Note

- Debt

During

December 2017,

we terminated a prior credit arrangement and entered in new financing agreements (the “PNC 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 were waived and financial covenants as of

March 31, 2019

were

not

considered, with the next calculation due

July 31, 2019

for the period ended

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.

August 1, 2019,

PNC issued a Notice of Default and Reservation of Rights letter, indicating the end of the forbearance period and continued events of default with our credit agreement, as amended. We entered into a new forbearance agreement during

October 2019

which completed

January 2020.

In conjunction with new equity financing, on

January 13, 2020,

a Limited Waiver, Consent, Amendment

No.

and Forbearance Agreement (the “Forbearance Agreement”) between PNC and the Company became effective, pursuant to which PNC agreed to (i) waive the Loan Agreement's requirement that the Company apply the net proceeds of the Offering

first

to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to PNC under the Loan Agreement for a period ending

later than

December 31, 2020.

In addition, on

June 15, 2020,

we received a notice of noncompliance and reservation of rights letter from the bank related to failing the covenant calculation during the

first

quarter of

2020.

We remain noncompliant with the terms of our facility and have thus 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 were 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. This requirement was removed during the

January 2020

Amendment

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. The highest values allowed for each quarterly calculation are as follow:

Fiscal Quarter Ratio

March 31, 2020	0.75	to	1.00
June 30, 2020	0.85	to	1.00
September 30, 2020	0.95	to	1.00
December 31, 2020	1.05	to	1.00
March 31, 2021 and thereafter	1.15	to	1.00

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 believe that, during the

first

three

months of

2020,

the standalone US business would have complied with the fixed charge coverage ratio, but consolidated group did

not

resulting in a new condition of noncompliance.

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 remain out of compliance with the terms of this facility.

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

2019

or the

six

months ended

June 30, 2020,

with

$32,000

and

$30,000,

respectively, of interest recorded as an expense during the

first

six

months of

2020

and

2019,

respectively.

During

2020,

Flexo replaced a

$260,000

line of credit with

three

line of credits totaling

$260,000.

Flexo's total debt instruments are

$1.75

million.

April 30, 2020,

the Company executed a promissory note (the “Note”) with PNC Bank National Association (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”). All the funds under the PPP Loan were disbursed to the Company on

April 23, 2020.

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

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 will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however,

assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments. During the

three

months ended

June 30, 2020

the Company recorded

$800,000

in other income for the PPP anticipated grant related to payroll utility and rent payment, which resulted in a deferred other income liability balance of

$264,854

as of

June 30, 2020.