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Note 9 - Notes Payable
 12 Months Ended
Dec. 31, 2021
Notes to Financial Statements  
Debt Disclosure [Text Block]

9.   Notes Payable

 

Long term debt consists of:

 

  

December 31,

 
  

2021

  

2020

 

Subordinated notes (officer) due December 2023

 $1,193,079  $1,123,769 

Related Party Note

  166,667   - 

Term Loan (2021 is net of deferred finance costs of $154,951)

  559,140   2,156,895 
Line of Credit  5,002,599   5,341,916 
         

Total long-term debt

  6,921,487   8,622,580 
         

Less current portion

  (6,921,487

)

  (8,622,580

)

Total Long-term debt, net of current portion

 $-  $- 

 

During December 2017, we entered in new financing agreements with PNC Bank, National Association (“PNC”). The financing agreements with PNC (the “PNC Agreements”) included a $6 million term loan and an $18 million revolving credit facility (the “Revolving Credit Facility”), with a credit facility termination date of December 2022. Available credit under the Revolving Credit facility was determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).

 

We notified PNC of our failure to meet certain financial covenants and conditions during multiple occasions between 2018 and 2021, resulting in amendments to the loan documents, and in some cases forbearance agreements, along with related fees, penalties and conditions. Pursuant to an April 2021 forbearance agreement, the Company agreed to pay PNC a Forbearance Fee of $1,000,000. Provided, however, that, so long as no event of default under the Loan Agreement has occurred (including as a result of a failure of the Company to pay down the Revolving Loans by $1,500,000 with the proceeds of the Purchaser Promissory Note, (i) if the Company consummates the Equity Investment (as defined in the agreement) by June 30, 2021, the Forbearance Fee shall be reduced by $250,000, to $750,000, and (ii) if the Company causes all of the obligations under the Loan Agreement to be paid in full, in cash, on or before September 30, 2021, the Forbearance Fee shall be reduced by an additional $500,000, to $250,000. As the Company repaid all obligations under the Loan Agreement by September 30, 2021 and the Equity Investment was consummated by June 30, 2021, the forbearance fee was $250,000. The Company recorded a forbearance expense of $250,000 during 2021.

 

On September 30, 2021 (the “Closing Date”), the Company entered into a loan and security agreement (the “Agreement”) with Line Financial (the “Lender”), which provides for a senior secured financing consisting of a revolving credit facility (the “Revolving Credit Facility) in an aggregate principal amount of up to $6 million (the “Maximum Revolver Amount”) and term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $731,250 (“Term Loan Amount” and, together with the Revolving Credit Facility, the “Senior Facilities”). Proceeds of loans borrowed under the Senior Facilities were used to repay all amounts outstanding under the Company's PNC Agreements and for the Company’s working capital. The Senior Facilities are secured by substantially all assets of the Company.

 

Interest on the Senior Facilities shall be the prime rate published from time to time published in the Wall Street Journal (3.25% as of September 30, 2021), plus 1.95% per annum, accruing daily and payable monthly. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. The Term Loan Facility shall be repaid by the Company to Lender in 48 equal monthly installments of principal and interest, each in the amount of $15,234, commencing on November 1, 2021, and continuing on the first day of each month thereafter until the Term Loan Maturity Date (as defined in the Agreement). Also, the Company will pay the Lender collateral monitoring fees of 4.62% of the eligible accounts receivable, inventory, and equipment supporting the Revolving Credit Facility and the Term Loan. In addition, the Company paid the Lender a loan fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon the execution of the Agreement.

 

The Senior Facilities mature on September 30, 2023 and shall automatically be extended for successive periods of one year each, unless the Company or the Lender gives the other party written notice of termination not less than 90 days prior to the end of such term or renewal term, as applicable. If the Senior Facilities are renewed, the Company shall pay the Lender a renewal fee of 1.25% of the Maximum Revolver Amount and the Term Loan Amount upon each renewal on the anniversary of the Closing Date. The Company has the option to prepay the Term Loan Facility (together with all accrued but unpaid interest and a Term Loan Prepayment Fee (as defined the Agreement) in whole, but not in part, upon not less than 60 days prior written notice to the Lender.

 

The Senior Facilities require that the Company shall, commencing December 31, 2021, maintain Tangible Net Worth of at least $4,000,000 or greater (“Minimum Tangible Net Worth”). Minimum Tangible Net Worth may be adjusted downward by the Lender, from time to time, in its sole and absolute discretion, based on the effect of non-cash charges and other factors on the calculation of Tangible Net Worth. Other debt subordinated to Lender is not considered as a reduction of this calculation. The Company believes it was in compliance with this covenant as of December 31, 2021.

 

The Senior Facilities contain certain affirmative and negative covenants that limit the ability of the Company, among other things and subject to certain significant exceptions, to incur debt or liens, make investments, enter into certain mergers, consolidations, and acquisitions, pay dividends and make other restricted payments, or make capital expenditures exceeding $1,000,000 in the aggregate in any fiscal year.

 

As of December 31, 2021, the term loan balance amounted to $559,140, which consisted of the principal and interest payable balance of $714,094 and deferred financing costs of $154,951.  The balance of the Revolving Line of Credit as of December 31, 2021 amounted to $5,002,599.

 

As of January 1, 2019, the Company had a note payable to John H. Schwan, Director and former Chairman of the Board, for $1.6 million, including accrued interest. This loan accrues interest, is due December 31, 2023, and is subordinate to the Senior Facilities. During January 2019, Mr. Schwan converted $600,000 of the note into approximately 181,000 shares of our common stock at the then market rate of $3.32 per share. As a result of the conversion, the loan balance decreased to $997,019. The loan and interest payable to Mr. Schwan amounted to $1,175,361 and $1,123,769 as of December 31, 2021 and December 31, 2020, respectively. No payments were made to Mr. Schwan during 2021 or 2020. Interest expense related to this loan amounted to $17,000 and $16,000 for the three months ended December 31, 2021 and 2020, respectively, and $70,000 and $65,000 for the twelve months ended December 31, 2021 and 2020, respectively.

 

As of December 31, 2021, the Company had a note payable to Alex Feng for $166,667. This loan accrues interest at 3% and is subordinate to the Senior Facilities. The subordination agreement signed September 30, 2021 changes the term of the maturity date from November 2023 to March 2024 and payment date starting April 2022.

 

On April 30, 2020, the Company executed a promissory note (the “Note”) with PNC (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $1,047,700 (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). The Note provides for a fixed interest rate of one percent per year with a maturity date of April 30, 2022 (the “Maturity Date”). Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of disbursement of the PPP Loan. The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company carefully monitored all qualifying expenses and other requirements necessary to attain loan forgiveness and the loan has been forgiven. The Company has used all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments.  Accordingly, the Company recorded grant income of $1,048,000 in 2020 which resulted in no deferred other income liability balance as of December 31, 2020.