Agreement
Exhibit 10.20
Limited waiver
and Amendment No. 2
to note and warrant purchase agreement
THIS LIMITED WAIVER AND AMENDMENT NO. 2 TO NOTE AND WARRANT PURCHASE AGREEMENT (this “Agreement”) is dated as of December 23, 2014, and is between CTI Industries Corporation, an Illinois corporation (the “Company”), CTI SUPPLY, Inc., an Illinois corporation (f/k/a CTI Helium, Inc.), and a Wholly-Owned Subsidiary of the Company, in its capacity as a guarantor (the “Subsidiary Guarantor”); and BMO PRIVATE EQUITY (U.S.), INC., a Delaware corporation (the “Purchaser”).
The Company and the Purchaser have entered into a Note and Warrant Purchase Agreement dated as of July 17, 2012, as amended by that certain Amendment No. 1 to Note and Warrant Purchase Agreement dated as of April 12, 2013 (as amended, restated, supplemented or otherwise modified from time to time, the “Purchase Agreement”), under which the Purchaser has extended certain credit facilities to the Company.
In connection with the Purchase Agreement, (i) the Company executed a Senior Subordinated Promissory Note dated July 17, 2012 (the “Note”), under which, among other things, the Company promised to pay the Note Amount to the Purchaser on the terms and conditions therein and (ii) the Subsidiary Guarantor entered into a Guaranty dated as of July 17, 2012 (the “Subsidiary Guaranty”), under which, among other things, the Subsidiary Guarantor guarantees the prompt and complete payment and performance of the Obligations.
The parties now desire to further amend the Purchase Agreement in certain respects.
The parties therefore agree as follows:
1. Definitions. Defined terms used but not defined in this Agreement are as defined in the Purchase Agreement.
2. Limited Waiver. (a) The Company has informed the Purchaser of the following defaults in the observance or performance of certain provisions of the Operative Documents:
(1) that the Company and its Subsidiaries will make or will have made Capital Expenditures in the fiscal year of the Company ending on December 31, 2014, in excess of $775,000, the maximum permitted amount of Capital Expenditures set forth in Section 8.23(d) of the Purchase Agreement; and
(2) that the Subsidiary Guarantor changed its legal name without first giving 30 days’ prior written notice of its intent to do so to the Purchaser.
(b) The Company acknowledges that an Event of Default has occurred or would occur as a result of each default described in Section 2(a) hereof (each such Event of Default, a “Subject Event of Default”). The Company further acknowledges that each Subject Event of Default entitles the Purchaser to exercise its rights and remedies under the Purchase Agreement, applicable law, or otherwise. The Company has therefore requested that the Purchaser waive each Subject Event of Default. The Company acknowledges that but for the terms of this Agreement all obligations under the Purchase Agreement and each of the other Operative Documents would be immediately due and payable as the result of the occurrence of or upon the occurrence of a Subject Event of Default. In addition, the Company acknowledges that the Purchaser has incurred reasonable attorneys’ fees in connection with each Subject Event of Default and that those costs, fees, and expenses are recoverable by the Purchaser under the Purchase Agreement.
(c) The Purchaser hereby waives each Subject Event of Default that has occurred or that would result from any of the defaults described in Section 2 and the Purchaser’s remedies under the Purchase Agreement with respect to each Subject Event of Default. The limited waivers set forth in this Agreement are to be narrowly construed. Except as provided in this Agreement, those limited waivers neither extend to any other violations under, or default of, the Purchase Agreement nor prejudice any rights or remedies that the Purchaser might have or be entitled to with respect to any such other violations or defaults.
3. Amendments to Purchase Agreement.
(a) The definition of “Senior Funded Debt” in section 5.1 of the Purchase Agreement is hereby amended by replacing “Excluded Flexo VIE Debt” with “Excluded VIE Debt.”
(b) The definition of “Total Funded Debt” in section 5.1 of the Purchase Agreement is hereby amended by replacing “Excluded Flexo VIE Debt” with “Excluded VIE Debt.”
(c) Section 5.1 of the Purchase Agreement is hereby further amended by inserting each of the following new definitions in the appropriate alphabetical order:
““Clever Container” means Clever Container Company LLC, an Illinois limited liability company and an Affiliate of the Company.
“Excluded Clever Container VIE Debt” means all Indebtedness for Borrowed Money of Clever Container subject to satisfaction of the following conditions: (a) the aggregate amount of Clever Container’s liability for such indebtedness does not exceed $880,000 at any time; (b) none of the Company and its other Subsidiaries has done any of the following: (i) directly or indirectly guaranteed such indebtedness; (ii) agreed (contingently or otherwise) to purchase or otherwise acquire such indebtedness; or (iii) otherwise assured any creditor of Clever Container against loss in respect of such indebtedness; and (c) no creditor of Clever Container has recourse to the general credit of the Company or any of its other Subsidiaries as a result of including Clever Container in the consolidated financial statements of the Company and its Subsidiaries.
“Excluded VIE Debt” means, collectively, the Excluded Clever Container VIE Debt and the Excluded Flexo VIE Debt.
“Financial Consultant” is defined in Section 8.28 hereof.”
| 2 |
(d) Section 8.5(b) of the Purchase Agreement is hereby amended to read in its entirety as follows:
“(b) as soon as available, and in any event within forty-five (45) days after the last day of each calendar month, (i) a copy of the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the last day of such period and the consolidated and consolidating statements of income, retained earnings, and cash flows of the Company and its Subsidiaries for the calendar month and the fiscal year-to-date period then ended, each in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Company in accordance with GAAP and certified to by its chief financial officer or such other officer acceptable to the Purchaser; and (ii) a variance-to-budget analysis, in reasonable detail and setting forth a description of variances, if any, in the figures for such period from the projected figures for such period presented in the applicable business plan delivered to the Purchaser in accordance with subsection (g) below and specifying the action, if any, taken by the Company to address the same;”
(e) Section 8.5(f) of the Purchase Agreement is hereby amended by replacing “its independent public accountants” with “its independent public accountants or the Financial Consultant.”
(f) Section 8.6 of the Purchase Agreement is hereby amended by replacing “and independent public accountants (and by this provision the Company hereby authorizes such accountants to discuss with the Purchaser the finances and affairs of the Company and of each Subsidiary)” with “and independent public accountants and the Financial Consultant (and by this provision the Company hereby authorizes such accountants and the Financial Consultant to discuss with the Purchaser the finances and affairs of the Company and of each Subsidiary).”
(g) Section 8.23(a) of the Purchase Agreement is hereby amended to read in its entirety as follows:
“ (a) Senior Leverage Ratio. As of the last day of each fiscal quarter of the Company, the Company shall not permit the Senior Leverage Ratio for the four fiscal quarters of the Company then ended to be more than the amount set forth below for such fiscal quarter:
| Fiscal Quarter Ending | Level | ||
| June 30, 2012 and September 30, 2012 | 3.65 to 1.00 | ||
| December 31, 2012 and March 31, 2013 | 3.40 to 1.00 | ||
| June 30, 2013, and September 30, 2013 | 3.60 to 1.00 |
| 3 |
| Fiscal Quarter Ending | Level | ||
| December 31, 2013 | 3.30 to 1.00 | ||
| March 31, 2014 | 3.05 to 1.00 | ||
| June 30, 2014, and September 30, 2014 | 2.75 to 1.00 | ||
| December 31, 2014 | 4.70 to 1.00 | ||
| March 31, 2015 | 4.15 to 1.00 | ||
| June 30, 2015 | 3.85 to 1.00 | ||
| September 30, 2015, and December 31, 2015 | 3.60 to 1.00 | ||
| March 31, 2016, and each fiscal quarter thereafter |
3.30 to 1.00 | ” |
(h) Section 8.23(b) of the Purchase Agreement is hereby amended to read in its entirety as follows:
“(b) Total Leverage Ratio. As of the last day of each fiscal quarter of the Company, the Company shall not permit the Total Leverage Ratio for the four fiscal quarters of the Company then ended to be more than the amount set forth below for such fiscal quarter:
| Fiscal Quarter Ending | Level | ||
| June 30, 2012 | 5.80 to 1.00 | ||
| September 30, 2012 | 5.45 to 1.00 | ||
| December 31, 2012 and March 31, 2013 | 5.10 to 1.00 | ||
| June 30, 2013, and September 30, 2013 | 5.50 to 1.00 | ||
| December 31, 2013 | 4.95 to 1.00 | ||
| March 31, 2014 | 4.70 to 1.00 | ||
| June 30, 2014, and September 30, 2014 | 4.60 to 1.00 | ||
| December 31, 2014 | 6.45 to 1.00 |
| 4 |
| Fiscal Quarter Ending | Level | ||
| March 31, 2015 | 5.80 to 1.00 | ||
| June 30, 2015, September 30, 2015, and December 31, 2015 |
4.95 to 1.00 | ||
| March 31, 2016, and each fiscal quarter thereafter |
4.70 to 1.00 | ” |
(i) Section 8 of the Purchase Agreement is hereby further amended by inserting after section 8.27 the following new section 8.28:
“Section 8.28 Engagement of Financial Consultant. The Company shall engage, for the duration of the fiscal year of the Company ending December 31, 2015 (or any shorter period approved in writing by the Senior Lender), at the Company’s expense, Capstone Advisory Group, LLC, or another independent consultant of recognized standing selected by the Company and reasonably acceptable to the Senior Lender (the “Financial Consultant”) to provide business financial planning and other advisory services to the Company and its Subsidiaries. The Company shall cause the management of the Company and its Subsidiaries to meet with the Financial Consultant at such reasonable times and reasonable intervals as the Company may determine, but at least once per fiscal quarter during the fiscal year of the Company ending December 31, 2015 (or less frequently as approved in writing by the Senior Lender).”
4. Reaffirmation of Subsidiary Guaranty. The Subsidiary Guarantor hereby expressly does each of the following:
(1) consents to the execution by the Company and the Purchaser of this Agreement;
(2) acknowledges that the “Indebtedness” (as defined in the Subsidiary Guaranty) includes all of the “Obligations” under and as defined in the Purchase Agreement, as amended from time to time (including as amended by this Agreement);
(3) acknowledges that the Subsidiary Guarantor does not have any set-off, defense, or counterclaim to the payment or performance of any of the obligations of the Company under the Purchase Agreement or the Subsidiary Guarantor under the Subsidiary Guaranty;
(4) reaffirms, assumes, and binds itself in all respects to all of the obligations, liabilities, duties, covenants, terms, and conditions contained in the Subsidiary Guaranty;
(5) agrees that all such obligations and liabilities under the Subsidiary Guaranty continue in full force and that the execution and delivery of this Agreement to, and its acceptance by, the Purchaser will not in any manner whatsoever do any of the following:
| 5 |
(A) impair or affect the liability of the Subsidiary Guarantor to the Company under the Subsidiary Guaranty;
(B) prejudice, waive, or be construed to impair, affect, prejudice, or waive the rights and abilities of the Purchaser at law, in equity, or by statute against the Subsidiary Guarantor pursuant to the Subsidiary Guaranty; or
(C) release or discharge, or be construed to release or discharge, any of the obligations and liabilities owing to the Purchaser by the Subsidiary Guarantor under the Subsidiary Guaranty; and
(6) represents and warrants that each of the representations and warranties made by the Subsidiary Guarantor in any of the documents executed in connection with the loans remain true and correct as of the date of this Agreement.
5. Representations and Warranties. To induce the Purchaser to enter into this Agreement, the Company hereby represents to the Purchaser as follows:
(1) that the Company is duly authorized to execute and deliver this Agreement and is and will continue to be duly authorized to borrow monies under the Purchase Agreement, as amended by this Agreement, and to perform its obligations under the Purchase Agreement, as amended by this Agreement;
(2) that the execution and delivery of this Agreement and the performance by the Company of its obligations under the Purchase Agreement, as amended by this Agreement, do not and will not conflict with any provision of law or of the articles of organization or operating agreement of the Company or of any agreement binding upon the Company;
(3) that the Purchase Agreement, as amended by this Agreement, is a legal, valid, and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability might be limited by bankruptcy, insolvency, or other similar laws of general application affecting the enforcement of creditors’ rights or by general principles of equity limiting the availability of equitable remedies;
(4) that the representation and warranties set forth in section 6 of the Purchase Agreement, as amended by this Agreement, are true and correct with the same effect as if those representations and warranties had been made on the date hereof, except that all references to the financial statements mean the financial statements most recently delivered to the Purchaser and except for changes specifically permitted under the Purchase Agreement, as amended by this Agreement;
(5) that the Company has complied with and is in compliance with all of the covenants set forth in the Purchase Agreement, as amended by this Agreement, including the covenants stated in section 8 of the Purchase Agreement, other than in respect of the Subject Event of Default; and
| 6 |
(6) that as of the date of this Agreement no Default and no Event of Default under section 10 of the Purchase Agreement, as amended by this Agreement, has occurred or is continuing, other than the Subject Event of Default.
6. Conditions. The effectiveness of this Agreement is subject to satisfaction of the following conditions:
(1) that the Purchaser has received the following:
(A) a copy of this Agreement, duly executed by the parties;
(B) a copy of an amendment to the Senior Credit Agreement and each of the other documents required to be delivered in accordance with section 6 of that amendment, each in form and substance satisfactory to the Purchaser and duly executed by all applicable Persons;
(C) a non-refundable closing fee of Twelve Thousand Five Hundred and No/100 Dollars ($12,500.00), which fee shall be fully earned and payable on the date hereof; and
(D) all other documents, certificates, resolutions, and opinions of counsel as the Purchaser requests; and
(2) that all legal matters incident to the execution and delivery of this Agreement are satisfactory to the Purchaser and its counsel.
7. General. (a) This Agreement and the rights and duties of the parties hereto are governed by, and are to be construed in accordance with, the internal laws of State of Illinois without regard to principles of conflicts of laws. Wherever possible each provision of the Purchase Agreement and this Agreement is to be interpreted in such manner as to be effective and valid under applicable law, but if any provision of the Purchase Agreement and this Agreement is prohibited by or invalid under any such law, that provision will be deemed ineffective to the extent of that prohibition or invalidity, without invalidating the remainder of that provision or the remaining provisions of the Purchase Agreement and this Agreement.
(b) This Agreement is an Operative Document.
(c) This Agreement binds each party and their respective successors and assigns, and this Agreement inures to the benefit of each party and the successors and assigns of the Purchaser.
(d) Except as specifically modified or amended by the terms of this Agreement, the terms and provisions of the Purchase Agreement, the Subsidiary Guaranty, and the other Operative Documents are incorporated by reference herein and in all respects continue in full force and effect. The Company, by execution of this Agreement, hereby reaffirms, assumes, and binds itself to all of the obligations, duties, rights, covenants, terms, and conditions contained in the Purchase Agreement and the other Operative Documents to which it is a party.
| 7 |
(e) Each reference in the Purchase Agreement to “this Agreement,” “hereunder,” “hereof,” or words of like import, and each reference to the Purchase Agreement in any and all instruments or documents delivered in connection therewith, are deemed to refer to the Purchase Agreement, as amended by this Agreement.
(f) The Company shall pay all costs and expenses in connection with the preparation of this Agreement and other related loan documents, including, without limitation, reasonable attorneys’ fees and time charges of attorneys who are employees of the Company or any affiliate or parent of the Purchaser. The Company shall pay any and all stamp and other taxes, UCC search fees, filing fees, and other costs and expenses in connection with the execution and delivery of this Agreement and the other instruments and documents to be delivered hereunder, and agrees to save the Company harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such costs and expenses.
(g) The Company hereby waives and releases any and all current existing claims, counterclaims, defenses, or set-offs of every kind and nature which it has or might have against the Purchaser arising out of, pursuant to, or pertaining in any way to the Purchase Agreement, any and all documents and instruments in connection with or relating to the foregoing, or this Agreement. The Company hereby further covenants and agrees not to sue the Purchaser or assert any claims, defenses, demands, actions, or liabilities against the Purchaser arising out of, pursuant to, or pertaining in any way to the Purchase Agreement, any and all documents and instruments in connection with or relating to the foregoing, or this Agreement.
(h) The parties may sign this Agreement in several counterparts, each of which will be deemed an original but all of which together will constitute one instrument.
[Signature pages follow]
| 8 |
(Signature Page to Limited Waiver and Amendment No. 2 to
Note and Warrant Purchase Agreement)
The parties are signing this Agreement as of the date stated in the introductory clause.
| COMPANY: | CTI Industries Corporation | |
| By: | /s/ Stephen M. Merrick | |
| Name: | Stephen M. Merrick | |
| Title: | President | |
| SUBSIDIARY GUARANTOR: | CTI SUPPLY, INC. | |
| (f/k/a CTI Helium, Inc.) | ||
| By: | /s/ Stephen M. Merrick | |
| Name: | Stephen M. Merrick | |
| Title: | President | |
| PURCHASER: | BMO PRIVATE EQUITY (U.S.), INC. | |
| By: | /s/ Douglas P. Sutton | |
| Name: | Douglas P. Sutton | |
| Title: | Managing Director | |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
CTI Industries Corporation and Subsidiaries:
We consent to the incorporation by reference in the registration statements (Nos. 333-76006, 333-76008 and 333-169442 on Form S-8 of CTI Industries Corporation and Subsidiaries of our report dated March 30, 2015, with respect to the consolidated balance sheet of CTI Industries Corporation and Subsidiaries as of December 31, 2014, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2014, which report appears in or is incorporated by reference in this annual report on Form 10-K of CTI Industries Corporation and Subsidiaries.
/s/ Plante & Moran, PLLC
Chicago, Illinois
March 30, 2015
Exhibit 31.1
CERTIFICATION
I, John H. Schwan, certify that:
1. I have reviewed this annual report on Form 10-K of CTI Industries Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 30, 2015 | |
| /s/ John H. Schwan | |
| John H. Schwan, Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Timothy S. Patterson, certify that:
1. I have reviewed this annual report on Form 10-K of CTI Industries Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 30, 2015 | |
| /s/ Timothy S. Patterson | |
| Timothy S. Patterson | |
| Chief Financial Officer | |
| Senior Vice President of Finance |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of CTI Industries Corporation (the “Company”) for the fiscal year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John H. Schwan, as Chief Executive Officer of the Company, and Timothy S. Patterson, as Chief Financial Officer and Senior Vice President of Finance of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ John H. Schwan | |
| John H. Schwan | |
| Chief Executive Officer | |
| Date: March 30, 2015 | |
| /s/ Timothy S. Patterson | |
| Timothy S. Patterson | |
| Chief Financial Officer | |
| Senior Vice President of Finance | |
| Date: March 30, 2015 |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-K or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99
FLEXO UNIVERSAL, S.A. DE C.V.
INDEPENDENT AUDITOR’S REPORT
AS OF DECEMBER 31 2014
| 1 |
FLEXO UNIVERSAL, S.A. DE C.V.
I N D E X
| 1.- | Independent Auditors’ Report. | 3 |
| 2.- | Balance Sheet. | 4 |
| 3.- | Statement of (Loss) Income. | 5 |
| 4.- | Statements of Changes in Stockholders’ Equity. | 6 |
| 5.- | Statement of Cash Flow. | 7 |
| 6.- | Notes to the Financial Statements. | 8 |
| 2 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Flexo Universal, S.A. de C.V.
We have audited the accompanying balance sheet of Flexo Universal, S.A. de C.V. as of December 31, 2014, and the related statements of comprehensive income, stockholders' equity and cash flows for the year ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position Flexo Universal, S.A. de C.V., as of December 31, 2014 and the results of their operations and their cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
HLB Vargas Graf y Cia., S.C
C.P.C. Antonio Vargas Aceves
Certified Public Accountant
Partner
March 18, 2015.
| 3 |
| FLEXO UNIVERSAL, S.A. DE C.V. | |||
| BALANCE SHEET AS OF DECEMBER 31, 2014 AND 2013 | |||
| ( In Mexican pesos ) | |||
| (Notes 1 & 2) |
| 2014 | 2013 | |||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 1,831,998 | $ | 7,665,359 | ||||
| Accounts receivables | 40,413,382 | 31,849,060 | ||||||
| Other accounts receivables (Note 3) | 3,840,861 | 2,432,251 | ||||||
| Related parties (Note 4) | 15,942,740 | 6,932,855 | ||||||
| Inventories (Note 5) | 49,368,070 | 42,533,663 | ||||||
| Total current assets | 111,397,051 | 91,413,188 | ||||||
| NON CURRENT ASSETS: | ||||||||
| Machinery and equipment (Note 6) | 7,771,767 | 8,037,530 | ||||||
| Warranty deposits | 1,287,837 | 2,158,904 | ||||||
| Other assets | 766,543 | 851,314 | ||||||
| Deferred income tax (Note 13) | 594,582 | 1,590,308 | ||||||
| Total non current assets | 10,420,729 | 12,638,056 | ||||||
| TOTAL ASSETS | $ | 121,817,780 | $ | 104,051,244 | ||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable to suppliers, accrued expenses and other accounts payable (Note 7) | $ | 18,016,793 | $ | 16,776,719 | ||||
| ISR payable | 3,342,273 | 3,795,009 | ||||||
| PTU reserve | 448,098 | 1,652,990 | ||||||
| Current portion of long term liabilities to related parties (Note 8) | 9,449,593 | 7,463,029 | ||||||
| Total current liabilities | 31,256,757 | 29,687,747 | ||||||
| LONG TERM LIABILITIES | ||||||||
| Long term liabilities to related parties (Note 8) | 2,807,062 | 2,709,448 | ||||||
| Total long term liabilities | 2,807,062 | 2,709,448 | ||||||
| TOTAL LIABILITIES | 34,063,819 | 32,397,195 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Capital stock (Note 10) | 47,410,945 | 44,934,998 | ||||||
| Legal Reserve | 1,393,404 | 670,811 | ||||||
| Accumulated results | 22,830,186 | 11,596,368 | ||||||
| Period's net (loss) profit | 16,119,426 | 14,451,872 | ||||||
| TOTAL STOCKHOLDERS' EQUITY | 87,753,961 | 71,654,049 | ||||||
| Contingencies (Note 12) | - | - | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' | ||||||||
| EQUTIY | $ | 121,817,780 | $ | 104,051,244 | ||||
| The enclosed notes are an integral part of these financial statements |
| 4 |
| FLEXO UNIVERSAL, S.A. DE C.V. | |||
| STATEMENT OF OPERATIONS FOR THE YEARS ENDED | |||
| DECEMBER 31, 2014 AND 2013 | |||
| ( In Mexican pesos ) |
| 2014 | 2013 | |||||||
| Net sales | $ | 169,425,816 | $ | 167,813,166 | ||||
| Cost of products sold | (126,903,053 | ) | (134,984,000 | ) | ||||
| GROSS PROFIT | 42,522,763 | 32,829,166 | ||||||
| Operating expenses | ||||||||
| Administration and sales expenses | (17,381,574 | ) | (16,914,750 | ) | ||||
| Other income, (expenses) - net | (1,062,665 | ) | 2,143,169 | |||||
| (18,444,239 | ) | (14,771,581 | ) | |||||
| OPERATION NET PROFIT | 24,078,523 | 18,057,585 | ||||||
| INTEGRAL FINANCING RESULTS | ||||||||
| Exchange rate fluctuations - net | 861,038 | 551,112 | ||||||
| interest - net | (1,107,052 | ) | (1,445,767 | ) | ||||
| (246,014 | ) | (894,655 | ) | |||||
| PROFIT BEFORE INCOME TAXES AND EPS | 23,832,509 | 17,162,930 | ||||||
| Employees' profit sharing | (361,222 | ) | (1,574,698 | ) | ||||
| Income tax | (6,356,134 | ) | (3,666,979 | ) | ||||
| Deferred income tax | (995,726 | ) | 2,530,619 | |||||
| (7,713,083 | ) | (2,711,058 | ) | |||||
| NET PROFIT | $ | 16,119,426 | $ | 14,451,872 | ||||
| The accompanying notes are an integral part of these financial statements |
| 5 |
| FLEXO UNIVERSAL, S.A. DE C.V. | |||
| STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY | |||
| FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 | |||
| ( In Mexican pesos ) |
| 2014 | 2013 | |||||||
| CAPITAL STOCK | ||||||||
| Initial period balance | $ | 44,934,998 | $ | 5,099,052 | ||||
| Capital stock increase (Note 10) | 2,475,947 | 39,857,357 | ||||||
| Capital stock decrease (Note 10) | (21,411 | ) | ||||||
| Initial and final period balance | 47,410,945 | 44,934,998 | ||||||
| LEGAL RESERVE | ||||||||
| Initial period balance | 670,811 | 346,626 | ||||||
| Transfer from accumulated results (Note 11) | 722,593 | 324,185 | ||||||
| Final period balance | 1,393,404 | 670,811 | ||||||
| ACCUMULATED RESULTS | ||||||||
| Initial period balance | 11,596,368 | 5,436,849 | ||||||
| Transfer from net profit (loss) | 14,451,872 | 6,483,704 | ||||||
| Transfer of 5% over profit period 2012, to legal reserve | (722,593 | ) | (324,185 | ) | ||||
| Dividends | (2,495,461 | ) | ||||||
| Final period balance | 22,830,186 | 11,596,368 | ||||||
| NET PROFIT (LOSS) | ||||||||
| Initial period balance | 14,451,872 | 6,483,704 | ||||||
| Transfer to accumulated results | (14,451,872 | ) | (6,483,704 | ) | ||||
| Net profit | 16,119,426 | 14,451,872 | ||||||
| Final period balance | 16,119,426 | 14,451,872 | ||||||
| TOTAL | $ | 87,753,961 | $ | 71,654,049 | ||||
| The accompanying notes are an integral part of these financial statements |
| 6 |
| FLEXO UNIVERSAL, S.A. DE C.V. | |||
| CASH FLOW STATEMENT | |||
| FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 | |||
| ( In Mexican pesos ) |
| 2014 | 2013 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net profit | $ | 16,119,426 | $ | 14,451,872 | ||||
| Items related with investment activities | ||||||||
| Depreciation | 2,191,987 | 2,694,889 | ||||||
| Balance canceled due to defered flat tax abrogation | - | (2,484,345 | ) | |||||
| Items related with financing activities | ||||||||
| Interest | 1,107,052 | 1,445,766 | ||||||
| 19,418,465 | 16,108,182 | |||||||
| Trade debtors and other receivables (increase) decrease | (18,982,817 | ) | 475,596 | |||||
| Inventories increase | (6,834,407 | ) | (2,947,250 | ) | ||||
| Other assets (increase) decrease | 1,951,564 | (1,297,538 | ) | |||||
| Liabilities to related parties increase (decrease) | 1,986,564 | (35,670,377 | ) | |||||
| Suppliers and other liabilities (decrease) increase | 35,182 | (1,557,629 | ) | |||||
| Taxes paid | (452,736 | ) | (5,783,110 | ) | ||||
| Net cash flow from financial activities | (2,878,185 | ) | (30,672,126 | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
| Machinery and equipment acquisition (net) | (1,926,224 | ) | (2,373,808 | ) | ||||
| (1,926,224 | ) | (2,373,808 | ) | |||||
| FINANCING ACTIVITIES: | ||||||||
| Long term liabilities to related parties | 97,614 | (846,994 | ) | |||||
| Paid interest | (1,107,052 | ) | (1,445,766 | ) | ||||
| Dividends | (2,495,461 | ) | ||||||
| Increase Social Capital (capitalization of liabilities) | - | 39,857,357 | ||||||
| Social Capital (Decrease) increase | 2,475,947 | (21,411 | ) | |||||
| (1,028,952 | ) | 37,543,186 | ||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | $ | (5,833,361 | ) | $ | 4,497,252 | |||
| Cash and cash equivalents at beginning of year | $ | 7,665,359 | $ | 3,168,107 | ||||
| Cash and cash equivalents at end of year | $ | 1,831,998 | $ | 7,665,359 | ||||
| The accompanying notes are an integral part of these financial statements |
| 7 |
NOTES TO FINACIAL STATEMENTS
FLEXO UNIVERSAL, S.A. DE C.V.
As of December 31st, 2014 and 2013
In Mexican pesos.
NOTE 1 – COMPANY DESCRIPTION:
Flexo Universal, S.A. de C.V. (FLEXO) was constituted on 2002. Subsidiary of CTI Industries INC, a North American company that owns 99.8260% of its capital stock.
Its main activity is the production of latex and mylar balloons; this operation is performed under the shelter of its parent company that finances its operations.
NOTE 2 – MAIN ACCOUNTING POLICIES
| a. | Basis for presentation |
The main accounting policies adopted by the company are in accordance with Financial Reporting Standards applicable Mexico (FRS), as well as the Interpretations to Financial Reporting Standards (FRS), only in a supplementary way International Financial Reporting Standards (IFRS) will apply.
The company prepares its financial statements according to FRS except for 1) lack of recognition of the inflation effects according to standard FRS B-10, this standard requires that operations are registered at its historical value and that the inflation effects are recognized for those operations and, consequently, in its financial statements. Inflation effects have to be recognized in an integral manner, performing an upgrade of the non-monetary assets (fixed assets and inventories) as well as the items that integrate the capital stock including the period’s net profit or loss, and that the result on monetary position is determined. It also requires that the accompanying financial statements of the prior period are presented in Mexican pesos and at the acquisition cost of the last period reported, so they can be comparable. As of January 1, 2008 the Financial Reporting Standard (B-10) “Inflation Effects” is disabled, due to this, the inflation effects are no longer recognized in accounting as of that date because of a non-inflationary environment. The adoption of this FRS will be reactivated when cumulative inflation over a period of three years exceeds 26%.
The indexes that were used to determine a non-inflationary environment were as follows:
| December 31 | INPC | Inflation |
2013 2012 |
111.508 107.246 |
3.97% 3.57% |
| 2011 | 103.551 | 3.82% |
2) The lack of a study to determine the possible impairment or disposal of long-lived assets, FRS C-15 “Accounting for the impairment or disposal of long-lived assets”, establishes, among other things, general criteria that allows the identification and recording of losses due impairment or value decrease of tangible and non-tangible long lived assets, including good will, also, it precise concepts like sales price and use value, to valuate long lived assets and
| 8 |
The main accounting policies and accounting procedures in the preparation of the financial statements are described below.
| b. | Estimates and assumptions |
The preparation of financial statements in accordance with Mexican financial reporting standards requires the company's management to make certain estimates and provisions that may affect the value of some assets and liabilities at the date of the balance sheet, as well as the value and measurement of revenues, costs and expenses during the reported period. Even if the final result of these estimates and provisions may differ from the calculated, management believes that those were appropriate used to the circumstances.
| c. | Statement of comprehensive income |
Starting January 2013, FRS B-3 was modified to converge with the established in the Intentional Accounting Standard 1 "Presentation of Financial Statements". This FRS supersedes the previous FRS B-3 Income Statement, Bulletin B-4 Income and Comprehensive Guidance on FRS 1 "Presentation or disclosure of the profit or loss per share."
The main changes of FRS B-3 "Statement of comprehensive income" with respect to the FRS that renders are as follows:
An entity may choose to present the statement of comprehensive income in one or two statements as follows:
i) A statement showing all items that make up the net profit and loss, as well as "Other Comprehensive Income" (OCI) and participation in the OCI of other entities. This statement must be named “Statement of Comprehensive Income”, and
ii) In two statements. The first statement must include only those items that make the net profit or loss and must be named “Income Statement”, and a second statement must start from the net profit or loss that concluded the income statement and then present the OCI and OCI participation in other entities and must be named “Statement of Other Comprehensive Income”.
The OCI should be presented in the statement of comprehensive income immediately after the net profit or loss separately, the profits or net accumulated losses are clarified, separately, in the statement of financial position, within equity.
Items classified as non-ordinary, should not be presented separated; either in the financial statement or in the notes to the financial statements. The above FRS B-3 Income Statement, allowed the presentation of non-ordinary items in a separated manner.
It is considered that under other income and expenses, items considered as operational should not be included, this item must include not significant amounts, so this FRS does not requires its presentation in separated form, however, the presentation may be elaborated in a separate manner.
With respect to discontinued operations, revenues, costs and expenses arising from discontinued operations after income or loss from continuing operations should be presented; the results of the period from discontinued operations, net of income taxes and Employees' Statutory Profit Sharing (ESPS) should be included
In 2014, items of other income, other expenses and other for year 2013 were reclassified in order to compare the new Statement of Comprehensive Income.
| d. | Monetary unit |
Financial Statements are prepared in Mexican pesos ($), currency which, bases on Mexican laws, the company’s accounting records must be prepared.
| 9 |
| e. | Cash and equivalents |
Mainly represented by deposits in bank accounts.
| f. | Accounts receivable and estimation for allowance for doubtful accounts |
Represent collection right originated from inventory sales. Accounts in foreign currency are valuated at the year closing exchange rate.
Estimates for doubtful collection accounts represent the inherent probable loss of all receivables due the behaviour of historic tendencies of the accounts receivable. Since 2009 the company has issued a provision to absorb the uncollectible accounts.
| g. | Inventories |
Inventories of finished goods, production in process and raw materials, are registered at its historic acquisition and production cost, using the absorbing cost system. The acquisition cost includes all associated expenses until the inventories are ready to be produced or sold. Inventories are valuated by the average cost method net form the value estimates which does not exceed their realization value.
| h. | Machinery and equipment |
Fixed Assets acquired from the fusion, were registered according to the historic cost of the absorbed company, adding the difference from the valuation practiced by and independent appraiser on 17th, 1996. Fixed assets acquisitions after the fusion are registered at its acquisition cost.
The acquisition cost includes all associated expenses until the fixed assets are ready to be used.
Depreciations are computed by the straight-line method, beginning in year in which assets are used, and according to the following:
| Rates % | |
| Leasehold improvements | 10.00 |
| Molds | 20.00 |
| Computer equipment | 30.00 |
| Machinery and office equipment | 10.00 |
| Tools and medical equipment | 35.00 |
| Transport equipment | 25.00 |
| Forklift | 25.00 |
| i. | Long lived assets evaluation |
Impairment of long term assets – As of January 1°, 2004 The C-15 Bulletin “Impairment in the value of long lasting assets and its disposal” became effective. This bulletin requires that companies determine the effect of impairment in long lasting assets in use, in case of detection of indication of impairment or losses for impairment recognized in those assets. In opinion of the Company’s management, there are no traces of impairment that could have an effect in the results, in accordance with the Bulletin.
| j. | Income tax |
The current income tax is determined according to current tax legislation. The deferred income tax is recorded in accordance with the asset and liability method, which compares the accounting and tax values of them. Deferred tax are recognized (assets and liabilities) for future tax consequences attributable to temporary differences between the values reflected in the financial statements of existing assets and liabilities and their respective tax bases and for tax loss carry forwards and tax credits not used. The assets and liabilities of deferred tax are calculated using the rates established in the law that will be applied to taxable income in years when it is estimated that the temporary differences will reverse. The effect of changes in tax rates on deferred taxes is recognized in the results of the period in which those changes are approved. The deferred tax asset is recorded only when there is a high probability of recovery. As of January 1°, 2008 this FRS was modified, the main changes are:
| 10 |
| · | Caused and deferred Employee Profit Sharing (PTU).- This concept is considered as an ordinary expense based on the benefits to employees, that is the reason why it is now classified in the results statement in other income and expenses. |
| · | Cumulative Effect of Income Tax -- The previous bulletin stated that this component will be presented separately in equity, the change consists to reclassify this concept to cumulative results. |
| k. | Liabilities |
The Company applies the dispositions of FRS C-9 “Liabilities, provisions, contingent assets and liabilities and commitments”. Bulletin C-9 establishes the valuation, presentation and disclosure general rules of liabilities provisions, contingent assets and liabilities.
| l. | Labor liabilities |
As of February 2014, the Company’s management decided to outsource payroll services through the figure "Outsourcing" with the company Desarrollo Fomento Organizativo, SA de CV, so from that date on employees of Universal Flexo, SA de CV, retaining their seniority and rights, became employees of "Desarrollo Fomento Organizativo, SA de C.V. "
| m. | Recognition of revenue |
Revenue is recognized in the period in which the risks and benefits of inventory are transferred to customers who acquire them, which generally occurs when these inventories are delivered and the corresponding invoice is prepared
| n. | Foreign currency operations |
Foreign currency operations are accounted at the exchange rate of the day of their occurrence. Assets and liabilities in foreign currency are registered in Mexican pesos at the exchange rate published by the Central Bank (Banco de Mexico) at the date of the financial statements. Exchange rate differences in assets and liabilities in foreign currency are registered in the year’s result.
| o. | Leasing |
The company classifies as operative leasing those operations in which only is granted the use or possession of the leased assets, without assuming the risks or benefits of such assets. These rents are applied to the results in the period of the lease. Variable rents are applied to results as they are accrued.
| p. | Income statement |
Income statements are classified by its operative activities, according to the company’s opinion; this classification allows evaluating the result of its operations identifying the cost of goods sold and administrative and sales expenses.
| 11 |
| q. | Integral Financial Result (RIF) |
The RIF includes net accrued interests, exchange rate profit (loss), monetary position gain (loss) and derivate financial instruments profit (loss).
Exchange rate profit (loss) originated by transactions in foreign currency, is the result of the exchange rates fluctuations at the date of the operation registry, at the date of realization or at the periods end valuation.
NOTE 3 – OTHER ACCOUNTS RECEIVABLE
As of December 31st, 2014 and 2013, the other accounts receivable are integrated as follows:
| 2014 | 2013 | |||||||
| Accounts receivable to officers and employees | $ | - | $ | 2,478 | ||||
| Sundry debtors | 824,545 | 1,090,650 | ||||||
| Other Collective taxes | 1,067,472 | 1,079,730 | ||||||
| Creditable VAT | 1,948,844 | 259,393 | ||||||
| $ | 3,840,861 | $ | 2,432,251 | |||||
NOTE 4 – RELATED PARTIES
Following a summary of the operations with related parties which originate the balances with related parties as of December 31st, 2014 and 2013 is presented:
| 2014 | 2013 | |||||||
| Goods Sold: | ||||||||
| CTI Industries Corporation | $ | 21,292,943 | $ | 26,962,088 | ||||
| Inventory Purchases: | ||||||||
| CTI Industries Corporation | $ | 7,694,886 | $ | 7,824,002 | ||||
Accounts receivable and (payable) to related parties are:
| Asset (Liabilitie) | ||||||||
| 2014 | 2013 | |||||||
| CTI Industries Corporation | $ | 11,750,928 | $ | 2,762,004 | ||||
| Arci, S.C. | - | (1,270,619 | ) | |||||
| Pablo Gortazar de Oyarzabal | 779,992 | 1,085,281 | ||||||
| Calidad Empresarial Mexicana | (13,040 | ) | (11,563 | ) | ||||
| CTF International S.A. de C.V. | - | 434,463 | ||||||
| CTI Mexico Corporation S.A. de C.V. | - | 1,950,887 | ||||||
| CTI Europe GMBH | 2,217,320 | 619,712 | ||||||
| Venture Leasing, S. de R.L. de C.V. | 1,207,540 | 1,362,690 | ||||||
| $ | 15,942,740 | $ | 6,932,855 | |||||
| 12 |
NOTE 5 – INVENTORIES
The balance of this account is integrated as follows:
| 2014 | 2013 | |||||||
| Finished goods | $ | 38,494,667 | $ | 31,297,881 | ||||
| Packing material | 2,519,357 | 2,529,984 | ||||||
| Production in process | 3,455,053 | 3,312,545 | ||||||
| Raw materials | 4,898,993 | 5,393,253 | ||||||
| $ | 49,368,070 | $ | 42,533,663 | |||||
NOTE 6 – MACHINERY AND EQUIPMENT
This item is analysed follows:
| 2014 | 2013 | |||||||
| Machinery | $ | 25,982,728 | $ | 24,218,242 | ||||
| Leasehold improvements | 3,003,934 | 3,003,934 | ||||||
| Molds | 5,426,380 | 5,408,630 | ||||||
| Computer equipment and softwere | 827,519 | 709,393 | ||||||
| Transport equipment | 297,273 | 297,273 | ||||||
| Furniture and office equipment | 276,723 | 250,861 | ||||||
| 35,814,557 | 33,888,333 | |||||||
| Depreciations and amortizations | (28,042,790 | ) | (25,850,803 | ) | ||||
| Total Machinery and equipment | $ | 7,771,767 | $ | 8,037,530 | ||||
The depreciation and amortization method and the annual rates are stated in note 2g. The charge to results amounted $2,191,987. and $2,694,889. for the periods ended on December 31st, 2014 and 2013 respectively.
Leasehold agreement
The company celebrated a leasehold agreement with Cuauhtemoc Inmobiliaria S.A. de C.V., for the building and facilities where it is located, both plant and administrative offices, these agreements establishes that the term of the leasehold is of a mandatory 5 years and 5 years voluntary to the sub-lessor, the new agreement takes place since August 1st 2011 and ends on July 13, 2016.
The charge to results amounted $4,994,680. and $4,961,429.for the years ended on December 31st, 2014 and 2013 respectively
NOTE 7 – OTHER ACCOUNTS PAYABLE
Some items presented in the balance sheet are analysed as follows, as of December 31st.
| 2014 | 2013 | |||||||
| Accounts payable to suppliers, accrued expenses | ||||||||
| and other accounts payable: | ||||||||
| Suppliers | $ | 15,200,710 | $ | 10,774,042 | ||||
| Salaries payable | -81,864 | -302,021 | ||||||
| Sundry creditors | 2,759,411 | 5,420,431 | ||||||
| Rated reserves | 123,206 | 86,499 | ||||||
| Taxes payable | 15,330 | 797,768 | ||||||
| $ | 18,016,793 | $ | 16,776,719 | |||||
| 13 |
NOTE 8 – LONG TERM LIABILITIES TO RELATED PARTIES
| 2014 | 2013 | |||||||
| CTI Industries | ||||||||
| Term promissory note | ||||||||
| Flexo Universal,
S.A. de C.V., hereby further promises to pay interest to the order of CTI Industries Corporation on the unpaid
principal balance hereof at the Interest Rate (as hereinafter defined). Such interest shall be paid in like money
at said office or place from the date hereof, commencing March 31, 2014 and on the first day of each calendar quarter thereafter
until the indebtedness evidenced by this Note is paid in full. Interest payable upon and after an Event of Default
or termination or non renewal of the Loan Agreement shall be payable upon demand. For purposes hereof, the term "Interest Rate" shall mean a rate of two and one-half percent (2.5%) per annum ; provided, that, at Payee's option, the Interest Rate shall mean a rate of eight percent (8.0%) per annum upon and after an Event of Default ; the term “Event of Default shall mean the failure of Flexo Universal, S.A. de C.V., to make any payment of principal or interest when due hereunder. This Note is issued to document amounts due from Flexo Universal, S.A. de C.V., to CTI Industries Corporation as of December 31, 2013, including $68,669 in principal amount due and $502,545 in accrued interest on indebtedness previously due from Flexo Universal, S.A. de C.V., to CTI Industries Corporation. | 8,627,141 | 7,463,029 | ||||||
| Current portion of long term liabilities | (8,627,141 | ) | (7,463,029 | ) | ||||
| Loans current account 2014 | ||||||||
| Undocumented loans current account totaling $ 55.817 US dollars, without interest and agreed term | 822452 | |||||||
| Current portion of long term liabilities | (822,452 | ) | ||||||
| CTI Balloons | ||||||||
| Loan made by CTI BALLONS to finance the company's operation amounted $69,478 US dollars payable in 3 years with an interest annual rate of LIBOR +.25 points | 1,023,744 | 907,744 | ||||||
| interest payable | 530,209 | 429,981 | ||||||
| Pablo Gortazar | ||||||||
| Loan made by PABLO GORTAZAR to liquidate CTF INTERNATIONAL's financing amounted $980,704 Mexican Pesos. | 980,704 | 980,704 | ||||||
| Loan made by PABLO GORTAZAR to liquidate CREDIT UNION's fiancincing amounted $776,070 Mexican pesos, with an interest annual rate LIBOR +.25 points | 272,405 | 391,019 | ||||||
| 12,256,655 | 10,172,477 | |||||||
| Total long term liabilities to related parties | (9,449,593 | ) | (7,463,029 | ) | ||||
| Total current portion of long term liabilities | $ | 2,807,062 | $ | 2,709,448 |
| 14 |
NOTE 9 – POSITION AND TRANSACTION IN FOREING CURRENCY
As of December 31st, 2014 and 2013, the company had rights and (obligations) in foreign currency as follows:
| US Dollars | ||||||||
| 2014 | 2013 | |||||||
| Assets | $ | 1,845,213 | $ | 880,681 | ||||
| Liabilities | (1,620,173 | ) | (673,003 | ) | ||||
| Excess of assets over (liabilities), assets in foreign currency | $ | 225,040 | $ | 207,678 | ||||
Assets where translated and adjusted using the exchange rate $14.7348 and $ 13.0652 pesos per US dollar, as of December 31st, 2014 and 2013 respectively. As of march 17, 2014 the exchange rate is $15.4271 pesos per dollar.
NOTE 10 – CONTRIBUTED CAPITAL
The company’s capital stock integrated as follows as of December 31st, 2014 and 2013:
| 2014 | 2013 | |||||||
| Fixed capital stock | $ | 50,000 | $ | 50,000 | ||||
| Variable capital stock | 47,360,945 | 44,884,998 | ||||||
| Total capital stock | $ | 47,410,945 | $ | 44,934,998 | ||||
The company’s capital stock is variable, with a fix minimum of $50,000 without possible of retiring. The variable part has not limit. Shares are common, nominative and are valuated as follows:
| "A" | 0.0679 | 1.00 |
| "B" | 0.0679 | 1.00 |
On April 3, 2014 the shareholders of the company agreed and approved unanimously an increase to variable share capital in the amount of $ 150,000. US dollars or its equivalent in pesos $ 2'475,947, by issuing 2'475,947 Series B common shares with nominal value of $ 1.00 each
On March 26, 2014 the shareholders of the company agreed and approved unanimously to declare a dividend payment from the income tax earnings (CUFIN) for a total of $ 190,347.77. US dollars or its equivalent in pesos $ 2'495,459.20
In the Ordinary General Meeting held the day August 5, 2013, a decrease of share capital was approved in the variable by repayment of 21,411 shares with a par value of $ 1.00 each.
In the Ordinary General Meeting held the day August 16, 2013, an increase of capital was approved in the variable through the capitalization of liabilities by the Company and for CTI Industries Corporation totalling $ 39,857,357. pesos M.N.
| 15 |
NOTE 11 – EARNED (LOSS) SURPLUS:
Under Mexican laws, a legal reserve must be created and increased by annually in 5% of the retained earnings up to a total of 20% of the Company’s Capital Stock. This reserve is not available for dividends payments, but can be used to reduce accumulated losses or to be turned in capital stock.
NOTE 12 – CONTINGENCIES:
| a. | Federal contributions are subject to certain reviews by the fiscal authorities, during a five year period. |
| b. | Due to the related parties operations there could be some differences with taxes, if the fiscal authority decides to review those transactions, and the IRS considers that the prices and amounts used by the Company were not at the same level as those used in the regular market or among independent parties in comparable transactions. |
NOTE 13- INCOME TAX (IT), CORPORATE FLAT TAX RATE (IETU) AND EMPLOYEES PROFIT SHARING (PTU):
Cost (benefit) of the tax applied to result is integrated as follows:
| 2014 | 2013 | |||||||
| ISR payable | $ | 6,356,134 | $ | 3,666,979 | ||||
| Deferred ISR | 995,726 | - | 46,273 | |||||
| Deferred IETU | - | 2,484,345 | ||||||
| Net | $ | 7,351,860 | $ | 1,136,361 | ||||
| a. | IT |
The main differences between the accounting profit and the tax result are:
| 2014 | 2013 | |||||||
| Net (Loss) profit | $ | 16,119,426 | $ | 14,451,872 | ||||
| Plus (minus) | ||||||||
| Excess of accounting depreciation net over the fiscal depreciation | - | 1,483,107 | - | 2,103,760 | ||||
| Excess of accounting deductions net over the fiscal deductions | 8,116,711 | 1,309,054 | ||||||
| Fiscal (loss) profit | 22,753,030 | 13,657,166 | ||||||
| Minus employee profit sharing (PTU) paid in 2012 and 2011 | - | 1,565,918 | - | 1,433,903 | ||||
| Tax basis to IT | 21,187,112 | 12,223,263 | ||||||
| Rate | 0.30 | 0.30 | ||||||
| IT payable (ISR) | $ | 6,356,134 | $ | 3,666,979 | ||||
| 16 |
As December 31st, 2014 and 2013 temporary differences and fiscal losses carry forward recognized by the company on the deferred IT calculations are:
| 2014 | 2013 | |||||||
| Year effect calculation: | ||||||||
| Deferred expenses | $ | (286,898 | ) | $ | (2,599,514 | ) | ||
| Suppliers | (1,695,041 | ) | (2,701,513 | ) | ||||
| Base | (1,981,939 | ) | (5,301,027 | ) | ||||
| Tax Rate | 0.30 | 0.30 | ||||||
| (594,582 | ) | (1,590,308 | ) | |||||
| Accrued inventory | - | - | ||||||
| Total (debit) credit | (594,582 | ) | $ | (1,590,308 | ) | |||
| Recognized | (1,590,308 | ) | (1,544,035 | ) | ||||
| Complement | $ | 995,726 | (46,273 | ) | ||||
| b. | IETU |
On November 2013 tax reform was approved for 2014, the following was modified:
- New Income Tax Law, rate remaining at 30%.
- Law Corporate Flat Tax (IETU) is abrogated.
The deferred IETU registered as a liability in previous periods is cancelled because this tax law was abrogated and is no longer in force. According to IFRS 20 (Interpretations to Financial Reporting Standards in Mexico) has to be accrued in the fiscal period 2013 as income for a total amount of $2,484,345.
| 2012 | 2011 | Previous years | ||||||||||
| Trade debtors | 29,013,948 | $ | 26,219,699 | 24,929,832 | ||||||||
| Liabilities provisions | (13,238,508 | ) | (23,613,526 | ) | (19,011,023 | ) | ||||||
| 15,775,440 | 2,606,173 | 5,918,809 | ||||||||||
| IETU rate | 17.50 | % | 17.50 | % | 17.00 | % | ||||||
| 2,760,702 | 456,080 | 1,006,198 | ||||||||||
| Inventories and fixed assets credits | (276,357 | ) | (276,357 | ) | (261,939 | ) | ||||||
| Deferred IETU payable | 2,484,345 | $ | 179,723 | 744,259 | ||||||||
| Recognized in previous years | 179,723 | 744,259 | ||||||||||
| Complement | 2,304,622 | (564,536 | ) | 744,259 | ||||||||
| c. | PTU |
As mentioned in note 2 l., The Company had work obligations until January 31, 2014 date on which the company subcontract outsourcing services for personnel management. Therefore the company determined and paid Employee profit sharing (PTU) only by the time elapsed from January 1 to January 31, 2014
Employee profit sharing (PTU) which is caused at a 10% rate is calculated based on the fiscal profit, excluding the inflation effects. As of December 2014 and 2013, employee profit sharing amounts to $361,222.and $1,574,698.
| 17 |
NOTE 14 - NEW ACCOUNTING PRONOUNCEMENTS.
The Mexican Council for Research and Development of Financial Reporting Standards (CINIF), an independent body in charge of the development of the Mexican Accounting Standards, has made public the submission of the following FRS (Financial Reporting Standards) listed below:
FRS C-9 “Provisions, contingencies and commitments”
FRS C-19 “Financial Instruments payable”
FRS D-3 “Employee Benefits”
Improvements to FRS 2015
The FRS C-9 and C-19 will become effective as of January 1°, 2018; with early application permitted under the terms established in each FRS.
The FRS D-3 will become effective for the fiscal years that begin as of January 1°, 2016.
The Improvements to FRS 2015, will become effective for the fiscal years that begin as of January 1°, 2015.
Is important to note, the use of FRS increases the quality of the financial information contained in the financial statements, thus ensuring their greater acceptance, not only nationally, but also internationally.
NOTE 15 -.APPROVAL OF THE ISSUANCE OF THE FINANCIAL STATEMENTS.
The financial statements were authorized for issue on March 10, 2015, by Pablo Gortazar de Oyarzabal, General Manager and Legal Representative, and subject to the approval of the general assembly of partners of the Company who may decide its modification in accordance with the provisions of the General Law of Commercial Societies.
The accompanying explanatory notes are an integral part of the financial statements.
| Flexo Universal, S.A. de C.V. | ||
| /s/ Pablo Gortazar de Oyarzabal | ||
| Lic. Pablo Gortazar de Oyarzabal | ||
| Legal Representative |
| 18 |
|
Income Taxes (Details) (USD $)
|
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2014
|
Dec. 31, 2013
|
|
| Current: | ||
| Federal | $ 0 | $ 0 |
| State | 94,371 | 43,751 |
| Foreign | 578,798 | 92,643 |
| Current Income Tax Expense (Benefit) | 673,169 | 136,394 |
| Deferred | ||
| Federal | (550,089) | (62,192) |
| State | 0 | 0 |
| Foreign | 66,887 | 195,634 |
| Deferred Income Tax Expense (Benefit) | (483,202) | 133,442 |
| Total Income Tax Provision | $ 189,967 | $ 269,836 |
|
Major Customers (Details Textual) (USD $)
|
12 Months Ended | |
|---|---|---|
|
Dec. 31, 2014
|
Dec. 31, 2013
|
|
| Customer One [Member] | ||
| Revenue, Major Customer [Line Items] | ||
| Concentration Risk, Percentage | 26.20% | 27.60% |
| Accounts Receivable, Gross | $ 2,951,000 | $ 1,523,000 |
| Customer Two [Member] | ||
| Revenue, Major Customer [Line Items] | ||
| Concentration Risk, Percentage | 13.70% | 12.50% |
| Accounts Receivable, Gross | $ 2,422,000 | $ 2,085,000 |