Note

- 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

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”) 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. We believe that we were in compliance with all covenants, as amended, as of

June 30, 2018.

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, 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	4.50	to	1.00
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

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.

Under the Amendment, we were required to maintain EBITDA during the fiscal month ended

April 30, 2018

less than

$300,000,

and for the

two

fiscal months ended

May 31, 2018

less than

$750,000.

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 fee was a

one

-time payment of

$58,750.

Additionally, the rate of interest increased by

until such time as the Fixed Charge Coverage Ratio for a

twelve

month period is greater than or equal to

1.10

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 also entered into a swap agreement with PNC Bank to fix the interest for

million over

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.

payments were issued to Mr. Schwan during the

three

and

six

months ended

June 30, 2018,

with

$27,000

and

$54,000,

respectively, of interest recorded as an expense.