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).

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	3.75	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, 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 interest for

million over

years. This contract was made at market value upon

December 2017

execution and accounted for as a hedge.

Failure to comply with these covenants might cause us to pay a higher rate of interest (by

per the Agreements), or other penalties up to and including the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. We believe that we were in compliance as of

December 31, 2017,

but

not

in compliance as of

March 31, 2018. As a result, we have reclassified

$4.4

million of noncurrent debt into current debt as of March 31, 2018.

The Company and its bank are currently discussing the appropriate actions going forward with respect to this credit facility.

September 30, 2016,

John H. Schwan advanced to the Company the sum of

$530,000

and Mr. Stephen M. Merrick advanced the Company the sum of

$370,000

to provide short-term working capital to the Company to fund the Company’s obligation to purchase and produce inventory for a substantial order for vacuum sealing systems to be delivered in

November 2016.

In consideration of such advances, the Company issued Promissory Notes to Mr. Schwan and Mr. Merrick. The principal balance of these notes were paid in

December 2016

and

January 2017.

Unrelated to the above, 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.

payments were issued to Mr. Schwan during the

three

months ended

March 31, 2018,

with

$27,000

of interest recorded as an expense.