YUNHONG GREEN CTI LTD. - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from _________to_________

Commission File Number

000-23115

CTI INDUSTRIES CORPORATION

(Exact name of Registrant as specified in its charter)

(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 o

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 o

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 o     Accelerated filer o    Non-accelerated filer o Smaller Reporting Company þ

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

The number of shares outstanding of the Registrant’s common stock as of November 1, 2015 was 3,301,116.

INDEX

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Condensed Consolidated Earnings per Share (unaudited)

See accompanying notes to condensed consolidated unaudited financial statements

CTI Industries Corporation and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

The accompanying condensed (a) consolidated balance sheet as of December 31, 2014, 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. 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, 2014.

Principles of consolidation and nature of operations:

The condensed consolidated financial statements include the accounts of CTI Industries Corporation and its wholly-owned subsidiaries, CTI Balloons Limited, CTI Supply, Inc. and CTF International S.A. de C.V., its majority-owned subsidiaries CTI Mexico S.A. de C.V., Flexo Universal, S.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 and (ii) operates systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products.

Variable Interest Entities (“VIE’s”):

The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. 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, 2015 and 2014, shares to be issued upon the exercise of options and warrants aggregated 343,548 and 368,548, 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, 2015 were 174,000, 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, 2014. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2015.

Recent Accounting Pronouncements:

In July 2015, FASB issued Accounting Standards Update (“ASU”) No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). As such, an entity will measure inventory that is within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments of this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is evaluating the impact that this pronouncement may have on the Company’s financial statements.

In May 2014, the FASB issued ASU No. 2014-09, (“ASU 2014-09”), “Revenue from Contracts with Customers”. The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. In August 2015, the FASB issued ASU 2015-14, (“ASU 2015-14”), “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly, public business entities should apply the guidance in ASU 2014-09 to annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15, 2016. Entities have the option of using either a full retrospective or modified approach to adopt ASU 2014-09. The Corporation is currently evaluating the new guidance and has not determined the impact this standard may have on its financial statements nor decided upon the method of adoption.

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 2015 and 2014. The expected volatility is based on historical volatility of the Company’s common stock.

The Company’s net income for the three months ended September 30, 2015 and 2014 includes approximately $7,000 and $17,000, respectively of compensation costs related to share based payments. The Company’s net income for the nine months ended September 30, 2015 and 2014 includes approximately $25,000 and $60,000, respectively of compensation costs related to share based payments. As of September 30, 2015 there is $18,000 of unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $4,000 of additional stock-based compensation expense to be recognized over the remainder of 2015, $11,000 to be recognized during 2016, and $3,000 to be recognized during 2017.

As of September 30, 2015, 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 12, 2001, the Board of Directors approved for adoption, effective December 27, 2001, the 2001 Stock Option Plan (“2001 Plan”). The 2001 Plan authorizes the grant of options to purchase up to an aggregate of 119,050, shares of the Company’s Common Stock. As of September 30, 2015, options for 139,958 shares (including cancelled shares re-issued under the Plan) have been granted and were fully vested at the time of grant and options for 2,000 shares remain outstanding.

On April 24, 2002, the Board of Directors approved for adoption, effective October 12, 2002, the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan authorizes the grant of options to purchase up to an aggregate of 142,860 shares of the Company’s Common Stock. As of September 30, 2015, options for 123,430 shares have been granted and were fully vested at the time of grant and options for 27,500 shares remain outstanding.

On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company. As of September 30, 2015, options for 201,000 shares had been granted and options for 174,000 shares remain outstanding.

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

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.

On April 12, 2013, the Company entered into Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendment, non-compliance with financial covenants prior to the date of the Amendment were waived and the Note and Warrant Purchase Agreement was 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 Note and Warrant Purchase Agreement and (ii) to modify the definitions of EBITDA and Total Funded Debt.

On December 23, 2014, the Company entered into Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendment, 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 the subsidiary CTI Helium, Inc., and the Note and Warrant Purchase Agreement was 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 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.

As of September 30, 2015, the Company was in compliance with the financial covenants provided in the Note and Warrant Purchase Agreement, as amended.

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, 2015 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, 2015 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, 2015.

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, 2015 the company had a comprehensive loss of approximately $547,000 and $1,010,000, respectively, all from foreign currency translation adjustments.

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

Note 5 - Inventories, Net

Note 6 - Geographic Segment Data

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

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, 2015 and 2014, 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, 2015 and 2014 are as follows:

As of September 30, 2015, the total amounts owed to the Company 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. The amounts owed at September 30, 2014 by these customers were approximately $2,089,000 or 18.8%, and $2,430,000 or 21.9% 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, 2015 and 2014, respectively, were $22,000 and $33,000. Legal fees paid by the Company to this firm for the nine months ended September 30, 2015 and 2014, respectively, were $114,000 and $84,000.

Interest payments have been made or accrued to John H. Schwan for loans made to the Company. During the three months ended September 30, 2015 and 2014 these interest payments totaled $22,000 and $20,000, respectively. During the nine months ended September 30, 2015 and 2014 these interest payments totaled $64,000 and $60,000, 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, 2015, Flexo made lease payments to Venture Leasing Mexico totaling $36,000 and $108,000. During the three and nine months ended September 30, 2014, Flexo made lease payments to Venture Leasing Mexico totaling $36,000 and $109,000.

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. During the three months ended September 30, 2015 and 2014, Clever Container purchased various products from the Company in the amount of $127,000 and $242,000, respectively. During the nine months ended September 30, 2015 and 2014, Clever Container purchased various products from the Company in the amount of $352,000 and $567,000, respectively. As of September 30, 2015 and 2014, the balance of accounts receivable from Clever Container to the Company were $498,000 and $266,000, respectively.

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, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

The Company is exposed to certain market risks including the effect of changes in interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business. It does not hold or issue derivatives for speculative trading purposes. The Company is exposed to non-performance risk from the counterparties in its derivative instruments. This risk would be limited to any unrealized gains on current positions. To help mitigate this risk, the Company transacts only with counterparties that are rated as investment grade or higher and all counterparties are monitored on a continuous basis. The fair value of the Company’s derivatives reflects this credit risk.

On July 1, 2011, the Company entered into a swap agreement with BMO Capital Markets with respect to $6,780,000 of our loan balances with BMO Harris Bank N.A. This swap agreement limits the Company’s exposure to interest rate fluctuations on the Company’s floating rate loans. The swap agreement has the effect of fixing the interest rate on the loan balances covered by the swap at 4.65% per annum. The swap agreement is a derivative financial instrument and we determine and record the fair market value of the swap agreement each quarter. The value is recorded on the balance sheet of the Company and the amount of the unrealized gain or loss for each period is recorded as interest income or expense. The swap agreement has expired as of September 30, 2014.

The Effect of Derivative Instruments on the Statement of Financial Performance

The Effect of Derivative Instruments on the Statement of Financial Performance

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.

Results of Operations

Net Sales. For the three months ended September 30, 2015, net sales were $14,881,000 compared to net sales of $14,569,000 for the same period of 2014, an increase of 2.1%. For the quarters ended September 30, 2015 and 2014, net sales by product category were as follows:

For the nine months ended September 30, 2015, net sales were $43,477,000 compared to net sales of $42,649,000 for the same period of 2014, an increase of 1.9%. For the nine months ended September 30, 2015 and 2014, net sales by product category were as follows:

Foil Balloons. During the three months ended September 30, 2015 revenues from the sale of foil balloons decreased by 7.1% compared to the prior year period from $5,657,000 to $5,253,000. During the nine months ended September 30, 2015 revenues from the sale of foil balloons decreased by 2.3% compared to the prior year period from $19,045,000 to $18,607,000. During the nine months ended September 30, 2015, foil balloon sales to our largest customer increased to $11,335,000 from $10,982,000 in the nine months ended September 30, 2014. For the nine month period, sales of foil balloons to other customers decreased to $7,272,000 from $8,063,000 for the same period last year. These sales to other customers include sales in the United States, Mexico, the United Kingdom and Europe. The decrease in sales to other customers is attributable to several customers in the United Kingdom and the United States and also to the lower dollar value of Euro and Peso denominated sales in Europe and Mexico.

Latex Balloons. During the three months ended September 30, 2015 revenues from the sale of latex balloons decreased by 12.9% compared to the prior year period from $3,001,000 to $2,613,000. During the nine months ended September 30, 2015 revenues from the sale of latex balloons decreased by 19.6% compared to the prior year period from $8,986,000 to $7,221,000. The difference reflects (i) a single large sale in the first quarter of 2014 in excess of $465,000, (ii) a decline in sales of $300,000 to a customer of Flexo Universal, our Mexico subsidiary, and (iii) the lower Dollar value of Peso denominated sales by Flexo Universal for 2015 compared to 2014 due to the decline in the value of the Peso.

Vacuum Sealing Products. During the three months ended September 30, 2015 revenues from the sale of pouches and vacuum sealing machines increased by 5.4% compared to the prior year from $3,777,000 to $3,982,000. During the nine months ended September 30, 2015 revenues from the sale of pouches and vacuum sealing machines increased by 9.9% compared to the prior year from $8,599,000 to $9,446,000. Our sales in this product line in 2015 and 2014 have been in two product categories: (i) zippered pouches and (ii) vacuum sealing systems incorporating vacuum sealing machines and associated pouches and rolls of film. For the three and nine months ended 2015 and 2014, sales of pouch products (and vacuum sealing machines) in these categories have been as follows:

Zippered Pouches. Most of our sales of zippered pouches have been of branded products to a principal customer, although we have had limited sales of our ZipVac® pouch line as well. Sales of zippered pouch products increased from $1,915,000 during the nine months ended September 30, 2014 to $2,060,000 during the same period in 2015.

Vacuum Sealing Systems. Since 2012, we have offered a line of vacuum sealing systems which include vacuum sealing machines and associated pouches and rolls of film.

In December 2011, we entered into a Trademark License Agreement with S. C. Johnson & Son, Inc. pursuant to which we received a license to market and sell vacuum sealing machines as well as pouches and rolls of film for use with those machines, under the Ziploc brand name. In the first quarter 2012, we introduced and began to market and sell that branded line of vacuum sealing machines and associated open-top bags and rolls. Since that time, we have offered our branded vacuum sealing system lines of product principally to chain stores in the United States, including several major chains.

Our sales of our branded vacuum sealing systems increased from $6,684,000 during the nine months ended September 30, 2014 to $7,386,000 during the same period this year, principally as the result of increased sales to several retail chain stores.

Films. During the three months ended September 30, 2015 revenues from the sale of laminated film products decreased by 1.8% compared to the prior year period from $1,435,000 to $1,409,000. During the nine months ended September 30, 2015 revenues from the sale of laminated film products decreased by 2.2% compared to the prior year period from $3,364,000 to $3,289,000. The decrease is attributable to a decrease in sales to a principal customer. All of the sales of laminated film products during the nine months ended September 30, 2015 were to one principal customer.

Other Revenues. During the three months ended September 30, 2015, we had revenues from the sale of various other products totaling $1,623,000 compared to revenues from other products in the same period in 2014 of $699,000. During the nine months ended September 30, 2015, we had revenues from the sale of various other products totaling $4,914,000 compared to revenues from other products in the same period during 2014 of $2,655,000. The revenues from the sale of other products during 2015 include (i) sales of home container products by a variable interest entity which we now consolidate with our financial results in the amount of $2,690,000, (ii) $1,173,000 in sales of a line of “Candy Blossoms” and “Candy Loons” consisting of candy and small inflated balloons sold in small containers, and (iii) 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, 2015 and 2014.

During the three and nine months ended September 30, 2015, 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, 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 three months ended September 30, 2014, were $3,369,000 or 23.1%, and $2,420,000 or 16.6% 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. Sales to these customers for the nine months ended September 30, 2014, were $11,299,000 or 26.5% and $5,583,000 or 13.1% of consolidated net sales, respectively. The amount owed at September 30, 2015 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. As of September 30, 2014, the total amounts owed to the Company by these customers were $2,089,000 or 18.8% and $2,430,000 or 21.9% of the Company’s consolidated net accounts receivable, respectively.

Cost of Sales. During the three months ended September 30, 2015, the cost of sales represented 72.4% of net sales compared to 74.3% for the three months ended September 30, 2014. During the nine months ended September 30, 2015, the cost of sales represented 73.3% of net sales compared to 75.9% for the nine months ended September 30, 2014. The improvement in gross margins is attributable principally to an increase in the gross margins at our Mexico subsidiary, an increase in sales of higher margin products, and higher margins achieved on the sales of home container products. The improvement in gross margins at our Mexico subsidiary is attributable principally to (i) a decline in the price of natural latex, and (ii) improvement in manufacturing efficiencies.

General and Administrative. During the three months ended September 30, 2015, general and administrative expenses were $1,840,000 or 12.4% of net sales, compared to $1,624,000 or 11.1% of net sales for the same period in 2014. During the nine months ended September 30, 2015, general and administrative expenses were $5,300,000 or 12.2% of net sales, compared to $5,499,000 or 12.9% of net sales for the same period in 2014. The increase in general and administrative expenses in the third quarter compared to the third quarter last year is attributable principally to (i) an increase in administrative expenses of a variable interest entity consolidated with our financial statements and (ii) a marginal increase in administrative expenses of our European subsidiaries.

Selling. During the three months ended September 30, 2015, selling expenses were $863,000 or 5.8% of net sales, compared to $1,006,000 or 6.9% of net sales for the same period in 2014. During the nine months ended September 30, 2015, selling expenses were $2,426,000 or 5.6% of net sales, compared to $2,334,000 or 5.5% of net sales for the same period in 2014.

Advertising and Marketing. During the three months ended September 30, 2015, advertising and marketing expenses were $689,000 or 4.6% of net sales for the period, compared to $596,000 or 4.1% of net sales for the same period of 2014. During the nine months ended September 30, 2015, advertising and marketing expenses were $2,006,000 or 4.6% of net sales for the period, compared to $1,646,000 or 3.9% of net sales for the same period of 2014. The increase is attributable to an increase of $305,000 in advertising and marketing expenses in US operations.

Other Income (Expense). During the three months ended September 30, 2015, the Company incurred interest expense of $345,000, compared to interest expense during the same period of 2014 in the amount of $236,000. During the nine months ended September 30, 2015, the Company incurred net interest expense of $1,037,000, compared to net interest expense during the same period of 2014 in the amount of $742,000. In addition to the interest on our line of credit with BMO Harris, the interest charges include (i) interest paid on our mezzanine loan with BMO Equity, (ii) a charge for the amount of the debt discount attributable to the warrants used in the BMO Equity transaction and (iii) a variable charge relating to the change in value of the warrants by reason of change in market price of our common stock.

For the three months ended September 30, 2015, the Company had a foreign currency transaction gain of $44,000 compared to a foreign currency transaction gain of $8,000 during the same period of 2014. For the nine months ended September 30, 2015, the Company had a foreign currency transaction gain of $47,000 compared to a foreign currency transaction gain of $6,000 during the same period of 2014.

Income Taxes. For the three months ended September 30, 2015, the Company reported a consolidated income tax expense of $161,000, compared to a consolidated income tax expense of $122,000 for the same period of 2014. For the nine months ended September 30, 2015, the Company reported a consolidated income tax expense of $387,000, compared to a consolidated income tax expense of $36,000 for the same period of 2014. For the nine months ended September 30, 2015, this income tax expense was composed of an income tax expense in the United States, income tax expense in Mexico of Flexo Universal, our Mexican subsidiary, an income tax benefit in the United Kingdom of CTI Balloons Limited, our United Kingdom subsidiary and income tax benefit in Europe of CTI Europe gmbH, our Germany subsidiary.

Net Income. For the three months ended September 30, 2015, the Company had net income of $209,000 or $0.06 per share (basic and diluted,) compared to net income of $210,000 for the same period of 2014 or $0.06 per share (basic and diluted). For the nine months ended September 30, 2015, the Company had net income of $546,000 or $0.17 per share (basic) and $0.16 per share (diluted,) compared to net income of $132,000 for the same period of 2014 or $0.04 per share (basic and diluted). For the nine months ended September 30, 2015, the Company had income from operations of $1,882,000 compared to income from operations during the same period in 2014 of $789,000.

Financial Condition, Liquidity and Capital Resources

Cash Flow Items.

Operating Activities. During the nine months ended September 30, 2015, net cash provided by operations was $3,390,000, compared to net cash used in operations during the nine months ended September 30, 2014 of $2,851,000.

Significant changes in working capital items during the nine months ended September 30, 2015 included:

Increases to cash flow: (i) depreciation and amortization in the amount of $1,379,000 compared to $1,594,000 for the same period last year, (ii) a decrease in accounts receivable of $665,000 compared to an increase of $2,449,000 for the same period last year, (iii) an increase in trade payables of $923,000 compared to an increase of $2,021,000 for the same period last year, (iv) an increase of accrued liabilities of $61,000 compared to a decrease of $1,120,000 last year and (v) a decrease in prepaid expenses of $107,000 compared to a decrease of $413,000 last year, and

Cash flow was decreased as a result of an increase in inventory of $688,000, which is substantially less than the increase in inventory for the same period last year of $3,164,000.

Investing Activity. During the nine months ended September 30, 2015, cash used in investing activity was $465,000, compared to $839,000 in the same period of 2014. Substantially all of this expense is related to equipment acquisitions and capitalized maintenance, leasehold improvements, tooling and related expense.

Financing Activities. During the nine months ended September 30, 2015, cash used in financing activities was $2,781,000 compared to cash provided by financing activities for the same period of 2014 in the amount of $3,177,000. During the nine months ended September 30, 2015, financing activities included payment of $396,000 on long-term debt obligations and a decrease in the amount outstanding under our revolving line of credit of $1,912,000.

Liquidity and Capital Resources. At September 30, 2015, the Company had cash balances of $273,000 compared to cash balances of $172,000 for the same period in 2014 and there was $2,164,000 available to advance under the Company’s revolving line of credit.

At September 30, 2015, the Company had a working capital balance of $11,484,000 compared to a working capital balance of $11,545,000 at December 31, 2014.

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:

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

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 Limited Guaranties of the loans and also 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, 2015, the effective rate on the outstanding loan balances was 4.0%.

As of September 30, 2015, the outstanding balances on the loans with BMO Harris were: (i) revolving line of credit, $9,755,000, (ii) mortgage loan, $1,828,000, and (iii) equipment loan, $402,000.

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.

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.

Management believes that the 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, 2015, the Company was in compliance with all the financial covenants under the Credit Agreement and the Note and Warrant Purchase Agreement.

Seasonality

In recent years, sales in the foil balloon product line have historically been seasonal with approximately 40% occurring in the period from December through March and 24% being generated in the period from July through October. The sales of latex balloons and laminated film products have not historically been seasonal.

Critical Accounting Policies

Please see pages 26-29 of our Annual Report on Form 10-K for the year ended December 31, 2014 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three and nine months ended September 30, 2015.

Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk

Not applicable.

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015. 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, 2015, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the three and nine months ended September 30, 2015 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company 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.

Item 1A. Risk Factors

Not applicable.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

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

Item 6. Exhibits

The following are being filed as exhibits to this report:

SIGNATURES

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

Exhibit Index