UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to_________
Commission File Number
000-23115
CTI INDUSTRIES CORPORATION
(Exact name of Registrant as specified in its charter)
Illinois | 36-2848943 | |
(State or other jurisdiction of | (I.R.S. Employer Identification Number) | |
incorporation or organization) | ||
22160 N. Pepper Road | ||
Lake Barrington, Illinois | 60010 | |
(Address of principal executive offices) | (Zip Code) |
(847) 382-1000 | ||
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller Reporting Company þ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares outstanding of the Registrant’s common stock as of November 1, 2016 was 3,524,354.
INDEX
PART 1 - FINANCIAL INFORMATION
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2016 | December 31, 2015 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents (VIE $111,000 and $82,000, respectively) | $ | 623,880 | $ | 346,404 | ||||
Accounts receivable, (less allowance for doubtful accounts of $132,000 and $126,000, respectively) (VIE $54,000 and $4,000, respectively) | 10,180,931 | 11,410,999 | ||||||
Inventories, net (VIE $1,292,000 and $1,264,000, respectively) | 22,942,341 | 17,869,911 | ||||||
Net deferred income tax asset | 749,089 | 761,096 | ||||||
Prepaid expenses (VIE $17,000 and $17,000, respectively) | 957,138 | 1,057,464 | ||||||
Other current assets (VIE $51,000 and $33,000, respectively) | 845,198 | 991,297 | ||||||
Total current assets | 36,298,577 | 32,437,171 | ||||||
Property, plant and equipment: | ||||||||
Machinery and equipment (VIE $0 and $546,000, respectively) | 26,582,044 | 26,847,110 | ||||||
Building | 3,378,006 | 3,360,017 | ||||||
Office furniture and equipment (VIE $120,000 and $66,000, respectively) | 3,614,814 | 3,512,613 | ||||||
Intellectual property | 482,088 | 482,088 | ||||||
Land | 250,000 | 250,000 | ||||||
Leasehold improvements | 405,306 | 624,902 | ||||||
Fixtures and equipment at customer locations | 3,187,724 | 3,174,535 | ||||||
Projects under construction | 629,731 | 773,985 | ||||||
38,529,713 | 39,025,250 | |||||||
Less : accumulated depreciation and amortization (VIE $27,000 and $150,000, respectively) | (33,010,749 | ) | (32,471,694 | ) | ||||
Total property, plant and equipment, net | 5,518,964 | 6,553,556 | ||||||
Other assets: | ||||||||
Deferred financing costs, net | 67,528 | 112,615 | ||||||
Goodwill (VIE $440,000 and $440,000, respectively) | 1,473,176 | 1,473,176 | ||||||
Net deferred income tax asset | 1,171,071 | 986,181 | ||||||
Other assets (due from related party $47,000 and $46,000, respectively) | 467,813 | 242,270 | ||||||
Total other assets | 3,179,588 | 2,814,242 | ||||||
TOTAL ASSETS | $ | 44,997,129 | $ | 41,804,969 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Checks written in excess of bank balance (VIE $19,000 and $8,000, respectively) | $ | 1,513,387 | $ | 1,481,827 | ||||
Trade payables (VIE $235,000 and $238,000, respectively) | 7,420,049 | 4,271,860 | ||||||
Line of credit (VIE $426,000 and $484,000, respectively) | 10,362,330 | 10,952,924 | ||||||
Notes payable - current portion (net discount of $158,000 and $171,000, respectively) (VIE $0 and $311,000, respectively) | 1,754,281 | 501,710 | ||||||
Notes payable - officers, current portion | 900,000 | - | ||||||
Notes payable - affiliates, current portion | 8,435 | 8,670 | ||||||
Capital Lease - current portion | 41,623 | 41,204 | ||||||
Accrued liabilities (VIE $964,000 and $655,000, respectively) | 2,968,488 | 2,942,481 | ||||||
Total current liabilities | 24,968,593 | 20,200,676 | ||||||
Long-term liabilities: | ||||||||
Notes payable - affiliates | 223,539 | 266,835 | ||||||
Notes payable, net of current portion (net of deferred financing fees of $0 and $113,000, respectively) (VIE $357,000 and $200, respectively) | 5,356,747 | 6,665,700 | ||||||
Notes payable - officers, subordinated | 1,392,268 | 1,323,139 | ||||||
Capital lease | 14,283 | 45,351 | ||||||
Deferred gain | 346,074 | - | ||||||
Total long-term debt, net of current portion | 7,332,911 | 8,301,025 | ||||||
Warrants Payable | 893,506 | 714,245 | ||||||
Total long-term liabilities | 8,226,417 | 9,015,270 | ||||||
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, 3,568,012 shares issued and 3,524,354 shares outstanding | 13,898,494 | 13,775,994 | ||||||
Paid-in-capital | 2,244,849 | 1,577,807 | ||||||
Accumulated earnings | 1,414,146 | 1,670,788 | ||||||
Accumulated other comprehensive loss | (4,916,462 | ) | (4,076,318 | ) | ||||
Less: Treasury stock, 75,627 shares | (160,784 | ) | (160,784 | ) | ||||
Total CTI Industries Corporation stockholders’ equity | 12,480,243 | 12,787,487 | ||||||
Noncontrolling interest | (678,124 | ) | (198,464 | ) | ||||
Total Equity | 11,802,119 | 12,589,023 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 44,997,129 | $ | 41,804,969 |
See accompanying notes to condensed consolidated unaudited financial statements
1 |
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net Sales | $ | 13,476,157 | $ | 14,880,820 | $ | 42,831,655 | $ | 43,476,981 | ||||||||
Cost of Sales | 10,064,066 | 10,775,500 | 31,661,039 | 31,863,004 | ||||||||||||
Gross profit | 3,412,091 | 4,105,320 | 11,170,616 | 11,613,977 | ||||||||||||
Operating expenses: | ||||||||||||||||
General and administrative | 1,808,299 | 1,840,643 | 5,470,523 | 5,300,418 | ||||||||||||
Selling | 977,928 | 862,587 | 3,162,083 | 2,425,677 | ||||||||||||
Advertising and marketing | 581,143 | 689,244 | 1,643,852 | 2,005,643 | ||||||||||||
Loss (gain) on sale of assets | (27,700 | ) | - | (27,700 | ) | - | ||||||||||
Total operating expenses | 3,339,670 | 3,392,474 | 10,248,758 | 9,731,738 | ||||||||||||
Income from operations | 72,421 | 712,846 | 921,858 | 1,882,239 | ||||||||||||
Other (expense) income: | ||||||||||||||||
Interest expense | (358,643 | ) | (350,960 | ) | (1,074,295 | ) | (1,067,895 | ) | ||||||||
Interest income | - | 5,952 | - | 30,729 | ||||||||||||
Change in fair value of warrants | 47,617 | - | (179,261 | ) | - | |||||||||||
Foreign currency gain | 9,663 | 43,932 | 77,341 | 47,230 | ||||||||||||
Total other expense, net | (301,363 | ) | (301,076 | ) | (1,176,215 | ) | (989,936 | ) | ||||||||
Net (loss) income before taxes | (228,942 | ) | 411,770 | (254,357 | ) | 892,303 | ||||||||||
Income tax (benefit) expense | (28,655 | ) | 161,280 | (16,804 | ) | 386,514 | ||||||||||
Net (loss) income | (200,287 | ) | 250,490 | (237,553 | ) | 505,789 | ||||||||||
Less: Net (loss) income attributable to noncontrolling interest | (19,812 | ) | 41,237 | 19,089 | (39,754 | ) | ||||||||||
Net (loss) income attributable to CTI Industries Corporation | $ | (180,475 | ) | $ | 209,253 | $ | (256,642 | ) | $ | 545,543 | ||||||
Other Comprehensive (Loss) | ||||||||||||||||
Foreign currency adjustment | (236,133 | ) | (547,475 | ) | (840,144 | ) | (1,009,986 | ) | ||||||||
Comprehensive (loss) | $ | (416,608 | ) | $ | (338,222 | ) | $ | (1,096,786 | ) | $ | (464,443 | ) | ||||
Basic (loss) income per common share | $ | (0.05 | ) | $ | 0.06 | $ | (0.07 | ) | $ | 0.17 | ||||||
Diluted (loss) income per common share | $ | (0.05 | ) | $ | 0.06 | $ | (0.07 | ) | $ | 0.16 | ||||||
Weighted average number of shares and equivalent shares of common stock outstanding: | ||||||||||||||||
Basic | 3,541,582 | 3,301,116 | 3,541,582 | 3,301,116 | ||||||||||||
Diluted | 3,714,239 | 3,446,808 | 3,703,732 | 3,447,938 |
See accompanying notes to condensed consolidated unaudited financial statements
2 |
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | (237,553 | ) | $ | 505,789 | |||
Adjustment to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,153,688 | 1,379,031 | ||||||
Amortization of debt discount | 125,689 | 107,681 | ||||||
Change in fair value of warrants | 179,261 | - | ||||||
Stock based compensation | 28,719 | 25,486 | ||||||
Amortization of deferred gain on sale/leaseback | (27,700 | ) | - | |||||
Provision for losses on accounts receivable | 28,685 | 32,557 | ||||||
Provision for losses on inventories | (31,259 | ) | 179,901 | |||||
Deferred income taxes | (170,653 | ) | 92,208 | |||||
Change in assets and liabilities: | ||||||||
Accounts receivable | 807,687 | 664,907 | ||||||
Inventories | (5,597,774 | ) | (688,340 | ) | ||||
Prepaid expenses and other assets | (77,839 | ) | 106,515 | |||||
Trade payables | 3,461,400 | 923,251 | ||||||
Accrued liabilities | 102,981 | 61,424 | ||||||
Net cash (used in) provided by operating activities | (254,668 | ) | 3,390,410 | |||||
Cash flows from investing activities: | ||||||||
Proceeds from equipment sale-leaseback | 783,134 | - | ||||||
Cash used in investment in subsidiary | (87,500 | ) | - | |||||
Purchases of property, plant and equipment | (555,961 | ) | (465,443 | ) | ||||
Net cash provided by (used in) investing activities | 139,673 | (465,443 | ) | |||||
Cash flows from financing activities: | ||||||||
Change in checks written in excess of bank balance | 31,560 | (460,401 | ) | |||||
Net change in revolving line of credit | (590,594 | ) | (1,911,937 | ) | ||||
Proceeds from issuance of long-term debt | 1,180,000 | 4,715 | ||||||
Repayment of long-term debt (related parties $0 and $2,000) | (652,903 | ) | (395,609 | ) | ||||
Proceeds from issuance of stock | 638,324 | - | ||||||
Cash paid for deferred financing fees | - | (8,050 | ) | |||||
Dividends Paid | - | (10,000 | ) | |||||
Redemption of Variable Interest Entity members | (455,000 | ) | - | |||||
Contributions received by Variable Interest Entity | 288,750 | - | ||||||
Net cash provided by (used in) financing activities | 440,137 | (2,781,282 | ) | |||||
Effect of exchange rate changes on cash | (47,666 | ) | (21,474 | ) | ||||
Net increase in cash and cash equivalents | 277,476 | 122,211 | ||||||
Cash and cash equivalents at beginning of period | 346,404 | 150,332 | ||||||
Cash and cash equivalents at end of period | $ | 623,880 | $ | 272,543 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash payments for interest | $ | 910,414 | $ | 929,324 | ||||
Supplemental Disclosure of non-cash investing and financing activity | ||||||||
Property, Plant & Equipment acquisitions funded by liabilities | $ | 35,012 | $ | 47,837 | ||||
Contributed Capital to Clever Container | ||||||||
Stock | $ | 122,500 | $ | - | ||||
Debt | $ | 43,750 | $ | - | ||||
Accounts Receivable | $ | 183,750 | $ | - |
See accompanying notes to condensed consolidated unaudited financial statements
3 |
CTI Industries Corporation and Subsidiaries
Condensed Consolidated Earnings per Share (unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Basic | ||||||||||||||||
Average shares outstanding: | ||||||||||||||||
Weighted average number of common shares outstanding | 3,541,582 | 3,301,116 | 3,541,582 | 3,301,116 | ||||||||||||
Net income: | ||||||||||||||||
Net (loss) income attributable to CTI Industries Corporation | $ | (180,475 | ) | $ | 209,253 | $ | (256,642 | ) | $ | 545,543 | ||||||
Per share amount | $ | (0.05 | ) | $ | 0.06 | $ | (0.07 | ) | $ | 0.17 | ||||||
Diluted | ||||||||||||||||
Average shares outstanding: | ||||||||||||||||
Weighted average number of common shares outstanding | 3,541,582 | 3,301,116 | 3,541,582 | 3,301,116 | ||||||||||||
Effect of dilutive shares | 172,657 | 145,692 | 162,150 | 146,822 | ||||||||||||
Weighted average number of shares and equivalent shares of common stock outstanding | 3,714,239 | 3,446,808 | 3,703,732 | 3,447,938 | ||||||||||||
Net income: | ||||||||||||||||
Net (loss) income attributable to CTI Industries Corporation | $ | (180,475 | ) | $ | 209,253 | $ | (256,642 | ) | $ | 545,543 | ||||||
Per share amount | $ | (0.05 | ) | $ | 0.06 | $ | (0.07 | ) | $ | 0.16 |
See accompanying notes to condensed consolidated unaudited financial statements
4 |
CTI Industries Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Basis of Presentation
The accompanying condensed (a) consolidated balance sheet as of December 31, 2015, which has been derived from audited consolidated financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015.
Principles of consolidation and nature of operations:
The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon products throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States.
Variable Interest Entities (“VIE’s”):
The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. There are three entities that have been consolidated as variable interest entities.
5 |
Use of estimates:
In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill.
Earnings per share:
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.
Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.
As of September 30, 2016 and 2015, shares to be issued upon the exercise of options and warrants aggregated 288,048 and 343,548, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three and nine months ended September 30, 2016 and 2015 were 0 and 174,000, respectively, all of which were represented by options.
Significant Accounting Policies:
The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2015. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2016.
Reclassification:
Certain 2015 amounts have been reclassified to conform to the 2016 presentation.
Recent Accounting Pronouncements:
In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.
6 |
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost . The ASU requires debt issuance costs associated with a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. An entity should apply the new guidance on a retrospective basis. We adopted this ASU effective with the first quarter of fiscal year 2016. The adoption of this accounting standard update did not have a material impact to our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. We do not expect the adoption of this accounting standard update to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , to eliminate the current requirements to classify deferred income tax assets and liabilities between current and noncurrent. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are continuing to evaluate the impact of ASU 2015-17 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases ( Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, although early adoption is allowed. For all other entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. We are continuing to evaluate the impact of ASU 2016-02 on our consolidated financial statements and related disclosures.
On March 30, 2016, the FASB issued Accounting Standards Updated No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company does not expect the adoption of this standard to have any impact on the Company’s consolidated financial statements.
On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.
7 |
Note 2 – Stock-Based Compensation; Changes in Equity
The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.
The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2016 and 2015. The expected volatility is based on historical volatility of the Company’s common stock.
The Company’s net loss for the three months ended September 30, 2016 and net income in 2015 includes approximately $5,000 and $7,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 2016 and net income in 2015 includes approximately $29,000 and $25,000, respectively, of compensation costs related to share based payments. As of September 30, 2016 there is $31,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $5,000 of additional stock-based compensation expense to be recognized over the remainder of 2016, $15,000 to be recognized during 2017, $7,000 to be recognized during 2018, $3,000 to be recognized during 2019 and $1,000 to be recognized during 2020.
As of September 30, 2016, the Company had three stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code, as well as for stock grants.
8 |
On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) As of September 30, 2016, options for 250,000 shares had been granted and options for 148,000 shares remain outstanding.
A summary of the Company’s stock option activity and related information is as follows:
Shares under Option | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
Balance at December 31, 2015 | 154,000 | $ | 5.25 | 2.9 | $ | 1,450 | ||||||||||
Granted | - | |||||||||||||||
Cancelled/Expired | (6,000 | ) | $ | 5.96 | ||||||||||||
Exercised | - | |||||||||||||||
Outstanding at September 30, 2016 | 148,000 | $ | 5.22 | 2.2 | $ | 172,850 | ||||||||||
Exercisable at September 30, 2016 | 88,000 | $ | 5.20 | 1.5 | $ | 104,658 |
On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“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. As of September 30, 2016, the Company was in compliance with all of the financial covenants under the Note and Warrant Purchase Agreement.
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On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement wherein the investors purchased 152,850 shares of common stock of the Company at a price of $6.00 per share. As additional consideration for the purchases of the shares in the offering, each investor received, with each share of common stock purchased, one-half of a warrant, with one warrant entitling the investor to purchase one share of the Company’s common stock at the price of $7.00. The warrants are exercisable between six months and three years from the investment date. As a result of the completion of the sale under the Purchase Agreement, warrants to purchase 76,425 shares of common stock at $7.00 per share were issued.
In addition to the Purchase Agreement, the Company and each of the investors entered into a Registration Rights Agreement pursuant to which the Company agreed to file a Registration Statement with the SEC to register the common stock sold to the investors.
A summary of the Company’s stock warrant activity and related information is as follows:
Shares under Warrant | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||||||
Balance at December 31, 2015 | 140,048 | $ | 0.01 | 6.55 | $ | 714,245 | ||||||||||
Granted | 76,675 | $ | 7.00 | 2.8 | - | |||||||||||
Cancelled | ||||||||||||||||
Exercised | ||||||||||||||||
Outstanding at September 30, 2016 | 216,723 | $ | 2.48 | 4.75 | $ | 893,506 | ||||||||||
Exercisable at September 30, 2016 | - | - | - | - |
A summary of the Company’s stock option activity by grant date as of September 30, 2016 is as follows:
Options Outstanding | Options Vested | |||||||||||||||||||||||||||||||
Options by Grant Date | Shares | Weighted Avg. | Remain. Life | Intrinsic Val | Shares | Weighted Avg. | Remain. Life | Intrinsic Val | ||||||||||||||||||||||||
Dec 2005 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Dec 2010 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Jan 2011 | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Nov 2012 | 94,000 | $ | 5.17 | 1.2 | $ | 114,680 | 75,200 | $ | 5.17 | 1.2 | $ | 91,744 | ||||||||||||||||||||
Nov 2013 | 5,000 | $ | 5.75 | 2.1 | $ | 3,200 | 3,000 | $ | 5.75 | 2.1 | $ | 1,920 | ||||||||||||||||||||
Dec 2015 | 49,000 | $ | 5.27 | 4.3 | $ | 54,970 | 9,800 | $ | 5.27 | 4.3 | $ | 10,994 | ||||||||||||||||||||
TOTAL | 148,000 | $ | 5.22 | 2.2 | $ | 172,850 | 88,000 | $ | 5.20 | 1.5 | $ | 104,658 |
The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended September 30, 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on September 30, 2016.
Note 3 – Legal Proceedings
The Company is party to certain claims or actions arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolution of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company.
Note 4 – Other Comprehensive Loss
In the three and nine months ended September 30, 2016 the company incurred other comprehensive losses of $236,000 and $840,000, respectively, all from foreign currency translation adjustments.
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The following table sets forth the accumulated balance of other comprehensive loss and each component.
Foreign Currency Items | Total Accumulated Other Comprehensive Loss | |||||||
Beginning balance as of January 1, 2016 | $ | (4,076,318 | ) | $ | (4,076,318 | ) | ||
Current period change, net of tax | (840,144 | ) | (840,144 | ) | ||||
Ending Balance as of September 30, 2016 | (4,916,462 | ) | (4,916,462 | ) |
Note 5 – Inventories, Net
September 30, 2016 | December 31, 2015 | |||||||
Raw materials | $ | 3,793,301 | $ | 2,770,636 | ||||
Work in process | 2,366,341 | 2,198,981 | ||||||
Finished goods | 17,563,321 | 13,723,090 | ||||||
Allowance for excess quantities | (780,622 | ) | (822,796 | ) | ||||
Total inventories | $ | 22,942,341 | $ | 17,869,911 |
Note 6 – Geographic Segment Data
The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company’s operations by geographic area is as follows:
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Net Sales to Outside Customers | Net Sales to Outside Customers | |||||||||||||||
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
United States | $ | 10,392,000 | $ | 11,377,000 | $ | 33,527,000 | $ | 33,904,000 | ||||||||
Europe | 761,000 | 374,000 | 1,927,000 | 1,031,000 | ||||||||||||
Mexico | 1,723,000 | 2,606,000 | 5,438,000 | 6,867,000 | ||||||||||||
United Kingdom | 600,000 | 524,000 | 1,940,000 | 1,675,000 | ||||||||||||
$ | 13,476,000 | $ | 14,881,000 | $ | 42,832,000 | $ | 43,477,000 |
Total Assets at | ||||||||
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
United States | $ | 33,121,000 | $ | 30,772,000 | ||||
Europe | 2,391,000 | 1,562,000 | ||||||
Mexico | 7,871,000 | 7,680,000 | ||||||
United Kingdom | 1,594,000 | 1,791,000 | ||||||
$ | 44,977,000 | $ | 41,805,000 |
Note 7 – Concentration of Credit Risk
Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company’s customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management’s expectations. During the three and nine months ended September 30, 2016 and 2015, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively. Sales to these customers for the three and nine months ended September 30, 2016 and 2015 are as follows:
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2016 | September 30, 2015 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 3,088,000 | 22.9 | % | $ | 3,256,000 | 21.9 | % | ||||||||
Customer B | $ | 3,070,000 | 22.8 | % | $ | 2,282,000 | 15.3 | % |
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Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2016 | September 30, 2015 | |||||||||||||||
Customer | Net Sales | % of Net Sales | Net Sales | % of Net Sales | ||||||||||||
Customer A | $ | 11,859,000 | 27.7 | % | $ | 11,660,000 | 26.8 | % | ||||||||
Customer B | $ | 7,870,000 | 18.4 | % | $ | 6,091,000 | 14.0 | % |
As of September 30, 2016, the total amounts owed to the Company by these customers were approximately $1,411,000 or 13.9%, and $2,653,000 or 26.1%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at September 30, 2015 by these customers were approximately $1,957,000 or 19.3%, and $1,972,000 or 19.5% of the Company’s consolidated net accounts receivable, respectively.
Note 8 – Related Party Transactions
Stephen M. Merrick, President of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which provides legal services to the Company. Legal fees paid by the Company to this firm for the three months ended September 30, 2016 and 2015, respectively, were $57,000 and $22,000. Legal fees paid by the Company to this firm for the nine months ended September 30, 2016 and 2015, respectively, were $128,000 and $114,000.
Interest payments have been made or accrued to John H. Schwan, Chief Executive Officer of the Company, for loans made to the Company. During the three months ended September 30, 2016 and 2015, these interest accruals totaled $23,000 and $22,000, respectively. During the nine months ended September 30, 2016 and 2015, these interest accruals totaled $69,000 and $64,000, respectively.
On July 1, 2011, Flexo Universal, S.R.L. de C.V. (“Flexo”) entered into a lease agreement with Venture Leasing S.A. de R.L. (“Venture Leasing Mexico”) for the lease of balloon production equipment financed and owned by Venture Leasing Mexico and used by Flexo for the production of latex balloons. Venture Leasing Mexico is wholly owned by entities owned by John H. Schwan, Chief Executive Officer of the Company and Stephen M. Merrick, President of the Company. Venture Leasing Mexico and Venture Leasing L.L.C., also owned by entities owned by Mr. Schwan and Mr. Merrick, are deemed variable interest entities and are consolidated with the accounts of the Company. During the three and nine months ended September 30, 2016, Flexo made lease payments to Venture Leasing Mexico totaling $0 and $65,000. During the three and nine months ended September 30, 2015, Flexo made lease payments to Venture Leasing Mexico totaling $36,000 and $108,000. In May 2016, Flexo purchased the balloon production equipment from Venture Leasing Mexico and the lease was terminated.
John H. Schwan, Chief Executive Officer of the Company, through an investment entity, and Stephen M. Merrick, President of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). The Company owns a 28.5% interest in Clever Container. During the three months ended September 30, 2016 and 2015, Clever Container purchased various products from the Company in the amount of $191,000 and $127,000, respectively. During the nine months ended September 30, 2016 and 2015, Clever Container purchased various products from the Company in the amount of $669,000 and $352,000, respectively. As of September 30, 2016 and 2015, the balance of accounts receivable from Clever Container to the Company were $192,000 and $498,000, respectively.
On September 30, 2016, John H. Schwan advanced to the Company the sum of $530,000 and on the same date, Stephen M. Merrick advanced to the Company the sum of $370,000 to provide short-term working capital to the Company to fund the Company’s obligation to purchase and produce inventory for a substantial order for vacuum sealing systems to be delivered in November 2016. In consideration of such advances, the Company issued a Promissory Note to Mr. Schwan in the principal amount of $530,000 and to Mr. Merrick in the amount of $370,000 dated September 30, 2016 and bearing interest at the rate of 6% per annum. Effective on the same date, Mr. Schwan and Mr. Merrick entered into Subordination Agreements with BMO Harris and BMO equity pursuant to which each of them agreed to subordinate the Company’s obligation to them under the Promissory Notes to the Company’s obligations to BMO Harris and BMO Equity, subject to certain rights of payment as provided in the Agreements. Further, effective on September 30, 2016, the Company and BMO Harris entered into Amendment No. 9 to the Credit Agreement and the Company and BMO Equity entered into Amendment No. 4 to the Note and Warrant Purchase Agreement pursuant to which each of BMO Harris and BMO Equity agreed to consent to payments of principal and interest to Mr. Schwan and Mr. Merrick under the Promissory Notes out of the proceeds received by the Company from the sale of vacuum sealing machines to a major retail chain in a promotional program.
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Note 9 – Derivative Instruments; Fair Value
The following tables represents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Amount as of | ||||||||||||||||
Description | 9/30/2016 | Level 1 | Level 2 | Level 3 | ||||||||||||
Warrant Liability | $ | 894,000 | - | $ | 894,000 | - | ||||||||||
$ | 894,000 | - | $ | 894,000 | - |
Amount as of | ||||||||||||||||
Description | 12/31/2015 | Level 1 | Level 2 | Level 3 | ||||||||||||
Warrant Liability | $ | 714,000 | - | $ | 714,000 | - | ||||||||||
$ | 714,000 | $ | 714,000 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This quarterly report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.
Overview
We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related latex toy products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and foil balloons at our plant in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe. We also market and sell vacuum sealing machines which we purchase from a supplier and we market and sell home organizing and container products.
Results of Operations
Net Sales. For the three months ended September 30, 2016, net sales were $13,476,000 compared to net sales of $14,881,000 for the same period of 2015, a decrease of 9.4%. For the quarters ended September 30, 2016 and 2015, net sales by product category were as follows:
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Three Months Ended | ||||||||||||||||
September 30, 2016 | September 30, 2015 | |||||||||||||||
$ | % of | $ | % of | |||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
Foil Balloons | 6,178 | 46 | % | 5,253 | 35 | % | ||||||||||
Latex Balloons | 1,875 | 14 | % | 2,613 | 18 | % | ||||||||||
Vacuum Sealing Products | 2,594 | 19 | % | 3,983 | 27 | % | ||||||||||
Film Products | 1,137 | 8 | % | 1,409 | 9 | % | ||||||||||
Home Organization Products | 1,288 | 10 | % | 1,121 | 8 | % | ||||||||||
Other Sales | 404 | 3 | % | 502 | 3 | % | ||||||||||
Total | 13,476 | 100 | % | 14,881 | 100 | % |
For the nine months ended September 30, 2016, net sales were $42,832,000 compared to net sales of $43,477,000 for the same period of 2015, a decrease of 1.5%. For the nine months ended September 30, 2016 and 2015, net sales by product category were as follows:
Nine Months Ended | ||||||||||||||||
September 30, 2016 | September 30, 2015 | |||||||||||||||
$ | % of | $ | % of | |||||||||||||
Product Category | (000) Omitted | Net Sales | (000) Omitted | Net Sales | ||||||||||||
Foil Balloons | 20,540 | 48 | % | 18,607 | 43 | % | ||||||||||
Latex Balloons | 6,182 | 14 | % | 7,221 | 17 | % | ||||||||||
Vacuum Sealing Products | 7,362 | 17 | % | 9,446 | 22 | % | ||||||||||
Film Products | 3,508 | 8 | % | 3,289 | 8 | % | ||||||||||
Home Organization Products | 4,243 | 10 | % | 2,690 | 5 | % | ||||||||||
Other Sales | 997 | 3 | % | 2,224 | 5 | % | ||||||||||
Total | 42,832 | 100 | % | 43,477 | 100 | % |
Foil Balloons. During the three months ended September 30, 2016, revenues from the sale of foil balloons increased by 17.6% compared to the prior year period from $5,253,000 to $6,178,000. During the nine months ended September 30, 2016, revenues from the sale of foil balloons increased by 10.4% compared to the prior year period from $18,607,000 to $20,540,000. During the nine months ended September 30, 2016, foil balloon sales to our largest customer increased to $11,825,000 from $11,335,000 for the same period last year. Sales of foil balloons to other customers increased by 19.8% to $8,715,000 from $7,272,000 for the same period last year. These sales to various customers include sales in the United States, Mexico, the United Kingdom and Europe.
Latex Balloons. During the three months ended September 30, 2016, revenues from the sale of latex balloons decreased by 28.2% compared to the prior year period from $2,613,000 to $1,875,000. During the nine months ended September 30, 2016, revenues from the sale of latex balloons decreased by 14.4% compared to the prior year period from $7,221,000 to $6,182,000. The decline in sales is attributable principally to (i) the reduced Dollar value of sales denominated in the Mexican Peso during those periods due to the decline of the Peso in relation to the Dollar, (ii) a reduction in sales to customers in Central and South America, and (iii) production shortfalls during portions of the period.
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Vacuum Sealing Products. During the three months ended September 30, 2016, revenues from the sale of pouches and vacuum sealing machines decreased by 34.8% compared to the prior year from $3,983,000 to $2,594,000. During the nine months ended September 30, 2016, revenues from the sale of pouches and vacuum sealing machines decreased by 22.1% compared to the prior year from $9,446,000 to $7,362,000. The decline in revenues for the nine month period is attributable to the decline in sales of zippered pouches from $2,060,000 in the first nine months of 2015 to $122,000 in the first nine months of 2016. Most of the sales of zippered pouches were to a principal customer. Sales to that customer ceased after the first quarter of this year and the customer has advised us that they will not be purchasing the product on an ongoing basis. However, we are introducing a new line of zippered pouch products under the brand Clever Fresh™ to be sold through Clever Container from which we anticipate new revenues of zippered pouch product. With respect to our branded vacuum sealing systems, sales for the quarter decreased to $2,594,000 from $3,137,000 for the same period last year and sales for the nine months ended September 30, 2016 decreased to $7,240,000 from $7,386,000 in the same period last year. We have received orders for vacuum sealing system products for the fourth quarter exceeding $8 million and anticipate that our sales of branded vacuum sealing systems will reach at least $17 million for 2016 compared to 2015 sales in that line of $10,624,000.
Films. During the three months ended September 30, 2016, revenues from the sale of laminated film products decreased by 19.3% compared to the prior year period from $1,409,000 to $1,137,000. During the nine months ended September 30, 2016, revenues from the sale of laminated film products increased by 6.7% compared to the prior year period from $3,289,000 to $3,508,000. Virtually all of the sales of this product line were to a single long-term customer.
Home Organizing Products. During the three months ended September 30, 2016, revenues from the sale of home organizing products increased by 14.9% compared to the prior year period from $1,121,000 to $1,288,000. During the nine months ended September 30, 2016, revenues from the sale of home organizing products increased by 57.7% compared to the prior year period from $2,690,000 to $4,243,000. We engage in direct sales of home organizing products through Clever Container Company, LLC. We now have a 28.5% direct ownership interest in Clever Container and the results of its operations are consolidated with those of the Company as a variable interest entity. Clever Container engages in the direct sales of home organizing products and containers (including certain products produced by the Company) through a network of independent consultants throughout the United States.
Other Revenues. During the three months ended September 30, 2016, revenues from the sale of various other products decreased by 19.5% to $404,000 compared to revenues from other products in the same period in 2015 of $502,000. During the nine months ended September 30, 2016, revenues from the sale of various other products decreased by 55.2% to $997,000 compared to revenues from other products in the same period in 2015 of $2,224,000. The revenues from the sale of other products during 2016 include (i) sales of a line of “Candy Blossoms” and “Candy Loons” consisting of candy and small inflated balloons sold in small containers and (ii) the sale of accessories and supply items related to balloon products.
Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales of our top three and ten customers for the three and nine months ended September 30, 2016 and 2015.
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
% of Sales | % of Sales | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Top 3 Customers | 53.9 | % | 46.5 | % | 54.0 | % | 48.3 | % | ||||||||
Top 10 Customers | 70.0 | % | 68.6 | % | 68.3 | % | 67.2 | % |
During the three and nine months ended September 30, 2016, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to these customers for the three months ended September 30, 2016 were $3,088,000 or 22.9%, and $3,070,000 or 22.8%, of consolidated net sales, respectively. Sales to these customers for the three months ended September 30, 2015 were $3,256,000 or 21.9%, and $2,282,000 or 15.3%, of consolidated net sales, respectively. Sales to these customers for the nine months ended September 30, 2016 were $11,859,000 or 27.7%, and $7,870,000 or 18.4%, of consolidated net sales, respectively. Sales to these customers for the nine months ended September 30, 2015 were $11,660,000 or 26.8%, and $6,091,000 or 14.0%, of consolidated net sales, respectively. The amounts owed at September 30, 2016 by these customers were $1,411,000 or 15.7%, and $2,653,000 or 29.4%, of the Company’s consolidated net accounts receivable, respectively. As of September 30, 2015, the total amounts owed to the Company by these customers were $1,957,000 or 19.3% and $1,972,000 or 19.5% of the Company’s consolidated net accounts receivable, respectively.
Cost of Sales. During the three months ended September 30, 2016, the cost of sales represented 74.7% of net sales compared to 72.4% for the three months ended September 30, 2015. During the nine months ended September 30, 2016, the cost of sales represented 73.9% of net sales compared to 73.3% for the nine months ended September 30, 2015. The increase in the cost of sales is the result principally of the decline in gross margins we have experienced in relation to the sale of latex balloons, resulting from the decline in the value of the Mexican Peso in relation to the dollar.
General and Administrative. During the three months ended September 30, 2016, general and administrative expenses were $1,808,000 or 13.4% of net sales, compared to $1,840,000 or 12.4% of net sales for the same period in 2015. During the nine months ended September 30, 2016, general and administrative expenses were $5,471,000 or 12.8% of net sales, compared to $5,300,000 or 12.2% of net sales for the same period in 2015.
Selling. During the three months ended September 30, 2016, selling expenses were $978,000 or 7.3% of net sales, compared to $863,000 or 5.8% of net sales for the same period in 2015. During the nine months ended September 30, 2016, selling expenses were $3,162,000 or 7.4% of net sales, compared to $2,426,000 or 5.6% of net sales for the same period in 2015. The increase in selling expense is attributable principally to an increase in commissions to clever container consultants.
Advertising and Marketing. During the three months ended September 30, 2016, advertising and marketing expenses were $581,000 or 4.3% of net sales for the period, compared to $689,000 or 4.6% of net sales for the same period of 2015. During the nine months ended September 30, 2016, advertising and marketing expenses were $1,644,000 or 3.8% of net sales for the period, compared to $2,006,000 or 4.6% of net sales for the same period of 2015.
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Other Income (Expense). During the three months ended September 30, 2016, the Company incurred interest expense of $359,000, compared to interest expense during the same period of 2015 in the amount of $345,000. During the nine months ended September 30, 2016, the Company incurred interest expense of $1,074,000, compared to interest expense during the same period of 2015 in the amount of $1,037,000. In addition to interest expense, there is a variable charge relating to the change in value of our outstanding warrants issued in connection with our mezzanine loan by reason of change in market price of our common stock. The amount of that change was ($48,000) in the third quarter compared to $18,000 in the third quarter of 2015.
For the three months ended September 30, 2016, the Company had a foreign currency transaction gain of $10,000 compared to a foreign currency transaction gain of $44,000 during the same period of 2015. For the nine months ended September 30, 2016, the Company had a foreign currency transaction gain of $77,000 compared to a foreign currency transaction gain of $47,000 during the same period of 2015.
Income Taxes. For the three months ended September 30, 2016, the Company reported a consolidated income tax benefit of $29,000, compared to a consolidated income tax expense of $161,000 for the same period of 2015. For the nine months ended September 30, 2016, the Company reported a consolidated income tax benefit of $17,000, compared to a consolidated income tax expense of $387,000 for the same period of 2015.
Net Income. For the three months ended September 30, 2016, the Company had net loss of ($180,000) or ($0.05) per share (basic and diluted,) compared to net income of $209,000 for the same period of 2015 or $0.06 per share (basic and diluted.) For the nine months ended September 30, 2016, the Company had net loss of ($257,000) or ($0.07) per share (basic and diluted,) compared to net income of $546,000 for the same period of 2015 or $0.17 per share (basic) and $0.16 per share (diluted.) For the nine months ended September 30, 2016, the Company had income from operations of $922,000 compared to income from operations during the same period in 2015 of $1,882,000.
Financial Condition, Liquidity and Capital Resources
Cash Flow Items.
Operating Activities. During the nine months ended September 30, 2016, net cash used in operations was $255,000, compared to net cash provided by operations during the nine months ended September 30, 2015 of $3,390,000.
Significant changes in working capital items during the nine months ended September 30, 2016 included:
· | A decrease in accounts receivable of $808,000 compared to a decrease in accounts receivable of $665,000 in the same period of 2015. |
· | An increase in inventory of $5,598,000 compared to an increase in inventory of $688,000 in 2015. |
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· | An increase in prepaid expenses of $78,000 compared to a decrease in prepaid expenses of $107,000 in 2015. |
· | An increase in trade payables of $3,461,000 compared to an increase in trade payables of $923,000 in 2015. |
· | An increase in accrued liabilities of $107,000 compared to an increase in accrued liabilities of $61,000 in 2015. |
The increase in inventory is attributable principally to the purchase and production of inventory for a significant sale of vacuum sealing systems in the fourth quarter, as well as the purchase of raw materials and production of inventory for anticipated balloon sales in the fourth quarter. We anticipate significant reductions in inventory and trade payables, and significant increases in receivables during the fourth quarter as we fulfill large orders for vacuum sealing systems and balloons during that period.
Investing Activity. During the nine months ended September 30, 2016, cash provided by investing activity was $140,000, compared to cash used in investing activity for the same period of 2015 in the amount of $465,000. Substantially all of these proceeds are related to the sale of equipment.
Financing Activities. During the nine months ended September 30, 2016, cash provided by financing activities was $440,000 compared to cash used in financing activities for the same period of 2015 in the amount of $2,781,000.
Liquidity and Capital Resources. At September 30, 2016, the Company had cash balances of $624,000 compared to cash balances of $273,000 for the same period in 2015 and there was $2,830,000 available to advance under the Company’s revolving line of credit.
At September 30, 2016, the Company had a working capital balance of $11,332,000 compared to a working capital balance of $12,236,000 at December 31, 2015.
The Company’s liquidity is dependent significantly on its bank financing and the Company relies on its revolving line of credit to maintain liquidity. On April 29, 2010, the Company entered into a Credit Agreement with BMO Harris Bank N.A. (“BMO Harris”). Under the Credit Agreement, BMO Harris agreed to provide loans and credits to the Company in the aggregate maximum amount of $14,417,000. The arrangement included:
i. | A revolving credit line up to a maximum amount of $9,000,000 based upon a borrowing base of 85% of eligible receivables and 60% of eligible inventory (up to a maximum of $5,000,000); |
ii. | A mortgage loan in the principal amount of $2,333,350, amortized over 25 years; |
iii. | A term loan in the principal amount of $583,333 maturing in monthly principal installments of $58,333; and |
iv. | An equipment loan commitment in the amount of up to $2,500,000 providing for loan advances from time to time until April 29, 2012 based upon 100% of the purchase price of equipment purchased, the loans to be amortized on a five year basis commencing April 29, 2012. |
The Credit Agreement included various representations, warranties and covenants of the Company, including various financial covenants.
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In connection with the Credit Agreement, the Company executed and delivered to BMO Harris, a Term Loan Note, a Mortgage Loan Note, an Equipment Note and a Revolving Note, as well as a form of Mortgage, Security Agreement, Pledge Agreement (pursuant to which shares of capital stock of the Registrant’s Mexico subsidiary were pledged as security for the loans), Patent Security Agreement and Trademark Security Agreement. Two officers and principal shareholders of the Company, John H. Schwan and Stephen M. Merrick each executed Subordination Agreements with respect to obligations of the Company to them.
The Credit Agreement, as amended, provides that the outstanding balance of all loans under the agreement will bear interest with reference to a base rate or, at the option of the Company, with reference to an adjusted LIBOR. At September 30, 2016, the effective rate on the outstanding loan balances was 3.75%.
As of September 30, 2016, the outstanding balances on the loans with BMO Harris were: (i) revolving line of credit, $9,936,522, (ii) mortgage loan, $1,734,457, and (iii) equipment loan, $133,937.
On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Private Equity (U.S.), Inc. (“BMO Equity”) and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017.
Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.
The Note and Warrant Purchase Agreement included provisions for:
(i) a closing fee of $100,000
(ii) payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;
(iii) security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;
(iv) various representations and warranties and covenants of the Company;
(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.
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On December 23, 2014, the Company entered into Amendment No. 5 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, BMO Harris and BMO Equity waived certain anticipated events of default as of December 31, 2014 by the Company with respect the amount of capital expenditures and the change of name of a subsidiary, and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to exclude from the definition of Senior Funded Debt and Total Funded Debt certain indebtedness of a variable interest entity, (ii) to require the Company to provide financial reports and variance reports to the Bank within 45 days after the end of each calendar month, (iii) to change the Senior Leverage Ratio and Total Leverage Ratio requirements for fiscal quarters ending December 31, 2014 and for each fiscal quarter thereafter to the maturity of the loans, and (iv) to provide for the engagement by the Company of a financial consultant to provide business financial planning and advisory services to the Company.
On October 13, 2015, the Company entered into Amendment No. 6 to the Credit Agreement among the Company and BMO Harris. Pursuant to the terms of the Amendment, the company will be able to obtain advances under the revolving line of credit with BMO Harris in the amount provided for in the borrowing base formula plus an overadvance amount of up to $1 million, up to a total maximum amount under the revolving line of credit of $12 million. The provision for the overadvance amount is available to the company for the period from October 1, 2015 to April 30, 2016. On April 29, 2016, the term under which the overadvance of $1 million is available to the Company was extended to July 31, 2016.
On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement in which the investors purchased 152,850 shares of common stock at the price of $6.00 per share. As additional consideration for the purchase of shares in the Company, each investor received one-half of a warrant, with one warrant entitling the investor to purchase one share of common stock at the price of $7.00 per share. The warrants are exercisable between six months and three years from the investment date. In addition to the Purchase Agreement, the Company and the investors entered into a Registration Rights Agreement under which the Company agreed to file a Registration Statement with the SEC on or before August 29, 2016 to register the common stock purchased by the investors.
The issuance of shares in this placement resulted in gross proceeds to the Company of $917,000, and after commissions and fees, net proceeds to the Company of approximately $638,328. The Company is using these proceeds for general working capital purposes.
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On August 5, 2016, the Company entered into Amendment No. 8 to the Credit Agreement among the Company and BMO Harris and Amendment No. 3 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, (i) for the period from August 1, 2016 through February 28, 2017, the Bank agreed to increase the revolving credit commitment from $12 million to $14 million, (ii) for the period from August 1, 2016 through November 2016, the Bank agreed to increase the borrowing base inventory cap from $6.5 million to $9 million, (iii) for the quarters ended September 30 and December 31, 2016, BMO Harris agreed to increase the senior leverage ratio to 3.5 to 1, for the quarter ended September 30, 2016, the total leverage ratio to 4.75 to 1, and for the quarter ended December 31, 2016, the total leverage ratio to 4.50 to 1 and (iv) for the periods ended September 30, 2016 and December 31, 2016, BMO Equity agreed to increase the senior leverage ratio for BMO Equity to 3.85 to 1, for the periods ended September 30, 2016, to increase the total leverage ratio to 5.225 to 1 and for December 31, 2016 to raise the total leverage ratio to 4.95 to 1.
On September 30, 2016, John H. Schwan advanced to the Company the sum of $530,000 and on the same date, Stephen M. Merrick advanced to the Company the sum of $370,000 to provide short-term working capital to the Company to fund the Company’s obligation to purchase and produce inventory for a substantial order for vacuum sealing systems to be delivered in November 2016. In consideration of such advances, the Company issued a Promissory Note to Mr. Schwan in the principal amount of $530,000 and to Mr. Merrick in the amount of $370,000 dated September 30, 2016 and bearing interest at the rate of 6% per annum. Effective on the same date, Mr. Schwan and Mr. Merrick entered into Subordination Agreements with BMO Harris and BMO equity pursuant to which each of them agreed to subordinate the Company’s obligation to them under the Promissory Notes to the Company’s obligations to BMO Harris and BMO Equity, subject to certain rights of payment as provided in the Agreements. Further, effective on September 30, 2016, the Company and BMO Harris entered into Amendment No. 9 to the Credit Agreement and the Company and BMO Equity entered into Amendment No. 4 to the Note and Warrant Purchase Agreement pursuant to which each of BMO Harris and BMO Equity agreed to consent to payments of principal and interest to Mr. Schwan and Mr. Merrick under the Promissory Notes out of the proceeds received by the Company from the sale of vacuum sealing machines to a major retail chain in a promotional program.
Management believes that, with the foregoing financing, funds available under the Credit Agreement, as amended, as well as internally generated funds will be sufficient for the Company to meet its working capital needs for at least the next 12 months.
As of September 30, 2016, the Company was in compliance with all of the financial covenants under the Credit Agreement and the Note and Warrant Purchase Agreement.
Seasonality
In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years. Vacuum sealing product sales are also seasonal; approximately 60% of sales in this product line occur in the period from July through December.
Critical Accounting Policies
Please see pages 25-28 of our Annual Report on Form 10-K for the year ended December 31, 2015 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three months ended September 30, 2016.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Not applicable.
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Item 4. Controls and Procedures
In the course of review of our preliminary financial statements for the period ending June 30, 2016, our audit firm identified a transaction involving the sale and leaseback of certain equipment by our Mexico subsidiary, Flexo Universal, which was not properly recorded under U.S. GAAP. This error was identified and corrected prior to completion of the financial statements. Upon review by management and our Audit Committee, it was determined that information respecting the transaction, and the accounting for it, was not provided to management on a timely basis to enable proper review of the transaction prior to its being recorded.
During the third quarter, the Company developed and implemented new internal control procedures and documentation covering financial commitments, contracts and other transactions involving financial commitments to remediate the identified weaknesses in controls and procedures. Based upon this remediation, our management, acting under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of September 30, 2016, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure.
Except for the foregoing, there have been no material changes in our internal control over financial reporting during the three months ended September 30, 2016 that have materially affected or are likely to materially affect our internal controls over financial reporting.
The Company is party to certain claims or actions arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolution of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company.
Not applicable.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
The Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.
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The following are being filed as exhibits to this report:
Exhibit Number |
Description | |
3.1 | Third Restated Certificate of Incorporation of CTI Industries Corporation (incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with Commission on October 25, 1999). | |
3.2 | By-laws of CTI Industries Corporation (incorporated by reference to Exhibit 3.1 contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997). | |
10.1 | Promissory Note between CTI Industries and Stephen M. Merricle dated September 30, 2016. | |
10.2 | Promissory Note between CTI Industries and John H. Schwan dated September 30, 2016. | |
10.3 | Amendment No. 9 to Credit Agreement between BMO Harris Bank, N.A. and the Company dated September 30, 2016. | |
10.4 | Amendment No. 4 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated September 30, 2016. | |
10.5 | Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Harris Bank N.A. effective September 30, 2016. | |
10.6 | Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Private Equity (U.S.), Inc. effective September 30, 2016. | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith). | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith). | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
101 | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 14, 2016
CTI INDUSTRIES CORPORATION | ||
By: | /s/ John H. Schwan | |
John H. Schwan | ||
Chief Executive Officer | ||
By: | /s/ Stephen M. Merrick | |
Stephen M. Merrick | ||
President | ||
By: | /s/ Timothy S. Patterson | |
Timothy S. Patterson | ||
Chief Financial Officer | ||
Senior Vice President Finance |
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Exhibit Index
Exhibit Number |
Description | |
3.1 | Third Restated Certificate of Incorporation of CTI Industries Corporation (incorporated by reference to Exhibit A contained in Registrant’s Schedule 14A Definitive Proxy Statement for solicitation of written consent of shareholders, as filed with Commission on October 25, 1999). | |
3.2 | By-laws of CTI Industries Corporation (incorporated by reference to Exhibit 3.1 contained in Registrant’s Form SB-2 Registration Statement (File No. 333-31969) effective November 5, 1997). | |
10.1 | Promissory Note between CTI Industries and Stephen M. Merricle dated September 30, 2016. | |
10.2 | Promissory Note between CTI Industries and John H. Schwan dated September 30, 2016. | |
10.3 | Amendment No. 9 to Credit Agreement between BMO Harris Bank, N.A. and the Company dated September 30, 2016. | |
10.4 | Amendment No. 4 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated September 30, 2016. | |
10.5 | Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Harris Bank N.A. effective September 30, 2016. | |
10.6 | Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Private Equity (U.S.), Inc. effective September 30, 2016. | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith). | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith). | |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
101 | Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements. |
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EXHIBIT 10.1
Payment of the indebtedness evidenced by this instrument or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Harris Bank N.A. to the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender.
Payment of the indebtedness evidenced by this instrument or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Private Equity (U.S.), Inc., to the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender. |
PROMISSORY NOTE
FOR VALUE RECEIVED, and subject to the terms and conditions set forth herein, CTI Industries Corporation, an Illinois corporation (the "Maker"), hereby unconditionally promises to pay to the order of Stephen M. Merrick or his assigns (the "Noteholder", and together with the Maker, the "Parties"), the principal amount of Three Hundred Seventy Thousand Dollars ($370,000) (the "Loan"), together with all accrued interest thereon, as provided in this Promissory Note (the "Note", as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms).
1. Definitions. Capitalized terms used herein shall have the meanings set forth in this Section 1.
"Applicable Rate" means the rate equal to Six percent (6%) per annum.
"Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Chicago, Illinois are authorized or required by law to close.
"Default" means any of the events specified in Section 6 which constitutes an Event of Default or which, upon the giving of notice, the lapse of time, or both pursuant to Section 6 would, unless cured or waived, become an Event of Default.
"Default Rate" means, at any time, the Applicable Rate plus 2%.
"Event of Default" has the meaning set forth in Section 6.
"Governmental Authority" means the government of any nation or any political subdivision thereof, whether at the national, state, territorial, provincial, municipal or any other level, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of, or pertaining to, government (including any supranational bodies such as the European Union or the European Central Bank).
"Law" as to any Person, means any law (including common law), statute, ordinance, treaty, rule, regulation, policy or requirement of any Governmental Authority and authoritative interpretations thereon, whether now or hereafter in effect, in each case, applicable to or binding on such Person or any of its properties or to which such Person or any of its properties is subject.
"Loan" has the meaning set forth in the introductory paragraph.
"Maker" has the meaning set forth in the introductory paragraph.
"Maturity Date" means the earlier of (a) the date that is six months after the latest maturity date for any indebtedness owing by the Maker under (i) a Credit Agreement dated as of April 29, 2010, between the Maker and BMO Harris Bank N.A. (as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms) or (ii) a Note and Warrant Purchase Agreement dated as of July 17, 2012, between the Maker and BMO Private Equity (U.S.), Inc. (as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms), and (b) the date on which all amounts under this Note shall become due and payable pursuant to Section 7.
"Note" has the meaning set forth in the introductory paragraph.
"Noteholder" has the meaning set forth in the introductory paragraph.
"Order" as to any Person, means any order, decree, judgment, writ, injunction, settlement agreement, requirement or determination of an arbitrator or a court or other Governmental Authority, in each case, applicable to or binding on such Person or any of its properties or to which such Person or any of its properties is subject.
"Parties" has the meaning set forth in the introductory paragraph.
"Person" means any individual, corporation, limited liability company, trust, joint venture, association, company, limited or general partnership, unincorporated organization, Governmental Authority or other entity.
2. Final Payment Date; Optional Prepayments.
2.1 Final Payment Date. The aggregate unpaid principal amount of the Loan, all accrued and unpaid interest and all other amounts payable under this Note shall be due and payable on the Maturity Date.
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2.2 Optional Prepayment. The Maker may prepay the Loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. No prepaid amount may be reborrowed.
3. Interest.
3.1 Interest Rate. Except as otherwise provided herein, the outstanding principal amount of the Loan made hereunder shall bear interest at the Applicable Rate from the date the Loan was made until the Loan is paid in full, whether at maturity, upon acceleration, by prepayment or otherwise.
3.2 Interest Payment Dates. In accordance with Section 2.1, all accrued and unpaid interest shall be due and payable on the Maturity Date.
3.3 Default Interest. If any amount payable hereunder is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such overdue amount shall bear interest at the Default Rate from the date of such non-payment until such amount is paid in full.
3.4 Computation of Interest. All computations of interest shall be made on the basis of a year of 365 days, and the actual number of days elapsed. Interest shall accrue on the Loan on the day on which such Loan is made, and shall not accrue on the Loan on the day on which it is paid. Interest shall not accrue on accrued and unpaid interest.
4. Payment Mechanics.
4.1 Manner of Payment. All payments of interest and principal shall be made in lawful money of the United States of America no later than [12:00] PM on the date on which such payment is due by wire transfer of immediately available funds to the Noteholder's account at a bank specified by the Noteholder in writing to the Maker from time to time.
4.2 Application of Payments. All payments made hereunder shall be applied first, to the payment of any fees or charges outstanding hereunder, second, to accrued interest and third, to the payment of the principal amount outstanding under the Note.
4.3 Business Day Convention. Whenever any payment to be made hereunder shall be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension will be taken into account in calculating the amount of interest payable under this Note.
5. Representations and Warranties. The Maker hereby represents and warrants to the Noteholder on the date hereof as follows:
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5.1 Existence. The Maker is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its jurisdiction of organization.
5.2 Power and Authority. The Maker has the power and authority, and the legal right, to execute and deliver this Note and to perform its obligations hereunder.
5.3 Authorization; Execution and Delivery. The execution and delivery of this Note by the Maker and the performance of its obligations hereunder have been duly authorized by all necessary corporate action in accordance with all applicable Laws. The Maker has duly executed and delivered this Note.
5.4 No Approvals. Other than consent by BMO Harris N.A. and BMO Private Equity (US) Inc., which consent has been given, no consent or authorization of, filing with, notice to or other act by, or in respect of, any Governmental Authority or any other Person is required in order for the Maker to execute, deliver, or perform any of its obligations under this Note.
5.5 No Violations. The execution and delivery of this Note and the consummation by the Maker of the transactions contemplated hereby do not and will not (a) violate any provision of the Maker's organizational documents; (b) violate any Law or Order applicable to the Maker or by which any of its properties or assets may be bound; or (c) constitute a default under any material agreement or contract by which the Maker may be bound.
5.6 Enforceability. The Note is a valid, legal and binding obligation of the Maker, enforceable against the Maker in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles.
6. Events of Default. The occurrence of any of the following shall constitute an Event of Default hereunder:
6.1 Failure to Pay. The Maker fails to pay (a) any principal amount of the Loan when due; or (b) interest or any other amount when due and such failure continues for [5] days.
6.2 Breach of Representations and Warranties. Any representation or warranty made or deemed made by the Maker to the Noteholder herein is incorrect in any material respect on the date as of which such representation or warranty was made or deemed made.
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6.3 Bankruptcy.
(a) the Maker commences any case, proceeding or other action (i) under any existing or future law relating to bankruptcy, insolvency, reorganization, or other relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Maker makes a general assignment for the benefit of its creditors;
(b) there is commenced against the Maker any case, proceeding or other action of a nature referred to in clause (a) above which (i) results in the entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed, undischarged or unbonded for a period of 60 days;
(c) there is commenced against the Maker any case, proceeding or other action seeking issuance of a warrant of attachment, execution or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which has not been vacated, discharged, or stayed or bonded pending appeal within 30 days from the entry thereof;
(d) the Maker takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (a), (b) or (c) above; or
(e) the Maker is generally not, or is unable to, or admits in writing its inability to, pay its debts as they become due.
6.4 Judgments. A judgment or decree is entered against the Maker and such judgment or decree has not been vacated, discharged, stayed or bonded pending appeal within 15 days from the entry thereof.
6.5 Default. The Maker shall be in default under, or shall have received notice of default with respect to, any note, agreement, or instrument to which Maker shall be a party and such notice of default shall not have been rescinded or waived within five days from the date given.
7. Remedies. Upon the occurrence of an Event of Default and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Maker (a) declare the entire principal amount of this Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable and/or (b) exercise any or all of its rights, powers or remedies under applicable law; provided, however that, if an Event of Default described in Section 6.3(a) or 6.3(b) shall occur, the principal of and accrued interest on the Loan shall become immediately due and payable without any notice, declaration or other act on the part of the Noteholder.
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8. Miscellaneous.
8.1 Notices.
(a) All notices, requests or other communications required or permitted to be delivered hereunder shall be delivered in writing to such address as a Party may from time to time specify in writing.
(b) Notices if (i) mailed by certified or registered mail or sent by hand or overnight courier service shall be deemed to have been given when received, (ii) sent by facsimile during the recipient's normal business hours shall be deemed to have been given when sent (and if sent after normal business hours shall be deemed to have been given at the opening of the recipient's business on the next business day) and (iii) sent by e-mail shall be deemed received upon the sender's receipt of an acknowledgment from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgment).
8.2 Expenses. The Maker shall reimburse the Noteholder on demand for all reasonable out-of-pocket costs, expenses and fees (including reasonable expenses and fees of its counsel) incurred by the Noteholder in connection with the transactions contemplated hereby including the negotiation, documentation and execution of this Note and the enforcement of the Noteholder's rights hereunder.
8.3 Governing Law. This Note and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Note and the transactions contemplated hereby shall be governed by the laws of the State of Illinois.
8.4 Submission to Jurisdiction.
(a) The Maker hereby irrevocably and unconditionally (i) agrees that any legal action, suit or proceeding arising out of or relating to this Note may be brought in the courts of the State of Illinois or of the United States of America for the Northern District of Illinois and (ii) submits to the exclusive jurisdiction of any such court in any such action, suit or proceeding. Final judgment against the Maker in any action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment.
(b) Nothing in this Section 8.4 shall affect the right of the Noteholder to (i) commence legal proceedings or otherwise sue the Maker in any other court having jurisdiction over the Maker or (ii) serve process upon the Maker in any manner authorized by the laws of any such jurisdiction.
8.5 Venue. The Maker irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Note in any court referred to in Section 8.4(a) and the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
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8.6 Waiver of Jury Trial. THE MAKER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY.
8.7 Counterparts; Integration; Effectiveness. This Note and any amendments, waivers, consents or supplements hereto may be executed in counterparts, each of which shall constitute an original, but all taken together shall constitute a single contract. This Note constitutes the entire contract between the Parties with respect to the subject matter hereof and supersede all previous agreements and understandings, oral or written, with respect thereto. Delivery of an executed counterpart of a signature page to this Note by facsimile or in electronic (i.e., "pdf" or "tif") format shall be effective as delivery of a manually executed counterpart of this Note.
8.8 Successors and Assigns. This Note may be assigned, transferred or negotiated by the Noteholder to any Person at any time without notice to or the consent of the Maker. The Maker may not assign or transfer this Note or any of its rights hereunder without the prior written consent of the Noteholder. This Note shall inure to the benefit of and be binding upon the parties hereto and their permitted assigns.
8.9 Waiver of Notice. The Maker hereby waives presentment, demand for payment, protest, notice of dishonor, notice of protest or nonpayment, notice of acceleration of maturity and diligence in connection with the enforcement of this Note or the taking of any action to collect sums owing hereunder.
8.10 Amendments and Waivers. No term of this Note may be waived, modified or amended except by an instrument in writing signed by both of the parties hereto. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given.
8.11 Headings. The headings of the various Sections and subsections herein are for reference only and shall not define, modify, expand or limit any of the terms or provisions hereof.
8.12 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising on the part of the Noteholder, of any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
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8.13 Severability. If any term or provision of this Note is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Note or invalidate or render unenforceable such term or provision in any other jurisdiction.
IN WITNESS WHEREOF, the Maker has executed this Note as of September 30, 2016.
CTI INDUSTRIES CORPORATION | ||
By: | /s/ Timothy Patterson | |
Authorized Officer | ||
Name: Timothy Patterson | ||
Title: Chief Financial Officer |
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EXHIBIT 10.2
Payment of the indebtedness evidenced by this instrument or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Harris Bank N.A. to the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender.
Payment of the indebtedness evidenced by this instrument or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Private Equity (U.S.), Inc., to the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender. |
PROMISSORY NOTE
FOR VALUE RECEIVED, and subject to the terms and conditions set forth herein, CTI Industries Corporation, an Illinois corporation (the "Maker"), hereby unconditionally promises to pay to the order of John H. Schwan or his assigns (the "Noteholder", and together with the Maker, the "Parties"), the principal amount of Five Hundred Thirty Thousand Dollars ($530,000) (the "Loan"), together with all accrued interest thereon, as provided in this Promissory Note (the "Note", as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms).
1. Definitions. Capitalized terms used herein shall have the meanings set forth in this Section 1.
"Applicable Rate" means the rate equal to Six percent (6%) per annum.
"Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in Chicago, Illinois are authorized or required by law to close.
"Default" means any of the events specified in Section 6 which constitutes an Event of Default or which, upon the giving of notice, the lapse of time, or both pursuant to Section 6 would, unless cured or waived, become an Event of Default.
"Default Rate" means, at any time, the Applicable Rate plus 2%.
"Event of Default" has the meaning set forth in Section 6.
"Governmental Authority" means the government of any nation or any political subdivision thereof, whether at the national, state, territorial, provincial, municipal or any other level, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of, or pertaining to, government (including any supranational bodies such as the European Union or the European Central Bank).
"Law" as to any Person, means any law (including common law), statute, ordinance, treaty, rule, regulation, policy or requirement of any Governmental Authority and authoritative interpretations thereon, whether now or hereafter in effect, in each case, applicable to or binding on such Person or any of its properties or to which such Person or any of its properties is subject.
"Loan" has the meaning set forth in the introductory paragraph.
"Maker" has the meaning set forth in the introductory paragraph.
"Maturity Date" means the earlier of (a) the date that is six months after the latest maturity date for any indebtedness owing by the Maker under (i) a Credit Agreement dated as of April 29, 2010, between the Maker and BMO Harris Bank N.A. (as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms) or (ii) a Note and Warrant Purchase Agreement dated as of July 17, 2012, between the Maker and BMO Private Equity (U.S.), Inc. (as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with its terms), and (b) the date on which all amounts under this Note shall become due and payable pursuant to Section 7.
"Note" has the meaning set forth in the introductory paragraph.
"Noteholder" has the meaning set forth in the introductory paragraph.
"Order" as to any Person, means any order, decree, judgment, writ, injunction, settlement agreement, requirement or determination of an arbitrator or a court or other Governmental Authority, in each case, applicable to or binding on such Person or any of its properties or to which such Person or any of its properties is subject.
"Parties" has the meaning set forth in the introductory paragraph.
"Person" means any individual, corporation, limited liability company, trust, joint venture, association, company, limited or general partnership, unincorporated organization, Governmental Authority or other entity.
2. Final Payment Date; Optional Prepayments.
2.1 Final Payment Date. The aggregate unpaid principal amount of the Loan, all accrued and unpaid interest and all other amounts payable under this Note shall be due and payable on the Maturity Date.
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2.2 Optional Prepayment. The Maker may prepay the Loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. No prepaid amount may be reborrowed.
3. Interest.
3.1 Interest Rate. Except as otherwise provided herein, the outstanding principal amount of the Loan made hereunder shall bear interest at the Applicable Rate from the date the Loan was made until the Loan is paid in full, whether at maturity, upon acceleration, by prepayment or otherwise.
3.2 Interest Payment Dates. In accordance with Section 2.1, all accrued and unpaid interest shall be due and payable on the Maturity Date.
3.3 Default Interest. If any amount payable hereunder is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such overdue amount shall bear interest at the Default Rate from the date of such non-payment until such amount is paid in full.
3.4 Computation of Interest. All computations of interest shall be made on the basis of a year of 365 days, and the actual number of days elapsed. Interest shall accrue on the Loan on the day on which such Loan is made, and shall not accrue on the Loan on the day on which it is paid. Interest shall not accrue on accrued and unpaid interest.
4. Payment Mechanics.
4.1 Manner of Payment. All payments of interest and principal shall be made in lawful money of the United States of America no later than [12:00] PM on the date on which such payment is due by wire transfer of immediately available funds to the Noteholder's account at a bank specified by the Noteholder in writing to the Maker from time to time.
4.2 Application of Payments. All payments made hereunder shall be applied first, to the payment of any fees or charges outstanding hereunder, second, to accrued interest and third, to the payment of the principal amount outstanding under the Note.
4.3 Business Day Convention. Whenever any payment to be made hereunder shall be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension will be taken into account in calculating the amount of interest payable under this Note.
5. Representations and Warranties. The Maker hereby represents and warrants to the Noteholder on the date hereof as follows:
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5.1 Existence. The Maker is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its jurisdiction of organization.
5.2 Power and Authority. The Maker has the power and authority, and the legal right, to execute and deliver this Note and to perform its obligations hereunder.
5.3 Authorization; Execution and Delivery. The execution and delivery of this Note by the Maker and the performance of its obligations hereunder have been duly authorized by all necessary corporate action in accordance with all applicable Laws. The Maker has duly executed and delivered this Note.
5.4 No Approvals. Other than consent by BMO Harris N.A. and BMO Private Equity (US) Inc., which consent has been given, no consent or authorization of, filing with, notice to or other act by, or in respect of, any Governmental Authority or any other Person is required in order for the Maker to execute, deliver, or perform any of its obligations under this Note.
5.5 No Violations. The execution and delivery of this Note and the consummation by the Maker of the transactions contemplated hereby do not and will not (a) violate any provision of the Maker's organizational documents; (b) violate any Law or Order applicable to the Maker or by which any of its properties or assets may be bound; or (c) constitute a default under any material agreement or contract by which the Maker may be bound.
5.6 Enforceability. The Note is a valid, legal and binding obligation of the Maker, enforceable against the Maker in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles.
6. Events of Default. The occurrence of any of the following shall constitute an Event of Default hereunder:
6.1 Failure to Pay. The Maker fails to pay (a) any principal amount of the Loan when due; or (b) interest or any other amount when due and such failure continues for [5] days.
6.2 Breach of Representations and Warranties. Any representation or warranty made or deemed made by the Maker to the Noteholder herein is incorrect in any material respect on the date as of which such representation or warranty was made or deemed made.
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6.3 Bankruptcy.
(a) the Maker commences any case, proceeding or other action (i) under any existing or future law relating to bankruptcy, insolvency, reorganization, or other relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Maker makes a general assignment for the benefit of its creditors;
(b) there is commenced against the Maker any case, proceeding or other action of a nature referred to in clause (a) above which (i) results in the entry of an order for relief or any such adjudication or appointment or (ii) remains undismissed, undischarged or unbonded for a period of 60 days;
(c) there is commenced against the Maker any case, proceeding or other action seeking issuance of a warrant of attachment, execution or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which has not been vacated, discharged, or stayed or bonded pending appeal within 30 days from the entry thereof;
(d) the Maker takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (a), (b) or (c) above; or
(e) the Maker is generally not, or is unable to, or admits in writing its inability to, pay its debts as they become due.
6.4 Judgments. A judgment or decree is entered against the Maker and such judgment or decree has not been vacated, discharged, stayed or bonded pending appeal within 15 days from the entry thereof.
6.5 Default. The Maker shall be in default under, or shall have received notice of default with respect to, any note, agreement, or instrument to which Maker shall be a party and such notice of default shall not have been rescinded or waived within five days from the date given.
7. Remedies. Upon the occurrence of an Event of Default and at any time thereafter during the continuance of such Event of Default, the Noteholder may at its option, by written notice to the Maker (a) declare the entire principal amount of this Note, together with all accrued interest thereon and all other amounts payable hereunder, immediately due and payable and/or (b) exercise any or all of its rights, powers or remedies under applicable law; provided, however that, if an Event of Default described in Section 6.3(a) or 6.3(b) shall occur, the principal of and accrued interest on the Loan shall become immediately due and payable without any notice, declaration or other act on the part of the Noteholder.
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8. Miscellaneous.
8.1 Notices.
(a) All notices, requests or other communications required or permitted to be delivered hereunder shall be delivered in writing to such address as a Party may from time to time specify in writing.
(b) Notices if (i) mailed by certified or registered mail or sent by hand or overnight courier service shall be deemed to have been given when received, (ii) sent by facsimile during the recipient's normal business hours shall be deemed to have been given when sent (and if sent after normal business hours shall be deemed to have been given at the opening of the recipient's business on the next business day) and (iii) sent by e-mail shall be deemed received upon the sender's receipt of an acknowledgment from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgment).
8.2 Expenses. The Maker shall reimburse the Noteholder on demand for all reasonable out-of-pocket costs, expenses and fees (including reasonable expenses and fees of its counsel) incurred by the Noteholder in connection with the transactions contemplated hereby including the negotiation, documentation and execution of this Note and the enforcement of the Noteholder's rights hereunder.
8.3 Governing Law. This Note and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Note and the transactions contemplated hereby shall be governed by the laws of the State of Illinois.
8.4 Submission to Jurisdiction.
(a) The Maker hereby irrevocably and unconditionally (i) agrees that any legal action, suit or proceeding arising out of or relating to this Note may be brought in the courts of the State of Illinois or of the United States of America for the Northern District of Illinois and (ii) submits to the exclusive jurisdiction of any such court in any such action, suit or proceeding. Final judgment against the Maker in any action, suit or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment.
(b) Nothing in this Section 8.4 shall affect the right of the Noteholder to (i) commence legal proceedings or otherwise sue the Maker in any other court having jurisdiction over the Maker or (ii) serve process upon the Maker in any manner authorized by the laws of any such jurisdiction.
8.5 Venue. The Maker irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Note in any court referred to in Section 8.4(a) and the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
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8.6 Waiver of Jury Trial. THE MAKER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY RELATING TO THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY.
8.7 Counterparts; Integration; Effectiveness. This Note and any amendments, waivers, consents or supplements hereto may be executed in counterparts, each of which shall constitute an original, but all taken together shall constitute a single contract. This Note constitutes the entire contract between the Parties with respect to the subject matter hereof and supersede all previous agreements and understandings, oral or written, with respect thereto. Delivery of an executed counterpart of a signature page to this Note by facsimile or in electronic (i.e., "pdf" or "tif") format shall be effective as delivery of a manually executed counterpart of this Note.
8.8 Successors and Assigns. This Note may be assigned, transferred or negotiated by the Noteholder to any Person at any time without notice to or the consent of the Maker. The Maker may not assign or transfer this Note or any of its rights hereunder without the prior written consent of the Noteholder. This Note shall inure to the benefit of and be binding upon the parties hereto and their permitted assigns.
8.9 Waiver of Notice. The Maker hereby waives presentment, demand for payment, protest, notice of dishonor, notice of protest or nonpayment, notice of acceleration of maturity and diligence in connection with the enforcement of this Note or the taking of any action to collect sums owing hereunder.
8.10 Amendments and Waivers. No term of this Note may be waived, modified or amended except by an instrument in writing signed by both of the parties hereto. Any waiver of the terms hereof shall be effective only in the specific instance and for the specific purpose given.
8.11 Headings. The headings of the various Sections and subsections herein are for reference only and shall not define, modify, expand or limit any of the terms or provisions hereof.
8.12 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising on the part of the Noteholder, of any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
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8.13 Severability. If any term or provision of this Note is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Note or invalidate or render unenforceable such term or provision in any other jurisdiction.
IN WITNESS WHEREOF, the Maker has executed this Note as of September 30, 2016.
CTI INDUSTRIES CORPORATION | ||
By: | /s/ Timothy Patterson | |
Authorized Officer | ||
Name: Timothy Patterson | ||
Title: Chief Financial Officer |
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EXHIBIT 10.3
Amendment
No. 9
to Credit Agreement
This Amendment No. 9 to Credit Agreement is dated as of October 12, 2016, but effective as of September 30, 2016, 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 (as amended, modified, or supplemented before the effective date of this agreement, 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. Amendments to Credit Agreement. (a) The definition of “CTI Helium” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:
“ “CTI Helium” means CTI Supply, Inc., an Illinois corporation and a Wholly-Owned Subsidiary f/k/a CTI Helium, Inc.”
(b) The definition of “Fixed Charges” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:
“ “Fixed Charges” means, with reference to any period, the sum of (a) the aggregate amount of payments made or required to be made by the Borrower and its Subsidiaries, on a consolidated basis, during such period in respect of principal on all Indebtedness for Borrowed Money (whether at maturity, as a result of mandatory sinking fund redemption, scheduled payments or otherwise) other than (i) Revolving Loans, (ii) Intercompany Debt, and (iii) in the case of Subordinated Debt, principal reductions caused by the exercise of warrants by the holders of such debt and principal reductions made prior to the date of this Agreement, plus (b) total cash interest expense (including interest on Subordinated Debt but excluding interest on Intercompany Debt) for such period.”
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(c) The definition of “Total Funded Debt” in section 5.1 of the Credit Agreement is hereby amended to read in its entirety as follows:
“ “Total Funded Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness for Borrowed Money of the Borrower and its Subsidiaries, on a consolidated basis, at such time, plus all Indebtedness for Borrowed Money of any other person or entity which is directly or indirectly guaranteed by the Borrower or any of its Subsidiaries or which the Borrower or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Borrower or any of its Subsidiaries has otherwise assured a creditor against loss. For purposes of this Agreement, “Total Funded Debt” includes the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt, but “Total Funded Debt” does not include any Excluded VIE Debt or the Subordinated Debt owing to John H. Schwan and Stephen M. Merrick described in Section 8.7(f).”
(d) Section 5.1 of the Credit Agreement is hereby further amended by inserting each of the following new definitions in the appropriate alphabetical order:
“ “2016 CTI–Merrick Debt” means the Indebtedness for Borrowed Money of the Borrower owing to Stephen M. Merrick evidenced by a Promissory Note dated September 30, 2016, in the original principal amount of $370,000 made by the Borrower and payable to Stephen M. Merrick.
“2016 CTI–Schwan Debt” means the Indebtedness for Borrowed Money of the Borrower owing to John H. Schwan evidenced by a Promissory Note dated September 30, 2016, in the original principal amount of $530,000 made by the Borrower and payable to John H. Schwan.
“2016 Walmart Promotional Program” means a program and arrangement pursuant to which the Borrower will provide and sell to Walmart in November 2016 approximately 4,000 half-pallets of vacuum-sealing machines and rolls of film for sale at Walmart stores.
“Amendment No. 9 Effective Date” means September 30, 2016, which is the effective date of an Amendment No. 9 to Credit Agreement dated as of October 12, 2016, but effective as of September 30, 2016, between the Borrower, CTI Helium, and the Bank.”
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(e) Section 8.5(a) of the Credit Agreement is hereby amended to read in its entirety as follows:
“ (a) (i) from and after the Amendment No. 9 Effective date through and including the earlier of (A) the date as of which all Receivables from the 2016 Walmart Promotional Program have been paid to the Borrower (as determined by the Bank in its sole and absolute discretion based, in part, on delivery to the Bank of invoice documentation and proof of payment remittance from Walmart) and (B) February 28, 2017, as soon as available, and in any event by the first Business Day of each week, a Borrowing Base certificate in the form attached hereto as Exhibit F showing the computation of the Borrowing Base in reasonable detail as of the close of business on the last day of the immediately preceding week, together with an accounts receivable and accounts payable aging and an inventory report supporting the computation of the Borrowing Base, prepared by the Borrower and certified to by its chief financial officer or such other officer acceptable to the Bank; and (ii) thereafter, as soon as available, and in any event within fifteen (15) days after the last day of each calendar month, a Borrowing Base certificate in the form attached hereto as Exhibit F showing the computation of the Borrowing Base in reasonable detail as of the close of business on the last day of such month, together with an accounts receivable and accounts payable aging and an inventory report supporting the computation of the Borrowing Base, prepared by the Borrower and certified to by its chief financial officer or such other officer acceptable to the Bank;”
(f) Section 8.7 of the Credit Agreement is hereby amended as follows: (1) by deleting “and” from the end of section 8.7(h); (2) by renumbering existing section 8.7(i) as a new section 8.7(k); and (3) by inserting the following as new sections 8.7(i) and 8.7(j):
“ (i) the 2016 CTI–Merrick Debt existing on the Amendment No. 9 Effective Date in an aggregate principal amount not to exceed $370,000 as of the Amendment No. 9 Effective Date, as reduced by permitted payments or permitted deemed payments thereon, and provided that (A) the maturity date for the 2016 CTI–Merrick Debt shall be not earlier than the date that is six months after the latest of the Equipment Loan Final Maturity Date, the Mortgage Loan Final Maturity Date, and the Revolving Credit Termination Date, (B) the 2016 CTI–Merrick Debt shall be unsecured, (C) the 2016 CTI–Merrick Debt shall be Subordinated Debt, and (D) the first $900,000 of Receivables from the 2016 Walmart Promotional Program paid to the Borrower shall, subject to Section 8.21, be used by the Borrower to make one or more prepayments or deemed prepayments of all of the outstanding principal amount of the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt;
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(j) the 2016 CTI–Schwan Debt existing on the Amendment No. 9 Effective Date in an aggregate principal amount not to exceed $530,000 as of the Amendment No. 9 Effective Date, as reduced by permitted payments or permitted deemed payments thereon, and provided that (A) the maturity date for the 2016 CTI–Schwan Debt shall be not earlier than the date that is six months after the latest of the Equipment Loan Final Maturity Date, the Mortgage Loan Final Maturity Date, and the Revolving Credit Termination Date, (B) the 2016 CTI–Schwan Debt shall be unsecured, (C) the 2016 CTI–Schwan Debt shall be Subordinated Debt, and (D) the first $900,000 of Receivables from the 2016 Walmart Promotional Program paid to the Borrower shall, subject to Section 8.21w, be used by the Borrower to make one or more prepayments or deemed prepayments of all of the outstanding principal amount of the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt; and”
(g) Clause (b) of Section 8.21 of the Credit Agreement is hereby amended to read in its entirety as follows:
“(b) make any voluntary prepayment of Subordinated Debt or effect any voluntary redemption thereof, other than voluntary prepayments (or deemed voluntary prepayments) of the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt that are not prohibited under the terms of any instrument or agreement subordinating the same to the Obligations, or”
3. 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. |
4. 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; |
(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; |
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(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; 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. |
5. 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) | one or more subordination agreements with respect to the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt (each as defined in the Credit Agreement as in effect immediately after giving effect to this agreement), each in form and substance satisfactory to the Bank and duly executed by all applicable Persons; |
(C) | a copy of an amendment to the BMO Mezzanine NWPA and each of the other documents required to be delivered in accordance with that amendment, each in form and substance satisfactory to the Bank and duly executed by all applicable Persons; and |
(D) | 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. |
6. 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.
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(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.
(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. Receipt of an executed signature page to this agreement by facsimile or other electronic transmission will constitute effective delivery of that executed signature page. Electronic records of executed Loan Documents (including this agreement) maintained by the Bank will be deemed to be originals.
[Signature pages follow]
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The parties are signing this Amendment No. 9 to Credit Agreement as of the date stated in the introductory clause.
CTI Industries Corporation | ||
By: | /s/ Stephen Merrick | |
Name: | Stephen Merrick | |
Title: | President | |
CTI Supply, Inc. | ||
(f/k/a CTI Helium, Inc.) | ||
By: | /s/ Stephen Merrick | |
Name: | Stephen Merrick | |
Title: | President | |
BMO Harris BANK N.A. | ||
By: | Timothy J. Moran | |
Name: | Timothy J. Moran | |
Title: | Managing Director |
Signature page to Amendment No. 9 to Credit Agreement
EXHIBIT 10.4
Amendment
No. 4
to NOTE AND WARRANT PURCHASE Agreement
This Amendment No. 4 to Note and Warrant Purchase Agreement is dated as of October 12, 2016, but effective as of September 30, 2016, 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 entered into a Note and Warrant Purchase Agreement dated as of July 17, 2012 (as amended, restated, supplemented or otherwise modified prior to the effective date hereof, the “Purchase Agreement”), under which, among other things, the Company sold to the Purchaser and the Purchaser purchased from the Company a note in the aggregate principal amount of $5,000,000.
In connection with the Purchase Agreement, 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 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. Amendments to Purchase Agreement. (a) The definition of “CTI Helium” in section 5.1 of the Purchase Agreement is hereby amended to read in its entirety as follows:
“ “CTI Helium” means CTI Supply, Inc., an Illinois corporation and a Wholly-Owned Subsidiary f/k/a CTI Helium, Inc.”
(b) The definition of “Fixed Charges” in section 5.1 of the Purchase Agreement is hereby amended to read in its entirety as follows:
“ “Fixed Charges” means, with reference to any period, the sum of (a) the aggregate amount of payments made or required to be made by the Company and its Subsidiaries, on a consolidated basis, during such period in respect of principal on all Indebtedness for Borrowed Money (whether at maturity, as a result of mandatory sinking fund redemption, scheduled payments or otherwise) other than (i) Revolving Loans (as defined in the Senior Credit Agreement), (ii) Intercompany Debt, and (iii) in the case of Subordinated Debt, principal reductions caused by the exercise of warrants by the holders of such debt and principal reductions made prior to the date of this Agreement, plus (b) total cash interest expense (including interest on Subordinated Debt but excluding interest on Intercompany Debt) for such period.”
(c) The definition of “Total Funded Debt” in section 5.1 of the Purchase Agreement is hereby amended to read in its entirety as follows:
“ “Total Funded Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness for Borrowed Money of the Company and its Subsidiaries, on a consolidated basis, at such time, plus all Indebtedness for Borrowed Money of any other person or entity which is directly or indirectly guaranteed by the Company or any of its Subsidiaries or which the Company or any of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Company or any of its Subsidiaries has otherwise assured a creditor against loss. For purposes of this Agreement, “Total Funded Debt” includes the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt, but “Total Funded Debt” does not include any Excluded Flexo VIE Debt or the Subordinated Debt owing to John H. Schwan and Stephen M. Merrick described in Section 8.7(f).”
(d) Section 5.1 of the Purchase Agreement is hereby further amended by inserting each of the following new definitions in the appropriate alphabetical order:
“ “2016 CTI-Merrick Debt” means the Indebtedness for Borrowed Money of the Company owing to Stephen M. Merrick evidenced by a Promissory Note dated September 30, 2016, in the original principal amount of $370,000 made by the Company and payable to Stephen M. Merrick.
“2016 CTI-Schwan Debt” means the Indebtedness for Borrowed Money of the Company owing to John H. Schwan evidenced by a Promissory Note dated September 30, 2016, in the original principal amount of $530,000 made by the Company and payable to John H. Schwan.
“2016 Walmart Promotional Program” means a program and arrangement pursuant to which the Company will provide and sell to Walmart in November 2016 approximately 4,000 half-pallets of vacuum-sealing machines and rolls of film for sale at Walmart stores.
“Amendment No. 4 Effective Date” means September 30, 2016, which is the effective date of an Amendment No. 4 to Note and Warrant Purchase Agreement dated as of October 12, 2016, but effective as of September 30, 2016, between the Company, CTI Helium, and the Purchaser.”
(e) Section 8.5(a) of the Purchase Agreement is hereby amended to read in its entirety as follows:
“(a) (i) from and after the Amendment No. 4 Effective Date and through and including the earlier of (A) the date as of which all Receivables (as such term is defined in the Senior Credit Agreement) from the 2016 Walmart Promotional Program have been paid to the Company (as determined by Purchaser in its sole and absolute discretion based, in part, on delivery to the Purchaser of invoice documentation and proof of payment remittance from Walmart) and (B) February 28, 2017, concurrently with delivery to the Senior Lender, and in any event by the first Business Day of each week, a copy of the Borrowing Base certificate in the form attached as Exhibit F to the Senior Credit Agreement showing the computation of the Borrowing Base in reasonable detail as of the close of business on the last day of the immediately preceding week, together with an accounts receivable and accounts payable aging and an inventory report supporting the computation of the Borrowing Base, prepared by the Company and certified to by its chief financial officer or such other officer acceptable to the Purchaser; and (ii) thereafter, concurrently with delivery to the Senior Lender, and in any event within fifteen (15) days after the last day of each calendar month, a copy of the Borrowing Base certificate in the form attached as Exhibit F to the Senior Credit Agreement showing the computation of the Borrowing Base in reasonable detail as of the close of business on the last day of such month, together with an accounts receivable and accounts payable aging and an inventory report supporting the computation of the Borrowing Base, prepared by the Company and certified to by its chief financial officer or such other officer acceptable to the Purchaser;”
(f) Section 8.7 of the Purchase Agreement is hereby amended as follows: (1) by deleting “and” from the end of section 8.7(h); (2) by renumbering existing section 8.7(i) as a new section 8.7(k); and (3) by inserting the following as new sections 8.7(i) and 8.7(j):
“(i) the 2016 CTI-Merrick Debt existing on the Amendment No. 4 Effective Date in an aggregate principal amount not to exceed $370,000 as of the Amendment No. 4 Effective Date, as reduced by permitted payments or permitted deemed payments thereon, and provided that (A) the maturity date for the 2016 CTI-Merrick Debt shall be not earlier than the date that is six months after the Maturity Date, (B) the 2016 CTI-Merrick Debt shall be unsecured, (C) the 2016 CTI-Merrick Debt shall be Subordinated Debt and (D) the first $900,000 of Receivables (as such term is defined in the Senior Credit Agreement) from the 2016 Walmart Promotional Program paid to the Company shall, subject to Section 8.21, be used by the Company to make one or more prepayments or deemed prepayments of all of the outstanding principal amount of the 2016 CTI-Merrick Debt and the 2016 CTI-Schwan Debt;
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(j) the 2016 CTI-Schwan Debt existing on the Amendment No. 4 Effective Date in an aggregate principal amount not to exceed $530,000 as of the Amendment No. 4 Effective Date, as reduced by permitted payments or permitted deemed payments thereon, and provided that (A) the maturity date for the 2016 CTI-Schwan Debt shall be not earlier than the date that is six months after the Maturity Date, (B) the 2016 CTI-Schwan Debt shall be unsecured, (C) the 2016 CTI-Schwan Debt shall be Subordinated Debt and (D) the first $900,000 of Receivables (as such term is defined in the Senior Credit Agreement) from the 2016 Walmart Promotional Program paid to the Company shall, subject to Section 8.21, be used by the Company to make one or more prepayments or deemed prepayments of all of the outstanding principal amount of the 2016 CTI-Merrick Debt and the 2016 CTI-Schwan Debt; and”
(g) Clause (b) of Section 8.21 of the Purchase Agreement is hereby amended and restated in its entirety to read as follows:
“(b) make any voluntary prepayment of Subordinated Debt or effect any voluntary redemption thereof other than voluntary prepayments (or deemed voluntary prepayments) of the 2016 CTI-Merrick Debt and the 2016 CTI-Schwan Debt that are not prohibited under the terms of any instrument or agreement subordinating the same to the Obligations, or”
3. 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: |
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(A) | impair or affect the liability of the Subsidiary Guarantor to the Purchaser 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 Note and the other Operative Documents remain true and correct as of the date of this agreement. |
4. 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, and Section 6 of the Senior Credit Agreement, as amended, in each case 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; and |
(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. |
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5. 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) | one or more subordination agreements with respect to the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt (each as defined in the Purchase Agreement as in effect immediately after giving effect to this agreement), each in form and substance satisfactory to the Purchaser and duly executed by all applicable Persons; |
(C) | a copy of an amendment to the Senior Credit Agreement and each of the other documents required to be delivered in accordance with that amendment, each in form and substance satisfactory to the Purchaser and duly executed by all applicable Persons; 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. |
6. 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.
(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.
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(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 Purchaser 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 Purchaser 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. Receipt of an executed signature page to this agreement by facsimile or other electronic transmission will constitute effective delivery of that executed signature page. Electronic records of executed Operative Documents (including this agreement) maintained by the Purchaser will be deemed to be originals.
[Signature pages follow]
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(Signature Page to Amendment No. 4 to Note and Warrant Purchase Agreement)
The parties are signing this Amendment No. 4 to Note and Warrant Purchase Agreement as of the date stated in the introductory clause.
CTI INDUSTRIES CORPORATION | ||
By: | /s/ Stephen Merrick | |
Name: Stephen Merrick | ||
Title: President | ||
CTI SUPPLY, INC. | ||
(f/k/a CTI Helium, Inc.) | ||
By: | /s/ Stephen Merrick | |
Name: Stephen Merrick | ||
Title: President | ||
BMO PRIVATE EQUITY (U.S.), INC. | ||
By: | /s/Serkan Eskinazi | |
Name: Serkan Eskinazi | ||
Title: President |
EXHIBIT 10.5
SUBORDINATION AGREEMENT
(2016 CTI–Shareholder Debt)
This Subordination Agreement made and entered into as of October 12, 2016, but effective as of September 30, 2016 (as amended, restated, supplemented or otherwise modified from time to time, this “Agreement”), is by and among CTI Industries CORPORATION, an Illinois corporation (the “Debtor”), Stephen M. Merrick, an individual (“Merrick”), John H. Schwan, an individual (“Schwan” and, together with Merrick, each a “Subordinated Creditor”), and BMO Harris Bank N.A., a national banking association (the “Bank”).
RECITALS:
A. Pursuant to that certain Credit Agreement dated as of April 29, 2010 (as amended, restated, supplemented, or otherwise modified from time to time, the “Credit Agreement”), by and between the Debtor and the Bank, the Bank has agreed to make available to the Debtor the Loans, as evidenced by the Notes, on the terms and subject to the conditions set forth in the Credit Agreement.
B. Pursuant to a Promissory Note dated September 30, 2016, in the original principal amount of $370,000 made by the Debtor and payable to Merrick (the “2016 CTI–Merrick Note”), and a Promissory Note dated September 30, 2016, in the original principal amount of $530,000 made by the Debtor and payable to Schwan (the “2016 CTI–Schwan Note” and, together with the 2016 CTI–Merrick Note, each a “Subordinated Debt Instrument”), the Debtor is or will be indebted in various amounts to the Subordinated Creditors.
C. The Debtor’s incurring the Subordinated Debt requires the Bank’s consent, and it is a condition the Bank’s consent that the Debtor and the Subordinated Creditors deliver this Agreement.
D. Therefore, the Debtor, the Subordinated Creditors, and the Bank now desire to enter into this Agreement.
AGREEMENTS:
In consideration of the Recitals and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
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1. Definitions. Capitalized terms not otherwise defined herein (including the Recitals) have the meaning assigned to such terms in the Credit Agreement. As used herein, the following terms have the following meanings:
(a) “2016 Merrick–BMO Debt” means the indebtedness of Merrick owing to the Bank evidenced by, among other documents, the 2016 Merrick–BMO Line of Credit Agreement and a Promissory Note dated September 30, 2016, in the original principal amount of $1,152,000 made by Merrick and payable to the Bank.
(b) “2016 Merrick–BMO Line of Credit Agreement” means a Line of Credit Agreement entered into as of September 30, 2016, by and between Merrick and the Bank.
(c) “2016 Schwan–BMO Debt” means the indebtedness of Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, owing to the Bank evidenced by, among other documents, the 2016 Schwan–BMO Line of Credit Agreement and a Promissory Note dated September 30, 2016, in the original principal amount of $2,250,000 made by Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, and payable to the Bank.
(d) “2016 Schwan–BMO Line of Credit Agreement” means a Line of Credit Agreement entered into as of September 30, 2016, by and between Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, and the Bank.
(e) “2016 Walmart Promotional Program” means a program and arrangement pursuant to which the Debtor will provide and sell to Walmart in November 2016 approximately 4,000 half-pallets of vacuum-sealing machines and rolls of film for sale at Walmart stores.
(f) “Merrick Bridge Repayment” means the “Bridge Repayment” under and as defined in the 2016 Merrick–BMO Line of Credit Agreement, as in effect on October 12, 2016.
(g) “Schwan Bridge Repayment” means the “Bridge Repayment” under and as defined in the 2016 Schwan–BMO Line of Credit Agreement, as in effect on October 12, 2016.
(h) “Subordinated Debt” means all of the indebtedness, obligations, and liabilities of the Debtor to the Subordinated Creditors evidenced by the Subordinated Debt Instruments.
(i) “Superior Debt” means all liabilities, indebtedness and obligations of the Debtor to the Bank, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and whether created directly or acquired by assignment or otherwise, including, but not limited to, all indebtedness, obligations and liabilities of the Borrower to the Bank under the Credit Agreement, the Notes, or any other agreement, document, or instrument referred to in Section 3 of the Credit Agreement.
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2. Subordination.
(a) Subordination of the Subordinated Debt. Each Subordinated Creditor postpones and subordinates to the extent and in the manner provided in this Agreement all of such Subordinated Creditor’s Subordinated Debt to the payment of all of the Superior Debt. Each Subordinated Creditor shall insure that any instrument or document evidencing such Subordinated Creditor’s Subordinated Debt shall bear the following legend:
Payment of the indebtedness evidenced by this instrument or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Harris Bank N.A. to the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender.
The Debtor’s and each Subordinated Creditor’s books shall be marked to evidence subordination of all of the Subordinated Debt to the Superior Debt. The Bank is authorized to examine such books from time to time and to make any notations required by this Agreement. All instruments and documents evidencing the Subordinated Debt shall, upon request, be delivered to the Bank properly assigned or endorsed to the Bank. Nothing contained in this Agreement shall affect the validity of the Subordinated Debt.
(b) Subordination of the Liens Securing the Subordinated Debt. Each Subordinated Creditor (i) acknowledges that, as of the date hereof, such Subordinated Creditor has no lien, security interest in, or other right to, any property of the Debtor, and (ii) covenants that it will not obtain any lien, security interest in, or other right to, any property of the Debtor without the Bank’s prior written consent. To the extent that, notwithstanding the foregoing acknowledgment and covenant, any Subordinated Creditor acquires any lien, security interest in, or other right to, any of the Subordinated Creditor Collateral (as hereinafter defined), each Subordinated Creditor expressly subordinates all of its rights in any property of the Debtor, real or personal, now or later securing the Subordinated Debt (the “Subordinated Creditor Collateral”), to all present and future rights of the Bank in any of the Subordinated Creditor Collateral to secure the Superior Debt, without regard to the time or order of attachment or perfection of any security interest, the time or order of filing any financing statement, or the giving or failure to give any notice of the acquisition or expected acquisition of any purchase money security interest. Each Subordinated Creditor consents to the creation and continuance of all present and future security interests of the Bank in the Subordinated Creditor Collateral to secure the Superior Debt and to the enforcement of those security interests, including the removal of the Subordinated Creditor Collateral from the real property of the Debtor. This subordination as to the Subordinated Creditor Collateral is intended to define the rights and duties of the Bank and the Subordinated Creditors; it is not intended that any third party shall benefit from it. If the effect of any provision of this subordination would be to give any third party a priority status to which that party would not otherwise be entitled, that provision shall, to the extent necessary to avoid that priority, be given no effect and the rights and priorities of the Bank and the Subordinated Creditors shall be determined in accordance with applicable law.
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3. Payments on Subordinated Debt.
(a) Limitations. Except as permitted by Section 3(c), until all the Superior Debt is paid in full in cash: (i) the Debtor shall not, directly or indirectly, make any payments on account of or (other than the liens securing the Subordinated Creditor Collateral) grant a security interest in, mortgage, assign, or transfer, any properties to secure or satisfy any part of the Subordinated Debt; (ii) no Subordinated Creditor shall demand or accept from the Debtor or any other person any such payment or collateral or cancel, set off or otherwise discharge any part of the Subordinated Debt; and (iii) neither the Debtor nor any Subordinated Creditor shall otherwise take or permit any action prejudicial to or inconsistent with the Bank’s priority position over the Subordinated Creditors created by this Agreement.
(b) Payments Received. If any payment (other than a payment permitted by this Agreement or the Credit Agreement) on account of or any collateral for any part of the Subordinated Debt is received by any Subordinated Creditor, such payment or collateral shall be delivered forthwith to the Bank by such Subordinated Creditor for application to the Superior Debt, in the form received except for the addition of any endorsement or assignment necessary to effect transfer of all rights therein to the Bank. The Bank is irrevocably authorized (but not required), and each Subordinated Creditor does hereby irrevocably appoint the Bank, or any of its officers or employees on behalf of the Bank as the attorney-in-fact for such Subordinated Creditor in connection with the Subordinated Debt, to supply any required endorsement or assignment which may have been omitted. Until so delivered any such payment or collateral shall be held by the recipient in trust for the Bank and shall not be commingled with other funds or property of the recipient.
(c) Permitted Payments.
(i) Subject to the other provisions of this Section 3(c), the Debtor shall be permitted to make, and the Subordinated Creditors shall be permitted to accept from the Debtor, one or more prepayments of principal of the Subordinated Debt, so long as (A) the Debtor has delivered to the Bank evidence satisfactory to the Bank, in its sole and absolute discretion, that that prepayment is being funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program (which evidence might include, but will not necessarily be limited to, invoice documentation and proof of payment remittance from Walmart), (B) that prepayment is funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program, and (C) that prepayment is made on or before February 28, 2017.
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(ii) Subject to the other provisions of this Section 3(c), the Debtor shall be permitted to make, and the Subordinated Creditors shall be permitted to accept from the Debtor, one or more prepayments of accrued interest on the Subordinated Debt, so long as (A) the Debtor has delivered to the Bank evidence satisfactory to the Bank, in its sole and absolute discretion, that that prepayment is being funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program (which evidence might include, but will not necessarily be limited to, invoice documentation and proof of payment remittance from Walmart), (B) that prepayment is funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program, (C) that prepayment is made on or before February 28, 2017, and (D) the outstanding principal balance of the Subordinated Debt has been paid in full in cash.
(iii) The Debtor shall not be permitted to make, and the Subordinated Creditors shall not be permitted to accept from the Debtor, payments in cash of any accrued interest on the Subordinated Debt other than in accordance with Section 3(c)(ii), but interest may accrue and continue to accrue on the Subordinated Debt in accordance with the Subordinated Debt Instruments. No such accrued interest may be capitalized or otherwise added to the outstanding principal balance of the Subordinated Debt, and no such accrued interest may itself bear interest under the Subordinated Debt Instruments.
(iv) Until the Merrick Bridge Repayment is paid in full in cash, the Debtor shall, in lieu of making any prepayment of the Subordinated Debt evidenced by the 2016 CTI–Merrick Note that is permitted to be made in accordance with Section 3(c)(i) or 3(c)(ii), pay to the Bank the amount of that permitted prepayment as a payment or prepayment of the Merrick Bridge Repayment, and any such payment or prepayment paid to the Bank will be deemed a prepayment, in like amount, of the Subordinated Debt evidenced by the 2016 CTI–Merrick Note.
(v) Until the Schwan Bridge Repayment is paid in full in cash, the Debtor shall, in lieu of making any prepayment of the Subordinated Debt evidenced by the 2016 CTI–Schwan Note that is permitted to be made in accordance with Section 3(c)(i) or 3(c)(ii), pay to the Bank the amount of that permitted prepayment as a payment or prepayment of the Schwan Bridge Repayment, and any such payment or prepayment paid to the Bank will be deemed a prepayment, in like amount, of the Subordinated Debt evidenced by the 2016 CTI–Schwan Note.
(vi) Unless otherwise agreed in writing by each Subordinated Creditor, the Debtor, and the Bank, all prepayments of the Subordinated Debt permitted to be made in accordance Section 3(c)(i) or 3(c)(ii) (and all payments or prepayments of the Merrick Bridge Repayment or the Schwan Bridge Repayment to be made in lieu of any such permitted prepayment in accordance with Section 3(c)(iv) or 3(c)(v), respectively) must be made ratably to the Subordinated Creditors (or to the Bank, as applicable) based on the outstanding principal balance of the Subordinated Debt owing from the Debtor to each Subordinated Creditor.
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4. Collection of the Subordinated Debt, Bankruptcy, Etc. Until all of the Superior Debt is paid in full in cash, no Subordinated Creditor shall, without the prior written consent of the Bank, accelerate the maturity of the Subordinated Debt, initiate or join with any other creditor of the Debtor in initiating any proceedings, voluntary or involuntary, for the collection of the Subordinated Debt or for the distribution, division or application of all or part of the assets of the Debtor or the proceeds thereof, whether such proceedings be for the liquidation, dissolution or winding up of the Debtor or the Debtor’s business, receivership, insolvency or bankruptcy proceedings, an assignment for the benefit of creditors or proceedings by or against the Debtor for relief under any bankruptcy, reorganization or insolvency law or any law relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangement, composition, extension or otherwise. The Bank is irrevocably authorized (but not required), and each Subordinated Creditor does hereby irrevocably appoint the Bank, or any of its officers or employees on behalf of the Bank as the attorney-in-fact for such Subordinated Creditor in connection with the Subordinated Debt, at its option, at any meeting of the creditors of the Debtor or in any such proceeding or any proceeding initiated by the Debtor:
(a) to enforce claims comprising the Subordinated Debt either in its own name or in the name of the Subordinated Creditors, by proof of debt, proof of claim, suit or otherwise;
(b) to collect any assets of the Debtor distributed, divided or applied by way of dividend or payment, or any securities issued, on account of the Subordinated Debt and apply the same, or the proceeds of any realization upon the same the Bank in its discretion elects to effect, to the Superior Debt until all of the Superior Debt has been paid in full in cash, rendering any surplus to the Subordinated Creditors;
(c) to vote claims comprising the Subordinated Debt to accept or reject any plan of partial or complete liquidation, reorganization, arrangement, composition or extension; and
(d) to take generally any action in connection with any such meeting or proceeding which any Subordinated Creditor might otherwise take.
5. Warranties and Representations Concerning Subordinated Debt.
(a) The Debtor and the Subordinated Creditors jointly and severally represent and warrant that (i) no part of Subordinated Debt is evidenced by any instrument, security or other writing which has not previously been or is not concurrently being deposited with the Bank (if requested by the Bank), (ii) the Subordinated Creditors are the lawful owner of the Subordinated Debt and no part thereof has been assigned to or subordinated or subjected to any other security interest in favor of anyone other than the Bank, and (iii) as of the date hereof, (A) the aggregate outstanding principal balance of Subordinated Debt owing from the Debtor to Schwan is $530,000 and (B) the aggregate outstanding principal balance of Subordinated Debt owing from the Debtor to Merrick is $370,000.
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(b) Until all of the Superior Debt has been paid in full in cash, (i) no Subordinated Creditor shall assign or subordinate any part of the Subordinated Debt except to or in favor of the Bank; and (ii) except as set forth in Section 8, neither the Debtor nor the Subordinated Creditors shall agree to any amendment, supplement, waiver, or other modification of any of the terms of the Subordinated Debt.
6. Waivers. The Subordinated Creditors jointly and severally waive (a) any defense based on the adequacy of a remedy at law which might be asserted as a bar to the remedy of specific performance hereof in any action brought therefor by the Bank, (b) presentment, notice and protest in connection with all negotiable instruments evidencing the Superior Debt or the Subordinated Debt to which they may be parties, notice of the acceptance of this Agreement by the Bank, notice of any loans made, increases in the amount of, or interest rate on the Superior Debt, extensions granted or other action taken or postponement of the time of payment or any other indulgence in connection with the Superior Debt, to any substitution, exchange or release of collateral therefor and to the addition or release of any person primarily or secondarily liable thereon and (c) all rights, if any, to require a marshaling of the Debtor’s assets by the Bank or to require that the Bank first resort to some or any portion of any collateral for the Superior Debt before foreclosing upon, selling or otherwise realizing on any other portion thereof. No waiver is made by the Bank of any of its rights hereunder unless the same is in writing, and each waiver, if any, is a waiver only with respect to the specific instance involved.
7. Duration. This Agreement is a continuing agreement and the Bank may, without notice to the Subordinated Creditors, extend or continue credit and make other financial accommodations to or for the account of the Debtor in reliance upon this Agreement. This Agreement may be terminated by the Subordinated Creditors only if all of the Superior Debt is finally paid in full in cash.
8. Amendment of Subordinated Debt. Each Subordinated Creditor shall not modify or amend any note, agreement, or instrument evidencing or securing the Subordinated Debt, including, without limitation, the Subordinated Debt Instruments, without the prior written consent of the Bank.
9. Default. If any representation or warranty in this Agreement or in any instrument evidencing the Superior Debt proves to have been materially false when made or in the event of a breach by the Debtor or any Subordinated Creditor in the performance of any of the terms of this Agreement or upon the occurrence of any event of default under any instrument or agreement evidencing the Superior Debt, the Bank may, at its option, declare all Superior Debt to be forthwith due and payable, without presentment, demand, protest, or notice of any kind, notwithstanding any time or credit otherwise allowed. At any time any Subordinated Creditor fails to comply with any provision applicable to such Subordinated Creditor, the Bank may demand specific performance of this Agreement, whether or not the Debtor has complied with this Agreement, or exercise any other remedy available at law or equity.
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10. The Bank’s Duties Limited. The rights granted to the Bank in this Agreement are solely for its protection and nothing herein contained imposes on the Bank any duties with respect to any property of the Debtor or any Subordinated Creditor received hereunder beyond reasonable care in their custody and preservation while in the Bank’s possession. The Bank has no duty to preserve rights against prior parties in any instrument or chattel paper received hereunder.
11. Authority. The Debtor and the Subordinated Creditors jointly and severally represent and warrant that they have authority to enter into this Agreement and the persons signing for each party are authorized and directed to do so.
12. Modification. This Agreement may only be modified in writing signed by the Bank, the Debtor and each Subordinated Creditor.
13. Additional Documentation. The Debtor and each Subordinated Creditor shall execute and deliver to the Bank such further instruments and shall take such further action as the Bank may at any time or times reasonably request in order to carry out the provisions and intent of this Agreement.
14. Expenses. The Debtor agrees to pay the Bank on demand all expenses of every kind, including actual attorney’s fees, which the Bank may incur in enforcing or protecting any of their rights under this Agreement.
15. Persons Bound. This Agreement benefits the Bank and its successors and assigns, and binds the Debtor, each Subordinated Creditor and their respective successors and assigns.
16. Defects Waived. This Agreement is effective notwithstanding any defect in the validity or enforceability of any instrument or document evidencing the Superior Debt.
17. Notices. All notices, demands and communications provided for herein or made hereunder shall be delivered, or mailed first class with postage prepaid, or telefaxed, addressed in each case as follows, until some other address shall have been designated in a written notice given in like manner, and shall be deemed to have been given when so delivered, mailed or telefaxed:
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If to the Debtor: |
CTI Industries Corporation 22160 North Pepper Road Barrington, Illinois 60010 Attention: Stephen M. Merrick Telephone: (847) 620-1308 Facsimile: (847) 382-1219 | |
with a copy to: |
Vanasco, Genelly & Miller 33 North LaSalle Street, Suite 2200 Chicago, Illinois 60602 Attention: Gerald Miller Telephone: (312) 786-5100 Facsimile: (312) 786-5111 | |
If to the Subordinated Creditors: |
Stephen M. Merrick 22160 North Pepper Road Barrington, Illinois 60010 Facsimile: (847) 382-1219 | |
John H. Schwan 22160 North Pepper Road Barrington, Illinois 60010 Facsimile: (847) 382-1219 | ||
If to the Bank: |
BMO Harris Bank N.A. 111 West Monroe Street – 5W Chicago, Illinois 60603 Attention: Timothy J. Moran Telephone: (312) 461-2633 Facsimile: (312) 502-3922 | |
with copy to: |
McGuireWoods LLP 77 West Wacker Drive, Suite 4100 Chicago, Illinois 60601 Attention: Clayton Stallbaumer Telephone: (312) 641-2096 Facsimile: (312) 698-4556 |
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18. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission will constitute effective delivery of that executed signature page. Electronic records of executed Loan Documents (including with Agreement) maintained by the Bank will be deemed originals.
19. Law Governing. The validity, construction and enforcement of this Agreement are governed by the internal laws of the State of Illinois.
[Signature pages follow]
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The parties are signing this Subordination Agreement as of the date stated in the introductory clause.
CTI Industries Corporation, | ||
as Debtor | ||
By: | /s/ Stephen Merrick | |
Name: | Stephen Merrick | |
Title: | President | |
/s/ Stephen M. Merrick | ||
Stephen M. Merrick, as a Subordinated Creditor | ||
/s/ john h. schwan | ||
John H. Schwan, as a Subordinated Creditor | ||
BMO Harris BANK N.A., | ||
as the Bank | ||
By: | /s/ Timothy J. Moran | |
Name: | Timothy J. Moran | |
Title: | Managing Director |
Signature page to Subordination Agreement (2016 CTI–Shareholder Debt)
EXHIBIT 10.6
SUBORDINATION AGREEMENT
(2016 CTI–Shareholder Debt)
This Subordination Agreement made and entered into as of October 12, 2016, but effective as of September 30, 2016 (as amended, restated, supplemented or otherwise modified from time to time, this “Agreement”), is by and among CTI Industries CORPORATION, an Illinois corporation (the “Debtor”), Stephen M. Merrick, an individual (“Merrick”), John H. Schwan, an individual (“Schwan” and, together with Merrick, each a “Subordinated Creditor”), and BMO PRIVATE EQUITY (U.S.), INC., a Delaware corporation (the “Purchaser”).
RECITALS:
A. Pursuant to that certain Note and Warrant Purchase Agreement dated as of July 17, 2012 (as amended, restated, supplemented, or otherwise modified from time to time, the “Purchase Agreement”), by and between the Debtor and the Purchaser, the Purchaser has agreed, subject to certain terms and conditions, to among other things, purchase from the Debtor a senior secured subordinated promissory note in the aggregate principal amount of $5,000,000.
B. Pursuant to a Promissory Note dated September 30, 2016, in the original principal amount of $370,000 made by the Debtor and payable to Merrick (the “2016 CTI–Merrick Note”), and a Promissory Note dated September 30, 2016, in the original principal amount of $530,000 made by the Debtor and payable to Schwan (the “2016 CTI–Schwan Note” and, together with the 2016 CTI–Merrick Note, together with any further notes, instruments or agreements, collectively, the “Subordinated Debt Instruments”), the Debtor is or will be indebted in various amounts to the Subordinated Creditors.
C. The Debtor’s incurring the Subordinated Debt (as defined below) requires the Purchaser’s consent, and it is a condition the Purchaser’s consent that the Debtor and the Subordinated Creditors deliver this Agreement.
D. Therefore, the Debtor, the Subordinated Creditors, and the Purchaser now desire to enter into this Agreement.
AGREEMENTS:
In consideration of the Recitals and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein (including the Recitals) have the meaning assigned to such terms in the Purchase Agreement. As used herein, the following terms have the following meanings:
(a) “2016 Merrick–BMO Debt” means the indebtedness of Merrick owing to the Senior Lender evidenced by, among other documents, the 2016 Merrick–BMO Line of Credit Agreement and a Promissory Note dated September 30, 2016, in the original principal amount of $1,152,000 made by Merrick and payable to the Senior Lender.
(b) “2016 Merrick–BMO Line of Credit Agreement” means a Line of Credit Agreement entered into as of September 30, 2016, by and between Merrick and the Senior Lender, as amended from time to time.
(c) “2016 Schwan–BMO Debt” means the indebtedness of Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, owing to the Senior Lender evidenced by, among other documents, the 2016 Schwan–BMO Line of Credit Agreement and a Promissory Note dated September 30, 2016, in the original principal amount of $2,250,000 made by Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, and payable to the Senior Lender.
(d) “2016 Schwan–BMO Line of Credit Agreement” means a Line of Credit Agreement entered into as of September 30, 2016, by and between Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, and the Senior Lender, as amended from time to time.
(e) “2016 Walmart Promotional Program” means a program and arrangement pursuant to which the Debtor will provide and sell to Walmart in November 2016 approximately 4,000 half-pallets of vacuum-sealing machines and rolls of film for sale at Walmart stores.
(f) “Merrick Bridge Repayment” means the “Bridge Repayment” under and as defined in the 2016 Merrick–BMO Line of Credit Agreement, as in effect on or about October 12, 2016.
(g) “Schwan Bridge Repayment” means the “Bridge Repayment” under and as defined in the 2016 Schwan–BMO Line of Credit Agreement, as in effect on or about October 12, 2016.
(h) “Subordinated Debt” means all of the indebtedness, obligations, and liabilities of the Debtor to the Subordinated Creditors evidenced by the Subordinated Debt Instruments.
(i) “Superior Debt” means the Obligations, together with any and all liabilities, indebtedness and obligations of the Debtor to the Purchaser, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and whether created directly or acquired by assignment or otherwise, including, but not limited to, all indebtedness, obligations and liabilities of the Debtor to the Purchaser under the Purchase Agreement, the Note, or any other Operative Document.
2. Subordination.
(a) Subordination of the Subordinated Debt. Each Subordinated Creditor postpones and subordinates to the extent and in the manner provided in this Agreement all of such Subordinated Creditor’s Subordinated Debt to the payment of all of the Superior Debt. Each Subordinated Creditor shall insure that any instrument or document evidencing such Subordinated Creditor’s Subordinated Debt shall bear the following legend:
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Payment of the indebtedness evidenced by this instrument or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Private Equity (U.S.), Inc. to the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender.
The Debtor’s and each Subordinated Creditor’s books shall be marked to evidence subordination of all of the Subordinated Debt to the Superior Debt. The Purchaser is authorized to examine such books from time to time and to make any notations required by this Agreement. All instruments and documents evidencing the Subordinated Debt shall, upon request, be delivered to the Purchaser properly assigned or endorsed to the Purchaser. Nothing contained in this Agreement shall affect the validity of the Subordinated Debt.
(b) Subordination of the Liens Securing the Subordinated Debt. Each Subordinated Creditor (i) acknowledges that, as of the date hereof, such Subordinated Creditor has no lien, security interest in, or other right to, any property of the Debtor, and (ii) covenants that it will not obtain any lien, security interest in, or other right to, any property of the Debtor without the Purchaser’s prior written consent. To the extent that, notwithstanding the foregoing acknowledgment and covenant, any Subordinated Creditor acquires any lien, security interest in, or other right to, any of the Subordinated Creditor Collateral (as hereinafter defined), each Subordinated Creditor expressly subordinates all of its rights in any property of the Debtor, real or personal, now or later securing the Subordinated Debt (the “Subordinated Creditor Collateral”), to all present and future rights of the Purchaser in any of the Subordinated Creditor Collateral to secure the Superior Debt, without regard to the time or order of attachment or perfection of any security interest, the time or order of filing any financing statement, or the giving or failure to give any notice of the acquisition or expected acquisition of any purchase money security interest. Each Subordinated Creditor consents to the creation and continuance of all present and future security interests of the Purchaser in the Subordinated Creditor Collateral to secure the Superior Debt and to the enforcement of those security interests, including the removal of the Subordinated Creditor Collateral from the real property of the Debtor. This subordination as to the Subordinated Creditor Collateral is intended to define the rights and duties of the Purchaser and the Subordinated Creditors; it is not intended that any third party shall benefit from it. If the effect of any provision of this subordination would be to give any third party a priority status to which that party would not otherwise be entitled, that provision shall, to the extent necessary to avoid that priority, be given no effect and the rights and priorities of the Purchaser and the Subordinated Creditors shall be determined in accordance with applicable law.
3. Payments on Subordinated Debt.
(a) Limitations. Except as permitted by Section 3(c), until all the Superior Debt is paid in full in cash: (i) the Debtor shall not, directly or indirectly, make any payments on account of or (other than any liens securing the Subordinated Creditor Collateral) grant a security interest in, mortgage, assign, or transfer, any properties to secure or satisfy any part of the Subordinated Debt; (ii) no Subordinated Creditor shall demand or accept from the Debtor or any other person any such payment or collateral or cancel, set off or otherwise discharge any part of the Subordinated Debt; and (iii) neither the Debtor nor any Subordinated Creditor shall otherwise take or permit any action prejudicial to or inconsistent with the Purchaser’s priority position over the Subordinated Creditors created by this Agreement.
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(b) Payments Received. If any payment (other than a payment permitted by this Agreement or the Purchase Agreement) on account of or any collateral for any part of the Subordinated Debt is received by any Subordinated Creditor, such payment or collateral shall be delivered forthwith to the Senior Lender, in the event any Senior Debt is outstanding, and if not so outstanding, to the Purchaser by such Subordinated Creditor for application to the Senior Debt, if still outstanding, and, if not outstanding, for application to the Superior Debt, in the form received except for the addition of any endorsement or assignment necessary to effect transfer of all rights therein to the Purchaser. The Purchaser is irrevocably authorized (but not required), and each Subordinated Creditor does hereby irrevocably appoint the Purchaser, or any of its officers or employees on behalf of the Purchaser as the attorney-in-fact for such Subordinated Creditor in connection with the Subordinated Debt, to supply any required endorsement or assignment which may have been omitted. Until so delivered any such payment or collateral shall be held by the recipient in trust for the Purchaser and shall not be commingled with other funds or property of the recipient.
(c) Permitted Payments.
(i) Subject to the other provisions of this Section 3(c), the Debtor shall be permitted to make, and the Subordinated Creditors shall be permitted to accept from the Debtor, one or more voluntary prepayments of principal in respect of the Subordinated Debt, so long as (A) the Debtor has delivered to the Purchaser evidence satisfactory to the Purchaser, in its sole and absolute discretion, that that prepayment is being funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program (which evidence might include, but will not necessarily be limited to, invoice documentation and proof of payment remittance from Walmart), (B) that prepayment is funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program, and (C) that any such voluntary prepayment is made on or before February 28, 2017.
(ii) Subject to the other provisions of this Section 3(c), the Debtor shall be permitted to make, and the Subordinated Creditors shall be permitted to accept from the Debtor, (x) one or more voluntary prepayments of accrued interest in respect of the Subordinated Debt, so long as (A) the Debtor has delivered to the Purchaser evidence satisfactory to the Purchaser, in its sole and absolute discretion, that that prepayment is being funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program (which evidence might include, but will not necessarily be limited to, invoice documentation and proof of payment remittance from Walmart), (B) that prepayment is funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional Program, (C) that any such voluntary prepayment is made on or before February 28, 2017 and (D) that the outstanding principal balance of the Subordinated Debt has been paid in full in cash.
(iii) The Debtor shall not be permitted to make, and the Subordinated Creditors shall not be permitted to accept from the Debtor, payments in cash of any accrued interest on the Subordinated Debt other than in accordance with Section 3(c)(ii), but interest may accrue and continue to accrue on the Subordinated Debt in accordance with the Subordinated Debt Instruments. No such accrued interest may be capitalized or otherwise added to the outstanding principal balance of the Subordinated Debt, and no such accrued interest may itself bear interest under the Subordinated Debt Instruments.
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(iv) Until the Merrick Bridge Repayment is paid in full in cash, the Debtor shall, in lieu of making any prepayment of the Subordinated Debt evidenced by the 2016 CTI–Merrick Note that is permitted to be made in accordance with Section 3(c)(i) or (ii), pay to the Senior Lender the amount of that permitted prepayment as a payment or prepayment of the Merrick Bridge Repayment, and any such payment or prepayment paid to the Senior Lender will be deemed a prepayment, in like amount, of the Subordinated Debt evidenced by the 2016 CTI–Merrick Note.
(v) Until the Schwan Bridge Repayment is paid in full in cash, the Debtor shall, in lieu of making any prepayment of the Subordinated Debt evidenced by the 2016 CTI–Schwan Note that is permitted to be made in accordance with Section 3(c)(i) or (ii), pay to the Senior Lender the amount of that permitted prepayment as a payment or prepayment of the Schwan Bridge Repayment, and any such payment or prepayment paid to the Senior Lender will be deemed a prepayment, in like amount, of the Subordinated Debt evidenced by the 2016 CTI–Schwan Note.
(vi) Unless otherwise agreed in writing by each Subordinated Creditor, the Debtor, and the Purchaser, all prepayments of the Subordinated Debt permitted to be made in accordance Section 3(c)(i) or 3(c)(ii) (and all payments or prepayments of the Merrick Bridge Repayment or the Schwan Bridge Repayment to be made in lieu of any such permitted prepayment in accordance with Section 3(c)(iv) or 3(c)(v), respectively) must be made ratably to the Subordinated Creditors (or to the Senior Lender, as applicable) based on the outstanding principal balance of the Subordinated Debt owing from the Debtor to each Subordinated Creditor.
4. Collection of the Subordinated Debt, Bankruptcy, Etc. Until all of the Superior Debt is paid in full in cash, no Subordinated Creditor shall, without the prior written consent of the Purchaser, accelerate the maturity of the Subordinated Debt, initiate or join with any other creditor of the Debtor in initiating any proceedings, voluntary or involuntary, for the collection of the Subordinated Debt or for the distribution, division or application of all or part of the assets of the Debtor or the proceeds thereof, whether such proceedings be for the liquidation, dissolution or winding up of the Debtor or the Debtor’s business, receivership, insolvency or bankruptcy proceedings, an assignment for the benefit of creditors or proceedings by or against the Debtor for relief under any bankruptcy, reorganization or insolvency law or any law relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangement, composition, extension or otherwise. The Purchaser is irrevocably authorized (but not required), and each Subordinated Creditor does hereby irrevocably appoint the Purchaser, or any of its officers or employees on behalf of the Purchaser as the attorney-in-fact for such Subordinated Creditor in connection with the Subordinated Debt, at its option, at any meeting of the creditors of the Debtor or in any such proceeding or any proceeding initiated by the Debtor:
(a) to enforce claims comprising the Subordinated Debt either in its own name or in the name of the Subordinated Creditors, by proof of debt, proof of claim, suit or otherwise;
(b) to collect any assets of the Debtor distributed, divided or applied by way of dividend or payment, or any securities issued, on account of the Subordinated Debt and apply the same, or the proceeds of any realization upon the same the Purchaser in its discretion elects to effect, to the Superior Debt until all of the Superior Debt has been paid in full in cash, rendering any surplus to the Subordinated Creditors;
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(c) to vote claims comprising the Subordinated Debt to accept or reject any plan of partial or complete liquidation, reorganization, arrangement, composition or extension; and
(d) to take generally any action in connection with any such meeting or proceeding which any Subordinated Creditor might otherwise take.
5. Warranties and Representations Concerning Subordinated Debt.
(a) The Debtor and the Subordinated Creditors jointly and severally represent and warrant that (i) no part of Subordinated Debt is evidenced by any instrument, security or other writing which has not previously been or is not concurrently being deposited with the Purchaser (if requested by the Purchaser), (ii) the Subordinated Creditors are the lawful owner of the Subordinated Debt and no part thereof has been assigned to or subordinated or subjected to any other security interest in favor of anyone other than the Purchaser and the Senior Lender, and (iii) as of the date hereof, (A) the aggregate outstanding principal balance of Subordinated Debt owing from the Debtor to Schwan is $530,000 and (B) the aggregate outstanding principal balance of Subordinated Debt owing from the Debtor to Merrick is $370,000.
(b) Until all of the Superior Debt has been paid in full in cash, (i) no Subordinated Creditor shall assign or subordinate any part of the Subordinated Debt except to or in favor of the Purchaser and the Senior Lender; and (ii) except as set forth in Section 8, neither the Debtor nor the Subordinated Creditors shall agree to any amendment, supplement, waiver, or other modification of any of the terms of the Subordinated Debt.
6. Waivers. The Subordinated Creditors jointly and severally waive (a) any defense based on the adequacy of a remedy at law which might be asserted as a bar to the remedy of specific performance hereof in any action brought therefor by the Purchaser, (b) presentment, notice and protest in connection with all negotiable instruments evidencing the Superior Debt or the Subordinated Debt to which they may be parties, notice of the acceptance of this Agreement by the Purchaser, notice of any loans made, increases in the amount of, or interest rate on the Superior Debt, extensions granted or other action taken or postponement of the time of payment or any other indulgence in connection with the Superior Debt, to any substitution, exchange or release of collateral therefor and to the addition or release of any person primarily or secondarily liable thereon and (c) all rights, if any, to require a marshaling of the Debtor’s assets by the Purchaser or to require that the Purchaser first resort to some or any portion of any collateral for the Superior Debt before foreclosing upon, selling or otherwise realizing on any other portion thereof. No waiver is made by the Purchaser of any of its rights hereunder unless the same is in writing, and each waiver, if any, is a waiver only with respect to the specific instance involved.
7. Duration. This Agreement is a continuing agreement and the Purchaser may, without notice to the Subordinated Creditors, increase, extend or continue credit and make other financial accommodations to or for the account of the Debtor in reliance upon this Agreement. This Agreement may be terminated by the Subordinated Creditors only if all of the Superior Debt is finally paid in full in cash.
8. Amendment of Subordinated Debt. Each Subordinated Creditor shall not modify or amend any note, agreement, or instrument evidencing or securing the Subordinated Debt, including, without limitation, the Subordinated Debt Instruments, without the prior written consent of the Purchaser.
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9. Default. If any representation or warranty in this Agreement or in any instrument evidencing the Superior Debt proves to have been materially false when made or in the event of a breach by the Debtor or any Subordinated Creditor in the performance of any of the terms of this Agreement or upon the occurrence of any event of default under any instrument or agreement evidencing the Superior Debt, the Purchaser may, at its option, declare all Superior Debt to be forthwith due and payable, without presentment, demand, protest, or notice of any kind, notwithstanding any time or credit otherwise allowed. At any time any Subordinated Creditor fails to comply with any provision applicable to such Subordinated Creditor, the Purchaser may demand specific performance of this Agreement, whether or not the Debtor has complied with this Agreement, or exercise any other remedy available at law or equity.
10. The Purchaser’s Duties Limited. The rights granted to the Purchaser in this Agreement are solely for its protection and nothing herein contained imposes on the Purchaser any duties with respect to any property of the Debtor or any Subordinated Creditor received hereunder beyond reasonable care in their custody and preservation while in the Purchaser’s possession. The Purchaser has no duty to preserve rights against prior parties in any instrument or chattel paper received hereunder.
11. Authority. The Debtor and the Subordinated Creditors jointly and severally represent and warrant that they have authority to enter into this Agreement and the persons signing for each party are authorized and directed to do so.
12. Modification. This Agreement may only be modified in writing signed by the Purchaser, the Debtor and each Subordinated Creditor.
13. Additional Documentation. The Debtor and each Subordinated Creditor shall execute and deliver to the Purchaser such further instruments and shall take such further action as the Purchaser may at any time or times reasonably request in order to carry out the provisions and intent of this Agreement.
14. Expenses. The Debtor agrees to pay the Purchaser on demand all expenses of every kind, including actual attorney’s fees, which the Purchaser may incur in enforcing or protecting any of its rights under this Agreement.
15. Persons Bound. This Agreement benefits the Purchaser and its successors and assigns, and binds the Debtor, each Subordinated Creditor and their respective successors and assigns.
16. Defects Waived. This Agreement is effective notwithstanding any defect in the validity or enforceability of any instrument or document evidencing the Superior Debt.
17. Notices. All notices, demands and communications provided for herein or made hereunder shall be delivered, or mailed first class with postage prepaid, or telefaxed, addressed in each case as follows, until some other address shall have been designated in a written notice given in like manner, and shall be deemed to have been given when so delivered, mailed or telefaxed:
7 |
If to the Debtor: | CTI Industries Corporation | |
22160 North Pepper Road | ||
Barrington, Illinois 60010 | ||
Attention: | Stephen M. Merrick | |
Telephone: | (847) 620-1308 | |
Facsimile: | (847) 382-1219 | |
with a copy to: | Vanasco, Genelly & Miller | |
33 North LaSalle Street, Suite 2200 | ||
Chicago, Illinois 60602 | ||
Attention: | Gerald Miller | |
Telephone: | (312) 786-5100 | |
Facsimile: | (312) 786-5111 | |
If to the Subordinated | ||
Creditors: | Stephen M. Merrick | |
22160 North Pepper Road | ||
Barrington, Illinois 60010 | ||
Facsimile: | (847) 382-1219 | |
John H. Schwan | ||
22160 North Pepper Road | ||
Barrington, Illinois 60010 | ||
Facsimile: | (847) 382-1219 | |
If to the Purchaser: | BMO Private Equity (U.S.), Inc. | |
c/o BMO Mezzanine Fund | ||
111 West Monroe, 20E | ||
Chicago, Illinois 60603 | ||
Attention: | Jason Swanson and Serkan Eskinazi | |
Telephone: | (312) 293-8196 | |
Facsimile: | N/A | |
with copy to: | Vedder Price P.C. | |
222 North LaSalle Street, Suite 2400 | ||
Chicago, Illinois 60601 | ||
Attention: | Guy E. Snyder and Marie H. Godush | |
Telephone: | (312) 609-7500 | |
Facsimile: | (312) 609-5005 |
18. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. Receipt of an executed signature page to this agreement by facsimile or other electronic transmission will constitute effective delivery of that executed signature page. Electronic records of executed Operative Documents (including this agreement) maintained by the Purchaser will be deemed to be originals.
8 |
19. Law Governing. The validity, construction and enforcement of this Agreement are governed by the internal laws of the State of Illinois.
[Signature Page Follows]
9 |
The parties are signing this Subordination Agreement as of the date stated in the introductory clause.
CTI INDUSTRIES CORPORATION, | |
as Debtor | |
By: /s/ Stephen Merrick | |
Name: Stephen Merrick | |
Title: President | |
/s/ Stephen M. Merrick | |
STEPHEN M. MERRICK, as a Subordinated Creditor | |
/s/ John H. Schwan | |
John H. Schwan, as a Subordinated Creditor | |
BMO PRIVATE EQUITY (U.S.), INC., | |
as the Purchaser | |
By: /s/ Timothy J. Moran | |
Name: Timothy J. Moran | |
Title: Managing Director |
Signature page to Subordination Agreement (2016 CTI–Shareholder Debt)
EXHIBIT 31.1
CERTIFICATIONS
I, John H. Schwan, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 the condensed consolidated 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: November 14, 2016
/s/ John H. Schwan | |
John H. Schwan, | |
Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
I, Timothy S. Patterson, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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 the condensed consolidated 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: November 14, 2016
By: | /s/ Timothy S. Patterson | |
Timothy S. Patterson | ||
Chief Financial Officer | ||
Senior Vice President 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 Quarterly Report on Form 10-Q of CTI Industries Corporation (the “Company”) for the quarterly period ended September 30, 2016, 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 Senior Vice President Finance and Chief Financial Officer 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: November 14, 2016 | |
/s/ Timothy S. Patterson | |
Timothy S. Patterson | |
Chief Financial Officer | |
Senior Vice President Finance | |
Date: November 14, 2016 |
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-Q 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.
Document And Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Nov. 01, 2016 |
|
Document Information [Line Items] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2016 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q3 | |
Entity Registrant Name | CTI INDUSTRIES CORP | |
Entity Central Index Key | 0001042187 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Trading Symbol | CTIB | |
Entity Common Stock, Shares Outstanding | 3,524,354 |
Condensed Consolidated Statements of Comprehensive Income - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Net Sales | $ 13,476,157 | $ 14,880,820 | $ 42,831,655 | $ 43,476,981 |
Cost of Sales | 10,064,066 | 10,775,500 | 31,661,039 | 31,863,004 |
Gross profit | 3,412,091 | 4,105,320 | 11,170,616 | 11,613,977 |
Operating expenses: | ||||
General and administrative | 1,808,299 | 1,840,643 | 5,470,523 | 5,300,418 |
Selling | 977,928 | 862,587 | 3,162,083 | 2,425,677 |
Advertising and marketing | 581,143 | 689,244 | 1,643,852 | 2,005,643 |
Loss (gain) on sale of assets | (27,700) | 0 | (27,700) | 0 |
Total operating expenses | 3,339,670 | 3,392,474 | 10,248,758 | 9,731,738 |
Income from operations | 72,421 | 712,846 | 921,858 | 1,882,239 |
Other (expense) income: | ||||
Interest expense | (358,643) | (350,960) | (1,074,295) | (1,067,895) |
Interest income | 0 | 5,952 | 0 | 30,729 |
Change in fair value of warrants | 47,617 | 0 | (179,261) | 0 |
Foreign currency gain | 9,663 | 43,932 | 77,341 | 47,230 |
Total other expense, net | (301,363) | (301,076) | (1,176,215) | (989,936) |
Net (loss) income before taxes | (228,942) | 411,770 | (254,357) | 892,303 |
Income tax (benefit) expense | (28,655) | 161,280 | (16,804) | 386,514 |
Net (loss) income | (200,287) | 250,490 | (237,553) | 505,789 |
Less: Net (loss) income attributable to noncontrolling interest | (19,812) | 41,237 | 19,089 | (39,754) |
Net (loss) income attributable to CTI Industries Corporation | (180,475) | 209,253 | (256,642) | 545,543 |
Other Comprehensive (Loss) | ||||
Foreign currency adjustment | (236,133) | (547,475) | (840,144) | (1,009,986) |
Comprehensive (loss) | $ (416,608) | $ (338,222) | $ (1,096,786) | $ (464,443) |
Basic (loss) income per common share | $ (0.05) | $ 0.06 | $ (0.07) | $ 0.17 |
Diluted (loss) income per common share | $ (0.05) | $ 0.06 | $ (0.07) | $ 0.16 |
Weighted average number of shares and equivalent shares of common stock outstanding: | ||||
Basic | 3,541,582 | 3,301,116 | 3,541,582 | 3,301,116 |
Diluted | 3,714,239 | 3,446,808 | 3,703,732 | 3,447,938 |
Condensed Consolidated Statements of Cash Flows [Parenthetical] - USD ($) |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Repayment of related party debt | $ 0 | $ 2,000 |
Condensed Consolidated Earnings per Share - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
|
Average shares outstanding: (Basic) | ||||
Weighted average number of common shares outstanding | 3,541,582 | 3,301,116 | 3,541,582 | 3,301,116 |
Net income: | ||||
Net (loss) income attributable to CTI Industries Corporation | $ (180,475) | $ 209,253 | $ (256,642) | $ 545,543 |
Per share amount | $ (0.05) | $ 0.06 | $ (0.07) | $ 0.17 |
Average shares outstanding: (Diluted) | ||||
Weighted average number of common shares outstanding | 3,541,582 | 3,301,116 | 3,541,582 | 3,301,116 |
Effect of dilutive shares | 172,657 | 145,692 | 162,150 | 146,822 |
Weighted average number of shares and equivalent shares of common stock outstanding | 3,714,239 | 3,446,808 | 3,703,732 | 3,447,938 |
Net income: | ||||
Net (loss) income attributable to CTI Industries Corporation | $ (180,475) | $ 209,253 | $ (256,642) | $ 545,543 |
Per share amount | $ (0.05) | $ 0.06 | $ (0.07) | $ 0.16 |
Basis of Presentation |
9 Months Ended | |
---|---|---|
Sep. 30, 2016 | ||
Organization, Consolidation and Presentation Of Financial Statements [Abstract] | ||
Organization, Consolidation and Presentation Of Financial Statements Disclosure [Text Block] | Note 1 Basis of Presentation The accompanying condensed (a) consolidated balance sheet as of December 31, 2015, which has been derived from audited consolidated financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2015. Principles of consolidation and nature of operations: The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon products throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States. Variable Interest Entities (“VIE’s”): The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. There are three entities that have been consolidated as variable interest entities. Use of estimates: In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill. Earnings per share: Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period. As of September 30, 2016 and 2015, shares to be issued upon the exercise of options and warrants aggregated 288,048 and 343,548, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three and nine months ended September 30, 2016 and 2015 were 0 and 174,000, respectively, all of which were represented by options. Significant Accounting Policies: The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2015. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2016. Reclassification: Certain 2015 amounts have been reclassified to conform to the 2016 presentation. Recent Accounting Pronouncements: In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach. In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost . The ASU requires debt issuance costs associated with a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. An entity should apply the new guidance on a retrospective basis. We adopted this ASU effective with the first quarter of fiscal year 2016. The adoption of this accounting standard update did not have a material impact to our consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. We do not expect the adoption of this accounting standard update to have a material impact on our consolidated financial statements. In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , to eliminate the current requirements to classify deferred income tax assets and liabilities between current and noncurrent. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are continuing to evaluate the impact of ASU 2015-17 on our consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases ( Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, although early adoption is allowed. For all other entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. We are continuing to evaluate the impact of ASU 2016-02 on our consolidated financial statements and related disclosures. On March 30, 2016, the FASB issued Accounting Standards Updated No. 2016-09, Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company does not expect the adoption of this standard to have any impact on the Company’s consolidated financial statements. On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements. |
Stock-Based Compensation; Changes in Equity |
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Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disclosure of Compensation Related Costs, Share-based Payments [Text Block] | Note 2 Stock-Based Compensation; Changes in Equity The Company has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values. The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2016 and 2015. The expected volatility is based on historical volatility of the Company’s common stock. The Company’s net loss for the three months ended September 30, 2016 and net income in 2015 includes approximately $5,000 and $7,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the nine months ended September 30, 2016 and net income in 2015 includes approximately $29,000 and $25,000, respectively, of compensation costs related to share based payments. As of September 30, 2016 there is $31,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $5,000 of additional stock-based compensation expense to be recognized over the remainder of 2016, $15,000 to be recognized during 2017, $7,000 to be recognized during 2018, $3,000 to be recognized during 2019 and $1,000 to be recognized during 2020. As of September 30, 2016, the Company had three stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code, as well as for stock grants. On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) As of September 30, 2016, options for 250,000 shares had been granted and options for 148,000 shares remain outstanding.
On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“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. As of September 30, 2016, the Company was in compliance with all of the financial covenants under the Note and Warrant Purchase Agreement. On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement wherein the investors purchased 152,850 shares of common stock of the Company at a price of $6.00 per share. As additional consideration for the purchases of the shares in the offering, each investor received, with each share of common stock purchased, one-half of a warrant, with one warrant entitling the investor to purchase one share of the Company’s common stock at the price of $7.00. The warrants are exercisable between six months and three years from the investment date. As a result of the completion of the sale under the Purchase Agreement, warrants to purchase 76,425 shares of common stock at $7.00 per share were issued. In addition to the Purchase Agreement, the Company and each of the investors entered into a Registration Rights Agreement pursuant to which the Company agreed to file a Registration Statement with the SEC to register the common stock sold to the investors. A summary of the Company’s stock warrant activity and related information is as follows:
A summary of the Company’s stock option activity by grant date as of September 30, 2016 is as follows:
The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended September 30, 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on September 30, 2016. |
Legal Proceedings |
9 Months Ended | |
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Sep. 30, 2016 | ||
Commitments and Contingencies Disclosure [Abstract] | ||
Commitments and Contingencies Disclosure [Text Block] | Note 3 Legal Proceedings The Company is party to certain claims or actions arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, the resolution of these matters is not expected to have a significant effect on the future financial position or results of operations of the Company. |
Other Comprehensive Loss |
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Comprehensive Income (Loss) Note [Text Block] | Note 4 Other Comprehensive Loss In the three and nine months ended September 30, 2016 the company incurred other comprehensive losses of $236,000 and $840,000, respectively, all from foreign currency translation adjustments. The following table sets forth the accumulated balance of other comprehensive loss and each component.
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Inventories, Net |
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Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory Disclosure [Text Block] | Note 5 Inventories, Net
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Geographic Segment Data |
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Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Reporting Disclosure [Text Block] | Note 6 Geographic Segment Data The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company’s operations by geographic area is as follows:
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Concentration of Credit Risk |
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Risks and Uncertainties [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Concentration Risk Disclosure [Text Block] | Note 7 Concentration of Credit Risk Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company’s customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management’s expectations. During the three and nine months ended September 30, 2016 and 2015, there were two customers whose purchases represented more than 10% of the Company’s consolidated net sales, respectively. Sales to these customers for the three and nine months ended September 30, 2016 and 2015 are as follows:
As of September 30, 2016, the total amounts owed to the Company by these customers were approximately $1,411,000 or 13.9%, and $2,653,000 or 26.1%, of the Company’s consolidated net accounts receivable, respectively. The amounts owed at September 30, 2015 by these customers were approximately $1,957,000 or 19.3%, and $1,972,000 or 19.5% of the Company’s consolidated net accounts receivable, respectively. |
Related Party Transactions |
9 Months Ended | |
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Sep. 30, 2016 | ||
Related Party Transactions [Abstract] | ||
Related Party Transactions Disclosure [Text Block] | Note 8 Related Party Transactions Stephen M. Merrick, President of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which provides legal services to the Company. Legal fees paid by the Company to this firm for the three months ended September 30, 2016 and 2015, respectively, were $57,000 and $22,000. Legal fees paid by the Company to this firm for the nine months ended September 30, 2016 and 2015, respectively, were $128,000 and $114,000. Interest payments have been made or accrued to John H. Schwan, Chief Executive Officer of the Company, for loans made to the Company. During the three months ended September 30, 2016 and 2015, these interest accruals totaled $23,000 and $22,000, respectively. During the nine months ended September 30, 2016 and 2015, these interest accruals totaled $69,000 and $64,000, respectively. On July 1, 2011, Flexo Universal, S.R.L. de C.V. (“Flexo”) entered into a lease agreement with Venture Leasing S.A. de R.L. (“Venture Leasing Mexico”) for the lease of balloon production equipment financed and owned by Venture Leasing Mexico and used by Flexo for the production of latex balloons. Venture Leasing Mexico is wholly owned by entities owned by John H. Schwan, Chief Executive Officer of the Company and Stephen M. Merrick, President of the Company. Venture Leasing Mexico and Venture Leasing L.L.C., also owned by entities owned by Mr. Schwan and Mr. Merrick, are deemed variable interest entities and are consolidated with the accounts of the Company. During the three and nine months ended September 30, 2016, Flexo made lease payments to Venture Leasing Mexico totaling $0 and $65,000. During the three and nine months ended September 30, 2015, Flexo made lease payments to Venture Leasing Mexico totaling $36,000 and $108,000. In May 2016, Flexo purchased the balloon production equipment from Venture Leasing Mexico and the lease was terminated. John H. Schwan, Chief Executive Officer of the Company, through an investment entity, and Stephen M. Merrick, President of the Company, also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”). The Company owns a 28.5% interest in Clever Container. During the three months ended September 30, 2016 and 2015, Clever Container purchased various products from the Company in the amount of $191,000 and $127,000, respectively. During the nine months ended September 30, 2016 and 2015, Clever Container purchased various products from the Company in the amount of $669,000 and $352,000, respectively. As of September 30, 2016 and 2015, the balance of accounts receivable from Clever Container to the Company were $192,000 and $498,000, respectively. On September 30, 2016, John H. Schwan advanced to the Company the sum of $530,000 and on the same date, Stephen M. Merrick advanced to the Company the sum of $370,000 to provide short-term working capital to the Company to fund the Company’s obligation to purchase and produce inventory for a substantial order for vacuum sealing systems to be delivered in November 2016. In consideration of such advances, the Company issued a Promissory Note to Mr. Schwan in the principal amount of $530,000 and to Mr. Merrick in the amount of $370,000 dated September 30, 2016 and bearing interest at the rate of 6% per annum. Effective on the same date, Mr. Schwan and Mr. Merrick entered into Subordination Agreements with BMO Harris and BMO equity pursuant to which each of them agreed to subordinate the Company’s obligation to them under the Promissory Notes to the Company’s obligations to BMO Harris and BMO Equity, subject to certain rights of payment as provided in the Agreements. Further, effective on September 30, 2016, the Company and BMO Harris entered into Amendment No. 9 to the Credit Agreement and the Company and BMO Equity entered into Amendment No. 4 to the Note and Warrant Purchase Agreement pursuant to which each of BMO Harris and BMO Equity agreed to consent to payments of principal and interest to Mr. Schwan and Mr. Merrick under the Promissory Notes out of the proceeds received by the Company from the sale of vacuum sealing machines to a major retail chain in a promotional program. |
Derivative Instruments; Fair Value |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives and Fair Value [Text Block] | Note 9 Derivative Instruments; Fair Value The following tables represents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
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Basis of Presentation (Policies) |
9 Months Ended | |
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Sep. 30, 2016 | ||
Accounting Policies [Abstract] | ||
Consolidation, Policy [Policy Text Block] | Principles of consolidation and nature of operations: The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc., its majority-owned subsidiaries, Flexo Universal, S. de R.L. de C.V. and CTI Europe gmbH, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C and Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions and accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes balloon products throughout the world, (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products, and (iii) distributes vacuum sealing products and home organization products in the United States. |
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Consolidation, Variable Interest Entity, Policy [Policy Text Block] | Variable Interest Entities (“VIE’s”): The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. There are three entities that have been consolidated as variable interest entities. |
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Use of Estimates, Policy [Policy Text Block] | Use of estimates: In preparing condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenue and expenses during the reporting period in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include reserves for doubtful accounts, reserves for the lower of cost or market of inventory, reserves for deferred tax assets and recovery value of goodwill. |
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Earnings Per Share, Policy [Policy Text Block] | Earnings per share: Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period. As of September 30, 2016 and 2015, shares to be issued upon the exercise of options and warrants aggregated 288,048 and 343,548, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the three and nine months ended September 30, 2016 and 2015 were 0 and 174,000, respectively, all of which were represented by options. |
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Reclassification, Policy [Policy Text Block] | Reclassification: Certain 2015 amounts have been reclassified to conform to the 2016 presentation. |
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New Accounting Pronouncements, Policy [Policy Text Block] | Recent Accounting Pronouncements: In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach. In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost . The ASU requires debt issuance costs associated with a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. An entity should apply the new guidance on a retrospective basis. We adopted this ASU effective with the first quarter of fiscal year 2016. The adoption of this accounting standard update did not have a material impact to our consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. We do not expect the adoption of this accounting standard update to have a material impact on our consolidated financial statements. In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , to eliminate the current requirements to classify deferred income tax assets and liabilities between current and noncurrent. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are continuing to evaluate the impact of ASU 2015-17 on our consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases ( Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, although early adoption is allowed. For all other entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. We are continuing to evaluate the impact of ASU 2016-02 on our consolidated financial statements and related disclosures. On March 30, 2016, the FASB issued Accounting Standards Updated No. 2016-09, Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company does not expect the adoption of this standard to have any impact on the Company’s consolidated financial statements. On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements. |
Stock-Based Compensation; Changes in Equity (Tables) |
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Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block] | A summary of the Company’s stock option activity and related information is as follows:
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Schedule of Stockholders' Equity Note, Warrants or Rights [Table Text Block] | A summary of the Company’s stock warrant activity and related information is as follows:
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Schedule Of Share Based Compensation Arrangement By Share Based Payment Award Options Vested Outstanding By Grant Date [Table Text Block] | A summary of the Company’s stock option activity by grant date as of September 30, 2016 is as follows:
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Other Comprehensive Loss (Tables) |
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Stockholders' Equity Note [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Accumulated Other Comprehensive Income (Loss) [Table Text Block] | The following table sets forth the accumulated balance of other comprehensive loss and each component.
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Inventories, Net (Tables) |
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Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Inventory, Current [Table Text Block] |
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Geographic Segment Data (Tables) |
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Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Segment Reporting Information, By Segment [Table Text Block] | The Company has determined that it operates primarily in one business segment that designs, manufactures and distributes film and film related products for use in packaging, storage and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company’s operations by geographic area is as follows:
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Concentration of Credit Risk (Tables) |
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Risks and Uncertainties [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedules of Concentration of Risk, by Risk Factor [Table Text Block] | Sales to these customers for the three and nine months ended September 30, 2016 and 2015 are as follows:
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Derivative Instruments; Fair Value (Tables) |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Fair Value, Assets and Liabilities Measured On Recurring Basis [Table Text Block] | The following tables represents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
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Basis of Presentation (Details Textual) - shares |
3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
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Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Shares To Be Issued Upon Exercise Of Options And Warrant | 288,048 | 343,548 | 288,048 | 343,548 |
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | 0 | 174,000 | 0 | 174,000 |
Other Comprehensive Loss (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
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Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Foreign Currency Items, Beginning balance | $ (4,076,318) | |||
Foreign Currency Items, Current period change, net of tax | $ (236,133) | $ (547,475) | (840,144) | $ (1,009,986) |
Foreign Currency Items, Ending Balance | (4,916,462) | (4,916,462) | ||
Total Accumulated Other Comprehensive Loss, Beginning balance | (4,076,318) | |||
Total Accumulated Other Comprehensive Loss, Current period change, net of tax | (840,144) | |||
Total Accumulated Other Comprehensive Loss, Ending Balance | $ (4,916,462) | $ (4,916,462) |
Other Comprehensive Loss (Details Textual) - USD ($) |
3 Months Ended | 9 Months Ended |
---|---|---|
Sep. 30, 2016 |
Sep. 30, 2016 |
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Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Other Comprehensive Income (Loss), Foreign Currency Translation Adjustment, Tax | $ 236,000 | $ 840,000 |
Inventories, Net (Details) - USD ($) |
Sep. 30, 2016 |
Dec. 31, 2015 |
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Inventory [Line Items] | ||
Raw materials | $ 3,793,301 | $ 2,770,636 |
Work in process | 2,366,341 | 2,198,981 |
Finished goods | 17,563,321 | 13,723,090 |
Allowance for excess quantities | (780,622) | (822,796) |
Total inventories | $ 22,942,341 | $ 17,869,911 |
Geographic Segment Data (Details) - USD ($) |
3 Months Ended | 9 Months Ended | |||
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Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
Dec. 31, 2015 |
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Segment Reporting Information [Line Items] | |||||
Net Sales to Outside Customers | $ 13,476,157 | $ 14,880,820 | $ 42,831,655 | $ 43,476,981 | |
Total Assets | 44,997,129 | 44,997,129 | $ 41,804,969 | ||
United States [Member] | |||||
Segment Reporting Information [Line Items] | |||||
Net Sales to Outside Customers | 10,392,000 | 11,377,000 | 33,527,000 | 33,904,000 | |
Total Assets | 33,121,000 | 33,121,000 | 30,772,000 | ||
Europe [Member] | |||||
Segment Reporting Information [Line Items] | |||||
Net Sales to Outside Customers | 761,000 | 374,000 | 1,927,000 | 1,031,000 | |
Total Assets | 2,391,000 | 2,391,000 | 1,562,000 | ||
Mexico [Member] | |||||
Segment Reporting Information [Line Items] | |||||
Net Sales to Outside Customers | 1,723,000 | 2,606,000 | 5,438,000 | 6,867,000 | |
Total Assets | 7,871,000 | 7,871,000 | 7,680,000 | ||
United Kingdom [Member] | |||||
Segment Reporting Information [Line Items] | |||||
Net Sales to Outside Customers | 600,000 | $ 524,000 | 1,940,000 | $ 1,675,000 | |
Total Assets | $ 1,594,000 | $ 1,594,000 | $ 1,791,000 |
Concentration of Credit Risk (Details) - USD ($) |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2016 |
Sep. 30, 2015 |
Sep. 30, 2016 |
Sep. 30, 2015 |
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Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Net Sales | $ 13,476,157 | $ 14,880,820 | $ 42,831,655 | $ 43,476,981 |
Customer A [Member] | Sales Revenue, Net [Member] | ||||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Net Sales | $ 3,088,000 | $ 3,256,000 | $ 11,859,000 | $ 11,660,000 |
% of Net Sales | 22.90% | 21.90% | 27.70% | 26.80% |
Customer B [Member] | Sales Revenue, Net [Member] | ||||
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||
Net Sales | $ 3,070,000 | $ 2,282,000 | $ 7,870,000 | $ 6,091,000 |
% of Net Sales | 22.80% | 15.30% | 18.40% | 14.00% |
Concentration of Credit Risk (Details Textual) - USD ($) |
9 Months Ended | ||
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Sep. 30, 2016 |
Sep. 30, 2015 |
Dec. 31, 2015 |
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Accumulated Other Comprehensive Income (Loss) [Line Items] | |||
Accounts Receivable, Net, Current | $ 10,180,931 | $ 11,410,999 | |
Customer A [Member] | Accounts Receivable [Member] | |||
Accumulated Other Comprehensive Income (Loss) [Line Items] | |||
Concentration Risk, Percentage | 13.90% | 19.30% | |
Accounts Receivable, Net, Current | $ 1,411,000 | $ 1,957,000 | |
Customer B [Member] | Accounts Receivable [Member] | |||
Accumulated Other Comprehensive Income (Loss) [Line Items] | |||
Concentration Risk, Percentage | 26.10% | 19.50% | |
Accounts Receivable, Net, Current | $ 2,653,000 | $ 1,972,000 |
Derivative Instruments; Fair Value (Details) - USD ($) |
Sep. 30, 2016 |
Dec. 31, 2015 |
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Derivative Instruments and Hedging Activities Disclosures [Line Items] | ||
Warrant Liability | $ 894,000 | $ 714,000 |
Liabilities, Fair Value Disclosure | 894,000 | 714,000 |
Fair Value, Inputs, Level 1 [Member] | ||
Derivative Instruments and Hedging Activities Disclosures [Line Items] | ||
Warrant Liability | 0 | 0 |
Liabilities, Fair Value Disclosure | 0 | |
Fair Value, Inputs, Level 2 [Member] | ||
Derivative Instruments and Hedging Activities Disclosures [Line Items] | ||
Warrant Liability | 894,000 | 714,000 |
Liabilities, Fair Value Disclosure | 894,000 | 714,000 |
Fair Value, Inputs, Level 3 [Member] | ||
Derivative Instruments and Hedging Activities Disclosures [Line Items] | ||
Warrant Liability | 0 | $ 0 |
Liabilities, Fair Value Disclosure | $ 0 |
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