Document:

EXHIBIT
10.4

 

Amendment
No. 4

to NOTE AND WARRANT PURCHASE Agreement

 

This Amendment No. 4
to Note and Warrant Purchase Agreement is dated as of October 12, 2016, but effective as of September 30, 2016, and is between
CTI Industries Corporation, an Illinois corporation (the “Company”);
CTI Supply, Inc., an Illinois corporation f/k/a CTI Helium, Inc., and a Wholly-Owned
Subsidiary of the Company, in its capacity as a guarantor (the “Subsidiary Guarantor”); and BMO PRIVATE EQUITY
(U.S.), INC., a Delaware corporation (the “Purchaser”).

 

The Company and the
Purchaser entered into a Note and Warrant Purchase Agreement dated as of July 17, 2012 (as amended, restated, supplemented
or otherwise modified prior to the effective date hereof, the “Purchase Agreement”), under which, among other
things, the Company sold to the Purchaser and the Purchaser purchased from the Company a note in the aggregate principal amount
of $5,000,000.

 

In connection with
the Purchase Agreement, the Subsidiary Guarantor entered into a Guaranty dated as of July 17, 2012 (the “Subsidiary
Guaranty”), under which, among other things, the Subsidiary Guarantor guarantees the prompt and complete payment and
performance of the Obligations.

 

The parties now desire
to amend the Purchase Agreement in certain respects.

 

The parties therefore
agree as follows:

 

1.          Definitions.
Defined terms used but not defined in this agreement are as defined in the Purchase Agreement.

 

2.          Amendments
to Purchase Agreement. (a) The definition of “CTI Helium” in section 5.1 of the Purchase Agreement is hereby
amended to read in its entirety as follows:

 

“            “CTI
Helium” means CTI Supply, Inc., an Illinois corporation and a Wholly-Owned Subsidiary f/k/a CTI Helium, Inc.”

 

(b)          The
definition of “Fixed Charges” in section 5.1 of the Purchase Agreement is hereby amended to read in its entirety as
follows:

 

“            “Fixed
Charges” means, with reference to any period, the sum of (a) the aggregate amount of payments made or required to be
made by the Company and its Subsidiaries, on a consolidated basis, during such period in respect of principal on all Indebtedness
for Borrowed Money (whether at maturity, as a result of mandatory sinking fund redemption, scheduled payments or otherwise) other
than (i) Revolving Loans (as defined in the Senior Credit Agreement), (ii) Intercompany Debt, and (iii) in the case of Subordinated
Debt, principal reductions caused by the exercise of warrants by the holders of such debt and principal reductions made prior to
the date of this Agreement, plus (b) total cash interest expense (including interest on Subordinated Debt but excluding
interest on Intercompany Debt) for such period.”

 

     

     

    

 

(c)          The
definition of “Total Funded Debt” in section 5.1 of the Purchase Agreement is hereby amended to read in its entirety
as follows:

 

“            “Total
Funded Debt” means, at any time the same is to be determined, the aggregate of all Indebtedness for Borrowed Money of
the Company and its Subsidiaries, on a consolidated basis, at such time, plus all Indebtedness for Borrowed Money of any other
person or entity which is directly or indirectly guaranteed by the Company or any of its Subsidiaries or which the Company or any
of its Subsidiaries has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which the Company
or any of its Subsidiaries has otherwise assured a creditor against loss. For purposes of this Agreement, “Total Funded Debt”
includes the 2016 CTI–Merrick Debt and the 2016 CTI–Schwan Debt, but “Total Funded Debt” does not include
any Excluded Flexo VIE Debt or the Subordinated Debt owing to John H. Schwan and Stephen M. Merrick described in Section 8.7(f).”

 

(d)          Section 5.1
of the Purchase Agreement is hereby further amended by inserting each of the following new definitions in the appropriate alphabetical
order:

 

“           “2016
CTI-Merrick Debt” means the Indebtedness for Borrowed Money of the Company owing to Stephen M. Merrick evidenced by a
Promissory Note dated September 30, 2016, in the original principal amount of $370,000 made by the Company and payable to Stephen
M. Merrick.

 

“2016 CTI-Schwan Debt”
means the Indebtedness for Borrowed Money of the Company owing to John H. Schwan evidenced by a Promissory Note dated September
30, 2016, in the original principal amount of $530,000 made by the Company and payable to John H. Schwan.

 

“2016 Walmart Promotional
Program” means a program and arrangement pursuant to which the Company 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.

 

“Amendment No. 4
Effective Date” means September 30, 2016, which is the effective date of an Amendment No. 4 to Note and Warrant
Purchase Agreement dated as of October 12, 2016, but effective as of September 30, 2016, between the Company, CTI Helium, and the
Purchaser.”

 

     

     

    

 

(e)            Section
8.5(a) of the Purchase Agreement is hereby amended to read in its entirety as follows:

 

“(a)          (i)
from and after the Amendment No. 4 Effective Date and through and including the earlier of (A) the date as of which all Receivables
(as such term is defined in the Senior Credit Agreement) from the 2016 Walmart Promotional Program have been paid to the Company
(as determined by Purchaser in its sole and absolute discretion based, in part, on delivery to the Purchaser of invoice documentation
and proof of payment remittance from Walmart) and (B) February 28, 2017, concurrently with delivery to the Senior Lender, and in
any event by the first Business Day of each week, a copy of the Borrowing Base certificate in the form attached as Exhibit F to
the Senior Credit Agreement showing the computation of the Borrowing Base in reasonable detail as of the close of business on the
last day of the immediately preceding week, together with an accounts receivable and accounts payable aging and an inventory report
supporting the computation of the Borrowing Base, prepared by the Company and certified to by its chief financial officer or such
other officer acceptable to the Purchaser; and (ii) thereafter, concurrently with delivery to the Senior Lender, and in any event
within fifteen (15) days after the last day of each calendar month, a copy of the Borrowing Base certificate in the form attached
as Exhibit F to the Senior Credit Agreement showing the computation of the Borrowing Base in reasonable detail as of the close
of business on the last day of such month, together with an accounts receivable and accounts payable aging and an inventory report
supporting the computation of the Borrowing Base, prepared by the Company and certified to by its chief financial officer or such
other officer acceptable to the Purchaser;”

 

(f)            Section 8.7
of the Purchase Agreement is hereby amended as follows: (1) by deleting “and” from the end of section 8.7(h); (2) by
renumbering existing section 8.7(i) as a new section 8.7(k); and (3) by inserting the following as new sections 8.7(i) and 8.7(j):

 

“(i)          the
2016 CTI-Merrick Debt existing on the Amendment No. 4 Effective Date in an aggregate principal amount not to exceed $370,000 as
of the Amendment No. 4 Effective Date, as reduced by permitted payments or permitted deemed payments thereon, and provided that
(A) the maturity date for the 2016 CTI-Merrick Debt shall be not earlier than the date that is six months after the Maturity Date,
(B) the 2016 CTI-Merrick Debt shall be unsecured, (C) the 2016 CTI-Merrick Debt shall be Subordinated Debt and (D) the first $900,000
of Receivables (as such term is defined in the Senior Credit Agreement) from the 2016 Walmart Promotional Program paid to the Company
shall, subject to Section 8.21, be used by the Company to make one or more prepayments or deemed prepayments of all of the outstanding
principal amount of the 2016 CTI-Merrick Debt and the 2016 CTI-Schwan Debt;

 

    	 	2	 

     

    

 

(j)          the
2016 CTI-Schwan Debt existing on the Amendment No. 4 Effective Date in an aggregate principal amount not to exceed $530,000 as
of the Amendment No. 4 Effective Date, as reduced by permitted payments or permitted deemed payments thereon, and provided that
(A) the maturity date for the 2016 CTI-Schwan Debt shall be not earlier than the date that is six months after the Maturity Date,
(B) the 2016 CTI-Schwan Debt shall be unsecured, (C) the 2016 CTI-Schwan Debt shall be Subordinated Debt and (D) the first $900,000
of Receivables (as such term is defined in the Senior Credit Agreement) from the 2016 Walmart Promotional Program paid to the Company
shall, subject to Section 8.21, be used by the Company to make one or more prepayments or deemed prepayments of all of the outstanding
principal amount of the 2016 CTI-Merrick Debt and the 2016 CTI-Schwan Debt; and”

 

(g)          Clause
(b) of Section 8.21 of the Purchase Agreement is hereby amended and restated in its entirety to read as follows:

 

“(b) make any voluntary prepayment
of Subordinated Debt or effect any voluntary redemption thereof other than voluntary prepayments (or deemed voluntary prepayments)
of the 2016 CTI-Merrick Debt and the 2016 CTI-Schwan Debt that are not prohibited under the terms of any instrument or agreement
subordinating the same to the Obligations, or”

 

3.            Reaffirmation
of Subsidiary Guaranty. The Subsidiary Guarantor hereby expressly does each of the following:

 

		(1)	consents to the execution by the Company and the Purchaser of this agreement;

 

		(2)	acknowledges that the “Indebtedness” (as defined in the Subsidiary Guaranty) includes
all of the “Obligations” under and as defined in the Purchase Agreement, as amended from time to time (including as
amended by this agreement);

 

		(3)	acknowledges that the Subsidiary Guarantor does not have any set-off, defense, or counterclaim
to the payment or performance of any of the obligations of the Company under the Purchase Agreement or the Subsidiary Guarantor
under the Subsidiary Guaranty;

 

		(4)	reaffirms, assumes, and binds itself in all respects to all of the obligations, liabilities, duties,
covenants, terms, and conditions contained in the Subsidiary Guaranty;

 

		(5)	agrees that all such obligations and liabilities under the Subsidiary Guaranty continue in full
force and that the execution and delivery of this agreement to, and its acceptance by, the Purchaser will not in any manner whatsoever
do any of the following:

 

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		(A)	impair or affect the liability of the Subsidiary Guarantor to the Purchaser under the Subsidiary
Guaranty;

 

		(B)	prejudice, waive, or be construed to impair, affect, prejudice, or waive the rights and abilities
of the Purchaser at law, in equity, or by statute against the Subsidiary Guarantor pursuant to the Subsidiary Guaranty; or

 

		(C)	release or discharge, or be construed to release or discharge, any of the obligations and liabilities
owing to the Purchaser by the Subsidiary Guarantor under the Subsidiary Guaranty; and

 

		(6)	represents and warrants that each of the representations and warranties made by the Subsidiary
Guarantor in any of the documents executed in connection with the Note and the other Operative Documents remain true and correct
as of the date of this agreement.

 

4.            Representations
and Warranties. To induce the Purchaser to enter into this agreement, the Company hereby represents to the Purchaser as follows:

 

		(1)	that the Company is duly authorized to execute and deliver this agreement and is and will continue
to be duly authorized to borrow monies under the Purchase Agreement, as amended by this agreement, and to perform its obligations
under the Purchase Agreement, as amended by this agreement;

 

		(2)	that the execution and delivery of this agreement and the performance by the Company of its obligations
under the Purchase Agreement, as amended by this agreement, do not and will not conflict with any provision of law or of the articles
of organization or operating agreement of the Company or of any agreement binding upon the Company;

 

		(3)	that the Purchase Agreement, as amended by this agreement, is a legal, valid, and binding obligation
of the Company, enforceable against the Company in accordance with its terms, except as enforceability might be limited by bankruptcy,
insolvency, or other similar laws of general application affecting the enforcement of creditors’ rights or by general principles
of equity limiting the availability of equitable remedies;

 

		(4)	that the representation and warranties set forth in section 6 of the Purchase Agreement, as amended
by this agreement, and Section 6 of the Senior Credit Agreement, as amended, in each case are true and correct with the same effect
as if those representations and warranties had been made on the date hereof, except that all references to the financial statements
mean the financial statements most recently delivered to the Purchaser and except for changes specifically permitted under the
Purchase Agreement, as amended by this agreement;

 

		(5)	that the Company has complied with and is in compliance with all of the covenants set forth in
the Purchase Agreement, as amended by this agreement, including the covenants stated in section 8 of the Purchase Agreement; and

 

		(6)	that as of the date of this agreement no Default and no Event of Default under Section 10 of the
Purchase Agreement, as amended by this agreement, has occurred or is continuing.

 

    	 	4	 

     

    

 

5.            Conditions.
The effectiveness of this agreement is subject to satisfaction of the following conditions:

 

		(1)	that the Purchaser has received the following:

 

		(A)	a copy of this agreement, duly executed by the parties;

 

		(B)	one or more subordination agreements with respect to the 2016 CTI–Merrick Debt and the 2016
CTI–Schwan Debt (each as defined in the Purchase Agreement as in effect immediately after giving effect to this agreement),
each in form and substance satisfactory to the Purchaser and duly executed by all applicable Persons;

 

		(C)	a copy of an amendment to the Senior Credit Agreement and each of the other documents required
to be delivered in accordance with that amendment, each in form and substance satisfactory to the Purchaser and duly executed by
all applicable Persons; and

 

		(D)	all other documents, certificates, resolutions, and opinions of counsel as the Purchaser requests;
and

 

		(2)	that all legal matters incident to the execution and delivery of this agreement are satisfactory
to the Purchaser and its counsel.

 

6.            General.
(a) This agreement and the rights and duties of the parties hereto are governed by, and are to be construed in accordance with,
the internal laws of State of Illinois without regard to principles of conflicts of laws. Wherever possible each provision of the
Purchase Agreement and this agreement is to be interpreted in such manner as to be effective and valid under applicable law, but
if any provision of the Purchase Agreement and this agreement is prohibited by or invalid under any such law, that provision will
be deemed ineffective to the extent of that prohibition or invalidity, without invalidating the remainder of that provision or
the remaining provisions of the Purchase Agreement and this agreement.

 

(b)          This
agreement is an Operative Document.

 

(c)          This
agreement binds each party and their respective successors and assigns, and this agreement inures to the benefit of each party
and the successors and assigns of the Purchaser.

 

(d)          Except
as specifically modified or amended by the terms of this agreement, the terms and provisions of the Purchase Agreement, the Subsidiary
Guaranty, and the other Operative Documents are incorporated by reference herein and in all respects continue in full force and
effect. The Company, by execution of this agreement, hereby reaffirms, assumes, and binds itself to all of the obligations, duties,
rights, covenants, terms, and conditions contained in the Purchase Agreement and the other Operative Documents to which it is a
party.

 

(e)          Each
reference in the Purchase Agreement to “this Agreement,” “hereunder,” “hereof,” or words of
like import, and each reference to the Purchase Agreement in any and all instruments or documents delivered in connection therewith,
are deemed to refer to the Purchase Agreement, as amended by this agreement.

 

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(f)          The
Company shall pay all costs and expenses in connection with the preparation of this agreement and other related loan documents,
including, without limitation, reasonable attorneys’ fees and time charges of attorneys who are employees of the Purchaser
or any affiliate or parent of the Purchaser. The Company shall pay any and all stamp and other taxes, UCC search fees, filing fees,
and other costs and expenses in connection with the execution and delivery of this agreement and the other instruments and documents
to be delivered hereunder, and agrees to save the Purchaser harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such costs and expenses.

 

(g)          The
Company hereby waives and releases any and all current existing claims, counterclaims, defenses, or set-offs of every kind and
nature which it has or might have against the Purchaser arising out of, pursuant to, or pertaining in any way to the Purchase Agreement,
any and all documents and instruments in connection with or relating to the foregoing, or this agreement. The Company hereby further
covenants and agrees not to sue the Purchaser or assert any claims, defenses, demands, actions, or liabilities against the Purchaser
arising out of, pursuant to, or pertaining in any way to the Purchase Agreement, any and all documents and instruments in connection
with or relating to the foregoing, or this agreement.

 

(h)          The
parties may sign this agreement in several counterparts, each of which will be deemed an original but all of which together will
constitute one instrument. 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.

 

[Signature pages follow]

 

    	 	6	 

     

    

 

(Signature Page to Amendment No. 4
to Note and Warrant Purchase Agreement)

 

The parties are signing
this Amendment No. 4 to Note and Warrant Purchase Agreement as of the date stated in the introductory clause.

 

	 	CTI INDUSTRIES CORPORATION
	 	 	 
	 	By:	/s/ Stephen Merrick
	 	Name: Stephen Merrick
	 	Title: President
	 	 
	 	CTI SUPPLY, INC.
	 	(f/k/a CTI Helium, Inc.)
	 	 	 
	 	By:	/s/ Stephen Merrick
	 	Name: Stephen Merrick
	 	Title: President
	 	 
	 	BMO PRIVATE EQUITY (U.S.), INC.
	 	By:	/s/Serkan Eskinazi
	 	Name:  Serkan Eskinazi
	 	Title:  PresidentEXHIBIT 10.5

 

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 Harris
Bank N.A., a national banking association (the “Bank”).

 

RECITALS:

 

A.           Pursuant
to that certain Credit Agreement dated as of April 29, 2010 (as amended, restated, supplemented, or otherwise modified from time
to time, the “Credit Agreement”), by and between the Debtor and the Bank, the Bank has agreed to make available
to the Debtor the Loans, as evidenced by the Notes, on the terms and subject to the conditions set forth in the Credit Agreement.

 

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, each a “Subordinated Debt Instrument”), the Debtor
is or will be indebted in various amounts to the Subordinated Creditors.

 

C.           The
Debtor’s incurring the Subordinated Debt requires the Bank’s consent, and it is a condition the Bank’s consent
that the Debtor and the Subordinated Creditors deliver this Agreement.

 

D.           Therefore,
the Debtor, the Subordinated Creditors, and the Bank 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	 

     

    

 

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

 

(a)          “2016 Merrick–BMO
Debt” means the indebtedness of Merrick owing to the Bank 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 Bank.

 

(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 Bank.

 

(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 Bank 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 Bank.

 

(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 Bank.

 

(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 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 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 all liabilities, indebtedness and obligations of the Debtor to the Bank, 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 Borrower to the Bank under the
Credit Agreement, the Notes, or any other agreement, document, or instrument referred to in Section 3 of the Credit Agreement.

 

    	 	2	 

     

    

 

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:

 

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 Harris Bank N.A. 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 Bank 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 Bank properly assigned or endorsed to the Bank. 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 Bank’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 Bank 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 Bank 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 Bank 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 Bank and the Subordinated Creditors shall be determined in accordance with applicable law.

 

    	 	3	 

     

    

 

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 the 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 Bank’s priority position over the Subordinated
Creditors created by this Agreement.

 

(b)          Payments
Received. If any payment (other than a payment permitted by this Agreement or the Credit 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 Bank by such Subordinated Creditor 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 Bank. The Bank is irrevocably authorized
(but not required), and each Subordinated Creditor does hereby irrevocably appoint the Bank, or any of its officers or employees
on behalf of the Bank 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 Bank 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 prepayments of principal of the Subordinated Debt, so long as (A) the
Debtor has delivered to the Bank evidence satisfactory to the Bank, 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 prepayment is made on or before February 28, 2017.

 

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(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, one or more prepayments of accrued interest on the Subordinated Debt, so long as (A) the
Debtor has delivered to the Bank evidence satisfactory to the Bank, 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 prepayment is made on or before February 28, 2017, and (D) 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.

 

(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 3(c)(ii),
pay to the Bank 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 Bank 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 3(c)(ii),
pay to the Bank 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 Bank 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 Bank, 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 Bank, as applicable) based on the outstanding principal
balance of the Subordinated Debt owing from the Debtor to each Subordinated Creditor.

 

    	 	5	 

     

    

 

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 Bank, 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 Bank is irrevocably authorized (but not required), and each Subordinated
Creditor does hereby irrevocably appoint the Bank, or any of its officers or employees on behalf of the Bank 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 Bank 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;

 

(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 Bank
(if requested by the Bank), (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 Bank, 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.

 

    	 	6	 

     

    

 

(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 Bank; 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 Bank, (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 Bank, 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 Bank or to require that the Bank 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 Bank 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 Bank may, without notice to the Subordinated Creditors, 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 Bank.

 

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
Bank 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 Bank 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.

 

    	 	7	 

     

    

 

10.         The
Bank’s Duties Limited. The rights granted to the Bank in this Agreement are solely for its protection and nothing herein
contained imposes on the Bank 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 Bank’s possession. The Bank 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 Bank, the Debtor and each Subordinated Creditor.

 

13.         Additional
Documentation. The Debtor and each Subordinated Creditor shall execute and deliver to the Bank such further instruments and
shall take such further action as the Bank 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 Bank on demand all expenses of every kind, including actual attorney’s fees, which the Bank
may incur in enforcing or protecting any of their rights under this Agreement.

 

15.         Persons
Bound. This Agreement benefits the Bank 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:

 

    	 	8	 

     

    

 

	 	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 Bank:	
        BMO Harris Bank N.A.

        111 West Monroe Street – 5W

        Chicago, Illinois 60603

        Attention:       Timothy
        J. Moran

        Telephone:     (312) 461-2633

        Facsimile:       (312) 502-3922

	 	 	 
	 	with copy to:	
        McGuireWoods LLP

        77 West Wacker Drive, Suite 4100

        Chicago, Illinois 60601

        Attention:       Clayton
        Stallbaumer

        Telephone:     (312) 641-2096

        Facsimile:       (312) 698-4556

 

    	 	9	 

     

    

 

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 Loan Documents (including with Agreement) maintained by the Bank will be deemed originals.

 

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

 

[Signature pages follow]

 

    	 	10	 

     

    

 

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 Harris BANK N.A.,
	 	as the Bank
	 	 	 
	 	By:	/s/ Timothy J. Moran
	 	Name:	Timothy J. Moran 
	 	Title:	Managing Director

 

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

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