EXHIBIT 10.6


 


SUBORDINATION AGREEMENT

(2016 CTI–Shareholder Debt)


 


This Subordination Agreement made and entered
into as of October 12, 2016, but effective as of September 30, 2016 (as amended, restated, supplemented or otherwise modified
from time to time, this “Agreement”), is by and among CTI Industries
CORPORATION, an Illinois corporation (the “Debtor”), Stephen M.
Merrick, an individual (“Merrick”), John H. Schwan,
an individual (“Schwan” and, together with Merrick, each a “Subordinated Creditor”), and
BMO PRIVATE EQUITY (U.S.), INC., a Delaware corporation (the “Purchaser”).


 


RECITALS:


 


A.           Pursuant
to that certain Note and Warrant Purchase Agreement dated as of July 17, 2012 (as amended, restated, supplemented, or otherwise
modified from time to time, the “Purchase Agreement”), by and between the Debtor and the Purchaser, the Purchaser
has agreed, subject to certain terms and conditions, to among other things, purchase from the Debtor a senior secured subordinated
promissory note in the aggregate principal amount of $5,000,000.


 


B.           Pursuant
to a Promissory Note dated September 30, 2016, in the original principal amount of $370,000 made by the Debtor and payable
to Merrick (the “2016 CTI–Merrick Note”), and a Promissory Note dated September 30, 2016, in the
original principal amount of $530,000 made by the Debtor and payable to Schwan (the “2016 CTI–Schwan Note”
and, together with the 2016 CTI–Merrick Note, together with any further notes, instruments or agreements, collectively, the
“Subordinated Debt Instruments”), the Debtor is or will be indebted in various amounts to the Subordinated Creditors.


 


C.           The
Debtor’s incurring the Subordinated Debt (as defined below) requires the Purchaser’s consent, and it is a condition
the Purchaser’s consent that the Debtor and the Subordinated Creditors deliver this Agreement.


 


D.           Therefore,
the Debtor, the Subordinated Creditors, and the Purchaser now desire to enter into this Agreement.


 


AGREEMENTS:


 


In consideration of the Recitals and for
other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:


 


1.           Definitions.
Capitalized terms not otherwise defined herein (including the Recitals) have the meaning assigned to such terms in the Purchase
Agreement. As used herein, the following terms have the following meanings:


 


(a)          “2016
Merrick–BMO Debt” means the indebtedness of Merrick owing to the Senior Lender evidenced by, among other documents,
the 2016 Merrick–BMO Line of Credit Agreement and a Promissory Note dated September 30, 2016, in the original principal
amount of $1,152,000 made by Merrick and payable to the Senior Lender.


 




     


     


    

 


(b)          “2016
Merrick–BMO Line of Credit Agreement” means a Line of Credit Agreement entered into as of September 30, 2016,
by and between Merrick and the Senior Lender, as amended from time to time.


 


(c)          “2016
Schwan–BMO Debt” means the indebtedness of Schwan, individually and as Trustee of the John H. Schwan Revocable
Trust dated September 9, 1997, owing to the Senior Lender evidenced by, among other documents, the 2016 Schwan–BMO Line
of Credit Agreement and a Promissory Note dated September 30, 2016, in the original principal amount of $2,250,000 made by
Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, and payable to the Senior
Lender.


 


(d)          “2016
Schwan–BMO Line of Credit Agreement” means a Line of Credit Agreement entered into as of September 30, 2016,
by and between Schwan, individually and as Trustee of the John H. Schwan Revocable Trust dated September 9, 1997, and
the Senior Lender, as amended from time to time.


 


(e)          “2016
Walmart Promotional Program” means a program and arrangement pursuant to which the Debtor will provide and sell to Walmart
in November 2016 approximately 4,000 half-pallets of vacuum-sealing machines and rolls of film for sale at Walmart stores.


 


(f)          “Merrick
Bridge Repayment” means the “Bridge Repayment” under and as defined in the 2016 Merrick–BMO Line of
Credit Agreement, as in effect on or about October 12, 2016.


 


(g)          “Schwan
Bridge Repayment” means the “Bridge Repayment” under and as defined in the 2016 Schwan–BMO Line of
Credit Agreement, as in effect on or about October 12, 2016.


 


(h)          “Subordinated
Debt” means all of the indebtedness, obligations, and liabilities of the Debtor to the Subordinated Creditors evidenced
by the Subordinated Debt Instruments.


 


(i)          “Superior
Debt” means the Obligations, together with any and all liabilities, indebtedness and obligations of the Debtor to the
Purchaser, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and whether
created directly or acquired by assignment or otherwise, including, but not limited to, all indebtedness, obligations and liabilities
of the Debtor to the Purchaser under the Purchase Agreement, the Note, or any other Operative Document.


 


2.           Subordination.


 


(a)          Subordination
of the Subordinated Debt. Each Subordinated Creditor postpones and subordinates to the extent and in the manner provided in
this Agreement all of such Subordinated Creditor’s Subordinated Debt to the payment of all of the Superior Debt. Each Subordinated
Creditor shall insure that any instrument or document evidencing such Subordinated Creditor’s Subordinated Debt shall bear
the following legend:


 




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Payment of the indebtedness evidenced by this instrument
or document and the rights of the holder hereof are subordinated and subject to the rights of BMO Private Equity (U.S.), Inc. to
the extent provided in a Subordination Agreement dated as of September 30, 2016, from the payee to said lender.


 


The Debtor’s and each Subordinated Creditor’s books
shall be marked to evidence subordination of all of the Subordinated Debt to the Superior Debt. The Purchaser is authorized to
examine such books from time to time and to make any notations required by this Agreement. All instruments and documents evidencing
the Subordinated Debt shall, upon request, be delivered to the Purchaser properly assigned or endorsed to the Purchaser. Nothing
contained in this Agreement shall affect the validity of the Subordinated Debt.


 


(b)          Subordination
of the Liens Securing the Subordinated Debt. Each Subordinated Creditor (i) acknowledges that, as of the date hereof,
such Subordinated Creditor has no lien, security interest in, or other right to, any property of the Debtor, and (ii) covenants
that it will not obtain any lien, security interest in, or other right to, any property of the Debtor without the Purchaser’s
prior written consent. To the extent that, notwithstanding the foregoing acknowledgment and covenant, any Subordinated Creditor
acquires any lien, security interest in, or other right to, any of the Subordinated Creditor Collateral (as hereinafter defined),
each Subordinated Creditor expressly subordinates all of its rights in any property of the Debtor, real or personal, now or later
securing the Subordinated Debt (the “Subordinated Creditor Collateral”), to all present and future rights of
the Purchaser in any of the Subordinated Creditor Collateral to secure the Superior Debt, without regard to the time or order of
attachment or perfection of any security interest, the time or order of filing any financing statement, or the giving or failure
to give any notice of the acquisition or expected acquisition of any purchase money security interest. Each Subordinated Creditor
consents to the creation and continuance of all present and future security interests of the Purchaser in the Subordinated Creditor
Collateral to secure the Superior Debt and to the enforcement of those security interests, including the removal of the Subordinated
Creditor Collateral from the real property of the Debtor. This subordination as to the Subordinated Creditor Collateral is intended
to define the rights and duties of the Purchaser and the Subordinated Creditors; it is not intended that any third party shall
benefit from it. If the effect of any provision of this subordination would be to give any third party a priority status to which
that party would not otherwise be entitled, that provision shall, to the extent necessary to avoid that priority, be given no effect
and the rights and priorities of the Purchaser and the Subordinated Creditors shall be determined in accordance with applicable
law.


 


3.           Payments
on Subordinated Debt.


 


(a)          Limitations.
Except as permitted by Section 3(c), until all the Superior Debt is paid in full in cash: (i) the Debtor shall not, directly
or indirectly, make any payments on account of or (other than any liens securing the Subordinated Creditor Collateral) grant a
security interest in, mortgage, assign, or transfer, any properties to secure or satisfy any part of the Subordinated Debt; (ii) no
Subordinated Creditor shall demand or accept from the Debtor or any other person any such payment or collateral or cancel, set
off or otherwise discharge any part of the Subordinated Debt; and (iii) neither the Debtor nor any Subordinated Creditor shall
otherwise take or permit any action prejudicial to or inconsistent with the Purchaser’s priority position over the Subordinated
Creditors created by this Agreement.


 




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(b)          Payments
Received. If any payment (other than a payment permitted by this Agreement or the Purchase Agreement) on account of or any
collateral for any part of the Subordinated Debt is received by any Subordinated Creditor, such payment or collateral shall be
delivered forthwith to the Senior Lender, in the event any Senior Debt is outstanding, and if not so outstanding, to the Purchaser
by such Subordinated Creditor for application to the Senior Debt, if still outstanding, and, if not outstanding, for application
to the Superior Debt, in the form received except for the addition of any endorsement or assignment necessary to effect transfer
of all rights therein to the Purchaser. The Purchaser is irrevocably authorized (but not required), and each Subordinated Creditor
does hereby irrevocably appoint the Purchaser, or any of its officers or employees on behalf of the Purchaser as the attorney-in-fact
for such Subordinated Creditor in connection with the Subordinated Debt, to supply any required endorsement or assignment which
may have been omitted. Until so delivered any such payment or collateral shall be held by the recipient in trust for the Purchaser
and shall not be commingled with other funds or property of the recipient.


 


(c)          Permitted
Payments.


 


(i)          Subject
to the other provisions of this Section 3(c), the Debtor shall be permitted to make, and the Subordinated Creditors shall
be permitted to accept from the Debtor, one or more voluntary prepayments of principal in respect of the Subordinated Debt, so
long as (A) the Debtor has delivered to the Purchaser evidence satisfactory to the Purchaser, in its sole and absolute discretion,
that that prepayment is being funded solely with amounts received in collection of accounts receivable from the 2016 Walmart Promotional
Program (which evidence might include, but will not necessarily be limited to, invoice documentation and proof of payment remittance
from Walmart), (B) that prepayment is funded solely with amounts received in collection of accounts receivable from the 2016
Walmart Promotional Program, and (C)  that any such voluntary prepayment is made on or before February 28, 2017.


 


(ii)         Subject
to the other provisions of this Section 3(c), the Debtor shall be permitted to make, and the Subordinated Creditors shall
be permitted to accept from the Debtor, (x) one or more voluntary prepayments of accrued interest in respect of the Subordinated
Debt, so long as (A) the Debtor has delivered to the Purchaser evidence satisfactory to the Purchaser, in its sole and absolute
discretion, that that prepayment is being funded solely with amounts received in collection of accounts receivable from the 2016
Walmart Promotional Program (which evidence might include, but will not necessarily be limited to, invoice documentation and proof
of payment remittance from Walmart), (B) that prepayment is funded solely with amounts received in collection of accounts
receivable from the 2016 Walmart Promotional Program, (C) that any such voluntary prepayment is made on or before February 28,
2017 and (D) that the outstanding principal balance of the Subordinated Debt has been paid in full in cash.


 


(iii)        The
Debtor shall not be permitted to make, and the Subordinated Creditors shall not be permitted to accept from the Debtor, payments
in cash of any accrued interest on the Subordinated Debt other than in accordance with Section 3(c)(ii), but interest may
accrue and continue to accrue on the Subordinated Debt in accordance with the Subordinated Debt Instruments. No such accrued interest
may be capitalized or otherwise added to the outstanding principal balance of the Subordinated Debt, and no such accrued interest
may itself bear interest under the Subordinated Debt Instruments.


 




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(iv)        Until
the Merrick Bridge Repayment is paid in full in cash, the Debtor shall, in lieu of making any prepayment of the Subordinated Debt
evidenced by the 2016 CTI–Merrick Note that is permitted to be made in accordance with Section 3(c)(i) or (ii), pay
to the Senior Lender the amount of that permitted prepayment as a payment or prepayment of the Merrick Bridge Repayment, and any
such payment or prepayment paid to the Senior Lender will be deemed a prepayment, in like amount, of the Subordinated Debt evidenced
by the 2016 CTI–Merrick Note.


 


(v)         Until
the Schwan Bridge Repayment is paid in full in cash, the Debtor shall, in lieu of making any prepayment of the Subordinated Debt
evidenced by the 2016 CTI–Schwan Note that is permitted to be made in accordance with Section 3(c)(i) or (ii), pay to
the Senior Lender the amount of that permitted prepayment as a payment or prepayment of the Schwan Bridge Repayment, and any such
payment or prepayment paid to the Senior Lender will be deemed a prepayment, in like amount, of the Subordinated Debt evidenced
by the 2016 CTI–Schwan Note.


 


(vi)        Unless
otherwise agreed in writing by each Subordinated Creditor, the Debtor, and the Purchaser, all prepayments of the Subordinated Debt
permitted to be made in accordance Section 3(c)(i) or 3(c)(ii) (and all payments or prepayments of the Merrick Bridge Repayment
or the Schwan Bridge Repayment to be made in lieu of any such permitted prepayment in accordance with Section 3(c)(iv) or
3(c)(v), respectively) must be made ratably to the Subordinated Creditors (or to the Senior Lender, as applicable) based on the
outstanding principal balance of the Subordinated Debt owing from the Debtor to each Subordinated Creditor.


 


4.           Collection
of the Subordinated Debt, Bankruptcy, Etc. Until all of the Superior Debt is paid in full in cash, no Subordinated Creditor
shall, without the prior written consent of the Purchaser, accelerate the maturity of the Subordinated Debt, initiate or join with
any other creditor of the Debtor in initiating any proceedings, voluntary or involuntary, for the collection of the Subordinated
Debt or for the distribution, division or application of all or part of the assets of the Debtor or the proceeds thereof, whether
such proceedings be for the liquidation, dissolution or winding up of the Debtor or the Debtor’s business, receivership,
insolvency or bankruptcy proceedings, an assignment for the benefit of creditors or proceedings by or against the Debtor for relief
under any bankruptcy, reorganization or insolvency law or any law relating to the relief of debtors, readjustment of indebtedness,
reorganization, arrangement, composition, extension or otherwise. The Purchaser is irrevocably authorized (but not required), and
each Subordinated Creditor does hereby irrevocably appoint the Purchaser, or any of its officers or employees on behalf of the
Purchaser as the attorney-in-fact for such Subordinated Creditor in connection with the Subordinated Debt, at its option, at any
meeting of the creditors of the Debtor or in any such proceeding or any proceeding initiated by the Debtor:


 


(a)          to
enforce claims comprising the Subordinated Debt either in its own name or in the name of the Subordinated Creditors, by proof of
debt, proof of claim, suit or otherwise;


 


(b)          to
collect any assets of the Debtor distributed, divided or applied by way of dividend or payment, or any securities issued, on account
of the Subordinated Debt and apply the same, or the proceeds of any realization upon the same the Purchaser in its discretion elects
to effect, to the Superior Debt until all of the Superior Debt has been paid in full in cash, rendering any surplus to the Subordinated
Creditors;


 




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(c)          to
vote claims comprising the Subordinated Debt to accept or reject any plan of partial or complete liquidation, reorganization, arrangement,
composition or extension; and


 


(d)          to
take generally any action in connection with any such meeting or proceeding which any Subordinated Creditor might otherwise take.


 


5.           Warranties
and Representations Concerning Subordinated Debt.


 


(a)          The
Debtor and the Subordinated Creditors jointly and severally represent and warrant that (i) no part of Subordinated Debt is
evidenced by any instrument, security or other writing which has not previously been or is not concurrently being deposited with
the Purchaser (if requested by the Purchaser), (ii) the Subordinated Creditors are the lawful owner of the Subordinated Debt
and no part thereof has been assigned to or subordinated or subjected to any other security interest in favor of anyone other than
the Purchaser and the Senior Lender, and (iii) as of the date hereof, (A) the aggregate outstanding principal balance
of Subordinated Debt owing from the Debtor to Schwan is $530,000 and (B) the aggregate outstanding principal balance of Subordinated
Debt owing from the Debtor to Merrick is $370,000.


 


(b)          Until
all of the Superior Debt has been paid in full in cash, (i) no Subordinated Creditor shall assign or subordinate any part
of the Subordinated Debt except to or in favor of the Purchaser and the Senior Lender; and (ii) except as set forth in Section 8,
neither the Debtor nor the Subordinated Creditors shall agree to any amendment, supplement, waiver, or other modification of any
of the terms of the Subordinated Debt.


 


6.           Waivers.
The Subordinated Creditors jointly and severally waive (a) any defense based on the adequacy of a remedy at law which might
be asserted as a bar to the remedy of specific performance hereof in any action brought therefor by the Purchaser, (b) presentment,
notice and protest in connection with all negotiable instruments evidencing the Superior Debt or the Subordinated Debt to which
they may be parties, notice of the acceptance of this Agreement by the Purchaser, notice of any loans made, increases in the amount
of, or interest rate on the Superior Debt, extensions granted or other action taken or postponement of the time of payment or any
other indulgence in connection with the Superior Debt, to any substitution, exchange or release of collateral therefor and to the
addition or release of any person primarily or secondarily liable thereon and (c) all rights, if any, to require a marshaling
of the Debtor’s assets by the Purchaser or to require that the Purchaser first resort to some or any portion of any collateral
for the Superior Debt before foreclosing upon, selling or otherwise realizing on any other portion thereof. No waiver is made by
the Purchaser of any of its rights hereunder unless the same is in writing, and each waiver, if any, is a waiver only with respect
to the specific instance involved.


 


7.           Duration.
This Agreement is a continuing agreement and the Purchaser may, without notice to the Subordinated Creditors, increase, extend
or continue credit and make other financial accommodations to or for the account of the Debtor in reliance upon this Agreement.
This Agreement may be terminated by the Subordinated Creditors only if all of the Superior Debt is finally paid in full in cash.


 


8.           Amendment
of Subordinated Debt. Each Subordinated Creditor shall not modify or amend any note, agreement, or instrument evidencing or
securing the Subordinated Debt, including, without limitation, the Subordinated Debt Instruments, without the prior written consent
of the Purchaser.


 




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9.          Default.
If any representation or warranty in this Agreement or in any instrument evidencing the Superior Debt proves to have been materially
false when made or in the event of a breach by the Debtor or any Subordinated Creditor in the performance of any of the terms of
this Agreement or upon the occurrence of any event of default under any instrument or agreement evidencing the Superior Debt, the
Purchaser may, at its option, declare all Superior Debt to be forthwith due and payable, without presentment, demand, protest,
or notice of any kind, notwithstanding any time or credit otherwise allowed. At any time any Subordinated Creditor fails to comply
with any provision applicable to such Subordinated Creditor, the Purchaser may demand specific performance of this Agreement, whether
or not the Debtor has complied with this Agreement, or exercise any other remedy available at law or equity.


 


10.         The
Purchaser’s Duties Limited. The rights granted to the Purchaser in this Agreement are solely for its protection and nothing
herein contained imposes on the Purchaser any duties with respect to any property of the Debtor or any Subordinated Creditor received
hereunder beyond reasonable care in their custody and preservation while in the Purchaser’s possession. The Purchaser has
no duty to preserve rights against prior parties in any instrument or chattel paper received hereunder.


 


11.         Authority.
The Debtor and the Subordinated Creditors jointly and severally represent and warrant that they have authority to enter into this
Agreement and the persons signing for each party are authorized and directed to do so.


 


12.         Modification.
This Agreement may only be modified in writing signed by the Purchaser, the Debtor and each Subordinated Creditor.


 


13.         Additional
Documentation. The Debtor and each Subordinated Creditor shall execute and deliver to the Purchaser such further instruments
and shall take such further action as the Purchaser may at any time or times reasonably request in order to carry out the provisions
and intent of this Agreement.


 


14.         Expenses.
The Debtor agrees to pay the Purchaser on demand all expenses of every kind, including actual attorney’s fees, which the
Purchaser may incur in enforcing or protecting any of its rights under this Agreement.


 


15.         Persons
Bound. This Agreement benefits the Purchaser and its successors and assigns, and binds the Debtor, each Subordinated Creditor
and their respective successors and assigns.


 


16.         Defects
Waived. This Agreement is effective notwithstanding any defect in the validity or enforceability of any instrument or document
evidencing the Superior Debt.


 


17.         Notices.
All notices, demands and communications provided for herein or made hereunder shall be delivered, or mailed first class with postage
prepaid, or telefaxed, addressed in each case as follows, until some other address shall have been designated in a written notice
given in like manner, and shall be deemed to have been given when so delivered, mailed or telefaxed:


 




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	If to the Debtor:	CTI Industries Corporation
	 	22160 North Pepper Road
	 	Barrington, Illinois  60010
	 	Attention:	Stephen M. Merrick
	 	Telephone:	(847) 620-1308
	 	Facsimile:	(847) 382-1219
	 	 	 
	with a copy to:	Vanasco, Genelly & Miller
	 	33 North LaSalle Street, Suite 2200
	 	Chicago, Illinois  60602
	 	Attention:	Gerald Miller
	 	Telephone:	(312) 786-5100
	 	Facsimile:	(312) 786-5111
	 	 	 
	If to the Subordinated	 	 
	Creditors:	Stephen M. Merrick
	 	22160 North Pepper Road
	 	Barrington, Illinois  60010
	 	Facsimile:	(847) 382-1219
	 	 	 
	 	John H. Schwan
	 	22160 North Pepper Road
	 	Barrington, Illinois  60010
	 	Facsimile:	(847) 382-1219
	 	 	 
	If to the Purchaser:	BMO Private Equity (U.S.), Inc.
	 	c/o BMO Mezzanine Fund
	 	111 West Monroe, 20E
	 	Chicago, Illinois  60603
	 	Attention:	Jason Swanson and Serkan Eskinazi
	 	Telephone:	(312) 293-8196
	 	Facsimile:	N/A
	 	 	 
	with copy to:	Vedder Price P.C.
	 	222 North LaSalle Street, Suite 2400
	 	Chicago, Illinois  60601
	 	Attention:	Guy E. Snyder and Marie H. Godush
	 	Telephone:	(312) 609-7500
	 	Facsimile:	(312) 609-5005


 


18.         Counterparts.
This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any
of the parties hereto may execute this Agreement by signing any such counterpart. Receipt of an executed signature page to
this agreement by facsimile or other electronic transmission will constitute effective delivery of that executed signature page.
Electronic records of executed Operative Documents (including this agreement) maintained by the Purchaser will be deemed to be
originals.


 




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19.         Law
Governing. The validity, construction and enforcement of this Agreement are governed by the internal laws of the State of Illinois.


 


[Signature Page Follows]


 




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The parties are signing this Subordination
Agreement as of the date stated in the introductory clause.


 


	 	CTI INDUSTRIES CORPORATION,
	 	as Debtor
	 	 
	 	By:  /s/ Stephen Merrick
	 	Name:  Stephen Merrick
	 	Title:  President
	 	 
	 	/s/ Stephen M. Merrick
	 	STEPHEN M. MERRICK, as a Subordinated Creditor
	 	 
	 	/s/ John H. Schwan
	 	John H. Schwan, as a Subordinated Creditor
	 	 
	 	BMO PRIVATE EQUITY (U.S.), INC.,
	 	as the Purchaser
	 	 
	 	By:  /s/ Timothy J. Moran
	 	Name:  Timothy J. Moran
	 	Title:  Managing Director


 


Signature page to Subordination Agreement
(2016 CTI–Shareholder Debt)