CTI INDUSTRIES CORP (Form: 10-K, Received: 03/31/2017 16:33:35)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File Number

000-23115

CTI INDUSTRIES CORPORATION

(Exact name of Registrant as specified in its charter)

Illinois	36-2848943
(State or other jurisdiction of	(I.R.S. Employer Identification Number)
incorporation or organization)

22160 N. Pepper Road
Lake Barrington, Illinois	60010
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (847) 382-1000

Securities Registered pursuant to sections 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered

Common Stock, No Par	NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller Reporting Company þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Based upon the closing price of $6.73 per share of the Registrant’s Common Stock as reported on NASDAQ Capital Market tier of The NASDAQ Stock Market on June 30, 2016, the aggregate market value of the voting common stock held by non-affiliates of the Registrant was then approximately $11,987,000. (The determination of stock ownership by non-affiliates was made solely for the purpose of responding to the requirements of the Form and the Registrant is not bound by this determination for any other purpose.)

The number of shares outstanding of the Registrant’s Common Stock as of March 1, 2017 was 3,525,227 (excluding treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Document		Part of Form 10-K into Which Document Is Incorporated

Sections of the registrant’s Proxy Statement To be filed on or before April 30, 2017 for the Annual Meeting of Stockholders		Part III

TABLE OF CONTENTS

INDEX

FORWARD LOOKING STATEMENTS

Part I

Item No. 1	Description of Business	1
Item No. 1B	Unresolved Staff Comments	15
Item No. 2	Properties	15
Item No. 3	Legal Proceedings	16

Part II

Item No. 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
Item No. 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item No. 7A	Quantitative and Qualitative Disclosures Regarding Market Risk	29
Item No. 8	Financial Statements and Supplementary Data	29
Item No. 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item No. 9A	Controls and Procedures	29
Item No. 9B	Other Information	30

Part III

Item No. 10	Directors and Executive Officers of the Registrant	30
Item No. 11	Executive Compensation	31
Item No. 12	Security Ownership of Certain Beneficial Owners and and Management and Related Stockholder Matters	31
Item No. 13	Certain Relationships and Related Transactions	31
Item No. 14	Principal Accounting Fees and Services	31

Part IV

Item No. 15	Exhibits and Financial Statement Schedules	31

FORWARD-LOOKING STATEMENTS

This annual report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future results. Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this annual report. We disclaim any intent or obligation to update any forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our opinions or expectations. These forward-looking statements are affected by factors, risks, uncertainties and assumptions that we make, including, without limitation, our participation in highly competitive markets, potential changes in the cost or availability of raw materials, our dependence on a limited number of suppliers, the possible inability to obtain an adequate supply of raw materials, our reliance on a limited number of key customers, the loss of one or more of our key customers, changing consumer demands, developments or changes in technology, risks of international operations and political environments, dependence on our intellectual property, compliance with federal, state or local regulations, restrictions included in the Company’s credit facility, the availability of funds under the Company’s credit facility, damage to or destruction of one or both of the Company’s principal plants, our ability to service our indebtedness, our ability to invest in needed plant or equipment.

PART I

Item No. 1 – Description of Business

Business Overview

We develop, produce and distribute a number of consumer products and sell these products throughout the United States and in over 30 other countries, and we produce film products for commercial and industrial uses in the United States. Many of our products utilize flexible films and, for a number of years, we have been a leading developer of innovative products which employ flexible films including novelty balloons, pouches and rolls of film for vacuum sealing and storage of products in the home as well as films for commercial packaging applications.

Our principal lines of products include:

Novelty Products consisting principally of foil and latex balloons and other inflatable toy items

Vacuum Sealing Containers and Sealing Devices for home and consumer use to vacuum seal, store and preserve food and personal items.

Flexible Films for food and other commercial and packaging applications.

In addition to these principle product lines, for the past several years, we have engaged in (i) the assembly and sale of Candy Blossoms (small containers of arranged candy items often including a small foil balloon), (ii) the distribution in Mexico of party goods products, and (iii) the sale and distribution of home containers and organizing products (some of which we produce) to and through a related entity which distributes these products through a network of independent distributors.

We leverage our technology to design and develop proprietary products which we market and sell and which we develop for our customers. We have been engaged in the business of developing flexible film products for over 40 years and have acquired significant technology and know-how in that time. We currently hold several patents, and have patent applications pending, relating to flexible film products including specific films, zipper closures, valves and other features of these products.

We print, process and convert flexible film into finished products and we produce latex balloons and novelty items. Our principal production processes include:

Coating and laminating rolls of flexible film. Generally, we adhere polyethylene film to another film such as nylon or polyester.

Printing film and latex balloons. We print both plastic and latex films, with a variety of graphics, for use as packaging film or for balloons.

Converting printed film to balloons.

Converting film to flexible containers.

Producing latex balloons and other latex novelty items.

Assembly and inflation of novelty products and balloons.

In 1978, we began manufacturing metalized balloons (often referred to as "foil" balloons), which are balloons made of a base material (usually nylon or polyester) often having vacuum deposited aluminum and polyethylene coatings. These balloons remain buoyant when filled with helium for much longer periods than latex balloons and permit the printing of graphic designs on the surface. In 1985, we began marketing latex balloons and, in 1988, we began manufacturing latex balloons. In 1999, we acquired an extrusion coating and laminating machine and began production of coated and laminated films, which we have produced since that time.

For more than 20 years, we have been engaged in the production of flexible containers for the storage of liquids, food products, household goods and other items, and in the coating, laminating and printing of flexible films for our novelty and container products and for the production of laminated and printed films we supply to others.

We market and sell our foil and latex balloons and related novelty items throughout the United States, Canada and Mexico and in a number of other countries in Latin America and Europe. We supply directly to retail stores and chains and through distributors, who in turn sell to retail stores and chains. Our balloon and novelty products are sold to consumers through a wide variety of retail outlets including general merchandise, discount and drugstore chains, grocery chains, card and gift shops, and party goods stores, as well as through florists and balloon decorators.

Most of our foil balloons contain printed characters, designs and social expression messages, such as “Happy Birthday,” “Get Well” and similar items. For some of our balloon designs, we obtain licenses for well-known characters and print those characters and messages on our balloons.

We produce flexible containers and rolls of film for use as flexible containers in a variety of applications, including (i) zippered pouches with valves for vacuum sealing of food and household products and (ii) pouches and rolls of film for use with vacuum sealing machines to vacuum seal, store and protect food and household items. We market and sell flexible containers and rolls of film for consumer storage uses through retail chains and outlets throughout the United States, and we provide flexible containers to others for resale. We market and sell vacuum sealing machines for use with pouches and rolls of film for the vacuum storage of food and household products.

We provide laminated films and printed films to customers who utilize the film to produce bags or pouches for the packaging of food, liquids and other items.

Commencing in 2014, we began assembling and producing Candyloons and Candy Blossoms - containers including candy items and air-inflated balloons - which we market to food store chains. Since 2014, we have distributed home container and organizing products, some of which we produce, to and through a related entity which distributes those products through a network of independent distributors in the United States. In 2015, we commenced the distribution of party goods in Mexico.

In 2016, our revenues from our product lines, as a percent of total revenues were:

·	Novelty Products	54% of revenues
·	Vacuum Sealing Containers and Devices	27% of revenues
·	Film Products	8% of revenues
·	Other Products	11% of revenues

We are an Illinois corporation with our principal offices and plant at 22160 N. Pepper Road, Lake Barrington, Illinois.

Business Strategies and Developments

Our business strategies, and recent developments related to our business, include:

Focus on our Core Assets and Expertise . We have been engaged in the development, production and sale of film and container products for 40 years and have developed assets, technology and expertise which, we believe, enable us to develop, manufacture, purchase, market and sell innovative products of high quality within our areas of knowledge and expertise. We plan to focus our efforts on these core assets and areas of expertise – film novelty products, consumer vacuum storage systems, specialty film products, container products, laminated films and printed films – to develop new products, to market and sell our products and to build our revenues.

Maintain a Focus on Margin Levels and Operating Costs in Order to Establish and Maintain Profitability . We consistently monitor, evaluate and manage our cost of goods sold, and our selling, general and administrative, expenses in order to establish and enhance profitability.

Develop New Products, Product Improvements and Technologies . We engage in research, design, innovation and development for the purpose of developing, and improving, products, materials, methods and technologies within our core product categories. We work to develop and identify new products, to improve existing products and to develop new technologies within our core product areas in order to enhance our competitive position and increase our sales. We seek to leverage our technology to develop innovative and proprietary products. In our novelty product lines, our development work includes new designs, new character licenses, new product developments, new materials and improved production methods. In our consumer storage product lines, we have developed new pouch closure systems and valves and new film methods for packaging applications. We have received seven patents for these developments and have patent applications pending. We developed and introduced a line of resealable pouches with a valve and pump system for household storage and vacuum sealing of food items. We designed and introduced a line of vacuum sealing equipment for the vacuum sealing of pouches for food and household items and are engaged in development efforts to create new and enhanced vacuum sealing machines, accessories and related products. We work with customers to develop custom film products which serve the unique needs or requirements of the customer.

Develop New Channels of Distribution and New Sales Relationships . We seek to develop new channels of distribution and new sales relationships, both for existing and new products. Over the past several years, we have developed new distributors and customers for our pouch and novelty products, in the United States and in Europe, Mexico, Latin America and Australia, expanding the scope and level of our international sales and activities. In 2013, we introduced a line of vacuum sealing systems for the storage and preservation of food and other items in the home under the Ziploc® Brand Vacuum Sealer System. We market and sell the vacuum sealing machines, pouches and rolls of film under the brand throughout the United States, Canada and Mexico. During the past three years, we developed a relationship with a related company engaged in the sale of home containers and organization products and have become a supplier of products, some of which we produce, to that company. During 2015, we became a distributor in Mexico for a major party goods company.

Enhance Our Productive Capacity. We invest in new plant and equipment when appropriate to expand the range and volume of products we produce. During 2008 and 2009, we acquired, installed and commenced operation of equipment which enabled us to produce the pouches and rolls of film for our vacuum sealing storage business we developed. During 2010 and 2011, we designed, assembled and installed latex balloon production equipment which significantly enhanced our production capacity for latex balloons to support our growing sales of this product line. We significantly expanded our warehouse, packaging and fulfillment facilities and operations during 2013. During the first quarter of 2014, we acquired printing equipment which almost doubled printing capacity to support our growing sales of foil balloons. We have acquired and installed a new latex balloon production machine in Mexico which became operational in August 2016; this machine will enhance our latex balloon production capacity by approximately 30%. Currently, we have contracted for the acquisition of two new foil balloon converting machines which we expect to be operational by mid-2017.

Products

Foil Balloons . We have designed, produced and sold foil balloons since 1979 and, we believe, are the second largest manufacturer of foil balloons in the United States. Currently, we produce about 900 foil balloon designs, in different shapes and sizes, including the following:

Superloons ^® - 17" and 18" foil balloons in round or heart shape, generally made to be filled with helium and remain buoyant for long periods. This is our predominant foil balloon size.

Ultraloons ^® - 31" jumbo foil balloons made to be filled with helium and remain buoyant for an extended time.

Miniloon ^® - 9" foil balloons made to be air-filled and sold on holder-sticks or for use in decorations.

Card-B-Loons ^® - 4 ½" air-filled foil balloons, often sold on a stick, used in floral arrangements or with a container of candy.

Shape-A-Loons ^® - 18" to 48" shaped foil balloons made to be filled with helium.

Minishapes - 11" to 16" small shaped foil balloons designed to be air filled and sold on sticks as toys or inflated characters.

In addition to size and shape, a principal element of the Company's foil balloon products is the printed design or message contained on the balloon. These designs include figures and licensed characters many of which are well known. We maintain licenses for several well-known characters.

Latex Balloons . Through our subsidiary in Guadalajara, Mexico, Flexo Universal, S. de R.L. de C.V. (“Flexo Universal”), we manufacture latex balloons in 17 sizes and 57 colors. Many of these balloons are marketed under the name Partyloons ^® and balloons are also marketed on a private label basis. We also manufacture toy balloon products including punch balls, water bombs and "Animal Twisties."

Vacuum Sealing Pouches and Systems . We produce, market and sell consumer vacuum storage pouches and systems for the vacuum storage of food and other household items. We produce (i) vacuum sealable bags and rolls of film for use with vacuum sealing devices for household storage and (ii) valved, resealable bags also for vacuum storage uses. Our valved, resealable bags function with a small hand or battery-powered pump to evacuate air from the bag when it is sealed. Since 2012, we have produced and marketed vacuum sealable bags and rolls of film under the Ziploc ^® brand. We also market vacuum sealing machines, produced for us, under the Ziploc ^® Brand Vacuum Sealer System. We have produced and marketed a line of valved, resealable bags under our Zipvac™ line. We have recently introduced a line of valved, resealable bags, including a line of vacuum sealing canisters sold under the brand Clever Fresh™ by our affiliate, Clever Container Company.

Packaging Films and Custom Film Products. We produce and sell films that are utilized for the packaging of various products, principally food products. We laminate, extrusion coat and print films and sell them to customers who utilize the films for packaging applications. Our customers generally use these film products to convert them to bags or pouches for the packaging of food and other products. We develop and produce for customers unique products composed of flexible film.

Other Products. We now distribute, and to some degree produce, home organization and container products for Clever Container Company, an entity consolidated with our company as a variable interest entity. Clever Container engages in the direct sale of such products through a network of independent distributors. In 2014, we began assembly and sale of our Candy Blossom product line. In 2015, we began to distribute party goods in Mexico.

Markets

Foil Balloons

The foil balloon came into existence in the late 1970s. During the 1980s, the market for foil balloons grew rapidly. Initially, the product was sold principally to individual vendors, small retail outlets and at fairs, amusement parks, shopping centers and other outdoor facilities and functions. Foil balloons remain buoyant when filled with helium for extended periods of time and they permit the printing and display of graphics and messages. As a result, the product has significant appeal as a novelty and message item. Foil balloons became part of the "social expression" industry, carrying graphics designs, characters and messages like greeting cards. In the mid-1980s, we and other participants in the market began licensing character and cartoon images for printing on the balloons and directed marketing of the balloons to retail outlets including grocery, general merchandise, discount and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators. These outlets now represent the principal means for the sale of foil balloons throughout the United States and in a number of other countries, although individual “vendors” remain a means of distribution in a number of areas.

Foil balloons are now sold in virtually every region of the world. The United States, however, remains the largest market for these products.

Foil balloons are sold in the United States and foreign countries directly by producers to retail outlets and through distributors and wholesalers. Often the sale of foil balloons by the wholesalers/distributors is accompanied by related products including latex balloons, floral supplies, candy containers, mugs, plush toys, baskets and a variety of party goods.

Latex Balloons

For a number of years, latex balloons and related novelty/toy latex items have been marketed and sold throughout the United States and in many other countries. Latex balloons are sold as novelty/toy items, for decorative purposes, as part of floral designs and as party goods and favors. In addition to standard size and shape balloons, inflatable latex items include punch balls, water bombs, balloons to be twisted into shapes, and other specialty designs. Often, latex balloons include printed messages or designs.

Latex balloons are sold principally in retail outlets, including party goods stores, general merchandise stores, discount chains, gift stores and drugstore chains. Latex balloons are also purchased by balloon decorators and floral outlets for use in decorative or floral designs. Printed latex balloons are sold both in retail outlets and for balloon decoration purposes including floral designs.

Latex balloons are sold both through distributors and directly to retail outlets by the producers.

Flexible Containers/Pouches

The market for flexible containers and pouches is large and diverse. Many companies engaged in the production of food items package their products in flexible containers or pouches, and, therefore, represent a market for these containers.

Flexible containers and pouches are sold and utilized in the consumer market in numerous forms. They include simple open-top plastic bags, resealable bags and zippered bags. The market also includes containers and pouches of special design or purpose, including vacuumable bags for storage of food or household items or commercial uses.

We participate in a segment of the market for vacuum sealing and storage of food and household items. These products generally are sold in retail chain stores, and to some degree, in grocery stores, and, recently, in a direct sales channel. The product lines sold include (i) zippered, resealable bags, incorporating a valve through which air can be evacuated by a hand pump or other device; (ii) pouches or rolls of film which can be sealed by vacuum sealing devices and (iii) vacuum sealing devices.

Printed and Specialty Films

The industry and market for printed and specialty films are fragmented and include many participants. There are hundreds of manufacturers of printed and specialty film products in the United States and in other markets. In many cases, companies who provide food and other products in film packages also produce or process the films used for their packages. The market for the Company's film products consists principally of companies who utilize the films for the packaging of their products, including food products and other items, usually by converting the film to a flexible container.

Marketing, Sales and Distribution

Balloon Products

We market and sell our foil balloon, latex balloon and related novelty products throughout the United States and in a number of other countries. We maintain marketing, sales and support staff and a customer service department in the United States. Sales in the United Kingdom are conducted by CTI Balloons Ltd. (“CTI Balloons”), the Company's subsidiary located in Rugby, England. Sales in Europe are conducted by CTI Europe GmbH (“CTI Europe”), the Company’s subsidiary located in Heusenstamm, Germany. Flexo Universal, our subsidiary in Mexico, conducts sales and marketing activities for the sale of balloon products in Mexico, Latin America, and certain other markets. Sales in other foreign countries are made generally to distributors in those countries and are managed at the Company's principal offices.

We sell and distribute our balloon products (i) by our employed staff of sales and customer service personnel in the United States, Mexico, the UK and Germany, (ii) through a network of distributors and wholesalers in the United States, Mexico, the UK and Europe, (iii) through several groups of independent sales representatives, and (iv) to retail chains. Our balloon products are generally sold through retail outlets including grocery, general merchandise and drug store chains, card and gift shops, party goods stores as well as florists and balloon decorators.

We engage in a variety of advertising and promotional activities to promote the sale of our balloon products. We produce a complete catalog of our balloon products, and also prepare various flyers and brochures for special or seasonal products, which we disseminate to thousands of customers, potential customers and others. We participate in several trade shows for the gift, novelty, balloon and other industries and advertise in several trade and other publications. We maintain websites which show images of our products.

Flexible Containers/Pouches

We market several lines of flexible containers or pouches for household use to vacuum seal, store and preserve food and other household items.

We developed and, for several years, we have produced and sold a line of pouches and rolls of film for use with vacuum sealing machines to vacuum seal food and household items. Initially, we marketed these products through various retail channels under our brand or on a private label basis. On December 14, 2011, the Company entered into a Trademark License Agreement with SC Johnson under which the Company is licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc ^® Brand Vacuum Sealer System. The agreement was initially for a three year term expiring on December 31, 2014 and was extended for a term commencing on January 1, 2015 and extending to December 31, 2017. The licensed product line includes vacuum sealing machines manufactured for the Company and pouches and rolls manufactured by the Company for use in the home to vacuum seal food items to preserve freshness and help prevent freezer burn.

During 2007, we introduced a line of re-sealable pouches incorporating a valve permitting the evacuation of air from the sealed pouch by use of a hand pump supplied with the pouches. This line of products has been marketed under the brand name ZipVac ^® . We now produce a line of resealable pouches under the brand Clever Fresh™ which we provide to our affiliate Clever Container Company for sale and distribution to its network of independent distributors.

Printed and Specialty Films

We market and sell printed and laminated films directly and through independent sales representatives throughout the United States. We sell laminated and printed films to companies that utilize these films to produce packaging for a variety of products, including food products, in both solid and liquid form, such as cola syrup, coffee, juices and other items. We seek to identify and maintain customer relationships in which we provide added value in the form of technology or systems.

Production and Operations

We conduct our operations at our facilities including: (i) our 68,000 square feet facility in Lake Barrington, Illinois, incorporating our headquarters office, production and warehouse space, (ii) our 118,000 square foot facility in Lake Zurich, Illinois consisting of warehouse, packaging and office space (iii) a 73,000 square foot facility in Guadalajara, Mexico, consisting of office, warehouse and production space, (iv) a 9,000 square foot facility in Rugby, England consisting of office and warehouse space, and (v) a 13,000 square foot facility in Heusenstamm, Germany (near Frankfurt), consisting of office and warehouse space.

We conduct production operations at our plants in Lake Barrington, Illinois and Guadalajara, Mexico. At our plants, our production operations include (i) lamination and extrusion coating of films, (ii) slitting of film rolls, (iii) printing on film and on latex balloons, (iv) converting film to completed products including balloons, flexible containers and pouches, and (v) production of latex balloon products. We perform all of the lamination, extrusion coating and slitting activities in our Lake Barrington, Illinois plant and produce all of our latex balloon products at our Guadalajara, Mexico plant. We print on films in Lake Barrington, Illinois and we print on latex balloons in Guadalajara, Mexico.

We warehouse raw materials at our plants in Lake Barrington, Illinois and Guadalajara, Mexico and we warehouse finished goods at our facilities in Lake Barrington, Illinois; Lake Zurich, Illinois; Guadalajara, Mexico; Rugby, England and Heusenstamm, Germany. We maintain customer service and fulfillment operations at each of our warehouse locations. We conduct sales operations for the United States and for all other markets, except those handled by our Mexico, Germany and England facilities, at the Lake Barrington, Illinois facility. Sales for Mexico and Latin America are handled at our Guadalajara, Mexico facility; sales for the United Kingdom are handled at our Rugby, England facility; sales for Europe are conducted from our facilities in Heusenstamm, Germany. In addition to warehouse and sales activities at these locations, we engage in some assembly, balloon inflation and related activities.

We maintain a graphic arts and development department at our Lake Barrington, Illinois facility which designs our balloon products and graphics. Our creative department operates a networked, computerized graphic arts system for the production of these designs and of printed materials including catalogues, advertisements and other promotional materials.

We conduct administrative and accounting functions at our headquarters in Lake Barrington, Illinois and at our facilities in Guadalajara, Mexico, Rugby, England and Heusenstamm, Germany.

Raw Materials

The principal raw materials we use in manufacturing our products are (i) petroleum or natural gas-based films, (ii) petroleum or natural gas-based resin, (iii) latex, and (iv) printing inks. The cost of raw materials represents a significant portion of the total cost of our products, with the result that fluctuations in the cost of raw materials have a material effect on our profitability. The cost of our raw materials represented approximately 41.5% of our net revenues in 2016 compared to 42.5% in 2015. During the past several years, we have experienced significant fluctuations in the cost of these raw materials. We do not have any long-term agreements for the supply of raw materials and may experience wide fluctuations in the cost of raw materials in the future. Further, although we have been able to obtain adequate supplies of raw materials in the past, there can be no assurance that we will be able to obtain adequate supplies of one or more of our raw materials in the future.

A principal raw material for our latex balloon is natural latex. Over the past five years, the price of natural latex has been volatile, ranging from a low of approximately $2.15 per kilo to a high of $4.49 per kilo. During a portion of that time, when the price of latex rose rapidly, we were unable to increase the selling price of our latex balloons sufficiently to compensate for the increase in the cost of latex with the result that our margins on the sale of latex balloons declined significantly for a period of time. Over the past three years, the market price of natural latex has declined and our margins on the sale of latex balloon products have improved. However, we purchase raw latex in U.S. Dollars for our plant in Mexico and, as the value of the Peso has declined against the Dollar, the effect has been to increase our cost of raw latex.

Many of the foil balloons we produce and sell are intended to be filled with helium in order to be buoyant. Over the past several years, the price of helium has increased substantially and the availability of helium has, on occasion, been limited. Limited availability or an increase in the cost of helium could adversely affect our sales of foil balloons in the future.

Information Technology Systems

Our corporate headquarters in Lake Barrington, Illinois and our warehouse / customer service facility in Lake Zurich, Illinois are serviced by PC-based local area networks. We interconnect the facilities via redundant voice and data services. Access to the network is available to all appropriate employees and is secured through nine Microsoft servers running Active Directory authentication. The network allows us to leverage printing resources, create shared file areas for cross-departmental functions and allows for a single source backup of critical business files. On the network we run Macola financial system software. Macola is a modular software system. We presently use the general ledger, order entry, inventory management, purchase order, manufacturing costing, controls and inventory controls, electronic data exchange and custom report writing modules of that system. Internal and external employee communications are handled by industry standard Microsoft Exchange email, allowing us to communicate with customers and vendors all over the world. We also provide secure, firewall protected, load balanced and redundant internet connections allowing employees to use e-mail, research issues, support customers and securely move data. Secure VPN connectivity is provided to our mobile and remote employees. A phone system located in Lake Barrington, and a phone system located in Lake Zurich, operate together to provide unified voice communications between both sites as well as for outside calls. These two phone systems are capable of operating independently should there be a failure at either site.

At each of our Mexico, England and Germany facilities, we operate server computers and local area networks, accessible to employees at those facilities. At each of those facilities, we operate separate integrated financial, order entry and inventory management systems.

Competition

The balloon and novelty industry is highly competitive, with numerous competitors. We believe there are presently five principal manufacturers of foil balloons whose products are sold in the United States including Anagram International, Inc., Pioneer Balloon Company, Convertidora International S.A. de C.V., and Betallic, LLC. Several companies market and sell foil balloons designed by them and manufactured by others for them. In addition, there are several additional foil balloon manufacturers in Europe and China who participate in our markets.

We compete for the sale of latex balloons in the United States, Canada, Mexico, Latin America, the United Kingdom, Australia and Europe. There are a number of other companies situated in the United States, Mexico, Asia, South America and Europe who manufacture latex balloons and with whom we compete in the markets in which we participate. The markets are highly competitive with respect to price, quality and terms.

Our company competes principally in the United States and Canada for the sale of vacuum sealing products. There are several companies who compete in those markets, principally Jarden Corporation, which was recently acquired by Newell Rubbermaid, Inc.

The market for films, packaging, flexible containers and custom products is fragmented, and competition in this area is difficult to gauge. However, there are numerous participants in this market and the Company can expect to experience intense quality and price competition.

Many of the companies in these markets offer products and services that are the same or similar to those offered by us and our ability to compete depends on many factors within and outside our control. There are a number of well-established competitors in each of our product lines, several of which possess substantially greater financial, marketing and technical resources and have established extensive, direct and indirect channels of distribution for their products and services. As a result, such competitors may be able to respond more quickly to new developments and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products and services than we can. Competitive pressures include, among other things, price competition, new designs and product development and copyright licensing.

Patents, Trademarks and Copyrights

We have developed or acquired a number of intellectual property rights which we believe are significant to our business.

Proprietary Designs and Copyright Licenses. We design the shapes and graphic designs of most of our foil balloon products. We also maintain licenses on certain characters and designs for our balloon products.

Trademarks. We own seven registered trademarks in the United States relating to our balloon products. Many of these trademarks are registered in foreign countries, principally in the European Union.

Patent Rights. We own, or have license rights under, or have applied for, patents related to our balloon products, certain film products and certain flexible container products. These include (i) several foil balloon design patents, (ii) patents and applications related to the design and structure of, and method of, inserting and affixing, zipper-closure systems in a bag, (iii) patents related to one-way valves for pouches, (iv) a patent related to methods of embossing film and utilizing such film to produce pouches with fitments, (v) a patent related to vacuumable storage bags with fitments, and (vi) a patent application related to vacuum sealing equipment.

Research and Development

We maintain a product development and research group for the development or identification of new products, product designs, product components and sources of supply. Research and development includes (i) creative product development and design, (ii) creative marketing, and (iii) engineering development. During each of the fiscal years ended December 31, 2016 and 2015, we estimate that the total amount spent on research and development activities was approximately $496,000 and $633,000, respectively.

Employees

As of December 31, 2016, the Company had 105 full-time employees in the United States, of whom 19 are executive or supervisory, 3 are in sales, 62 are in manufacturing or warehouse functions and 21 are clerical. As of that same date, we had 23 full-time employees in England, of whom 1 is executive or supervisory, 4 are in sales, 16 are in warehousing and 2 are clerical. At Flexo Universal, our Mexico subsidiary, as of December 31, 2016, we had 352 full-time employees, of whom 7 are executive or supervisory, 5 are in sales, 330 are in manufacturing and 10 are clerical. As of December 31, 2016, the Company had 7 full-time employees in Germany, of whom two are executive or supervisory, 1 is in warehousing and 4 are clerical. The Company is not a party to any collective bargaining agreement in the United States, has not experienced any work stoppages, and believes that its relationship with its employees is satisfactory.

Regulatory Matters

Our manufacturing operations in the United States are subject to the U.S. Occupational Safety and Health Act ("OSHA"). We believe we are in material compliance with OSHA. The Company generates liquid, gaseous and solid waste materials in its operations in Lake Barrington, Illinois and the generation, emission or disposal of such waste materials are, or may be, subject to various federal, state and local laws and regulations regarding the generation, emission or disposal of waste materials. We believe we are in material compliance with applicable environmental rules and regulations. Several states have enacted laws limiting or restricting the release of helium filled foil balloons. We do not believe such legislation will have any material effect on our operations.

In August 2012, the U.S. Securities and Exchange Commission (SEC) issued a rule under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country. Under the rule, issuers are required to conduct a reasonable country of origin inquiry and, if necessary, exercise due diligence process to ascertain the source of conflict minerals, defined as tantalum, tin, gold or tungsten, that are necessary to the functionality or production of their manufactured or contracted to be manufactured products. Companies are required to provide this disclosure on a form to be filed with the SEC called Form SD. Companies were required to file Form SD on May 31, 2014 for the 2013 calendar period and annually on May 31 every year thereafter. The Company filed Form SD on May 27, 2016.

International Operations

We conduct operations in three locations outside of the United States:

Flexo Universal, a 99%-owned subsidiary in Guadalajara, Mexico. Flexo Universal maintains a plant, offices and warehouse in Guadalajara, Mexico where we produce latex and foil balloons and print latex balloons. Flexo Universal conducts sales, warehousing and fulfillment operations, servicing principally the Company and other customers in the United States, our subsidiaries in the United Kingdom and Europe, customers in Mexico and Latin America and certain customers in Europe.

CTI Balloons, a wholly-owned subsidiary located in Rugby, England. CTI Balloons maintains offices and a warehouse in Rugby, conducts certain packaging and inflation activities there and conducts sales, warehousing and fulfillment activities for customers principally in the United Kingdom.

CTI Europe, a majority-owned subsidiary located in Heusenstamm, Germany. CTI Europe maintains offices and a warehouse in Heusenstamm, Germany (near Frankfurt), conducts certain packaging and inflation activities there and conducts sales, warehousing and fulfillment activities for customers principally in Europe.

We rely, and are dependent, on our operations in Mexico for the supply of latex balloons in the United States, Mexico, Europe and other markets. Interruption of that supply would have a materially adverse effect on the business of the Company.

Our domestic and international sales to outside customers and assets by area over the period 2015-2016 have been as follows:

	United States		United Kingdom (UK)		Europe (Excluding UK)		Mexico		Consolidated
Year ended 12/31/16
Sales to outside customers	$	51,792,000	$	2,427,000	$	2,590,000	$	7,459,000	$	64,268,000
Total Assets	$	33,170,000	$	1,324,000	$	2,418,000	$	7,064,000	$	43,976,000

	United States		United Kingdom (UK)		Europe (Excluding UK)		Mexico		Consolidated
Year ended 12/31/15
Sales to outside customers	$	46,520,000	$	2,207,000	$	1,530,000	$	9,108,000	$	59,365,000
Total Assets	$	30,772,000	$	1,791,000	$	1,562,000	$	7,680,000	$	41,805,000

Available Information

We maintain our corporate website at www.ctiindustries.com and we make available, free of charge, through this website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports that we file with, or furnish to, the Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after we electronically file that material with, or furnish it to, the SEC. You may also read and copy material filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, and you may obtain information on the operation of the Public Reference Room by calling the SEC in the U.S. at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov, that contains reports, proxy and information statements and other information that we file electronically with the SEC. Our website also includes corporate governance information, including our Code of Ethics and our Board Committee Charters. The information contained on our website does not constitute a part of this report.

Item No. 1B – Unresolved Staff Comments

As of the filing of this Annual report on Form 10-K, we had no unresolved comments from the staff of the Securities and Exchange Commission that were received not less than 180 days before the end of our 2016 fiscal year.

Item No. 2 – Properties

We own our principal plant and offices located in Lake Barrington, Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility includes approximately 68,000 square feet of office, manufacturing and warehouse space. This facility is subject to a mortgage loan with an initial principal of $2,300,000 as of April 29, 2010, having a term of approximately 7 years, with payments amortized over 25 years. The balance due on this loan on July 18, 2017 will be $1,664,000.

In September 2012, we entered into a lease agreement, expiring on February 28, 2017 to rent approximately 117,000 square feet of warehouse and office space in Lake Zurich, Illinois. Effective March 1, 2017, this lease has been renewed for three years, at a basic rental cost per month of:

Lease period	Amount per month
November 1, 2016 – February 28, 2017	$	36,000
March 1, 2017 – February 28, 2018	$	38,000
March 1, 2018 – February 28, 2019	$	40,000
March 1, 2019 – February 29, 2020	$	42,000

In August 2015, CTI Balloons, entered into a 5-year lease agreement for approximately 9,000 square feet of office and warehouse space in Rugby, England at a cost of $6,000 per month. This facility is utilized to warehouse balloon products and to manage and service the Company's operations in England.

In August 2011, Flexo Universal entered into a 5-year lease agreement, expiring July 31, 2016, for the lease of approximately 73,000 square feet of manufacturing, warehouse and office space in Guadalajara, Mexico at a cost of $22,000 per month. The lease was extended to February 28, 2017. Effective March 1, 2017, Flexo Universal entered into a five year lease for these premises at a cost of 493,090 Mexican Pesos per month (currently, approximately $26,000 per month).

On November 22, 2016, CTI Europe entered into a lease agreement for 13,000 square feet of office and warehouse space in Heusenstamm, Germany for a term commencing on February 1, 2017 and ending on February 1, 2022, at a rate per month of $9,000.

We believe that our properties have been adequately maintained, are in generally good condition and are suitable for our business as presently conducted. We believe our existing facilities provide sufficient production capacity for our present needs and for our presently anticipated needs in the foreseeable future. We also believe that, with respect to leased properties, upon the expiration of our current leases, we will be able to either secure renewal terms or to enter into leases for alternative locations at market terms.

Item No. 3 – Legal Proceedings

The Company may be party to certain lawsuits or claims arising in the normal course of business. The ultimate outcome of these matters is unknown but, in the opinion of management, we do not believe any of these proceedings will have, individually or in the aggregate, a material adverse effect upon our financial condition, cash flows or future results of operation.

PART II

Item No. 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company's Common Stock was admitted to trading on the NASDAQ SmallCap Market (now the NASDAQ Capital Market) under the symbol CTIB on November 5, 1997.

The high and low sales prices for the last eight fiscal quarters according to the NASDAQ Stock Market's Stock Price History Report, were:

	High		Low
January 1, 2015 to March 31, 2015		4.27		3.64
April 1, 2015 to June 30, 2015		4.29		3.50
July 1, 2015 to September 30, 2015		3.92		3.15
October 1, 2015 to December 31, 2015		5.12		3.56
January 1, 2016 to March 31, 2016		6.56		4.61
April 1, 2016 to June 30, 2016		6.94		5.85
July 1, 2016 to September 30, 2016		7.60		5.75
October 1, 2016 to December 31, 2016		6.99		5.01

As of December 31, 2016 there were approximately 53 holders of record of the Company’s Common Stock. The Company’s total number of beneficial owners of common stock of the Company is approximately 486.

The Company did not pay any cash dividends on its Common Stock during 2016 or 2015. Under the terms of the Company’s current loan agreements, the amount of dividends the Company may pay is limited by the terms of the financial covenants.

Item No. 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company produces film products for novelty, packaging container and custom film product applications. These products include foil balloons, latex balloons and related latex toy products, films for packaging applications, flexible containers for packaging and storage applications and custom film products. We produce all of our film products for packaging and container applications at our facilities in Lake Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging applications and flexible containers for packaging and storage are sold to customers in the United States. We market and sell our novelty items – principally foil balloons and latex balloons – in the United States, Mexico, the United Kingdom and a number of additional countries. In addition, the Company assembles and sells Candy Blossoms (containers of arranged candy items) in the United States, distributes party goods in Mexico and provides home organization and container products to an affiliated company who markets and sells these products in the United States to a network of independent distributors. These additional products, and certain accessory products sold by the Company, are recorded as “Other Products” in the following product category table.

Our revenues from each of our product categories in each of the past two years have been as follows:

	(000 Omitted)
	$		% of			$		% of
Product Category	2016		Net Sales			2015		Net Sales

Foil Balloons		26,530		41	%		25,187		43	%

Latex Balloons		8,250		13	%		9,739		16	%

Vacuum Sealing Products		17,455		27	%		13,206		22	%

Film Products		4,856		8	%		4,523		8	%

Other Products		7,177		11	%		6,710		11	%

Total		64,268		100.0	%		59,365		100.0	%

Our primary expenses include the cost of products sold and selling, general and administrative expenses.

Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead expenses such as supervisory labor, depreciation, utilities expense and facilities expense directly associated with production of our products, warehousing and fulfillment expenses and shipping costs relating to the shipment of products to customers. Cost of products sold is impacted by the cost of the raw materials used in our products, the cost of shipping, along with our efficiency in managing the production of our products.

Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation of equipment and facilities utilized in administration, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits, the cost of regulatory compliance and other administrative costs.

Purchases by a limited number of customers represent a significant portion of our total revenues. In 2016, sales to our top 10 customers represented 72.5% of net revenues. During 2016, there were two customers to whom our sales represented more than 10% of net revenues.

Our principal customer sales for 2016 and 2015 were:

Customer	Product	2016 Sales		% of 2016 Revenues			2015 Sales		% of 2015 Revenues
Wal-Mart	Vacuum Sealing Products; Balloons	$	17,990,000		28.0	%	$	9,158,000		15.4	%
Dollar Tree Stores	Balloons	$	15,802,000		24.6	%	$	15,973,000		26.9	%

The loss of one or both of these principal customers, or a significant reduction in purchases by one or both of them, could have a material adverse effect on our business.

We generally do not have agreements with our customers under which customers are obligated to purchase any specific or minimum amount of product from us.

Results of Operations

The following table sets forth selected results of our operations expressed as a percentage of net sales for the years ended December 31, 2016 and 2015. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.

	Year ended December 31,
	2016			2015

Net sales		100.0	%		100.0	%
Costs and expenses:
Cost of products sold		73.4			72.5
Operating Expenses		22.2			22.8

Income from operations		4.4			4.7
Interest expense		(2.4	)		(2.5	)
Other income		0.1			0.0

Income before income taxes		2.1			2.2
Provision for income taxes		1.1			0.6

Net profit		1.0	%		1.8	%

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Net Sales

For the fiscal year ended December 31, 2016, consolidated net sales from the sale of all products were $64,268,000 compared to consolidated net sales of $59,365,000 for the year ended December 31, 2015, an increase of 8.3%.

Sales of foil balloons were $25,187,000 in 2015 and $26,530,000 in 2016, an increase of 5.3%. Our largest customer for foil balloons was Dollar Tree Stores. The remaining sales were made to nearly 900 customers including distributors and retail stores or chains in the United States, Canada, Mexico, the United Kingdom, Europe and Latin America. Sales to these other customers increased by 10.9% from $9,704,000 in 2015 to $10,762,000 in 2016. The Dollar volume of sales in Mexico, the United Kingdom and Europe was affected by the decline in the value of currency in those countries in relation to the Dollar.

Sales of latex balloons were $9,739,000 in 2015 and $8,250,000 in 2016, a decrease of 15.3%. The decline is attributable to: (i) a decline in sales of $455,000 to a particular customer and (ii) the lower Dollar value of Peso denominated sales by Flexo Universal for 2016 compared to 2015 due to the decline in value of the Peso, as more than 50% of Flexo Universal sales were denominated in Pesos.

Sales of vacuum sealing products including pouch and related products and vacuum sealing machines were $13,206,000 in 2015 and $17,455,000 in 2016, an increase of 32.2%. Sales in this line during 2015 and 2016 consisted of two categories: (i) vacuum sealing systems including open-top pouches or rolls and vacuum sealing machines and (ii) zippered, resealable vacuum pouches. For 2016 and 2015, sales of products in these categories have been as follows:

	(000 Omitted)
	2016		2015

Vacuum Sealing Systems	$	17,331	$	10,625

Zippered Pouches		124		2,581

Total	$	17,455	$	13,206

Our sales of vacuum sealing systems during 2015 and 2016 have been made principally to two retail chains in the United States. In 2016, $7.85 million of our sales of vacuum sealing systems were to one retail chain for a promotional sales program at that chain in November, 2016.

Sales of film products were $4,523,000 in 2015 and $4,856,000 in 2016, an increase of 7.4%. Approximately 99% of these sales were to Rapak, L.L.C. but includes sales to two other customers.

Sales of other products increased from $6,710,000 in 2015 to $7,177,000 in 2016. This category includes (i) sales of helium and accessory items for our balloon products, (ii) sales of Candy Blossoms and Candyloons, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors and (iv) sales of party goods in Mexico by Flexo Universal.

Cost of Sales

Cost of sales increased from 72.5% of sales in 2015 to 73.4% of sales in 2016. The increase in cost of sales was attributable principally to (i) an increase in the cost to Flexo Universal of latex purchased in U.S. Dollars and (ii) the increase in cost to each of our Mexico, UK and Europe subsidiaries of purchasing goods from the Company in Dollars with depreciated currencies.

General and Administrative Expenses

General and administrative expenses increased from $7,134,000 or 12% of net sales in 2015 to $7,378,000 or 11.5% of net sales in 2016. The increase reflects primarily an increase of $205,000 in audit expense.

Selling

Selling expenses increased from $3,511,000 or 5.9% of sales in 2015 to $4,748,000 or 7.4% of sales in 2016. The increase in selling expenses is attributable to (i) increased license royalty payments arising from an increase in sales of our branded vacuum sealing systems, (ii) increased sales commissions from high sales of vacuum sealing systems and balloons and (iii) increased commissions, bonus and incentive payments by Clever Container Company to independent distributors.

Advertising and Marketing

Advertising and marketing expenses decreased from $2,890,000 or 4.9% of sales in 2015 to $2,190,000 or 3.4% of sales in 2016, representing principally a decline in warranty expense.

Other Income or Expense

During 2016, we incurred net interest expense of $1,253,000 compared to net interest expense of $1,542,000 during 2015 .

During 2016, we realized a foreign currency gain in the amount of $43,000 compared to foreign currency gain in 2015 of $32,000.

Net Income or Loss

During 2016, the Company had income from operations of $2,840,000 compared to income from operations of $2,816,000 in 2015. During 2016, we had net income after provisions for interest and taxes of $653,000 on a consolidated basis compared to net income after provisions for interest and taxes of $1,047,000 in 2015.

Income Taxes

In 2016, the Company recognized income tax expense, on a consolidated basis, of $703,000. This income tax expense is composed of an income tax expense in the United States of $560,000, an income tax benefit realized by CTI Balloons, our United Kingdom subsidiary, in the amount of $129,000, an income tax expense realized by CTI Europe, our Germany subsidiary, in the amount of $11,000 and an income tax expense by Flexo Universal, our Mexico subsidiary, in the amount of $261,000. In 2015, the Company recognized income tax expense, on a consolidated basis, of $370,000. This income tax expense is composed of an income tax benefit in the United States of $52,000, an income tax expense realized by CTI Balloons, our United Kingdom subsidiary, in the amount of $36,000, an income tax expense realized by CTI Europe, our Germany subsidiary, in the amount of $6,000 and an income tax expense of our Mexico subsidiaries, in the amount of $380,000.

Financial Condition, Liquidity and Capital Resources

Cash Used In Operating Activities During fiscal 2016, cash used in operating activities amounted to $449,000, compared to cash provided by operating activities during fiscal 2015 of $2,596,000. Significant changes in working capital items affecting cash flow used in operating activities were:

Depreciation and amortization of $1,592,000 compared to depreciation and amortization for 2015 of $1,926,000.

An increase in inventories of $1,364,000 compared to an increase of inventories of $973,000 in 2015.

An increase in accounts receivable of $4,083,000 compared to an increase in accounts receivable of $690,000 in 2015.

A decrease in prepaid expenses and other assets of $473,000 compared to a decrease in prepaid expenses and other assets of $350,000 in 2015.

An increase in trade payables of $2,070,000 compared to an increase in trade payables of $79,000 in 2015.

During the first quarter of 2017, we expect accounts receivable to decrease as we receive payments on outstanding receivables and trade payables to decrease as payments are made toward those balances. We expect inventory levels to moderate over the course of 2017.

Cash Provided by Investing Activities During fiscal 2016, cash provided by investing activities amounted to $65,000 compared to cash used in investing activities during fiscal 2015 of $682,000. During 2016, the Company had purchases of equipment of $630,000 compared to $682,000 in 2015 but, in 2016, received proceeds from the sale-leaseback of equipment of $783,000 and invested $87,000 in a subsidiary.

Cash Provided by Financing Activities During fiscal 2016, cash provided by financing activities amounted to $681,000, compared to cash used in financing activities of $1,694,000 during fiscal 2015.

On April 29, 2010, the Company entered into a Credit Agreement and associated documents with Harris N.A., now BMO Harris Bank, N.A. (“BMO Harris”) under which BMO Harris agreed to extend to the Company a credit facility in the aggregate amount of $14,417,000. The facility included (i) a Revolving Credit providing for maximum advances to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables and inventory of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of equipment, (iii) a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount the Company can borrow on the Revolving Credit includes 85% of eligible accounts and 60% of eligible inventory. The Mortgage Loan is amortized over a term of 25 years. The maturity date of the facility was April 30, 2013, which was subsequently extended to July 17, 2017.

Certain terms of the credit agreement, as amended, 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 tangible net worth (plus Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010;

We are required to maintain specified ratios of senior debt to EBITDA on an annual basis and determined quarterly; and,

We are required to maintain a level of adjusted EBITDA to fixed charges on an annual basis determined quarterly of not less than 1.1 to 1. Adjusted EBITDA is EBITDA minus (i) taxes paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures.

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. The initial interest rate under the agreement was 4.00% per annum. On a quarterly basis, this ratio will be measured and the interest rate changed in accordance to the table below.

When Senior Debt to EBITDA is:	The Premium to the Prime Rate is:
Greater than or equal to 3.25 to 1.00		1.25	%
Greater than or equal to 2.25 to 1.00; Less than 3.25 to 1.00		0.75	%
Less than or equal to 2.25 to 1.00		0.50	%

At December 31, 2016 the Company was paying a premium of 0.50% over prime.

On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Equity and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017.

Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.) (“BMO Equity”) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.

The Note and Warrant Purchase Agreement includes provisions for:

(i)

a closing fee of $100,000

(ii)

payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;

(iii)

security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;

(iv)

various representations and warranties and covenants of the Company;

(v)

financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.

On April 12, 2013, the Company entered into Amendment No. 4 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, non-compliance with financial covenants prior to the date of the Amendments was waived and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to modify the Senior Leverage Ratio and Total Leverage Ratio requirements for the fiscal quarter ending June 30, 2013 and each quarter thereafter during the term of the Credit Agreement and the Note and Warrant Purchase Agreement and (ii) to modify the definitions of EBITDA and Total Funded Debt in the Credit Agreement and the Note and Warrant Purchase Agreement.

On December 23, 2014, the Company entered into Amendment No. 5 to the Credit Agreement among the Company and BMO Harris, and Amendment No. 2 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, BMO Harris and BMO Equity waived certain anticipated events of default as of December 31, 2014 by the Company with respect the amount of capital expenditures and the change of name of a subsidiary, and both the Credit Agreement and the Note and Warrant Purchase Agreement were amended (i) to exclude from the definition of Senior Funded Debt and Total Funded Debt certain indebtedness of a variable interest entity, (ii) to require Registrant to provide financial reports and variance reports to the Bank within 45 days after the end of each calendar month, (iii) to change the Senior Leverage Ratio and Total Leverage Ratio requirements for fiscal quarters ending December 31, 2014 and for each fiscal quarter thereafter to the maturity of the loans, and (iv) to provide for the engagement by the Company of a financial consultant to provide business financial planning and advisory services to the Company.

On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement in which the investors purchased 152,850 shares of common stock at the price of $6.00 per share. As additional consideration for the purchase of shares in the Company, each investor received one-half of a warrant, with one warrant entitling the investor to purchase one share of common stock at the price of $7.00 per share. The warrants are exercisable between six months and three years from the investment date. In addition to the Purchase Agreement, the Company and the investors entered into a Registration Rights Agreement under which the Company agreed to file a Registration Statement with the SEC on or before August 29, 2016 to register the common stock purchased by the investors.

The issuance of shares in this placement resulted in gross proceeds to the Company of $917,000, and after commissions and fees, net proceeds to the Company of approximately $638,328. The Company used these proceeds for general working capital purposes.

On August 5, 2016, the Company entered into Amendment No. 8 to the Credit Agreement among the Company and BMO Harris and Amendment No. 3 to the Note and Warrant Purchase Agreement among the Company and BMO Equity. In the Amendments, (i) for the period from August 1, 2016 through February 28, 2017, the Bank agreed to increase the revolving credit commitment from $12 million to $14 million, (ii) for the period from August 1, 2016 through November 2016, the Bank agreed to increase the borrowing base inventory cap from $6.5 million to $9 million, (iii) for the quarters ended September 30 and December 31, 2016, BMO Harris agreed to increase the senior leverage ratio to 3.5 to 1, for the quarter ended September 30, 2016, the total leverage ratio to 4.75 to 1, and for the quarter ended December 31, 2016, the total leverage ratio to 4.50 to 1 and (iv) for the periods ended September 30, 2016 and December 31, 2016, BMO Equity agreed to increase the senior leverage ratio for BMO Equity to 3.85 to 1, for the periods ended September 30, 2016, to increase the total leverage ratio to 5.225 to 1 and for December 31, 2016 to raise the total leverage ratio to 4.95 to 1.

On September 30, 2016, John H. Schwan advanced to the Company the sum of $530,000 and on the same date, Stephen M. Merrick advanced to 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 a Promissory Note to Mr. Schwan in the principal amount of $530,000 and to Mr. Merrick in the amount of $370,000 dated September 30, 2016 and bearing interest at the rate of 6% per annum. Effective on the same date, Mr. Schwan and Mr. Merrick entered into Subordination Agreements with BMO Harris and BMO equity pursuant to which each of them agreed to subordinate the Company’s obligation to them under the Promissory Notes to the Company’s obligations to BMO Harris and BMO Equity, subject to certain rights of payment as provided in the Agreements. Further, effective on September 30, 2016, the Company and BMO Harris entered into Amendment No. 9 to the Credit Agreement and the Company and BMO Equity entered into Amendment No. 4 to the Note and Warrant Purchase Agreement pursuant to which each of BMO Harris and BMO Equity agreed to consent to payments of principal and interest to Mr. Schwan and Mr. Merrick under the Promissory Notes out of the proceeds received by the Company from the sale of vacuum sealing machines to a major retail chain in a promotional program. The principle balance of these notes were paid in December 2016 and January 2017.

As of December 31, 2016, the Company was in compliance with the financial covenants provided in the Credit Agreement and in the Note and Warrant Purchase Agreement, as amended.

Current Assets. As of December 31, 2016, the total current assets of the Company were $35,732,000, compared to total current assets of $32,437,000 at December 31, 2015.

Current Liabilities . Total current liabilities increased from $20,201,000 as of December 31, 2015 to $23,880,000 as of December 31, 2016.

Liquidity and Capital Resources ; Working Capital. As of December 31, 2016, our current assets exceeded our current liabilities by $11,853,000, we had cash and cash equivalents of $563,000 and there was available under our line of credit $4,491,000 in additional funds. Management believes that these available funds, our internally generated funds and the borrowing capacity under our revolving line of credit facility will be sufficient to meet working capital requirements for the remainder of 2017.

CTI Industries Corporation Stockholders’ Equity. Stockholders’ equity was $12,717,000 as of December 31, 2016 compared to $12,787,000 as of December 31, 2015.

Seasonality

In the foil balloon product line, sales have historically been seasonal with approximately 40% occurring in the period from December through March of the succeeding year and 24% being generated in the period July through October in recent years. Vacuum sealing product sales are also seasonal; approximately 60% of sales in this product line occur in the period from July through December.

Critical Accounting Policies

The financial statements of the Company are based on the selection and application of significant accounting policies which require management to make various estimates and assumptions. The following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operation.

Revenue Recognition. Substantially all of the Company's revenues are derived from the sale of products. With respect to the sale of products, revenue from a transaction is recognized when (i) a definitive arrangement exists for the sale of the product, (ii) delivery of the product has occurred, (iii) the price to the buyer has been fixed or is determinable, and (iv) collectibility is reasonably assured. The Company generally recognizes revenue for the sale of products when the products have been shipped and invoiced. In some cases, product is provided on consignment to customers. In those cases, revenue is recognized when the customer reports a sale of the product.

Allowance for Doubtful Accounts. We estimate our allowance for doubtful accounts based on an analysis of specific accounts, an analysis of historical trends, payment and write-off histories. Our credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts. However, unexpected changes in the financial condition of customers or changes in the state of the economy could result in write-offs which exceed estimates and negatively impact our financial results.

Inventory Valuation. Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted at the time of introduction of a new product or design, periodically and at year-end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory levels for estimated obsolescence or unmarketable items, in reference to future demand requirements and shelf life of the products. As of December 31, 2016, the Company had established a reserve for obsolescence, marketability or excess quantities with respect to inventory in the aggregate amount of $794,000. As of December 31, 2015, the amount of the reserve was $823,000. In addition, on a periodic basis, the Company disposes of inventory deemed to be obsolete or unsaleable and, at such time, charges reserve for the value of such inventory. We record freight income as a component of net sales and record freight costs as a component of cost of goods sold.

Valuation of Long-Lived Assets. We evaluate whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property and equipment and goodwill) may be impaired or not recoverable. Significant factors which may trigger an impairment review include: changes in business strategy, market conditions, the manner of use of an asset, underperformance relative to historical or expected future operating results, and negative industry or economic trends. We apply the provisions of GAAP USA under which goodwill is evaluated at least annually for impairment. We performed a quantitative assessment for the year ended December 31, 2016 in which we considered the assets and liabilities of the Company as one operating segment, both recognized and unrecognized, as well as the cash flows necessary to operate the business relating to the assets and liabilities. We conducted a quantitative assessment of our goodwill in our consolidated balance sheet for the year ended December 31, 2015. From this quantitative assessment and from the quantitative assessment for December 31, 2016, we determined the fair value of the subsidiary exceeds the carrying amount initially recorded, and was therefore not impaired.

Foreign Currency Translation. All balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts are translated using the average exchange rates for the year-to-date periods. The gains and losses resulting from the changes in exchange rates during the period have been reported in other comprehensive income or loss, except that, on November 30, 2012, the Company determined that it does have an expectation of receiving payment with respect to indebtedness of Flexo Universal to the Company, and accordingly, as of and after that date foreign currency gains and losses with respect to such indebtedness will be reported in the statement of operations.

Stock-Based Compensation. We follow GAAP USA which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values.

We use the Black-Scholes option pricing model to determine the fair value of stock options which requires us to estimate certain key assumptions. In accordance with the application of GAAP USA, we incurred employee stock-based compensation cost of $34,000 for the year ended December 31, 2016. At December 31, 2016, we had $26,000 of unrecognized compensation cost relating to stock options.

On July 17, 2012, the Company issued detachable warrants in connection with the Note and Warrant Purchase Agreement with BMO Equity. The fair value of the detachable warrants was estimated on the date of the grant using the Black-Scholes option-pricing model. Changes in the fair value of the warrants have been recognized in the consolidated statement of operations.

Income Taxes and Deferred Tax Assets. Income taxes are accounted for as prescribed in GAAP USA. Under the asset and liability method of GAAP USA, the Company recognizes the amount of income taxes currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years these temporary differences are expected to be recovered or settled.

We evaluate all available positive and negative evidence in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before what we have estimated in our current forecasts, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period.

As of December 31, 2016, the Company had net deferred tax assets of $1,697,000 representing the amount the Company may recover in future years from future taxable income. As of December 31, 2015, the amount of the net deferred tax asset was $1,747,000. Each quarter and year-end, management makes a judgment to determine the extent to which the deferred tax asset will be recovered from future taxable income.

Fair Value Measurements . In September 2006, the FASB issued GAAP USA which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. GAAP USA clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. GAAP USA also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available. In February 2008, the FASB issued guidance now codified in GAAP USA which provides for delayed application of certain guidance related to non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

In February 2007, the FASB issued GAAP USA which permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. GAAP USA was effective for us on January 1, 2008. We did not elect the fair value option for any assets or liabilities that were not previously carried at fair value. Accordingly, the adoption of GAAP USA had no impact on our consolidated financial statements.

In October 2008, the FASB issued clarification to GAAP USA which clarifies the application of GAAP USA in a market that is not active, and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable market information when the market is not active, and the use of market quotes when assessing the relevance of observable and unobservable data. GAAP USA is effective for all periods presented. The adoption of GAAP USA did not have a significant impact on our consolidated financial statements.

Item No. 7A – Qualitative and Quantitative Disclosures Regarding Market Risk

Not applicable.

Item No. 8 – Financial Statements and Supplementary Data

Reference is made to the Consolidated Financial Statements contained in Part IV hereof.

Item No. 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item No. 9A – Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016, the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016, to ensure that the information required to be disclosed by us in the reports that we file or submit under Security Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including officers, as appropriate, to allow for timely decisions regarding required disclosure. There were no material changes in our internal control over financial reporting during the fourth quarter of 2016 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operation effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting, based on our evaluation, management has concluded our internal controls over financial reporting were effective as of December 31, 2016.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Item 9B – Other Information

None

PART III

Item No. 10 – Directors and Executive Officers of the Registrant

Information called for by Item 9 of Part III is incorporated by reference to the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2016.

Item No. 11 – Executive Compensation

Information called for by Item 10 of Part III is incorporated by reference to the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2016.

Item No. 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information called for by Item 11 of Part III is incorporated by reference to the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2016.

Item No. 13 – Certain Relationships and Related Transactions

Information called for by Item 12 of Part III is incorporated by reference to the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2016.

Item No. 14 – Principal Accountant Fees and Services

Information called for by Item 13 of Part III is incorporated by reference to the definitive Proxy Statement for the 2017 Annual Meeting of Shareholders which is expected to be filed with the Commission within 120 days after December 31, 2016.

PART IV

Item No. 15 – Exhibits and Financial Statement Schedules

The Consolidated Financial Statements filed as part of this report on Form 10-K are listed on the accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules.

Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below:

Schedule II Valuation and qualifying accounts

All other financial schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

Exhibits:

Exhibit Number		Document

3.1		Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015).
3.2		Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017).
4.1		Form of CTI Industries Corporation’s common stock certificate (filed herewith).
10.1		CTI Industries Corporation 2002 Stock Option Plan (Incorporated by reference to Appendix A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on May 15, 2002).
10.2		CTI Industries Corporation 2009 Stock Incentive Plan (Incorporated by reference to Schedule A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on April 30, 2009).
10.3		Credit Agreement between Harris N.A. and CTI Industries Corporation dated April 29, 2010 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.4		Mortgage and Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.5		Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.6		Pledge Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.7		Trademark License Agreement between S.C. Johnson & Son, Inc. and the Company dated December 14, 2011 (Incorporated by reference to Exhibit 10.14 contained in Registrant’s Report on Form 10-K dated March 29, 2012).
10.8		Third Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).

10.9		Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.10		Note and Warrant Purchase Agreement between BMO Private Equity, Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.11		Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.12		Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.13		Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012 (Incorporated by reference to Exhibit 10.8 contained in Registrant’s Report on Form 10-Q dated November 14, 2012).
10.14		Fourth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated May 15, 2013).
10.15		First Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 15, 2013).
10.16		Consignment and Pay by Scan Agreement between Food Lion L.L.C. and CTI Supply, Inc. dated December 10, 2014. (Incorporated by reference to Exhibit 10.18 contained in Registrant’s Report on Form 10-K dated March 30, 2015).
10.17		Fifth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated December 23, 2014. (Incorporated by reference to Exhibit 10.19 contained in Registrant’s Report on Form 10-K dated March 30, 2015).
10.18		Second Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated December 23, 2014. (Incorporated by reference to Exhibit 10.20 contained in Registrant’s Report on Form 10-K dated March 30, 2015).
10.19		Sixth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated October 13, 2015 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated November 12, 2015).

10.20		Eighth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated August 8, 2016 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.21		Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated August 8, 2016 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.22		Third Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated August 8, 2016 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.23		Securities Purchase Agreement between [Purchaser] and the Company (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.24		Stock Purchase Warrant to Purchase Common Stock of CTI Industries Corporation (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.25		Registration Rights Agreement between [Purchaser] and the Company (Incorporated by reference to Exhibit 10.6 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.26		Promissory Note between CTI Industries and Stephen M. Merrick dated September 30, 2016 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.27		Promissory Note between CTI Industries and John H. Schwan dated September 30, 2016 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.28		Ninth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated September 30, 2016 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.29		Fourth Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated September 30, 2016 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.30		Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Harris Bank, N.A. effective September 30, 2016 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).

10.31		Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Private Equity (U.S.), Inc. effective September 30, 2016 (Incorporated by reference to Exhibit 10.6 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
14		Code of Ethics (Incorporated by reference to Exhibit contained in the Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on October 8, 2004).
21		Subsidiaries (description incorporated in Form 10-K under Item No. 1).
23.1		Consent of Independent Registered Public Accounting Firm, Plante & Moran, PLLC (filed herewith).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99		Audited financial statements of the Company’s subsidiary, Flexo Universal, S. de R.L. de C.V. for the year ended December 31, 2016 (filed herewith).
101		Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

	(a)	The Exhibits listed in subparagraph (a)(3) of this Item 15 are attached hereto unless incorporated by reference to a previous filing.
	(b)	The Schedule listed in subparagraph (a)(2) of this Item 15 is attached hereto.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 31, 2017.

	CTI INDUSTRIES CORPORATION
	By:	/s/ Stephen M. Merrick
		Stephen M. Merrick, President

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

Signatures	Title	Date

/s/ John H. Schwan	Chief Executive Officer and Director	March 31, 2017
John H. Schwan

/s/ Stephen M. Merrick	President, Secretary, and Director	March 31, 2017
Stephen M. Merrick

/s/ Timothy S. Patterson	Chief Financial Officer and	March 31, 2017
Timothy S. Patterson	Senior Vice President of Finance

/s/ Stanley M. Brown	Director	March 31, 2017
Stanley M. Brown

/s/ Bret Tayne	Director	March 31, 2017
Bret Tayne

/s/ John I. Collins	Director	March 31, 2017
John I. Collins

/s/ John Klimek	Director	March 31, 2017
John Klimek

CTI Industries Corporation

and Subsidiaries

Consolidated Financial Statements

Years ended December 31, 2016 and 2015

Contents

Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2016 and 2015	F-2
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015	F-3
Consolidated Statements of Stockholders’ Equity as of December 31, 2016 and 2015	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015	F-5
Notes to Consolidated Financial Statements for the years ended December 31, 2016 and 2015	F-6

Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2016 and 2015	F-31

All other schedules for which a provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

CTI Industries Corporation and Subsidiaries

Lake Barrington, Illinois

We have audited the accompanying consolidated balance sheet of CTI Industries Corporation and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, stockholders' equity, and cash flows for the years then ended. Our audits of the consolidated financial statements included the financial statement schedule appearing under Schedule II. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the 2016 or 2015 financial statements of Flexo Universal S.A. de C.V., a 99.82 percent owned subsidiary, whose statements reflect total assets and revenues constituting 19 percent and 14 percent of the related consolidated totals respectively as of and for the year ended December 31, 2016 and total assets and revenues constituting 18 percent and 18 percent of the related consolidated totals respectively as of and for the year ended December 31, 2015. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Flexo Universal S.A. de C.V., is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

In our opinion, based on our report and the 2016 and 2015 reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CTI Industries Corporation and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years ended December 31, 2016 and 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule for the years ended December 31, 2016 and 2015, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Plante & Moran, PLLC

March 31, 2017

Chicago, Illinois

F- 1

CTI Industries Corporation and Subsidiaries

Consolidated Balance Sheets

	December 31, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents (VIE $51,000 and $82,000, respectively)	$	563,043		$	346,404
Accounts receivable, (less allowance for doubtful accounts of $137,000 and $126,000 respectively) (VIE $6,000 and $4,000, respectively)		14,838,978			11,410,999
Inventories, net (VIE $719,000 and $1,264,000, respectively)		18,348,011			17,869,911
Net deferred income tax asset		773,007			761,096
Prepaid expenses (VIE $18,000 and $17,000, respectively)		678,689			1,057,464
Other current assets (VIE $0 and $33,000, respectively)		530,669			991,297

Total current assets		35,732,397			32,437,171

Property, plant and equipment:
Machinery and equipment (VIE $0 and $546,000, respectively)		26,348,443			26,847,110
Building		3,379,636			3,360,017
Office furniture and equipment (VIE $154,000 and $66,000, respectively)		3,597,158			3,512,613
Intellectual property		482,088			482,088
Land		250,000			250,000
Leasehold improvements		395,603			624,902
Fixtures and equipment at customer locations		3,302,868			3,174,535
Projects under construction		493,859			773,985
		38,249,655			39,025,250
Less : accumulated depreciation and amortization (VIE $29,000 and $150,000, respectively)		(32,938,267	)		(32,471,694	)

Total property, plant and equipment, net		5,311,388			6,553,556

Other assets:
Deferred financing costs, net		0			112,615
Goodwill (VIE $440,000 and $440,000, respectively)		1,473,176			1,473,176
Net deferred income tax asset		923,683			986,181
Other assets (due from related party $47,000 and $46,000, respectively)		473,095			242,270

Total other assets		2,869,954			2,814,242

TOTAL ASSETS	$	43,913,739		$	41,804,969

LIABILITIES AND EQUITY
Current liabilities:
Checks written in excess of bank balance	$	1,688,675		$	1,481,827
Trade payables (VIE $92,000 and $238,000, respectively)		5,861,932			4,271,860
Line of credit (net of deferred financing costs of $62,000) (VIE $408,000 and $484,000, respectively)		11,263,531			10,952,924
Notes payable - current portion (net discount of $113,000 and $171,000, respectively) (VIE $0 and $311,000, respectively)		1,709,220			501,710
Notes Payable Officers - current portion		180,000			0
Notes Payable Affiliates - current portion		8,141			8,670
Capital Lease - current portion		40,660			41,204
Accrued liabilities (VIE $140,000 and $655,000, respectively)		3,127,425			2,942,481

Total current liabilities		23,879,584			20,200,676

Long-term liabilities:
Notes Payable - Affiliates (VIE 153,000 and 183,000 respectively)		218,858			266,835
Notes payable, net of current portion (net discount of $0 and $113,000, respectively) (VIE $301,000 and $200, respectively)		5,301,491			6,665,700
Notes payable - officer, subordinated		1,416,138			1,323,139
Capital Lease		4,690			45,351
Deferred gain (non current)		297,521			-

Total long-term debt, net of current portion		7,238,698			8,301,025

Warrants Payable		817,880			714,245

Total long-term liabilities		8,056,578			9,015,270

Equity:
CTI Industries Corporation stockholders' equity:
Preferred Stock - no par value 2,000,000 shares authorized 0 shares issued and outstanding		-			-
Common stock - no par value, 5,000,000 shares authorized, 3,568,590 and 3,386,284 shares issued and 3,567,201 and 3,310,657 outstanding, respectively		13,898,494			13,775,994
Paid-in-capital		2,250,235			1,577,807
Accumulated earnings		2,323,326			1,670,788
Accumulated other comprehensive loss		(5,593,878	)		(4,076,318	)
Less: Treasury stock - 75,627 shares and 75,627 shares, respectively		(160,784	)		(160,784	)

Total CTI Industries Corporation stockholders' equity		12,717,393			12,787,487

Noncontrolling interest		(739,816	)		(198,464	)

Total Equity		11,977,577			12,589,023

TOTAL LIABILITIES AND EQUITY	$	43,913,739		$	41,804,969

See accompanying notes to consolidated financial statements

F- 2

CTI Industries Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

	For the Year Ended December 31,
	2016			2015
Net Sales	$	64,268,367		$	59,364,701

Cost of Sales		47,149,360			43,013,345

Gross profit		17,119,007			16,351,356

Operating expenses:
General and administrative		7,378,296			7,134,385
Selling		4,748,061			3,510,824
Advertising and marketing		2,189,620			2,889,609
Gain on sale of assets		(36,745	)		-

Total operating expenses		14,279,232			13,534,818

Income from operations		2,839,775			2,816,538

Other (expense) income:
Interest expense		(1,454,589	)		(1,425,510	)
Interest income		-			72,834
Change in fair value of warrants		(103,636	)		(189,064	)
Foreign currency gain		43,263			32,470

Total other expense, net		(1,514,962	)		(1,509,270	)

Income before taxes		1,324,813			1,307,268

Income tax expense		702,877			369,596

Net Income		621,936			937,672

Less: Net (loss) income attributable to noncontrolling interest		(30,602	)		(109,661	)

Net income attributable to CTI Industries Corporation	$	652,538		$	1,047,333

Other Comprehensive (Loss) Income
Foreign currency adjustment		(1,517,560	)		(1,175,106	)
Comprehensive (loss) income attributable to CTI Industries Corporation	$	(865,022	)	$	(127,773	)

Basic income per common share	$	0.18		$	0.32

Diluted income per common share	$	0.18		$	0.30

Weighted average number of shares and equivalent shares of common stock outstanding:
Basic		3,566,400			3,297,448

Diluted		3,727,554			3,437,140

See accompanying notes to consolidated financial statements

F- 3

CTI Industries Corporation and Subsidiaries

Consolidated Statements of Stockholders' Equity

	CTI Industries Corporation
									Accumulated
									Other			Less
	Common Stock				Paid-in		Accumulated		Comprehensive			Treasury Stock						Noncontrolling
Balance, December 31, 2014		3,376,743	$	13,775,994	$	1,542,718	$	623,455	$	(2,901,212	)		(75,627	)	$	(160,784	)		(72,802	)		12,807,369

Stock Purchase																					$	-

Compensation relating to Option Issuance		9,541			$	35,089															$	35,089

Stock Redemption																					$	-

Dividends Declared																		$	(16,000	)	$	(16,000	)

Net Income							$	1,047,333										$	(109,661	)	$	937,672

Other comprehensive income, net of taxes Foreign currency translation									$	(1,175,106	)										$	(1,175,106	)

Balance, December 31, 2015		3,386,284	$	13,775,994	$	1,577,807	$	1,670,788	$	(4,076,318	)		(75,627	)	$	(160,784	)		(198,463	)		12,589,024

Stock Issued		177,596	$	122,500	$	672,428															$	794,928

Options Exercised		4,710

Member contributions, net																		$	201,249		$	201,249

Dividends Declared																		$	(712,000	)	$	(712,000	)

Net Income							$	652,538										$	(30,602	)	$	621,936

Other comprehensive income, net of taxes Foreign currency translation									$	(1,517,560	)										$	(1,517,560	)

Balance, December 31, 2016		3,568,590	$	13,898,494	$	2,250,235	$	2,323,326	$	(5,593,878	)		(75,627	)	$	(160,784	)		(739,816	)		11,977,577

See accompanying notes to consolidated financial statements

F- 4

CTI Industries Corporation and Subsidiaries

Consolidated Statements of Cash Flows

	For the Year Ended December 31,
	2016			2015

Cash flows from operating activities:
Net income	$	621,936		$	937,672
Adjustment to reconcile net income to cash (used in) provided by operating activities:
Depreciation and amortization		1,420,789			1,779,524
Amortization of debt discount		170,931			146,441
Change in fair value of warrants		103,636			189,064
Stock based compensation		34,104			29,329
Amortization of deferred gain on sale-leaseback		(60,401	)		0
Provision for losses on accounts receivable		26,318			54,863
Change in allowance for excess quantities of inventory		(11,294	)		178,769
Deferred income taxes		50,591			(15,191	)
Change in assets and liabilities:
Accounts receivable		(4,083,379	)		(689,953	)
Inventories		(1,364,450	)		(972,687	)
Prepaid expenses and other assets		473,328			350,158
Trade payables		2,070,011			79,473
Accrued liabilities		99,005			528,548

Net cash (used in) provided by operating activities		(448,875	)		2,596,010

Cash flows from investing activities:
Purchases of property, plant and equipment		(630,187	)		(681,952	)
Proceeds from equipment sale-leaseback		783,134			0
Purchase of member units		(87,500	)		0

Net cash provided by (used in) investing activities		65,447			(681,952	)

Cash flows from financing activities:
Change in checks written in excess of bank balance		206,848			57,136
Net change in revolving line of credit		373,059			(1,205,375	)
Repayment of long-term debt (related parties $0 and $32,000)		(1,528,927	)		(532,198	)
Proceeds from issuance of debt		1,180,000			4,951
Proceeds from issuance of stock, net		638,323			-
Proceeds from exercise of stock options and warrants		-			5,760
Dividends paid		-			(16,000	)
Purchase of treasury stock		-			-
Cash paid for deferred financing fees		(9,953	)		(8,627	)
Distributions to Variable Interest Entity members		(467,000	)		0
Contributions received by Variable Interest Entity		288,750			0

Net cash provided by (used in) financing activities		681,100			(1,694,353	)

Effect of exchange rate changes on cash		(81,033	)		(23,633	)

Net increase in cash and cash equivalents		216,639			196,072

Cash and cash equivalents at beginning of year		346,404			150,332

Cash and cash equivalents at end of year	$	563,043		$	346,404

Supplemental disclosure of cash flow information:
Cash payments for interest	$	910,414		$	1,235,878

Supplemental Disclosure of non-cash investing and financing activity
Property, plant & equipment acquisitions funded by liabilities	$	13,522		$	70,928

Interest accrued not paid	$	92,900		$	86,663

Contributed Capital to Clever Container
Stock	$	122,500			-
Debt	$	43,750			-
Accounts Receivable	$	183,750			-

See accompanying notes to consolidated financial statements

F- 5

Notes to Consolidated Financial Statements Years Ended

December 31, 2016 and 2015

1. Nature of Business

Nature of Operations

CTI Industries Corporation, its United Kingdom subsidiary (CTI Balloons Limited), its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V.), its German subsidiary (CTI Europe GmbH) and CTI Supply, Inc. (collectively, the “Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the world and (ii) operate systems for the production, lamination, coating and printing of films used for food packaging and other commercial uses and for conversion of films to flexible packaging containers and other products.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of CTI Industries Corporation, its wholly owned subsidiaries CTI Balloons Limited and CTI Supply, Inc. and its majority owned subsidiaries, Flexo Universal and CTI Europe, as well as the accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C., and Clever Container Company, L.L.C. (Clever Container). The last three entities have been consolidated as variable interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation.

Variable Interest Entities

The determination of whether or not to consolidate a variable interest entity under U.S. GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interest. To make these judgments, management has conducted an analysis of the relationship of the holders of variable interest to each other, the design of the entity, the expected operations of the entity, which holder of variable interests is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. Upon the adoption of amended accounting guidance applicable to variable interest entities on January 1, 2015, management continually reconsiders whether the Company is deemed to be a variable interest entity’s primary beneficiary who consolidates such entity. The Company has three entities that have been consolidated as variable interest entities. (See Note 13)

F- 6

Foreign Currency Translation

The financial statements of foreign subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities, the historical exchange rate for stockholders’ equity, and a weighted average exchange rate for each period for revenues and expenses. Translation adjustments are recorded in accumulated other comprehensive income (loss) as the local currencies of the subsidiaries are the functional currencies. Foreign currency transaction gains and losses are recognized in the period incurred and are included in the consolidated statements of operations.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the amounts reported of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period in the financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include valuation allowances for doubtful accounts, lower of cost or market of inventory, slow moving inventory, deferred tax assets, recovery value of goodwill, and assumptions used as inputs in the Black-Scholes option-pricing model .

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and short term investments with original maturities of three months or less.

Accounts Receivable

Trade receivables are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts, evaluating the individual customer receivables through consideration of the customer’s financial condition, credit history and current economic conditions and use of historical experience applied to an aging of accounts. A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for a period over the customer’s normal terms. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximates costing determined on a first-in, first-out basis, to reflect the actual cost of production of inventories.

Production costs of work in process and finished goods include material, labor and overhead. Work in process and finished goods are not recorded in excess of net realizable value.

F- 7

Property, Plant and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line method over the lesser of the estimated useful life or the lease term. The estimated useful lives range as follows:

Building	25 - 30 years
Machinery and equipment	3 - 15 years
Projects that prolong the life and increase efficiency of machinery	3 - 5 years
Light Machinery	5 - 10 years
Heavy Machinery	10 - 15 years
Office furniture and equipment	5 - 8 years
Intellectual Property	9 - 15 years
Leasehold improvements	5 - 8 years
Furniture and equipment at customer locations	1 - 3 years

Light machinery consists of forklifts, scissor lifts, and other warehouse machinery. Heavy machinery consists of production equipment including laminating, printing and converting equipment. Projects in process represent those costs capitalized in connection with construction of new assets and/or improvements to existing assets including a factor for interest on funds committed to projects in process of $33,000 and $29,000 for the years ended December 31, 2016 and 2015, respectively. Upon completion, these costs are reclassified to the appropriate asset class.

Stock-Based Compensation

The Company has stock-based incentive plans which may grant stock option, restricted stock, and unrestricted stock awards. The Company recognizes stock-based compensation expense based on the grant date fair value of the award and the related vesting terms. The fair value of stock-based awards is determined using the Black-Scholes model, which incorporates assumptions regarding the risk-free interest rate, expected volatility, expected option life, and dividend yield. See Note 16 for additional information.

Fair Value Measurements

GAAP USA defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements required under other accounting pronouncements. See Note 4 for further discussion .

F- 8

The Company accounts for derivative instruments in accordance with GAAP USA, which requires that all derivative instruments be recognized on the balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a one-to-one matching of the derivative instrument to our underlying transaction. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in the consolidated statement of operations. We have no derivative financial instruments designated as hedges. Therefore, changes in fair value for the respective periods were recognized in the consolidated statement of operations.

Goodwill

The Company applies the provisions of GAAP USA, under which goodwill is tested at least annually for impairment. Goodwill on the accompanying balance sheets relates to the Company’s acquisition of Flexo Universal in a prior year, the investment in CTI Europe in a prior year and the goodwill related to Clever Container, a variable interest entity in which CTI is the primary beneficiary. It is the Company’s policy to perform impairment testing annually as of December 31, or as circumstances change. An annual impairment review was completed and no impairment was noted for the years ended December 31, 2016 and 2015 (see Note 14). While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect these evaluations.

Valuation of Long Lived Assets

The Company evaluates whether events or circumstances have occurred which indicate that the carrying amounts of long-lived assets (principally property, plant and equipment) may be impaired or not recoverable. The significant factors that are considered that could trigger an impairment review include: changes in business strategy, market conditions, or the manner of use of an asset; underperformance relative to historical or expected future operating results; and negative industry or economic trends. In evaluating an asset for possible impairment, management estimates that asset’s future undiscounted cash flows and appraised values to measure whether the asset is recoverable. The Company measures the impairment based on the projected discounted cash flows of the asset over its remaining life.

Deferred Financing Costs

Deferred financing costs are amortized on a straight line basis over the term of the loan. Upon a refinancing, existing unamortized deferred financing costs are expensed.

F- 9

Income Taxes

The Company accounts for income taxes using the liability method. As such, deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation allowance when management cannot determine, in its opinion, that it is more likely than not that the Company will recover that recorded value of the deferred tax asset. The Company is subject to U.S. Federal, state and local taxes as well as foreign taxes in the United Kingdom, Germany and Mexico. U.S. income tax expense and foreign withholding taxes are provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested.

Unrecognized tax benefits are accounted for as required by GAAP USA which prescribes a more likely than not threshold for financial statement presentation and measurement of a tax position taken or expected to be taken in a tax return. See Note 10 for further discussion.

Revenue Recognition

The Company recognizes revenue when title transfers upon shipment. Revenue from a transaction is not recognized until (i) a definitive arrangement exists, (ii) delivery of the product has occurred or the services have been performed and legal title and risk are transferred to the customer, (iii) the price to the buyer has been fixed or is determinable, and (iv) collectability is reasonably assured. In some cases, product is provided on consignment to customers. For these cases, revenue is recognized when the customer reports a sale of the product.

Research and Development

The Company conducts product development and research activities which include (i) creative product development and (ii) engineering. During the years ended December 31, 2016 and 2015, research and development activities totaled $496,000 and $633,000, respectively.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising expenses amounted to $139,000 and $215,000 for the years ended December 31, 2016 and 2015, respectively.

3 . New Accounting Pronouncements

In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidance on our financial statements and the timing of adoption, and have not yet selected a transition approach.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Cost . The ASU requires debt issuance costs associated with a recognized debt liability to be presented on the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. An entity should apply the new guidance on a retrospective basis. We adopted this ASU effective with the first quarter of fiscal year 2016. The adoption of this accounting standard update did not have a material impact to our consolidated financial statements.

F- 10

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory . Under this ASU, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The ASU defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. We do not expect the adoption of this accounting standard update to have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes , to eliminate the current requirements to classify deferred income tax assets and liabilities between current and noncurrent. To simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of ASU 2015-17 on our consolidated financial statement.

In February 2016, the FASB issued ASU 2016-02, Leases ( Topic 842), aimed at making leasing activities more transparent and comparable. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all entities. When the standard becomes effective, we expect that our property, plant and equipment will increase significantly due to the addition of assets under lease and the lease liabilities will correspondingly increase. There is not expected to be a significant impact on the income statement.

On March 30, 2016, the FASB issued Accounting Standards Updated No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company does not expect the adoption of this standard to have any impact on the Company’s consolidated financial statements.

On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) , a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.

F- 11

4. Fair Value Disclosures; Derivative Instruments

GAAP USA clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. GAAP USA also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based upon the best information available.

GAAP USA establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs are observable for the asset or liability, or unobservable but corroborated by market data, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of the input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The following table presents information about the Company’s liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

	Amount as of
Description	12/31/2016		Level 1		Level 2		Level 3
Warrant Liability	$	818,000		-	$	818,000		-
	$	818,000			$	818,000

F- 12

	Amount as of
Description	12/31/2015		Level 1		Level 2		Level 3
Warrant Liability	$	714,000		-	$	714,000		-
	$	714,000			$	714,000

It was determined that the warrants are required to be carried as a derivative liability at fair value. Changes in the fair value of the warrants have been recognized in the consolidated statement of operations.

5. Other Comprehensive Loss

The following table sets forth the tax effects of components of other comprehensive loss and the accumulated balance of other comprehensive loss and each component.

Tax Effects Allocated to Each Component of Other Comprehensive Loss

for the years ended December 31, 2016 and 2015

				Tax
	Before-Tax			(Expense)		Net-of-Tax
	Amount			or Benefit		Amount
2016
Foreign currency translation adjustments	$	(1,517,560	)	$	-	$	(1,517,560	)
Other comprehensive loss	$	(1,517,560	)	$	-	$	(1,517,560	)

				Tax
	Before-Tax			(Expense)		Net-of-Tax
	Amount			or Benefit		Amount
2015
Foreign currency translation adjustments	$	(1,175,106	)	$	-	$	(1,175,106	)
Other comprehensive loss	$	(1,175,106	)	$	-	$	(1,175,106	)

Accumulated Other Comprehensive Loss Balances as of December 31, 2016

				Accumulated
	Foreign			Other
	Currency			Comprehensive
	Items			Loss
Beginning balance	$	(4,076,318	)	$	(4,076,318	)
Current period change		(1,517,560	)		(1,517,560	)
Ending balance	$	(5,593,878	)	$	(5,593,878	)

F- 13

Accumulated Other Comprehensive Loss Balances as of December 31, 2015

				Accumulated
	Foreign			Other
	Currency			Comprehensive
	Items			Loss
Beginning balance	$	(2,901,212	)	$	(2,901,212	)
Current period change		(1,175,106	)		(1,175,106	)
Ending balance	$	(4,076,318	)	$	(4,076,318	)

For the years ended December 31, 2016 and 2015, no tax benefit has been recorded on the foreign currency translation; as such amounts would result in a deferred tax asset and are not expected to reverse in the foreseeable future.

6 . Major Customers

For the year ended December 31, 2016, the Company had two customers that accounted for approximately 28.0% and 24.6% of consolidated net sales. For the year ended December 31, 2015, the Company had two customers that accounted for approximately 26.9% and 15.4% of consolidated net sales. At December 31, 2016, the outstanding accounts receivable balances due from these customers were $5,512,000 and $2,842,000, respectively. At December 31, 2015, the outstanding accounts receivable balances due from these customers were $2,685,000 and $2,849,000 respectively.

7. Inventories

Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted periodically and at year end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory for estimated obsolescence or unmarketable items, primarily by reviewing future demand requirements and shelf life of the product.

Inventories are comprised of the following:

	December 31, 2016			December 31, 2015
Raw materials	$	3,310,310		$	2,770,636
Work in Process		1,942,600			2,198,981
Finished Goods		13,889,328			13,723,090
Allowance for excess quantities		(794,227	)		(822,796	)
Total inventories	$	18,348,011		$	17,869,911

F- 14

8. Notes Payable and Capital Leases

Long term debt consists of:

	Dec. 31, 2016			Dec. 31, 2015
Mezzanine Note Payable with BMO Private Equity, balance due January 18, 2018, interest at 11.50% (effective rate of 15.56%)	$	5,000,000		$	5,000,000
Less: Remaining debt discount to be amortized		(113,000	)		(283,000	)
Term Loan with Barrington Bank, payable in monthly installments of $11,000 amortized over 7 years, interest at 6.25%, balance due May 2016, which uses balloon production and related equipment as collateral		-			311,000
Loan with Officer, payable on receipt, interest at 6.25%, balance paid January 2017, S/T		180,000			-
Mortgage Loan with BMO Harris, payable in monthly installments of $7,778 plus interest at prime (3.75%) plus a variable rate (based on loan covenants) of 0.75% (4.5%) at December 31, 2016 (amortized over 25 years), balance due July 18, 2017		1,711,000			1,804,000
Promissory Note with Clever Container shareholder(s) due 2018 L/T		81,000			-
Promissory Note from CTI to Clever Container shareholder S/T		45,000			-
Promissory Note with John Schwan due 2018 L/T		220,000			-
Term Loan with BMO Harris, payable in monthly installments of $22,323 beginning April 2012 plus interest at prime (3.75%) plus a variable rate (based on loan covenants) of 0.75% (4.5%) at December 31, 2016, (amortized over 5 years), balance due March 31, 2017.		67,000			335,000
Capital Lease with First American Equipment Finance, payable in monthly installments of $2,890 (amortized over 5 years).		36,000			67,000
Capital Lease with Wells Fargo, payable in monthly installments of $367 (amortized over 5 years).		6,000			10,000
Capital Lease with Wells Fargo, payable in monthly installments of $550 (amortized over 3 years).		3,000			10,000
Subordinated Notes (Officer) due on demand, interest at 9% (see Notes 9, 12).		5,000			5,000
Subordinated Notes (Officer) due on demand, interest at 8% (see Notes 9, 12).		802,000			741,000
Subordinated Notes (Officer) due on demand, interest at prime (3.75%) plus 2% (5.75%) at December 31, 2016 (see Note 9).		609,000			577,000
Notes Payable (Affiliates) due 2015, interest at prime (3.75%) plus 0.25% (4%) at December 31, 2016 (see Note 12) (Related Party).		27,000			27,000
Promissory Note with Merrick Company due on demand, interest at 4.25% (Related Party).		83,000			113,000
Promissory Note with Schwan Leasing due on demand, interest at 4.25% (Related Party).		70,000			70,000
Notes Payable (Affiliates) due 2021, interest at 11.75% (see Note 12) (Related Party).		47,000			65,000
Total long-term debt		8,879,000			8,852,000
Less current portion		(1,938,000	)		(551,000	)
Total Long-term debt, net of current portion	$	6,941,000		$	8,301,000

F- 15

On April 29, 2010, the Company entered into a Credit Agreement and associated documents with BMO Harris under which BMO Harris agreed to extend to the Company a credit facility in the aggregate amount of $14,417,000. The facility includes (i) a Revolving Credit providing for maximum advances to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables and inventory of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of equipment, (iii) a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount the Company can borrow on the Revolving Credit includes 85% of eligible accounts and 60% of eligible inventory up to the maximum amount of the Revolving Credit which was amended to $12,000,000 in July 2012. The Mortgage Loan is amortized over a term of 25 years. The maturity date of the facility was April 30, 2013, which was subsequently extended to July 17, 2017. As of December 31, 2016 the balance outstanding on the Revolving Line of credit with BMO Harris was $10,918,000 and there was $4,491,000 available to borrow.

Certain terms of the loan agreement, as amended, include:

Restrictive Covenants : The Loan 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 Loan Agreement includes a series of financial covenants we are required to meet including:

We are required to maintain a tangible net worth (plus Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010;

We are required to maintain specified ratios of senior debt to EBITDA on an annual basis and determined quarterly; and,

We are required to maintain a level of adjusted EBITDA to fixed charges on an annual basis determined quarterly of not less than 1.5 to 1. Adjusted EBITDA is EBITDA minus (i) taxes paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures.

As of December 31, 2016, the Company was in compliance with these financial covenants.

F- 16

Also, on July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a detachable warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. An initial value of $703,000 was allocated to the detachable warrant. This value is recorded as a debt discount to the principal amount of the debt and is amortized as additional interest expense based on the effective interest method over the term of the debt. Additional interest expense of $171,000 and $146,000 was recognized during 2016 and 2015, respectively. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum.

The Note and Warrant Purchase Agreement includes provisions for:

(i)

a closing fee of $100,000

(ii)

payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;

(iii)

security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;

(iv)

various representations and warranties and covenants of the Company;

(v)

financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.

On April 12, 2013, the Company entered into Amendment No. 4 to the Credit Agreement among the Company and BMO Harris Bank N.A. (the “Bank”) (the “Credit Agreement Amendment”) and also entered into Amendment No. 1 to the Note and Warrant Purchase Agreement among the Company and BMO Private Equity (U.S.) (the “NWPA Agreement Amendment”). In the Credit Agreement Amendment, the Bank, and in the NWPA Agreement Amendment, BMO Equity, waives defaults by the Company as of December 31, 2012 and March 31, 2013 with respect to certain financial covenants in the agreement relating to the Senior Leverage Ratio and Total Leverage Ratio. In addition, the levels of these financial covenants for June 30, 2013 and subsequent quarters during the term of the agreements are revised.

F- 17

On October 13, 2015, the Company entered into Amendment No. 6 to the Credit Agreement among the Company and BMO Harris. Pursuant to the terms of the Amendment, the company will be able to obtain advances under the revolving line of credit with BMO Harris in the amount provided for in the borrowing base formula plus an overadvance amount of up to $1 million, up to a total maximum amount under the revolving line of credit of $12 million. The provision for the overadvance amount is available to the company for the period from October 1, 2015 to April 30, 2016.

Future minimum principal payments for amounts outstanding under the long-term debt items on the foregoing schedule for each of the years ended December 31 are:

2017	$	1,938,000
2018		5,315,000
2019		10,000
2020		12,000
2021		8,000
Thereafter		1,596,000
Total	$	8,879,000

The issuance of shares in this placement resulted in gross proceeds to the Company of $917,000, and after commissions and fees, net proceeds to the Company of approximately $638,328. The Company has used these proceeds for general working capital purposes.

F- 18

On September 30, 2016, John H. Schwan advanced to the Company the sum of $530,000 and on the same date, Stephen M. Merrick advanced to 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 a Promissory Note to Mr. Schwan in the principal amount of $530,000 and to Mr. Merrick in the amount of $370,000 dated September 30, 2016 and bearing interest at the rate of 6% per annum. Effective on the same date, Mr. Schwan and Mr. Merrick entered into Subordination Agreements with BMO Harris and BMO equity pursuant to which each of them agreed to subordinate the Company’s obligation to them under the Promissory Notes to the Company’s obligations to BMO Harris and BMO Equity, subject to certain rights of payment as provided in the Agreements. Further, effective on September 30, 2016, the Company and BMO Harris entered into Amendment No. 9 to the Credit Agreement and the Company and BMO Equity entered into Amendment No. 4 to the Note and Warrant Purchase Agreement pursuant to which each of BMO Harris and BMO Equity agreed to consent to payments of principal and interest to Mr. Schwan and Mr. Merrick under the Promissory Notes out of the proceeds received by the Company from the sale of vacuum sealing machines to a major retail chain in a promotional program. The principal balances of the notes to Mr. Schwan and Mr. Merrick were paid in full on January 4, 2017.

9. Subordinated Debt – Related Parties

In February 2003, the Company received $1,630,000 from certain shareholders in exchange for (i) 9% subordinated notes and (ii) five year warrants to purchase 163,000 common shares at $4.87 per share. The proceeds were to (i) re-finance a bank loan for CTI Mexico in the amount of $880,000 and (ii) to provide financing for CTI Mexico and Flexo Universal. The fair value of the warrants was $460,000 calculated using Black-Scholes option pricing formula. The Company applied the discount against the subordinated debt. The discount is amortized using the effective interest method to interest expense over the term of the debt. These loans are subordinated to the bank debt of the Company. On February 8, 2008 those shareholders exercised these warrants in exchange for a reduction on these notes of $794,000. The remaining balance of $5,000 is due on demand.

F- 19

In February 2006, the Company received $1,000,000 from certain shareholders in exchange for (i) five year subordinated notes bearing interest at 2% over the prime rate determined on a quarterly basis and (ii) five year warrants to purchase an aggregate of 303,030 shares of common stock of the Company at the price of $3.30 per share. The proceeds were to fund capital improvements and give additional liquidity to the Company. The value of the warrants was $443,000 using the Black-Scholes option pricing formula. The Company applied the discount against the subordinated debt. The discount was amortized using the effective interest method to interest expense over the term of the debt. These loans are subordinated to the bank debt of the Company. On May 28, 2010, these shareholders exercised all of these warrants in exchange for note indebtedness. The remaining balance of $609,000 is due on demand.

At various times from 2003 to 2005, certain shareholders loaned an aggregate of $814,000 to the Company in exchange for notes bearing interest at an annual rate of 8%. These notes are subordinated to the Company’s bank loan. The remaining balance of $802,000 is due on demand.

10. Income Taxes

The income tax provisions are comprised of the following:

	Dec. 31 2016			Dec. 31 2015
Current:
Federal	$	448,462		$	6,516
State		-			4,200
Foreign		203,824			374,071
	$	652,286		$	384,787

Deferred
Federal	$	70,223		$	(63,433	)
State		71,716			-
Foreign		(91,348	)		48,242
		50,591			(15,191	)
Total Income Tax Provision	$	702,877		$	369,596

F- 20

The components of the net deferred tax asset at December 31 are as follows:

	2016			2015
Deferred tax assets:
Allowance for doubtful accounts	$	16,014		$	21,150
Inventory allowances		312,592			314,101
Accrued liabilities		403,049			372,172
Unicap 263A adjustment		170,765			170,765
Net operating loss carryforwards		438,075			511,403
Alternative minimum tax credit carryforwards		-			-
State investment tax credit carryforward		22,448			22,448
Foreign tax credit carryforward		559,469			916,121
Other foreign tax items		17,922			44,394
Foreign net operating loss carryforwards		541,983			424,164
Total deferred tax assets		2,482,317			2,796,718
Deferred tax liabilities:
Tax over book basis of capital assets		(740,627	)		(1,004,437	)
Undistributed Earnings from Subsidiaries		-			-
Other foreign tax items		-			-
Net deferred tax assets before valuation allowance	$	1,741,690		$	1,792,281
Less: Valuation allowance		(45,000	)		(45,000	)
Net deferred tax assets		1,696,690			1,747,281

The Company has net operating loss carryforwards of approximately $2,495,000 expiring in various years through 2025.

Income tax provisions differed from the taxes calculated at the statutory federal tax rate as follows:

	Years Ended December 31,
	2016		2015
Federal Taxes at statutory rate	$	450,464	$	444,471
State income taxes, net of Federal tax effect		67,768		66,867
Nondeductible expenses		51,741		46,523
Foreign taxes		132,905		(188,266	)
Income tax provision	$	702,877	$	369,596

The Company files tax returns in the U.S., and in the U.K, Germany and Mexico foreign tax jurisdictions and also in various state jurisdictions in the U.S. The tax years 2013 through 2015 remain open to examination. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the year ended December 31, 2016 and 2015, the Company did not recognize expense for interest or penalties, and do not have any amounts accrued at December 31, 2016 and 2015, as the Company does not believe it has any uncertain tax positions.

F- 21

11. Employee Benefit Plan

The Company has a defined contribution plan for substantially all employees. Profit sharing contributions may be made at the discretion of the Board of Directors. Effective January 1, 2006, the Company amended its defined contribution plan. Under the amended plan, the maximum contribution for the Company is 4% of gross wages. Employer contributions to the plan totaled $78,000 and $76,000 for the years ended December 31, 2016 and 2015, respectively.

12. Related Party Transactions

Stephen M. Merrick, President of the Company, is of counsel to a law firm from which the Company received legal services during the year. Mr. Merrick is both a director and a shareholder of the Company. Legal fees paid to this firm were $188,000 and $149,000 for the years ended December 31, 2016 and 2015, respectively.

John H. Schwan, Chief Executive Officer of the Company, is the brother of Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance and remodeling services to the Company. The Company made payments to Schwan Incorporated of approximately $15,000 and $4,000 during the years ended December 31, 2016 and 2015, respectively.

During the period from January 2003 to the present, John H. Schwan, Chief Executive Officer of the Company, has made loans to the Company which have outstanding balances, for the Company of $1,416,000 and $1,323,000 as of December 31, 2016 and 2015, respectively. During 2016 and 2015, interest expense to this individual on these outstanding loans was $93,000 and $87,000, respectively (see Notes 8 and 9).

During 2010, Schwan Leasing and Merrick Company, owned by John H. Schwan and Stephen M. Merrick, provided financing for the acquisition and construction of latex balloon production and related equipment (see Note 13).

Other Assets include amounts due to the Company from its employees. As of December 31, 2016 and 2015, the balance outstanding on these amounts was $47,000 and $46,000, respectively.

Items identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of December 31, 2016 and 2015 include loans by shareholders to Flexo Universal totaling $47,000 and $65,000, respectively, as well as a loan to CTI Europe totaling $27,000 and $27,000, respectively.

The transactions described in Note 13.

F- 22

13. Variable Interest Entities (“VIE”) and Transactions

During 2010, two entities owned by officers and principal shareholders of the Company (John H. Schwan and Stephen M. Merrick) provided financing for Flexo Universal, the Company’s Mexico subsidiary, for the acquisition and construction of latex balloon production and related equipment. The entities included Venture Leasing L.L.C., (“VLUS”), an Illinois limited liability company which is 100% owned by an entity owned by Mr. Schwan and Mr. Merrick, and Venture Leasing Mexico S. A. de R. L (“VLM”), a Mexico company which is also owned 100% by entities owned by Mr. Schwan and Mr. Merrick. The Company is the primary beneficiary of VLUS & VLM and accordingly consolidated the result of the entities in its financial statements.

Mr. Schwan and Mr. Merrick, through entities owned by them, arranged for a line of credit in the amount of $1,000,000 from Barrington Bank in order to loan monies to VLUS as needed. During 2010, VLUS received advances on this line totaling $700,000. VLUS loaned substantially all of these funds to VLM. VLM utilized the funds to purchase materials, parts, components and services for the acquisition and construction of balloon production and related equipment to be placed at the premises of Flexo Universal. Assembly and construction of this equipment was completed on or about December 31, 2010 and, in January 2011, the equipment was placed in service at Flexo Universal.

Title to the equipment remained in the name of VLM. VLM leased the equipment to Flexo Universal under a lease in which Flexo Universal paid to VLM rental payments at the rate of approximately $9,000 per month and had the right to purchase the equipment from VLM at the expiration of the lease at fair market value. The Company has not provided any guarantees related to VLUS or VLM and no creditors of the variable interest entities have recourse to the general credit of the Company as a result of including VLUS & VLM in the consolidated financial statements. The accounts of VLM and VLUS have been consolidated with the accounts of the Company.

On May 31, 2016, Flexo Universal purchased the equipment from VLM for 8,700,000 in Mexican Pesos and the lease was terminated.

Mr. Schwan and Mr. Merrick are 50% owners of Clever Container, an Illinois limited liability company engaged in the sale and distribution through a network of independent distributors, of household items including containers and organizing products. The Company acquired a 28.5% interest in Clever Container from third parties in 2016. The Company produces and sells certain container products to Clever Container and also purchases and re-sells products to Clever Container. By reason of the level of ownership of Clever Container by two principal officers and shareholders of the Company, the ownership interest of the Company in Clever Container and the transactions among the Company and Clever Container, the determination was made to consolidate the results of Clever Container in the consolidated financial statements of the Company commencing as of October 1, 2013 and going forward.

F- 23

The following sets forth the condensed balance sheet of VLM, VLUS and Clever Container for December 31, 2016 and 2015.

	Dec. 31, 2016		Dec. 31, 2015
Current Assets	$	794,000	$	1,400,000
Property, plant and equipment, net		125,000		462,000
Other noncurrent assets		794,000		794,000
Total assets	$	1,713,000	$	2,656,000

Mortgages and other long-term debt payable	$	1,962,000	$	2,775,000
Total liabilities	$	1,962,000	$	2,775,000

14. Goodwill

Under the provisions of GAAP USA, goodwill is subject to at least annual assessments for impairment by applying a fair-value based test. GAAP USA also requires that an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. The Company has no acquired intangible assets other than goodwill.

The Company has determined that the fair value of goodwill was not impaired as of December 31, 2016 and 2015.

15. Commitments

Operating Leases

In August 2015, the Company’s United Kingdom subsidiary entered into a 5-year lease agreement to rent approximately 9,000 square feet of warehouse and office space in Rugby, England for $6,000 per month.

F- 24

In November 2016, CTI Europe entered into a lease agreement for 13,000 square feet of office and warehouse space in Heusenstamm, Germany for a term commencing on February 1, 2017 and ending on February 1, 2022 at the rate per month of $9,000. A prior lease for space in Heusenstamm was terminated on February 1, 2017.

In August 2011, Flexo Universal entered into a 5-year lease to rent 73,000 square feet of warehouse and office space in Guadalajara, Mexico at the cost of $22,000 per month. The lease was extended to February 28, 2017. Effective March 1, 2017, Flexco Universal entered into a five year lease for these premises at a cost of 493,090 Mexican Pesos per month (currently, approximately $26,000 per month).

Lease period	Amount per month
November 1, 2016 – February 28, 2017	$	36,000
March 1, 2017 – February 28, 2018	$	38,000
March 1, 2018 – February 28, 2019	$	40,000
March 1, 2019 – February 29, 2020	$	42,000

All of the Company’s lease payments are recognized on a straight-line basis. The net lease expense was $732,000 and $950,000 for the years ended December 31, 2016 and 2015, respectively.

The future aggregate minimum net lease payments under existing agreements as of December 31, are as follows:

2017	$	182,000
2018		111,000
2019		111,000
Thereafter		373,000
Total	$	777,000

Licenses

The Company has certain merchandising license agreements that require royalty payments based upon the Company’s net sales of the respective products. The agreements call for guaranteed minimum commitments that are determined on a calendar year basis. Future guaranteed commitments due, as computed on a pro rata basis, as of December 31, are as follows:

2017		$	500,000
Total		$	500,000

F- 25

16. Stockholders’ Equity

Stock Options

The Company has adopted GAAP USA which requires all stock-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their grant-date fair values.

The Compensation Committee administers the stock-based plans. The exercise price for Incentive Stock Options (“ISO”) cannot be less than the fair value of the stock subject to the option on the grant date (110% of such fair value in the case of ISOs granted to a stockholder who owns more than 10% of the Company’s Common Stock). The exercise price of a Non-Qualified Stock Options (“NQSO”) shall be fixed by the Compensation Committee at whatever price the Committee may determine in good faith. Unless the Committee determines otherwise, options beginning with the 2009 Plan generally have a 4-year term with a 3-year vesting schedule. Unless the Committee provides otherwise, options terminate upon the termination of a participant’s employment, except that the participant may exercise an option to the extent it was exercisable on the date of termination and for a period of time after termination. Officers, directors and employees of, and consultants to the Company, or any parent or subsidiary corporation selected by the Committee, are eligible to receive options under the Plan. Subject to certain restrictions, the Committee is authorized to designate the number of shares to be covered by each award, the terms of the award, the date on which and the rates at which options or other awards may be exercised, the method of payment, vesting and other terms.

The Company has applied the Black-Scholes model to value stock-based awards. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of the Company’s Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company’s Common Stock.

The valuation assumptions we have applied to determine the value of stock-based awards were as follows:

Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility.

Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities in effect at the time of the grant, which varied between 1.36% and 1.80%.

Expected life: The expected life of the option represents the period of time options are expected to be outstanding. The Company uses an expected life of 3.75 years.

Dividend yield: The estimate for dividend yield is 0.0%, as the Company did not issue dividends during 2016.

F- 26

Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.

The Company, at the discretion of the board, may issue options in excess of the total available, if options related to that stock plan are cancelled. In some cases, not all shares that are available to a stock plan are issued, as the Company is unable to issue options to a previous plan when a new plan is in place.

The Company’s pre-tax income for the fiscal year ended December 31, 2016 and 2015 includes approximately $34,000 and $29,000, respectively, of compensation costs related to share-based payments. As of December 31, 2016, there is $26,000 of unrecognized compensation expense related to non-vested stock option grants. We expect approximately $15,000, $7,000, and $3,000 to be recognized during 2017, 2018, and 2019 respectively.

On April 24, 2002, the Board of Directors approved for adoption, effective October 12, 2002, the 2002 Stock Option Plan (“2002 Plan”). The 2002 Plan authorizes the grant of options to purchase up to an aggregate of 142,860 shares of the Company’s Common Stock . As of December 31, 2016, 123,430 options have been granted and were fully vested at the time of grant; no options remain outstanding.

On April 10, 2009, the Board of Directors approved for adoption, and on June 5, 2009, the shareholders of the Company approved the 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan authorizes the issuance of up to 250,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) As of December 31, 2016, 250,000 options have been granted; 143,094 remain outstanding of which 83,275 are vested and 59,819 are not vested. Vesting schedules for the 2009 Plan are as follows:

Vesting Schedule A				Vesting Schedule B				Vesting Schedule C				Vesting Schedule D
	25	%	12 months		33	%	24 months		50	%	48 months		20	%	6 months
	50	%	24 months		67	%	36 months		100	%	57 months		40	%	18 months
	75	%	36 months		100	%	48 months						60	%	30 months
	100	%	48 months										80	%	42 months
													100	%	54 months

During the years ended December 31, 2016, 4,906 options were exercised and no options were exercised during the year ended December 31, 2015.

F- 27

The following is a summary of the activity in the Company’s stock option plans and other options for the years ended December 31, 2016 and 2015, respectively:

	December 31, 2016					December 31, 2015
				Weighted Avg.					Weighted Avg.
	Shares			Exercise Price		Shares			Exercise Price
Exercisable, beginning of period		63,800		$	5.26		132,099		$	5.07
Vested		30,381			5.22		34,801			5.65
Exercised		4,906			5.15		29,500			2.88
Cancelled		(6,000	)		5.96		(73,000	)		6.06
Exercisable at the end of period		83,275		$	5.20		64,400		$	5.26

	December 31, 2016					December 31, 2015
				Weighted Avg.					Weighted Avg.
	Shares			Exercise Price		Shares			Exercise Price
Outstanding, beginning of period		154,000		$	5.25		214,500		$	5.20
Granted		-			-		49,000			5.27
Exercised		4,906			5.15		29,500			2.88
Cancelled		(6,000	)		5.96		(80,000	)		6.01
Outstanding at the end of period		143,094		$	5.22		154,000		$	5.25

At December 31, 2016, there were 96,000 available options to grant.

Significant option groups remained outstanding at December 31, 2016 and related weighted average grant date fair value, remaining life and intrinsic value information are as follows:

	Options Outstanding								Options Vested
Options by Grant Date	Shares		Weighted Avg.		Remain. Life		Intrinsic Val		Shares		Weighted Avg.		Remain. Life		Intrinsic Val
Nov 2012		90,000		5.17		0.9	$	61,200		71,200		5.17		0.9	$	48,416
Nov 2013		5,000		5.75		1.9	$	500		3,000		5.75		1.9	$	300
Dec 2015		48,094		5.27		4.0	$	27,794		9,075		5.28		4.0	$	5,129
TOTAL		143,094		5.22		2.9	$	89,494		64,400		5.26		1.8	$	53,845

Warrants

On July 17, 2012, the Company issued detachable warrants in connection with the Note and Warrant Purchase Agreement with BMO Equity (see Note 8). The warrants are exercisable at any time after July 17, 2012 and until July 17, 2022, or 18 months after full payment of the related $5,000,000 note payable, whichever is earlier, for up to 4% of the outstanding units of the Company (on a fully diluted basis) on the date of exercise. The warrants are exercisable at the purchase price of $0.01 per unit. At inception, the fair value allocated to the warrants of $703,000 was separately reflected as a noncurrent liability in the consolidated balance sheet.

F- 28

The fair value of the detachable warrants was estimated on the date of the grant using the Black-Scholes option-pricing model. This model uses the assumptions listed in the table below as of July 17, 2012 (initial valuation date of the warrants). In the valuation of the warrants, it was determined that the warrants were required to be carried as a derivative liability at fair value. Changes in the fair value of the warrants have been recognized in the consolidated statement of operations.

	December 31, 2016			December 31, 2015			December 31, 2014			December 31, 2013			December 31, 2012			July 17, 2012
Weighted average fair value per warrant	$	5.85		$	5.11		$	3.76		$	5.84		$	4.87		$	5.03
Risk-free interest rate		1.47	%		1.76	%		2.47	%		2.45	%		1.18	%		0.99	%
Expected lives		3.0 yrs.			4.0 yrs.			5.0 yrs.			6.0 yrs.			7.0 yrs.			7.5 yrs.
Expected volatility		34.03	%		28.99	%		44.99	%		37.49	%		28.18	%		36.98	%

The following is a summary of the activity of the Company’s warrants for the years ended December 2016 and 2015:

	December 31, 2016				December 31, 2015
			Weighted Avg.				Weighted Avg.
	Shares		Exercise Price		Shares		Exercise Price
Outstanding and exercisable, beginning of period		140,048	$	0.01		140,048	$	0.01
Granted		76,675		7.00		-		-
Exercised						-		-
Cancelled						-		-
Outstanding and exercisable at the end of period		216,723	$	2.48		140,048	$	0.01

The warrants outstanding and exercisable as of December 31, 2016 have a remaining life of 4.49 years and a fair value of $818,000.

17. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during each period.

Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and equivalents (stock options and warrants), unless anti-dilutive, during each period.

F- 29

For the three and twelve months ended December 31, 2016, 76,675 shares were anti-dilutive (not included in the determination of earnings on a diluted basis), all of which were represented by options. For the three and twelve months ended December 31, 2015, 106,065 shares were anti-dilutive, all of which were represented by options.

Consolidated Earnings per Share

	Year Ended December 31,
	2016		2015
Basic
Average shares outstanding:
Weighted average number of shares outstanding during the period		3,566,400		3,297,448

Earnings:
Net income attributable to CTI Industries Corporation	$	652,538	$	1,047,333

Amount for per share Computation	$	652,538	$	1,047,333

Net earnings applicable to Common Shares	$	0.18	$	0.32

Diluted
Average shares outstanding:		3,566,400		3,297,448
Weighted averages shares Outstanding Common stock equivalents (options, warrants)		161,154		139,692

Weighted average number of shares outstanding during the period		3,727,554		3,437,140

Earnings:
Net income attributable to CTI Industries Corporation	$	652,538	$	1,047,333

Amount for per share computation	$	652,538	$	1,047,333

Net income applicable to Common Shares	$	0.18	$	0.30

18. Geographic Segment Data

The Company’s operations consist of a single business segment which designs, manufactures, and distributes film products. Transfers between geographic areas were primarily at cost plus a standard markup. The Company’s subsidiaries have assets consisting primarily of trade accounts receivable, inventory and machinery and equipment. Sales and selected financial information by geographic area for the years ended December 31, 2016 and 2015, respectively, are:

F- 30

	United States		United Kingdom (UK)		Europe (Excluding UK)		Mexico		Consolidated
Year ended 12/31/16
Sales to outside customers	$	51,792,000	$	2,427,000	$	2,590,000	$	7,459,000	$	64,268,000
Total Assets	$	33,108,000	$	1,324,000	$	2,418,000	$	7,064,000	$	43,914,000

	United States		United Kingdom (UK)		Europe (Excluding UK)		Mexico		Consolidated
Year ended 12/31/15
Sales to outside customers	$	46,520,000	$	2,207,000	$	1,530,000	$	9,108,000	$	59,365,000
Total Assets	$	30,772,000	$	1,791,000	$	1,562,000	$	7,680,000	$	41,805,000

19. Contingencies

In the ordinary conduct of our business, we are from time to time subject to lawsuits, investigations and claims, including environmental claims and employee-related matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, including civil penalties or other enforcement actions, we do not believe that any currently pending legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, financial condition or results of operations.

Schedule II – Valuation and Qualifying Accounts:

The following is a summary of the allowance for doubtful accounts related to accounts receivable for the years ended December 31:

	2016			2015
Balance at beginning of year	$	126,000		$	230,000
Charged to expenses		26,000			55,000
Uncollectible accounts written off		(15,000	)		(159,000	)
Balance at end of year	$	137,000		$	126,000

The following is a summary of the allowance for excess inventory for the years ended December 31:

	2016			2015
Balance at beginning of year	$	823,000		$	645,000
Charged to expenses		(11,000	)		179,000
Obsolete inventory written off		(18,000	)		(1,000	)
Balance at end of year	$	794,000		$	823,000

F- 31

The following is a summary of property and equipment and the related accounts of accumulated depreciation for the years ended December 31:

	2016			2015
Cost Basis
Balance at beginning of year	$	39,025,000		$	38,818,000
Additions		-			207,000
Disposals		(775,000	)		-
Balance at end of year	$	38,250,000		$	39,025,000

Accumulated depreciation
Balance at beginning of year	$	32,472,000		$	31,063,000
Depreciation		466,000			1,409,000
Disposals		-			-
Balance at end of year	$	32,938,000		$	32,472,000

F- 32

EXHIBIT INDEX

Exhibit

Number		Document

3.1		Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015).
3.2		Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017).
4.1		Form of CTI Industries Corporation’s common stock certificate (filed herewith).
10.1		CTI Industries Corporation 2002 Stock Option Plan (Incorporated by reference to Appendix A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on May 15, 2002).

F- 33

10.2		CTI Industries Corporation 2009 Stock Incentive Plan (Incorporated by reference to Schedule A contained in Registrant’s Schedule 14A Definitive Proxy Statement, as filed with the Commission on April 30, 2009).
10.3		Credit Agreement between Harris N.A. and CTI Industries Corporation dated April 29, 2010 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.4		Mortgage and Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.5		Security Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.6		Pledge Agreement between Harris N.A. and the Company dated April 29, 2010 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated May 14, 2010).
10.7		Trademark License Agreement between S.C. Johnson & Son, Inc. and the Company dated December 14, 2011 (Incorporated by reference to Exhibit 10.14 contained in Registrant’s Report on Form 10-K dated March 29, 2012).
10.8		Third Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.9		Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.10		Note and Warrant Purchase Agreement between BMO Private Equity, Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.11		Warrant Agreement between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.12		Senior Secured Subordinated Promissory Note between BMO Private Equity (U.S.), Inc. and the Company dated July 17, 2012 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 14, 2012).
10.13		Lease Agreement between Schultz Bros. Co. and the Company dated September 19, 2012 (Incorporated by reference to Exhibit 10.8 contained in Registrant’s Report on Form 10-Q dated November 14, 2012).

F- 34

10.14		Fourth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated May 15, 2013).
10.15		First Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated April 12, 2013. (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated May 15, 2013).
10.16		Consignment and Pay by Scan Agreement between Food Lion L.L.C. and CTI Supply, Inc. dated December 10, 2014. (Incorporated by reference to Exhibit 10.18 contained in Registrant’s Report on Form 10-K dated March 30, 2015).
10.17		Fifth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated December 23, 2014. (Incorporated by reference to Exhibit 10.19 contained in Registrant’s Report on Form 10-K dated March 30, 2015).
10.18		Second Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated December 23, 2014. (Incorporated by reference to Exhibit 10.20 contained in Registrant’s Report on Form 10-K dated March 30, 2015).
10.19		Sixth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated October 13, 2015 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated November 12, 2015).
10.20		Eighth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated August 8, 2016 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.21		Replacement Revolving Note between BMO Harris Bank, N.A. and the Company dated August 8, 2016 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.22		Third Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated August 8, 2016 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.23		Securities Purchase Agreement between [Purchaser] and the Company (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.24		Stock Purchase Warrant to Purchase Common Stock of CTI Industries Corporation (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).
10.25		Registration Rights Agreement between [Purchaser] and the Company (Incorporated by reference to Exhibit 10.6 contained in Registrant’s Report on Form 10-Q dated August 22, 2016).

F- 35

10.26		Promissory Note between CTI Industries and Stephen M. Merrick dated September 30, 2016 (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.27		Promissory Note between CTI Industries and John H. Schwan dated September 30, 2016 (Incorporated by reference to Exhibit 10.2 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.28		Ninth Amendment to Credit Agreement between BMO Harris Bank, N.A. and the Company dated September 30, 2016 (Incorporated by reference to Exhibit 10.3 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.29		Fourth Amendment to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.), Inc. and the Company dated September 30, 2016 (Incorporated by reference to Exhibit 10.4 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.30		Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Harris Bank, N.A. effective September 30, 2016 (Incorporated by reference to Exhibit 10.5 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
10.31		Subordination Agreement between CTI Industries, Stephen M. Merrick, John H. Schwan and BMO Private Equity (U.S.), Inc. effective September 30, 2016 (Incorporated by reference to Exhibit 10.6 contained in Registrant’s Report on Form 10-Q dated November 14, 2016).
14		Code of Ethics (Incorporated by reference to Exhibit contained in the Registrant’s Form 10-K/A Amendment No. 2, as filed with the Commission on October 8, 2004).
21		Subsidiaries (description incorporated in Form 10-K under Item No. 1).
23.1		Consent of Independent Registered Public Accounting Firm, Plante & Moran, PLLC (filed herewith).
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99		Audited financial statements of the Company’s subsidiary, Flexo Universal, S. de R.L. de C.V. for the year ended December 31, 2016 (filed herewith).

F- 36

101

Interactive Data Files, including the following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

F- 37

Exhibit 4.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

CTI Industries Corporation and Subsidiaries:

We consent to the incorporation by reference in the registration statements (Nos. 333-76006, 333-76008 and 333-169442 on Form S-8 of CTI Industries Corporation and Subsidiaries of our report dated March 31, 2017, with respect to the consolidated balance sheet of CTI Industries Corporation and Subsidiaries as of December 31, 2016, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2016, which report appears in or is incorporated by reference in this annual report on Form 10-K of CTI Industries Corporation and Subsidiaries.

/s/ Plante & Moran, PLLC

Chicago, Illinois

March 31, 2017

Exhibit 31.1

CERTIFICATION

I, John H. Schwan, certify that:

1. I have reviewed this annual report on Form 10-K of CTI Industries Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2017

	/s/ John H. Schwan
	John H. Schwan, Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Timothy S. Patterson, certify that:

1. I have reviewed this annual report on Form 10-K of CTI Industries Corporation;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 31, 2017

	/s/ Timothy S. Patterson
	Timothy S. Patterson
	Chief Financial Officer
	Senior Vice President of Finance

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of CTI Industries Corporation (the “Company”) for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John H. Schwan, as Chief Executive Officer of the Company, and Timothy S. Patterson, as Chief Financial Officer and Senior Vice President of Finance of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John H. Schwan
John H. Schwan
Chief Executive Officer

Date: March 31, 2017

/s/ Timothy S. Patterson
Timothy S. Patterson
Chief Financial Officer
Senior Vice President of Finance

Date: March 31, 2017

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being “filed” as part of the Form 10-K or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

INDEPENDENT AUDITOR’S REPORT

AS OF DECEMBER 31 2016 AND 2015

Santa Rita Nº1110 Col. Chapalita Oriente, Zapopan Jalisco, México C.P. 45040

Teléfonos: +3647-2715, 3647-2732, 36472752 Facsímile: +3647-2728 E-mail vghlbgdl@vinet.com.mx

HLB Vargas Graf y Cía., S.C. is a member of HLB International. A world-wide organization of accounting firms and business advisers

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

I N D E X

1.-

Independent Auditors’ Report.

2.-

Balance Sheet.

3.-

Statement of (Loss) Income.

4.-

Statements of Changes in Stockholders’ Equity.

5.-

Statement of Cash Flow.

6.-

Notes to the financial statements.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of

Flexo Universal, S. de R.L de C.V.

We have audited the accompanying balance sheets of Flexo Universal, S de R.L. de C.V. as of December 31 2016 and 2015, and the related statement of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions.

We draw attention to Note 2 of the financial statements, which describes the basis of accounting. The financial statements are prepared according to Financial Reporting Standards Applicable Mexico (FRS), which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinions are not modified with respect to this matter.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Flexo Universal, S. de R.L. de C.V ., as of December 31 2016 and 2015 and the results of their operations and their cash flows for the years then ended, in conformity with the basis of accounting described above.

HLB Vargas Graf y Cía., S.C

Zapopan, Jalisco, México C. Cp, 45040

C.P.C. Antonio Vargas Aceves

Certified Public Accountant

Partner

March 31, 2017

Santa Rita Nº1110 Col. Chapalita Oriente, Zapopan Jalisco, México C.P. 45040

Teléfonos: +3647-2715, 3647-2732, 36472752 Facsímile: +3647-2728 E-mail vghlbgdl@vinet.com.mx

HLB Vargas Graf y Cía., S.C. is a member of HLB International. A world-wide organization of accounting firms and business advisers

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

BALANCE SHEET AS OF DECEMBER 31, 2016 AND 2015

( In Mexican pesos )

(Notes 1 & 2)

	2016		2015
CURRENT ASSETS:

Cash and cash equivalents	$	2,547,910	$	2,372,760
Accounts receivables		50,151,684		46,825,627
Other accounts receivables (Note 3)		7,342,727		3,447,873
Related parties (Note 4)		24,194,424		33,310,804
Inventories (Note 5)		81,369,237		58,107,580
Total current assets		165,605,982		144,064,644

NON CURRENT ASSETS:

Machinery and equipment (Note 6)		5,177,005		6,574,956

Warranty deposits		7,553,011		2,924,296

Other assets		1,427,526		1,535,926
Deferred income tax (Note 14)		370,828		767,395
Other deferred assets (Note 10 )		6,679,583		-
Total non current assets		21,207,953		11,802,573

TOTAL ASSETS	$	186,813,935	$	155,867,217

CURRENT LIABILITIES

Accounts payable to suppliers, accrued expenses and other accounts payable (Note 7)	$	47,588,267	$	36,828,608
ISR payable		636,465		633,329
PTU reserve		62,641		62,641
Current portion of long term liabilities to related parties (Note 8)		12,609,416		12,044,282
Total current liabilities		60,896,789		49,568,860

LONG TERM LIABILITIES

Long term liabilities to related parties (Note 8)		969,916		1,119,781

Total long term liabilities		969,916		1,119,781

DEFERRED LIABILITIES
Deferred Sales (Note 10 )		11,781,609		-
TOTAL LIABILITIES		73,648,314		50,688,641

STOCKHOLDERS' EQUITY

Capital stock (Note 11 )		47,410,945		47,410,945
Legal Reserve		3,070,607		2,199,375
Accumulated results		54,697,024		38,143,641
Period's net (loss) profit		7,987,045		17,424,615
TOTAL STOCKHOLDERS' EQUITY		113,165,621		105,178,576

Contingencies (Note 13)		-		-

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUTIY	$	186,813,935	$	155,867,217

The enclosed notes are an integral part of these financial statements

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

STATEMENT OF OPERATIONS FOR THE YEARS ENDED

DECEMBER 31, 2016 AND 2015

( In Mexican pesos )

	2016			2015

Net sales	$	171,958,227		$	176,427,298
Cost of products sold		(136,572,984	)		(131,777,839	)
GROSS PROFIT		35,385,243			44,649,459

Operating expenses
Administration and sales expenses		(21,625,400	)		(21,015,704	)
Other income, (expenses) - net		(162,252	)		217,772
		(21,787,652	)		(20,797,932	)

OPERATION NET PROFIT		13,597,591			23,851,527

INTEGRAL FINANCING RESULTS
Exchange rate fluctuations - net		2,294,504			1,416,549
interest - net		(1,446,363	)		(1,318,662	)
		848,141			97,887

PROFIT BEFORE INCOME TAXES AND EPS		14,445,732			23,949,414


Income tax		(6,062,120	)		(6,697,612	)
Deferred income tax		(396,567	)		172,813
		(6,458,687	)		(6,524,799	)

NET PROFIT	$	7,987,045		$	17,424,615

The accompanying notes are an integral part of these financial statements

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

( In Mexican pesos )

	2016			2015

CAPITAL STOCK

Initial and final period balance		47,410,945			47,410,945

LEGAL RESERVE

Initial period balance		2,199,375			1,393,404
Transfer from accumulated results (Note 12)		871,232			805,971
Final period balance		3,070,607			2,199,375

ACCUMULATED RESULTS

Initial period balance		38,143,641			22,830,186
Transfer from net profit (loss)		17,424,615			16,119,426
Transfer of 5% over profit period 2012, to legal reserve		(871,232	)		(805,971	)

Final period balance		54,697,024			38,143,641

NET PROFIT (LOSS)

Initial period balance		17,424,615			16,119,426
Transfer to accumulated results		(17,424,615	)		(16,119,426	)
Net profit		7,987,045			17,424,615
Final period balance		7,987,045			17,424,615

TOTAL	$	113,165,621		$	105,178,576

The accompanying notes are an integral part of these financial statements

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

CASH FLOW STATEMENT

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

( In Mexican pesos )

	2016			2015
OPERATING ACTIVITIES:

Net profit	$	7,987,045		$	17,424,615

Items related with investment activities
Depreciation		1,685,901			1,727,706
Items related with financing activities
Interest		1,446,363			1,318,662
		11,119,309			20,470,983

Trade debtors and other receivables (increase) decrease		1,895,469			(6,019,257	)
Inventories increase		(23,261,657	)		(8,739,510	)
Other assets (increase) decrease		(10,803,331	)		(2,578,655	)
Assets, Liabilities to related parties increase (decrease)		565,134			(14,773,375	)
Suppliers and other liabilities (decrease) increase		10,759,659			18,426,358
Deferred Sales		11,781,609
Taxes paid		3,136			(2,708,944	)

Net cash flow from financial activities		2,059,328			4,077,600

INVESTING ACTIVITIES:

Machinery and equipment acquisition (net)		(287,950	)		(530,895	)

		(287,950	)		(530,895	)
FINANCING ACTIVITIES:

Long term liabilities to related parties		(149,865	)		(1,687,281	)
Paid interest		(1,446,363	)		(1,318,662	)
		(1,596,228	)		(3,005,943	)
INCREASE IN CASH AND CASH EQUIVALENTS	$	175,150		$	540,762

Cash and cash equivalents at beginning of year	$	2,372,760		$	1,831,998
Cash and cash equivalents at end of year	$	2,547,910		$	2,372,760

The accompanying notes are an integral part of these financial statements

NOTES TO FINACIAL STATEMENTS

FLEXO UNIVERSAL, S. DE R.L. DE C.V.

As of December 31 ^st , 2016 and 2015

In Mexican pesos.

NOTE 1 – COMPANY DESCRIPTION:

Flexo Universal S. de R.L. de C.V., (FLEXO) was constituted on 2002. Subsidiary of CTI Industries INC, a North American company that owns 99.8269% of its capital stock.

Its main activity is the production of latex and mylar balloons; this operation is performed under the shelter of its parent company that finances its operations.

On August 28, 2015 by unanimous vote of shareholders, Flexo Universal was transformed to a Limited Liability Company with Variable Capital (S de RL de CV).

NOTE 2 – MAIN ACCOUNTING POLICIES

Basis for presentation

The significant accounting policies adopted by the company are in accordance with the Financial Reporting Standards in Mexico (FRS) and Interpretations to the Financial Reporting Standards (IFRS).

Those Standards (FRS), may differ from accounting principles generally accepted in the United States of America (US GAAP). However, under an analysis of similarities, convergences and important differences between the two standards with respect to the operations recorded that generate the financial information of the Company, we can conclude that there are no differences that could lead to material adjustments and alter that information

Estimates and assumptions

The preparation of financial statements in accordance with Mexican financial reporting standards requires the company's management to make certain estimates and provisions that may affect the value of some assets and liabilities at the date of the balance sheet, as well as the value and measurement of revenues, costs and expenses during the reported period. Even if the final result of these estimates and provisions may differ from the calculated, management believes that those were appropriate used to the circumstances.

Monetary unit

Per Mexican laws, Financial Statements are prepared in Mexican pesos ($).

Cash and equivalents

Mainly represented by deposits in bank accounts.

Accounts receivable and estimation for allowance for doubtful accounts

Represent collection right originated from inventory sales. Accounts in foreign currency are valuated at the year closing exchange rate.

Estimates for doubtful collection accounts represent the inherent probable loss of all receivables due to the behaviour of historic tendencies of the accounts receivable. Since 2009 the company has issued a provision to absorb the uncollectible accounts.

Inventories

Inventories of finished goods, production in process and raw materials, are recorded at its historic acquisition and production cost using the absorbing cost system. The acquisition cost includes all associated expenses to get the inventories ready to be sold. Inventories are valued at the average cost method net from the estimates which does not exceed their realization value.

Machinery and equipment

Fixed Assets acquired from the fusion, were recorded at the historic cost of the absorbed company, adding the difference from the valuation determined by an independent appraiser on 17 ^th , 1996. Fixed assets acquisitions after the fusion are recorded at its acquisition cost.

Acquisition costs include all associated expenses to get the fixed assets ready to be used.

Depreciation is computed by the straight-line method, beginning the year in which assets are used, and according to the following rates:

	Rates %
Leasehold improvements		10.00
Molds		20.00
Computer equipment		30.00
Machinery and office equipment		10.00
Tools and medical equipment		35.00
Transport equipment		25.00
Forklift		25.00

Long lived assets evaluation

Impairment of long term assets – As of January 1°, 2004 The C-15 Bulletin “Impairment in the value of long lasting assets and its disposal” became effective. This bulletin requires that companies evaluate the effect of impairment in long lasting assets in use. In opinion of the Company’s management, there are no traces of impairment that could have an effect in the results, in accordance with the Bulletin.

Income tax

The current income tax is determined according to current tax legislation. The deferred income tax is recorded in accordance with the asset and liability method, which compares its accounting and tax values of them. Deferred tax are recognized (assets and liabilities) for future tax consequences attributable to temporary differences between the values reflected in the financial statements of existing assets and liabilities and their respective tax bases, and for tax loss carry forwards and tax credits not used. The assets and liabilities of deferred tax are calculated using the rates established in the law that will be applied to taxable income in years when it is estimated that the temporary differences will reverse. The effect of changes in tax rates on deferred taxes is recognized in the results of the period in which those changes are approved. The deferred tax asset is recorded only when there is a high probability of recovery. As of January 1°, 2008 this FRS was modified. The main changes are:

Caused and deferred Employee Profit Sharing (PTU).- This is now considered an ordinary expense based on the benefits to employees. That is the reason why it is now classified in the results statement in other income and expenses.

Cumulative Effect of Income Tax — The previous bulletin stated that this component will be presented separately in equity. The change consists to reclassify this concept to cumulative results.

Liabilities

The Company applies the dispositions of FRS C-9 “Liabilities, provisions, contingent assets and liabilities and commitments”. Bulletin C-9 establishes the valuation, presentation and disclosure, general rules of liabilities provisions, contingent assets and liabilities.

Labor liabilities

As of February 2014, the Company’s management decided to outsource payroll services through the figure "Outsourcing".

Recognition of revenue

Revenue is recognized in the period in which the risks and benefits of inventory are transferred to customers who acquire them, which generally occurs when these inventories are delivered and the corresponding invoice is prepared

Foreign currency operations

Foreign currency operations are accounted at the exchange rate of the day of their occurrence. Assets and liabilities in foreign currency are registered in Mexican pesos at the exchange rate published by the Central Bank (Banco de Mexico) at the date of the financial statements. Exchange rate differences in assets and liabilities in foreign currency are registered in the year’s result.

Leasing

The company classifies as operating leases the operations where the use or possession of the leased assets is granted without assuming the risks or benefits of such assets. These rents are applied to the results in the period of the lease. Variable rents are applied to results as they are accrued.

Income statement

Income statements are classified by its operative activities. According to the company’s opinion; this classification allows evaluating the result of its operations identifying the cost of goods sold and administrative and sales expenses.

Integral Financial Result (RIF)

The RIF includes net accrued interests, exchange rate profit (loss), monetary position gain (loss) and derivate financial instruments profit (loss).

Exchange rate profit (loss) originated by transactions in foreign currency, is the result of exchange rates fluctuations at the date of the operation registry, at the date of realization or at the period end valuation.

NOTE 3 – OTHER ACCOUNTS RECEIVABLE

As of December 31 ^st , 2016 and 2015, the other accounts receivable are integrated as follows:

	2016		2015

Sundry debtors	$	728,913	$	191,398
Other Collective taxes		1,067,014		1,196,775
Creditable VAT		5,546,801		2,059,700
	$	7,342,728	$	3,447,873

NOTE 4 – RELATED PARTIES

Following a summary of the operations with related parties which originate the balances with related parties as of December 31 ^st , 2016 and 2015 is presented:

	2016		2015
Goods Sold:
CTI Industries Corporation	$	18,598,078	$	25,972,718
CtTI Balloons Limited		11,227,994		5,156,854
CTI Europe BMBH		289,646		-586,533

Inventory Purchases:
CTI Industries Corporation	$	8,356,587	$	4,526,086

Services
CtTI Balloons Limited	$	-	$	137,847

Interest paid
CTI Industries Corporation	$	268,012	$	228,486
CTI Balloons Limited		-		52,816

Accounts receivable and (payable) to related parties are:

	Receivable- (Payable)
	Net balances
	2016			2015
CTI Industries Corporation	$	15,801,426		$	25,824,968
Pablo Gortazar de Oyarzabal		258			452,902
CTI Balloons Limited		9,588,450			4,071,163
CTI Europe GMBH		353,360			1,842,405
Venture Leasing, S. de R.L. de C.V.		(1,549,071	)		1,119,365
	$	24,194,424		$	33,310,803

For the year 2016 the company has with transfer pricing study for transactions with related parties where such operations must be comparable to those used in/or arm's-length transactions.

NOTE 5 – INVENTORIES

The balance of this account is integrated as follows:

	2016		2015
Finished goods	$	67,776,881	$	47,576,686
Packing material		2,974,084		2,957,997
Production in process		4,401,300		3,409,355
Raw materials		6,216,972		4,163,542
	$	81,369,237	$	58,107,580

NOTE 6 – MACHINERY AND EQUIPMENT

This item is analysed follows:

	2016			2015
Machinery	$	26,233,044		$	26,145,344
Leasehold improvements		3,003,934			3,003,934
Molds		5,678,140			5,556,380
Computer equipment and softwere		896,000			872,382
Transport equipment		297,273			297,273
Furniture and office equipment		547,984			474,485
		36,656,375			36,349,798
Depreciations and amortizations		(31,479,370	)		(29,774,842	)
Total Machinery and equipment	$	5,177,005		$	6,574,956

The depreciation and amortization methods and the annual rates are stated in note 2g. The charge to results amounted $1,685,901. and $1,727,706. for the periods ended on December 31 ^st , 2016 and 2015 respectively.

Leasehold agreement

The company celebrated a leasehold agreement with Cuauhtemoc Inmobiliaria S.A. de C.V., for the building and facilities where it is located, both plant and administrative offices. This agreement establishes that the term of the leasehold is of mandatory 5 years. This agreement takes place since March 1st, 2017 and ends on February 28th, 2022.

The charge to results amounted $5,037,536. and $5,041,228. for the years ended on December 31 ^st , 2016 and 2015 respectively.

NOTE 7 – OTHER ACCOUNTS PAYABLE

Some items presented in the Balance Sheet are analysed as follows, as of December 31 ^st .

	2016		2015
Accounts payable to suppliers, accrued expenses and other accounts payable:
Suppliers	$	42,733,682	$	32,736,137
Salaries payable		-		126,384
Sundry creditors		4,253,689		3,714,739
Rated reserves		539,862		239,480
Taxes payable		61,033		11,868
	$	47,588,267	$	36,828,608

NOTE 8 – LONG TERM LIABILITIES TO RELATED PARTIES

	2016			2015

CTI Industries

Term promissory note

Flexo Universal, S. de R.L.. de C.V., hereby further promises to pay interest to the order of CTI Industries Corporation on the unpaid principal balance hereof at the Interest Rate (as hereinafter defined). Such interest shall be paid in like money at said office or place from the date hereof, commencing March 31, 2014 and on the first day of each calendar quarter thereafter until the indebtedness evidenced by this Note is paid in full. Interest payable upon and after an Event of Default or termination or non renewal of the Loan Agreement shall be payable upon demand. For purposes hereof, the term "Interest Rate" shall mean a rate of two and one-half percent (2.5%) per annum ; provided, that, at Payee's option, the Interest Rate shall mean a rate of eight percent (8.0%) per annum upon and after an Event of Default ; the term “Event of Default shall mean the failure of Flexo Universal, S.A. de C.V., to make any payment of principal or interest when due hereunder. This Note is issued to document amounts due from Flexo Universal, S. de R.L. de C.V., to CTI Industries Corporation as of December 31, 2013, including $68,669 in principal amount due and $502,545 in accrued interest on indebtedness previously due from Flexo Universal, S de R.L. de C.V., to CTI Industries Corporation.		12,661,926			10,400,174

Current portion of long term liabilities		(12,661,926	)		(10,400,174	)

Loans current account 2014

Undocumented loans current account totaling $ 55.817 US dollars, without interest and agreed term		-			967,856
Current portion of long term liabilities		-			(967,856	)

Loans current account 2015

Undocumented loans current account totaling $ 39,000. US dollars, without interest and agreed term		52,510			676,252
Current portion of long term liabilities		52,510			(676,252	)

Pablo Gortazar

Loan made by PABLO GORTAZAR to liquidate CTF INTERNATIONAL's financing amounted $980,704 Mexican Pesos.		969,916			980,704

Loan made by PABLO GORTAZAR to liquidate CREDIT UNION's fiancincing amounted $776,070 Mexican pesos, with an interest annual rate LIBOR +.25 points		-			139,077

		13,579,332			13,164,063
Total long term liabilities to related parties		(12,609,416	)		(12,044,282	)
Total current portion of long term liabilities	$	969,916		$	1,119,781

NOTE 9 – POSITION AND TRANSACTION IN FOREING CURRENCY

As of December 31 ^st , 2016 and 2015, the company had rights and (obligations) in foreign currency as follows:

	US Dollars
	2016			2015
Assets	$	2,094,585		$	2,478,954
Liabilities		(1,785,669	)		(2,055,786	)

Excess of assets over (liabilities), assets in foreign currency	$	308,916		$	423,168

Assets where translated and adjusted using the exchange rate $ 20.6194 and $ 17.3398 pesos per US dollar, as of December 31 ^st , 2016 and 2015 respectively. As of march 08 the exchange rate is $19.521 pesos per dollar.

NOTE 10 – DEFERRED ASSETS AND LIABILITIES

In June 3rd, 2016 Flexo Universal, S. de R.L. de C.V., sold a latex machine to Unifin Financiera SAB de CV SOFOM de ENR in $13´793,103.45 MXN pesos plus VAT. It is cost of sales was $7,500,000.00 MXN pesos.

Unifin leases the same machine to Flexo. The term of the leasing agreement is 4 years, becoming effective on July, 2016 and concluding on June, 2020.

The profit generated in this transaction was deferred according to the terms of the leasing agreement in 48 months since June, 2016. Monthly amounts are:

Income	$	287,356.32
Cost of sale	$	156,250.00
Profit	$	131,106.32

During 2016 were booked 7 months and balance as of December is:

	Income deferred		Cost deferred		Profit deferred

Initial balance		13,793,103.45		7,500,000.00		6,293,103.45
P&L 2016		2,011,494.25		1,093,750.00		917,744.25
Final balance		11,781,609.20		6,406,250.00		5,375,359.20

NOTE 11 – CONTRIBUTED CAPITAL

The company’s capital stock integrated as follows as of December 31 ^st , 2016 and 2015:

	2016		2015
Fixed capital stock	$	50,000	$	50,000
Variable capital stock		47,360,945		47,360,945

Total capital stock	$	47,410,945	$	47,410,945

The company’s capital stock is variable, with a fixed minimum of $50,000 without the possibility of retirement. The variable part has not limit.

Until August 31, 2015, the share capital was represented by common, nominative shares since the transformation of society in a Limited Liability Company with Variable Capital (1 September 2015). The capital is represented by Social Parties integrated and valued as follows:

Social Parties
Class I				Class II
Number of parts		Value		Number of parts		Value

	1	$	49,999		1	$	47,278,870
	1		1		1		61,154
					1		20,921
	2	$	50,000		3	$	47,360,945

NOTE 12 – EARNED (LOSS) SURPLUS:

Legal reserve

According to the General Law of Mercantile Societies, 5% of the fiscal year’s net profits should be kept to form the legal reserve until it reaches 20% of the capital stock. The legal reserve may be capitalized but not distributed unless the society is dissolved, and must be replenished when it decreases for any reason.

NOTE 13 – CONTINGENCIES:

Transfer pricing. - For related party transactions, tax differences could arise if the tax authority when reviewing such operations considers that the prices and amounts used by the company are not comparable to those used with or between independent parties in comparable operations.

Review by the tax authorities.- According to current tax legislation, the authorities are entitled to examine up to five fiscal years prior to the last income tax return submitted.

NOTE 14- INCOME TAX (IT), CORPORATE FLAT TAX RATE (IETU) AND EMPLOYEES PROFIT SHARING (PTU):

Cost (benefit) of the tax applied to result is integrated as follows:

	2016		2015
ISR payable	$	6,062,120	$	6,697,612
Deferred ISR		396,567		-172,813
Net	$	6,458,687	$	6,524,799

The main differences between the accounting profit and the tax result are:

	2016		2015
Net (Loss) profit	$	6,191,227	$	17,424,615
Plus (minus)
Excess of accounting depreciation net over the fiscal depreciation		584,886		-1,340,351
Excess of accounting deductions net over the fiscal deductions		13,430,955		6,621,999
Fiscal (loss) profit		20,207,068		22,706,263
Minus employee profit sharing (PTU) paid in 2015 and 2014		-		-380,890
Tax basis to IT		20,207,068		22,325,373
Rate		0.30		0.30
IT payable (ISR)	$	6,062,120	$	6,697,612

As December 31 ^st , 2016 and 2015 temporary differences and fiscal losses carry forward recognized by the company on the deferred IT calculations are:

	2016			2015
Year effect calculation:
Deferred expenses	$	7,863,805		$	355,025
Guarranty deposits		3,620,690			-
Net machinary and equipment		(876,337	)		-
Deferred liabilities		(11,781,609	)		-
Liabilities		(62,641	)		(2,913,009	)
Base		(1,236,092	)		(2,557,984	)
Tax Rate		0.30			0.30
		(370,829	)		(767,395	)
Recognized		(767,395	)		(594,582	)
Complement	$	396,567			(172,813	)

NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS.

The Mexican Council for Research and Development of Financial Reporting Standards (CINIF), an independent body in charge of the development of the Mexican Accounting Standards, has made public the submission of the following FRS (Financial Reporting Standards) listed below:

Standards and Interpretation of Standards 2017

Improvements to FRS 2017

Standards on following years

B-17, Fair value determination

C-10, Derivative financial instruments and hedge relationships

These FRS, will become effective on January 1°, 2018, allowing its advanced application in the terms established in each FRS.

Is important to note that the use of FRS increases the quality of the financial information contained in the financial statements, thus ensuring their greater acceptance, not only nationally, but also internationally.

NOTE 16 -.APPROVAL OF THE ISSUANCE OF THE FINANCIAL STATEMENTS.

The financial statements were authorized for issue, by Pablo Gortazar de Oyarzabal, General Manager and Legal Representative, and subject to the approval of the general assembly of partners of the Company who may decide its modification in accordance with the provisions of the General Law of Commercial Societies.

The accompanying explanatory notes are an integral part of the financial statements.

	Flexo Universal, S. de R.L. de C.V.

	/s/ Pablo Gortazar de Oyarzabal
	Lic. Pablo Gortazar de Oyarzabal
	Legal Representative