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Note 2 - Debt
 9 Months Ended
Sep. 30, 2018
Notes to Financial Statements  
Debt and Capital Leases Disclosures [Text Block]
Note
2
- Debt
 
Until
December 2017,
we had in place a series of credit facility and related agreements with BMO Harris Bank, N.A. and BMO Private Equity (U.S.), (collectively, “BMO”), in the aggregate amount of approximately
$17
million. During
December 2017,
we terminated those agreements and fully repaid all amounts owed BMO under those agreements, including associated fees and costs related to termination, as we entered in new financing agreements with PNC Bank, National Association (“PNC”). The “PNC Agreements” include a
$6
million term loan and an
$18
million revolving credit facility, with a termination date of
December 2022.
 
Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet
two
financial covenants as of
March 31, 2018.
On
June 8, 2018,
we entered into Waiver and Amendment
No.
1
(the “Amendment
1”
) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in interest rate. During
September 2018,
we filed a preliminary prospectus on Form S-
1
for a planned equity issuance. On
October 8, 2018,
we entered into Consent and Amendment
No.
2
(the “Amendment
2”
) to our PNC Agreements. Amendment
2
reduced the amount of new funding proceeds that must be used to repay the term loan from
$5
million to
$2
million and waived the calculation of financial ratios for the period ended
September 30, 2018,
in exchange for a new covenant committing to raise at least
$7.5
million in gross proceeds from our equity issuance by
November 15, 2018
and pay an amendment fee. As of the date of this filing market conditions have forced us to postpone the offering, and thus any ultimate proceeds would occur after
November 15, 2018.
We intend to engage our bank to resolve this impending failure to meet our amended covenant. As we expect to be out of compliance with this requirement, we have reclassified long-term bank debt to current liabilities on our balance sheet. See Note
3
for a related discussion of the impact of this event.
 
Certain terms of the PNC Agreements, as amended, include:
 
 
●
Restrictive Covenants
: The Credit Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to:
 
o
Borrow money;
 
o
Pay dividends and make distributions;
 
o
Make certain investments;
 
o
Use assets as security in other transactions;
 
o
Create liens;
 
o
Enter into affiliate transactions;
 
o
Merge or consolidate; or
 
o
Transfer and sell assets.
 
 
●
Financial Covenants
: The Credit Agreement, as amended, includes a series of financial covenants we are required to meet including:
 
o
We are required to maintain a "Leverage Ratio", which is defined as the ratio of (a) Funded Debt (other than the Shareholder Subordinated Loan) as of such date of determination to (b) EBITDA (as defined in the PNC Agreements, as amended) for the applicable period then ended. The highest values for this ratio allowed by the PNC Agreements are:
 
Fiscal Quarter Ratio
           
             
December 31, 2017
    
4.75
to
1.00
  
March 31, 2018
    
4.50
to
1.00
  
June 30, 2018
    
4.50
to
1.00
  
September 30, 2018
    
not applicable
  
December 31, 2018
    
3.50
to
1.00
  
March 31, 2019
    
3.25
to
1.00
  
June 30, 2019
    
3.00
to
1.00
  
September 30, 2019 and thereafter
    
2.75
to
1.00
  
 
 
o
We are required to maintain a "Fixed Charge Coverage Ratio", which is defined as the ratio of (a) EBITDA for such fiscal period, as amended, minus Unfinanced Capital Expenditures made during such period, minus distributions (including tax distributions) and dividends made during such period, minus cash taxes paid during such period to (b) all Debt Payments made during such period. This ratio must
not
exceed
1.1
:
1.0
for any quarterly calculation. Amendment
2
eliminated the calculation of this ratio for the period ended
September 30, 2018.
 
 
o
Under Amendment
1,
we were required to maintain EBITDA during the fiscal month ended
April 30, 2018
of
no
less than
$300,000,
and for the
two
fiscal months ended
May 31, 2018
of
no
less than
$750,000.
Under Amendment
2
we are required to raise at least
$7.5
million in gross proceeds from our equity issuance by
November 15, 2018.
 
Meeting the above covenants are stipulated as a condition of the PNC Agreements. Failing to meet them could result in increased costs, and potentially, the loss of the credit facility. Any such failure could add financial stress to the Company, up to and including its ability to continue as a going concern.
 
The Amendment
1
fee was a
one
-time payment of
$58,750.
Additionally, the rate of interest increased by
2%
until such time as the Fixed Charge Coverage Ratio for a
twelve
month period is greater than or equal to
1.10
to
1.00.
The Amendment
2
fee was
$34,500.
 
The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We also entered into a swap agreement with PNC Bank to fix the interest for
$3
million over
3
years. This contract was made at market value upon
December 2017
execution and accounted for as a hedge.
 
As of
December 2017,
Mr. John Schwan was owed a total of approximately
$1.1
million, with additional accrued interest of
$400,000,
by the Company. As part of the
December 2017
financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan.
No
payments were issued to Mr. Schwan during the
three
months ended
September 30, 2018,
with
$23,000
of interest recorded as an expense.