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Note 9 - Notes Payable and Capital Leases | 12 Months Ended
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Dec. 31, 2018
Notes to Financial Statements |
Debt and Capital Leases Disclosures [Text Block] | 9. Notes Payable and Capital Leases Long term debt consists of:
|  | Dec. 31, 201 8 |  |  | Dec. 31, 2017 |
Capital Lease with First American Equipment Finance, payable in monthly installments of $2,890 (amortized over 5 years). |  |  |  |  |  |  | 3,000 |
Capital Lease with Wells Fargo, payable in monthly installments of $367 (amortized over 5 years). |  |  |  |  |  |  | 2,000 |
Subordinated Notes (Officers) due on demand, interest at 4%, which consolidated prior Subordinated Notes (Officers). During January 2019, $600,000 of this balance was exchanged for 181,000 shares of our common stock at then market value |  |  | 1,597,000 |  |  |  | 1,507,000 |
Notes Payable (Affiliates) due 2015, interest at prime (3.25%) plus 0.25% (3.5%) at December 31, 2017 (see Note 12) (Related Party). |  |  | 32,000 |  |  |  | 32,000 |
Promissory Note with Merrick Company due on demand, interest at 4.25% (Related Party). |  |  | 39,000 |  |  |  | 76,000 |
Promissory Note with Schwan Leasing due on demand, interest at 4.25% (Related Party). |  |  | 127,000 |  |  |  | 60,000 |
Notes Payable (Affiliates) due 2021, interest at 11.75% (see Note 12) (Related Party). |  |  | 28,000 |  |  |  | 41,000 |
Term Loan with PNC, payable in monthly installments of $100,000 amortized over 5 years, interest at 8.25%, balance due December 2022, which uses balloons and related equipment as collateral |  |  | 4,700,000 |  |  |  | 6,000,000 |
Total long-term debt |  |  | 6,523,000 |  |  |  | 7,721,000 |
Less current portion |  |  | (4,432,000 | ) |  |  | (1,247,000 | )
Total Long-term debt, net of current portion |  | $ | 2,091,000 |  |  | $ | 6,474,000 |
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 the outstanding warrant note payable and 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. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement. We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 have entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures will be waived and financial covenants as of March 31, 2019 will not be considered, with the next calculation due for the period ending June 30, 2019. We received a temporary over-advance of $1.2 million, declining to zero over a six week period, under the terms of this agreement and paid a fee of $250,000. As forbearance is a temporary condition and we remain out of compliance with the terms of our facility, 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. Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico). Certain terms of the PNC Agreements include:
| ● | Restrictive Covenants : The Credit Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to:
| o | Borrow money;
| o | Pay dividends and make distributions;
| o | Make certain investments;
| o | Use assets as security in other transactions;
| o | Create liens;
| o | Enter into affiliate transactions;
| o | Merge or consolidate; or
| o | Transfer and sell assets.
| ● | Financial Covenants : The Credit Agreement includes a series of financial covenants we are required to meet including:
| 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) for the applicable period then ended. The highest values for this ration 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 | 4.25 | to | 1.00
September 30, 2018 | not applicable
December 31, 2018 | 3.50 | to | 1.00
March 31, 2019 | not applicable
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, 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.
The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We also entered into a swap agreement with PNC Bank to fix the rate of interest for $3 million of the notes over 3 years at 2.25%. This contract was made at market value upon December 14, 2017 execution and accounted for as a hedge. This contract is expected to terminate during 2019 at no cost or benefit to the Company under the terms of the forbearance agreement. Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as well as in Note 3, we believe that we were not in compliance with this credit facility as of December 31, 2018, and have entered into a forbearance agreement with our bank as of March 2019.

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- Definition The entire disclosure for debt and capital lease obligations can be reported. Information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. Also includes descriptions and amounts of capital leasing arrangements that consist of direct financing, sales type and leveraged leases. Disclosure may include the effect on the balance sheet and the income statement resulting from a change in lease classification for leases that at inception would have been classified differently had guidance been in effect at the inception of the original lease. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 840 -URI http://asc.fasb.org/topic&trid=2208923 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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