Note

- Debt

During

December 2017,

we terminated a prior credit arrangement and entered in new financing agreements with PNC Bank, National Association (“PNC”). The “PNC Agreements” include a

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.

June 8, 2018,

we entered into Waiver and Amendment

No.

(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-

for a planned equity issuance. On

October 8, 2018,

we entered into Consent and Amendment

No.

(the “Amendment

2”

) to our PNC Agreements. Amendment

reduced the amount of new funding proceeds that must be used to repay the term loan from

million to

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

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

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, which declined 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.

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:

Borrow money;

Pay dividends and make distributions;

Make certain investments;

Use assets as security in other transactions;

Create liens;

Enter into affiliate transactions;

Merge or consolidate; or

Transfer and sell assets.

●

Financial Covenants

: The Credit Agreement includes a series of financial covenants we are required to meet including:

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 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	4.25	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

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

million of the notes over

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

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

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

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.

As of

December 2017,

Mr. Schwan was owed a total of

$1,099,000,

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. During

January 2019,

Mr. Schwan converted

$600,000

of his balance into approximately

181,000

shares of our common stock at the then market rate.

payments were issued to Mr. Schwan during

2018

or the

three

months ended

March 31, 2019,

with

$15,000

of interest recorded as an expense.