UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________

FORM 10-Q

(Mark One)

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

For the quarterly period ended MJ~~arch 31,~~une 30, 2020

OR

☐	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

YUNHONG CTI LTD.

(Exact name of registrant as specified in its charter)

Illinois		36-2848943
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

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

(847)382-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

CTIB

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

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

The number of shares outstanding of the registrant’s common stock as of ~~June 1,~~August 11, 2020 was ~~4,494,608~~5,055,907 (excluding treasury shares).

~~EXPLANATORY NOTE~~

As previously disclosed in the Company's Current Report on Form 8-K filed with the SEC on May 14, 2020, the Company determined to rely on the relief provided by the SEC Order to delay the filing of its Form 10-Q due to circumstances related to the COVID-19 pandemic. In particular, COVID-19 has caused our key internal accounting personnel responsible for assisting the Company in the preparation of its financial statements to work remotely, and, consequently, has delayed their ability to complete their detailed review of the Company’s financials. The Company has relied on the “Order Under Section 36 of the Securities Exchange Act Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies” dated March 25, 2020 (Release No. 34-88465), issued by the SEC in light of the COVID-19 pandemic, to delay the filing of the Form 10-Q.

~~Table of Contents~~

							June 30, 2020			December 31, 2019
	March 31, 2020 (unaudited)			December 31, 2019			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	160,105		$	845,098		$	103,668		$	845,098
Accounts receivable		7,288,853			9,011,569			7,169,499			9,011,569
Inventories, net		12,686,643			13,959,499			11,027,364			13,959,499
Prepaid expenses		306,923			353,183			284,921			353,183
Other current assets		1,112,566			1,312,205			1,147,949			1,312,205
Receivable from related party		1,386,638			1,387,131			1,047,114			1,387,131
Current assets of discontinued operations		881,378			756,031			788,388			756,031

Total current assets		23,823,106			27,624,716			21,568,903			27,624,716

Property, plant and equipment:
Machinery and equipment		23,466,349			23,822,808			22,722,932			23,822,808
Building		3,374,334			3,374,334			3,374,334			3,374,334
Office furniture and equipment		2,269,379			2,289,444			2,206,897			2,289,444
Intellectual property		783,179			783,179			783,179			783,179
Land		250,000			250,000			250,000			250,000
Leasehold improvements		382,213			415,737			386,719			415,737
Fixtures and equipment at customer locations		518,450			518,450			518,450			518,450
Projects under construction		111,177			74,929			80,636			74,929
		31,155,081			31,528,881			30,323,147			31,528,881
Less : accumulated depreciation and amortization		(28,890,383	)		(28,997,809	)		(28,163,953	)		(28,997,809	)

Total property, plant and equipment, net		2,264,698			2,531,072			2,159,194			2,531,072

Other assets:
Operating lease right-of-use		671,872			1,046,438			455,408			1,046,438
Other assets		84,179			118,857			75,981			118,857

Total other assets		756,051			1,165,295			531,389			1,165,295

TOTAL ASSETS		26,843,855			31,321,083		$	24,259,486		$	31,321,083

LIABILITIES AND EQUITY
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade payables	$	6,249,294		$	7,021,580		$	5,560,569		$	7,021,580
Line of credit		10,106,037			14,518,107			8,484,849			14,518,107
Notes payable - current portion		3,198,453			3,451,880			2,745,257			3,451,880
Deferred other income liability								246,854			-
Notes payable affiliates - current portion		10,311			12,684			10,998			12,684
Operating Lease Liabilities		399,044			658,374			342,759			658,374
Accrued liabilities		1,192,690			1,205,027			904,213			1,205,027
Current liabilities of discontinued operations		303,715			656,753			306,889			656,753

Total current liabilities		21,459,544			27,524,405			18,602,388			27,524,405

Long-term liabilities:
Notes payable - affiliates		9,436			14,340			8,622			14,340
Notes payable, net of current portion		1,315,107			1,024,441			1,688,015			1,024,441
Operating Lease Liabilities		272,828			388,064			112,649			388,064
Notes payable - officers, subordinated		1,074,442			1,058,486			1,090,639			1,058,486
Deferred gain (non current)		159,156			184,840			852			184,840

Total long-term debt, net of current portion		2,830,969			2,670,171			2,900,777			2,670,171

Total long-term liabilities		2,830,969			2,670,171			2,900,777			2,670,171


TOTAL LIABILITIES		24,290,513			30,194,576			21,503,165			30,194,576

Equity:
Stockholders' Equity:
Yunhong CTI, Ltd stockholders' equity:
Preferred Stock -- no par value, 3,000,000 shares authorized, 410,860 shares issued and outstanding at March 31, 2020 and nil at December 31,2019 respectively (liquidation preference - $4,108,000 as of March 31, 2020)		2,161,607			-
Common stock - no par value, 15,000,000 shares authorized, 4,219,608 and 3,879,608 shares issued and 4,175,950 and 3,835,930 shares outstanding at March 31, 2020 and December 31, 2019 respectively		14,321,161			13,898,494
Preferred Stock - no par value, 3,000,000 shares authorized, 590,860 shares issued and outstanding at June 30, 2020 and nil at December 31, 2019 respectively (liquidation preference - $5.9 million as of June 30, 2020)								3,472,161			-
Common stock - no par value, 15,000,000 shares authorized, 4,479,608 and 3,879,608 shares issued and 4,435,950 and 3,835,930 shares outstanding at June 30, 2020 and December 31, 2019 respectively								14,537,828			13,898,494
Paid-in-capital		4,287,470			3,587,287			4,356,097			3,587,287
Accumulated deficit		(10,631,537	)		(9,992,841	)		(12,159,046	)		(9,992,841	)
Accumulated other comprehensive loss		(6,712,315	)		(5,348,812	)		(6,645,988	)		(5,348,812	)
Less: Treasury stock, 43,658 shares		(160,784	)		(160,784	)		(160,784	)		(160,784	)
					-
Total Yunhong CTI, Ltd Stockholders' Equity		3,265,602			1,983,344			3,400,268			1,983,344

Noncontrolling interest		(712,260	)		(856,837	)		(643,947	)		(856,837	)

Total Equity		2,553,342			1,126,507

TOTAL LIABILITIES AND EQUITY	$	26,843,855		$	31,321,083
Total Stockholders' Equity								2,756,321			1,126,507
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY							$	24,259,486		$	31,321,083

Note 1 - Basis of Presentation

The accompanying condensed (a) consolidated balance sheet as of ~~March 31,~~June 30, 2020, which has been derived from ~~audited~~unaudited consolidated financial statements, and (b) the unaudited interim condensed consolidated financial statements have been prepared and, in the opinion of management, contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the consolidated financial position and the consolidated statements of comprehensive income and consolidated cash flows for the periods presented in conformity with generally accepted accounting principles for interim consolidated financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. Operating results for the three and six months ended ~~March 31,~~June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2019.

Principles of consolidation and nature of operations:

~~The condensed consolidated financial statements include the accounts of~~ Yunhong CTI Ltd. ~~and its wholly-owned subsidiaries,~~(formerly CTI ~~Balloons Limited (CTI Balloons; divested during 2019) and CTI Supply, Inc.~~Industries Corporation), its ~~majority-owned subsidiaries, Flexo~~former United Kingdom subsidiary (CTI Balloons Limited), its Mexican subsidiary (Flexo Universal, S. de R.L. de C.V. ~~(Flexo)~~), its German subsidiary (CTI Europe GmbH) and CTI ~~Europe GmbH (CTI Europe), as well as~~Supply, Inc. (collectively, the ~~accounts of Venture Leasing S. A. de R. L. (VLM). As discussed in Note 2 Discontinued Operations, effective in~~“Company”) (i) design, manufacture and distribute metalized and latex balloon products throughout the third quarter 2019, the Company determined that it has exited CTI Balloons and will be exiting CTI Europe. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements. Effective July 1, 2019 the company deconsolidated Clever Organizing Solutions (Clever) and Venture Leasing US (VL) as Variable Interest Entities and the results are included in the first quarter of 2019 but not the first quarter of 2020.

~~The Company (i) designs, manufactures and distributes balloon and related novelty (candy and party related) products,~~world and (ii) ~~operates~~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~~products. As discussed in Note 2 Discontinued Operations, effective in the third quarter of 2019, the Company determined that it was exiting CTI Balloons Limited (“CTI Balloons”) and CTI Europe GmbH (“CTI Europe”). CTI Balloons has been fully liquidated as of the fourth quarter 2019. Accordingly, the operations of these entities are classified as discontinued operations in these financial statements.

The consolidated financial statements include the accounts of Yunhong CTI Ltd., 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. (“VL”), and Clever Organizing Solutions (formerly Clever Container Company, L.L.C. “Clever”). The last three entities have been consolidated as variable interest entities. All significant intercompany accounts and transactions have been eliminated upon consolidation. The treatment of VL and Clever changed during 2019 as described in the next section.

Variable Interest Entities (“~~VIE’s”~~VIEs”):

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.

~~Table~~

The Company has variable interests in VL and Clever. Through June 30, 2019, the Company had determined that it was the primary beneficiary of ~~Contents~~

these entities and included them in our consolidated results. In the third quarter, we determined that operationally material changes in our involvement with Clever and VL resulted in us having no power over the decisions which impact their financial performance. Therefore, we are no longer the primary beneficiary of these entities. Effective July 1, 2019, we deconsolidated these entities and their results are not included in our Consolidated Statements of Comprehensive Income subsequent to June 30, 2019. Upon deconsolidation of these entities, we recognized a gain of $219,000. In accordance with ASC 810-10 because the carrying value of the noncontrolling interest of Clever which was eliminated exceeded the net carrying value of the assets and liabilities of Clever. The Company determined that there was no fair value associated with its remaining noncontrolling interest in Clever based on an income approach.

Use of estimates:

In preparing ~~condensed consolidated~~ 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 ~~amounts~~ of assets and liabilities, disclosure of contingent assets and liabilities at the date of the ~~condensed consolidated~~ financial statements and the reported amount of ~~revenue~~revenues and expenses during the reporting period in the ~~condensed consolidated~~ financial statements and accompanying notes. Actual results may differ from those estimates. The Company’s significant estimates include ~~reserves~~valuation allowances for doubtful accounts, ~~reserves for the lower of cost or market of~~ inventory ~~reserves for~~valuation, deferred tax assets, goodwill and intangible asset valuation, and assumptions used as inputs in the Black-Scholes option-pricing model. In addition, issues pertaining to COVID-19 have added assumptions related to 2020 sales activities including the timing of graduation season, as well as the timing of recovery ~~value~~and condition of ~~goodwill.~~the broader market after COVID-19 related shutdowns and limitations.

During 2020, the Company issued shares of convertible preferred stock that are convertible into 5,908,600 shares of the Company’s common stock, in the aggregate.

Earnings ~~(loss)~~ per share:

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

Diluted ~~(loss)~~earnings per share is computed by dividing the net ~~(loss)~~income by the weighted average number of shares of common stock ~~outstanding plus the dilutive effect of shares issuable through the common stock equivalents. The effect of dilution on net loss becomes anti-dilutive~~ and ~~therefore is not reflected on the income statement.~~

~~Common stock~~ equivalents ~~including Series A Preferred, stock~~(stock options and warrants, as of March 31, 2020 and March 31, 2019 totaling 4.1 million and 0.6 million shares, respectively, were not included in the computation of diluted loss per share because the effect would have beenwarrants), unless anti-dilutive, ~~due to the net losses for the three months ended March 31, 2020 and March 31, 2019.~~during each period.

As of ~~March 31,~~June 30, 2020 and 2019, shares to be issued upon the exercise of options and warrants aggregated ~~632,660~~792,660 and ~~471,000,~~471,144, respectively. The number of shares included in the determination of earnings on a diluted basis for the three months ended June 30, 2020 and 2019 were none, as doing so would have been anti-dilutive.

Significant Accounting Policies:

The Company’s significant accounting policies are summarized in Note 2 of the Company’s consolidated financial statements for the year ended December 31, 2019. There were no significant changes to these accounting policies during the three or six months ended ~~March 31, 2020~~.June 30, 2020.

The Company evaluates embedded conversion features within convertible debt under ASC 815 "Derivatives and Hedging" to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 "Debt with Conversion and Other Options" for consideration of any beneficial conversion feature.

On January 1, 2019, ~~the Company~~we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased ~~the Company's~~our assets and liabilities and further discussed in Note 12. ASC 842 requires a lessee to recognize assets and liabilities related to leases with terms in excess of 12 months. Such assets are typically considered Right-Of-Use (“ROU”) assets. Prior information has not been restated and continues to be reported under the accounting standards in effect for those periods.

~~Foreign Currency Translation~~On January 1, 2018, we adopted ASC 606 (Revenue From Contracts With Customers) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.

The Company ~~follows Section 830-10-45 of the FASB Accounting Standards Codification (“Section 830-10-45”)~~provides for foreign currency translation to translate the financial statements of the foreign subsidiary from the functional currency, generally the local currency, into U.S. Dollars. Section 830-10-45 sets out the guidance relating to how a reporting entity determines the functional currency of a foreign entity (including of a foreign entity in a highly inflationary economy), re-measures the books of record (if necessary), and characterizes transaction gains and losses. Pursuant to Section 830-10-45, the assets, liabilities, and operations of a foreign entity shall be measured using the functional currency of that entity. An entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment, or local currency, in which an entity primarily generates and expends cash.

~~The functional currency of each foreign subsidiary is determined~~product returns based on ~~management’s judgment~~historical return rates. While we incur costs for sales commissions to our sales employees and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. If a subsidiary’s functional currency is deemed to be the local currency, then any gain or loss associatedoutside agents, we recognize commission costs concurrent with the ~~translation of that subsidiary’s financial statements~~related revenue, as the amortization period is less than one year and we have elected the practical expedient included in accumulated other comprehensive income. However, if the functional currency is deemed to be the U.S. Dollar, then any gain or loss associated with the re-measurement of these financial statements from the local currency to the functional currency would be included in the consolidated statements of income and comprehensive income (loss). If the Company disposes of foreign subsidiaries, then any cumulative translation gains or losses would be recorded into the consolidated statements of income and comprehensive income (loss). If the Company determines that there has been a change in the functional currency of a subsidiary to the U.S. Dollar, any translation gains or losses arising after the date of change would be included within the statement of income and comprehensive income (loss).

Based on an assessment of the factors discussed above, the management of the Company determined its operating subsidiary’s local currency (i.e. the Mexican Peso) to be the functional currency for its foreign subsidiary. The functional currency of its German subsidiary is the Euro.

~~Beneficial conversion feature of convertible preferred stock~~

~~The Company accounts for the beneficial conversion feature on its convertible preferred stock in accordance with~~ ASC ~~470-20,~~ ~~Debt with Conversion and Other Options~~. The Beneficial Conversion Feature (“BCF”) of convertible preferred stock is normally characterized as the convertible portion or feature that provides a rate of conversion that is below market value or in-the-money when issued. The Company records a BCF related to the issuance of convertible preferred stock when issued. BCFs that are contingent upon the occurrence of a future event are recorded when the contingency is resolved.

To determine the effective conversion price, the Company first allocates the proceeds received to the convertible preferred stock and then uses those allocated proceeds to determine the effective conversion price. Any amounts paid to the investor when the transaction is consummated (e.g., origination fees, due diligence costs) represent a reduction in the proceeds received by the issuer. The intrinsic value of the conversion option is measured using the effective conversion price for the convertible preferred stock on the proceeds allocated to that instrument. The effective conversion price represents proceeds allocable to the convertible preferred stock divided by the number of shares into which it is convertible. The effective conversion price is then compared to the per share fair value of the underlying shares on the commitment date.

The BCF is recognized by allocating the intrinsic value of the conversion option to additional paid-in capital, resulting in a discount on the convertible preferred stock. This discount is accreted from the date on which the BCF is first recognized through the earliest conversion date for instruments that606. We do not ~~have a stated redemption date. The intrinsic value of~~incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the ~~BCF is recognized~~customer that the products are as ~~a deemed dividend on convertible preferred stock over the period~~ specified in the ~~guidance.~~contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

~~Warrants~~

Prior Period Reclassification

~~The Company accounts for freestanding warrants within~~Certain amounts in prior periods have been reclassified to conform with current period presentation and had no effect on prior period net loss or stockholders’ equity or as liabilities based on the characteristics and provisions of each instrument. The Company evaluates outstanding warrants in accordance with ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. If none of the criteria in the evaluation in these standards are met, the warrants are classified as a component of stockholders’ equity and initially recorded at their grant date fair value without subsequent remeasurement. Warrants that meet the criteria are classified as liabilities and remeasured to their fair value at the end of each reporting period.equity.

Note 2 – Discontinued Operations

In July 2019 management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the board authorized management to divest of CTI Balloons and CTI Europe. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and expects to divest CTI Europe (Germany) in September 2020.

In October 2019, we determined that we would not renew our Trademark License Agreement with SC Johnson when it expired on December 31, 2019. Under this Agreement, we were licensed to manufacture and sell a line of vacuum sealing machines and pouches under the Ziploc® Brand Vacuum Sealer System. The terms of the Agreement included a run-off provision which allowed us to sell products under the Ziploc® trademark for 90 days after the end of the Agreement. Our exit of the Ziploc® product line is considered a strategic shift and will have a major effect on our operations and financial results on a go forward basis therefore, this product line has been presented as discontinued ~~operations and was abandoned as of March 31, 2020.~~ operations.

~~Table of Contents~~

CTI Balloons recorded losses from discontinued operations, net of taxes of ($~~73,000)~~96,000) and ($169,000) for the three and six months ended ~~March 31,~~June 30, 2019.

CTI Europe recorded a gain from discontinued operations, net of taxes of ~~$317,000~~$92,000 for the three months ended ~~March 31,~~June 30, 2020, compared to a gain from discontinued operations, net of taxes of $241,000 for the six months ended June 30, 2020. The net losses, net of taxes, ~~was~~were ($~~147,000)~~11,000) and ($158,000) for the three ~~months~~and six month periods ended ~~March 31, 2019.~~June 30, 2019, respectively.

Our Ziploc product line recorded a loss from discontinued operations, net of taxes of ($~~804,000)~~746,000) and ($1,550,000) for the three and six months ended ~~March 31,~~June 30, 2020. The net gain, net of taxes, was ~~($558,000)~~$842,000 and $284,000 for the three ~~months~~and six month periods ended ~~March 31, 2019.~~June 30, 2019, respectively.

Summarized Discontinued Operations Financial Information

The following table summarizes the major line items ~~from CTI Europe and Ziploc product line~~for the operations that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income for the three months ending

	June 30, 2020			June 30, 2019
Income Statement
Net Sales	$	615,388		$	3,204,434
Cost of Sales		941,230			1,987,637

Gross Loss		(325,842	)		1,216,797

Selling, general and administrative		330,446			511,164

Operating income (loss)		(656,288	)		705,633

Other income (loss)		9,233			(25,053	)

Total pretax income (loss) from discontinued operations		(665,521	)		730,686

Gain from classification to held for sale		65,565			-

Net income (loss) prior to non-controlling interest		(599,956	)		730,686

Non-controlling Interest share of profit/loss		70,576			(306	)

Net (loss) income		(670,532	)		730,992

The following table summarizes the major line items for the operations that are included in the income from discontinued operations, net of tax line item in the Consolidated Statements of Income for the six months ending

03/31/20

03/31/19

Income Statement

Net Sales
1,057,058 3,856,372
Cost of Sales
1,174,045 3,817,207

Gross Margin
(116,987 ) 39,165

SG&A
524,550 815,179

Operating Income
(641,537 ) (776,014 )

Other Expense
13,220 (1,974 )

Total pretax loss from discontinued operations
(654,757 ) (774,040 )

Gain from re-measurement of valuation allowance
168,120 -

Net loss prior to non-controlling interest
(486,637 ) (774,040 )

Non-controlling Interest share of profit/loss
152,094 (76,017 )

Net Loss
(638,731 ) (698,023 )

	June 30, 2020			June 30, 2019
Income Statement
Net Sales	$	1,672,445		$	7,060,806
Cost of Sales		2,115,275			5,804,844

Gross profit (loss)		(442,830	)		1,255,962

Selling, general and administrative		854,995			1,326,343

Operating loss		(1,297,825	)		(70,381	)

Other income (expense)		22,453			(270,278	)

Total pretax loss from discontinued operations		(1,320,278	)		(43,353	)

Gain from classification to held for sale		233,685			-

Net (loss) income prior to non-controlling interest		(1,086,593	)		(43,353	)

Non-controlling Interest share of profit (loss)		222,670			(76,323	)

Net income (loss)		(1,309,263	)		32,970

~~Table of Contents~~

The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented:

~~Yunhong CTI Ltd.~~

~~Consolidated Balance Sheet~~

	3/31/2020			12/31/2019			June 30, 2020			December 31, 2019
Balance Sheet
Assets
Current Assets
Cash on hand and Banks		6,073			4,307		$	151,680		$	4,307
Accounts Receivable		686,639			539,910			424,296			539,910
Inventory					74,383			-			74,383
Prepaid & Other		112,889			135,912
Prepaid and Other								78,471			135,912

TOTAL Current Assets		805,601			754,512			654,447			754,512

NET Property, Plant, and Equipment		8,517			53,919			7,334			53,919

Other Assets
Operating lease right-of-use		220,039			220,541			181,278			220,541
Other		-			47,958			32,543			47,958
TOTAL Other Assets		220,039			268,499			213,821			268,499
TOTAL Non-Current Assets		228,556			322,418			221,155			322,418

Valuation Allowance on Assets Held for Sale		(152,779	)		(320,899	)		(87,214	)		(320,899	)

TOTAL Assets		881,378			756,031		$	788,388		$	756,031

Liabilities
Current Liabilities
Trade Accounts Payable		31,339			384,333		$	74,095		$	384,333
Operating Lease Liabilities - Current		121,070			203,291			123,153			203,291
Other/Accrued Liabilities		20,149			19,562			18,486			19,562
TOTAL Current Liabilities		172,558			607,187			215,734			607,186

Non-Current Liabilities
Operating Lease Liabilities - Non Current		98,968			17,250			58,126			17,250
Other Non-Current		32,189			32,317			33,029			32,317
TOTAL Non-Current Liabilities		131,157			49,567			91,155			49,567

TOTAL Liabilities		303,715			656,753		$	306,889		$	656,753

The cash flows related to discontinued operations have not been segregated and are included in the Consolidated Statements of Cash Flows. The following table summarizes depreciation from discontinued operations for each of the periods presented:

Note 3 – Liquidity and Going Concern

The Company’s primary sources of liquidity are cash and cash equivalents as well as availability under the ~~Credit Agreement~~credit agreement with PNC Bank, National Association (“PNC”) (the “Credit Agreement”) (see Note 4). As indicated in Note 4, twice during 2018 ~~the Company~~we violated covenants in ~~the Credit Agreement~~our credit facility and during March 2019 ~~the Company~~we entered into a forbearance agreement with PNC. Under the terms of ~~the forbearance~~this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but ~~the Company remain~~we remained out of compliance with the terms of our credit facility, as amended, including the covenants as of June 30, 2019 calculated on or about July 31, 2019. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to the Company, in which PNC advised that line of credit advances would continue to be available to the Company at PNC’s sole discretion, and subject to its terms and conditions. On October 18, 2019, ~~the Company~~we entered into a new forbearance agreement with PNC (“Amendment 4”). Identified events of default were waived until January 10, 2020 with respect to CTI Industries Corporation, but not its Mexican subsidiary (Flexo), subject to its terms and conditions. On January 13, 2020, ~~the Company~~we entered into a new forbearance agreement with PNC (“Amendment 5”). PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to ~~Lender~~PNC under the Loan Agreement for a period ending no later than December 31, 2020. ~~As defined~~

The Credit Agreement provides for interest at varying rates in ~~note 4,~~excess of the prime rate, depending on the level of senior debt to EBITDA over time. We believe that, during the first three months of 2020, the Company’s standalone US business would have complied with the Credit Agreement’s requirement that the Company maintain a ~~new~~fixed charge coverage ratio of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the “Fixed Charge Coverage Ratio”).The Company, as a consolidated group, however, did not comply with the Fixed Charge Coverage Ratio, resulting in the noncompliance. On June 15, 2020, the Company received a letter from PNC notifying the Company of its noncompliance. PNC has continued to make advances to the Company (“Discretionary Advances”), although it is not required to do so under the terms of the Credit Agreement due to the aforementioned events of default. On July 17, 2020, PNC provided the Company notice that multiple previously disclosed events, which each constitute an event of default, ~~was communicated~~are continuing to occur. Additionally, PNC required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, PNC advised that it may cease making Discretionary Advances to the ~~bank June 2020.~~Company. On July 22, 2020, the Board authorized the Company to seek such funding and Mr. Yubao Li, the Company’s Chairman, to ensure the Company meets PNC’s equity funding commitment deadline, committed that, in the event the Company does not obtain funding of at least $3,000,000 by August 31, 2020, he would provide the necessary funding.

During 2019, ~~the Company~~we attempted to execute a major capital event with a partner that would infuse money, among other attributes. That effort was unsuccessful as envisioned. ~~The Company was~~We were subsequently successful in obtaining new financing during 2020. On January 3, 2020 ~~the Company~~we entered into a securities purchase agreement, as amended on February 24, 2020 and April 13, 2020, (the “LF Purchase Agreement”) with LF International Pte Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company Chairman Mr. Yubao Li, pursuant to which we sold to LF International 500,000 shares of our Series A Convertible Preferred Stock at a purchase price of $10.00 per share and for aggregate proceeds of $5,000,000. Pursuant to the LF Purchase Agreement, ~~the Company was~~we were authorized to sell an additional $2 million shares of Series A to other investors under similar financial terms, approximately $1 million of which has been sold as of June 1,30, 2020, including to an investor which converted an accounts receivable of ~~$478,017~~$478,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred. There were several closings with the LF International ~~Pte Ltd~~ from January 2020 through June 2020. The majority of the funds received reduced our bank debt. ~~The Company~~We issued a total of 400,000 shares of common stock to LF International and, pursuant to the LF Purchase Agreement, changed our name from CTI Industries Corporation to Yunhong CTI Ltd. During the transaction and subsequent interim closings, LF International had the right to name three directors to serve on our ~~Board of Directors.~~Board. They are Mr. Yubao Li, our Chairman of the Board, ~~of Directors,~~ Ms. Wan Zhang and Ms. Yaping Zhang.

~~Table of Contents~~

In addition to the above, financial performance in 2017, 2018 and 2019, included net losses attributable to the Company of $1.6 million, $3.6 million, and $7.1 million, respectively. While these results included significant charges related to the disposition of subsidiaries, ~~the Company believes~~we believe that the result raises substantial doubt about our ability to continue as a going concern ~~at March 31, 2020.~~one year from the date these financial statements are issued.

Additionally, ~~the Company has~~we have experienced challenges in maintaining adequate seasonal working capital balances, made more challenging by increases in financing and labor costs, along with a supply disruption in the helium market during 2019. These changes in cash flows have created very significant strain within our operations and have therefore increased our attempts to obtain additional funding resources.

In December 2019, COVID-19 was reported in Wuhan, China. The World Health Organization has since declared the outbreak to constitute a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers and employees, all of which are uncertain and cannot be predicted. The preventative and protective actions that governments have taken to counter the effects of COVID-19 have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-19 continues or worsens, the demand for our products may be negatively impacted, and we may have difficulty obtaining the materials necessary for the production of our products. In addition, the production facilities of ~~the Company's~~our suppliers may be closed for sustained periods of time and industry-wide shipment of products may be negatively impacted, the severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company ~~in the second quarter of 2020~~ from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does not know if and when such transactions will be completed. ~~During the three months ended March 31, 2020, the Company did not record any COVID-19 related impairment charges.~~

Finally, claims have been filed in court by certain vendors regarding claims of non-payment pursuant to contractual obligations. While many have been resolved, the sum of the outstanding claims made or threatened exceeds $0.5 million in the aggregate. The cost of defense and potential ultimate resolution increases the strain on our financial resources.

Management’s plans include:

(1)

Working with our new investor group to expand our business in profitable ways.

(2)

Working with our bank to resolve our compliance failure on a long-term basis.

(3)

Relocating our existing operation in Lake Zurich, IL to a lower cost environment in Laredo, TX and Nuevo Laredo, Mexico.

(4)

Evaluating and potentially executing a transaction of our facility in Lake Barrington, IL.

(5)

Simplifying our group structure, focusing on the most profitable products and markets, and

(6)

~~(1) Working with the Company's new investor group to expand our business in profitable ways.~~

~~(2) Working with the Company's bank to resolve our compliance failure on a long-term basis.~~

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~~(3) Relocating the Company's existing operation in Lake Zurich, IL to a lower cost environment in Laredo, TX and Nuevo Laredo, Mexico.~~

~~(4) Evaluating and potentially executing a transaction of the Company's facility in Lake Barrington, IL.~~

~~(5) Simplifying the Company's group structure, focusing on the most profitable products and markets, and~~

~~(6)~~ Exploring alternative funding sources.

Management Assessment

Considering both quantitative and qualitative information, ~~management believes~~we believe that our plans to obtain additional financing may provide ~~the Company~~us with an ability to finance our operations through 2020 and, if successfully executed, may mitigate the substantial doubt about ~~the Company's~~our ability to continue as a going concern.

Note 4 - Debt

During December 2017, we terminated a prior credit arrangement and entered in new financing agreements (the “PNC Agreements”) with PNC Bank, National Association (“PNC”). The PNC Agreements include a $6 million term loan and an $18 million revolving credit facility, with a termination date of December 2022.

Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico). We notified PNC of our failure to meet two financial covenants as of March 31, 2018. On June 8, 2018, we entered into Waiver and Amendment No. 1 (the “Amendment 1”) to our PNC Agreements. The Amendment modified certain covenants, added others, waived our failure to comply as previously reported, and included an amendment fee and temporary increase in interest rate. During September 2018, we filed a preliminary prospectus on Form S-1 for a planned equity issuance. On October 8, 2018, we entered into Consent and Amendment No. 2 (the “Amendment 2”) to our PNC Agreements. Amendment 2 reduced the amount of new funding proceeds that must be used to repay the term loan from $5 million to $2 million and waived the calculation of financial ratios for the period ended September 30, 2018, in exchange for a new covenant committing to raise at least $7.5 million in gross proceeds from our equity issuance by November 15, 2018 and pay an amendment fee. Market conditions ultimately forced us to postpone the offering, and thus no proceeds were received by the November 15, 2018 requirement.

We engaged PNC to resolve this failure to meet our amended covenant, and as of March 2019 entered into a forbearance agreement. Under the terms of this agreement, previously identified compliance failures were waived and financial covenants as of March 31, 2019 were not considered, with the next calculation due July 31, 2019 for the period ended June 30, 2019. We received a temporary over-advance of $1.2 million, which declined to zero over a six-week period under the terms of this agreement and paid a fee of $250,000.

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On August 1, 2019, PNC issued a Notice of Default and Reservation of Rights letter, indicating the end of the forbearance period and continued events of default with our credit agreement, as amended. We entered into a new forbearance agreement during October 2019 which completed January 2020. In conjunction with new equity financing, on January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) between ~~Lender~~PNC and the Company became effective, pursuant to which ~~Lender~~PNC agreed to (i) waive the Loan Agreement’s requirement that the Company apply the net proceeds of the Offering first to the Term Loans (as defined in the Loan Agreement), and agreed that the Company shall instead apply the net proceeds of the Offering to the Revolving Advances (as defined in the Loan Agreement) and in connection therewith the Revolving Commitment Amount (as defined in the Loan Agreement) shall be reduced on a dollar for dollar basis by the amount so applied to the Revolving Advances, and (ii) forebear from exercising the rights and remedies in respect of the Existing Defaults afforded to ~~Lender~~PNC under the Loan Agreement for a period ending no later than December 31, 2020. In addition, on June 15, 2020, we received a notice of noncompliance and reservation of rights letter from the bank related to failing the covenant calculation during the first quarter of 2020. We remain noncompliant with the terms of our facility and have thus reclassified long-term bank debt to current liabilities on our balance sheet.

On June 15, 2020, the Lender provided the Company notice (the “Default Notice”) that (i) an additional Event of Default (as defined in the Loan Agreement) had occurred and is continuing as a result of the Company's failure to maintain a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the "March FCCR Default"), (ii) as a result of the occurrence and continuance of the March FCCR Default, the Forbearance Period has ended, and (iii) as a result of the termination of the Forbearance Period, the Lender is entitled to exercise immediately all of its rights and remedies under the Loan Agreement including, without limitation, ceasing to make further advances to the Company and declaring all obligations to be immediately due and payable in accordance with the Loan Agreement

Available credit under the Revolving Credit facility is determined by eligible receivables and inventory at CTI Industries (U.S.) and Flexo Universal (Mexico).

Certain terms of the PNC Agreements include:

●

Restrictive Covenants: The Credit Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to:

Borrow money;

Pay dividends and make distributions;

Make certain investments;

Use assets as security in other transactions;

Create liens;

Enter into affiliate transactions;

Merge or consolidate; or

Transfer and sell assets.

●

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

We were required to maintain a "Leverage Ratio", which is defined as the ratio of (a) Funded Debt (other than the Shareholder Subordinated Loan) as of such date of determination to (b) EBITDA (as defined in the PNC Agreements) for the applicable period then ended. This requirement was removed during the January 2020 Amendment 5.

We are required to maintain a "Fixed Charge Coverage Ratio", which is defined as the ratio of (a) EBITDA for such fiscal period, minus Unfinanced Capital Expenditures made during such period, minus distributions (including tax distributions) and dividends made during such period, minus cash taxes paid during such period to (b) all Debt Payments made during such period. The highest values allowed for each quarterly calculation are as follow:

Fiscal Quarter Ratio

Fiscal Quarter Ratio

March 31, 2020
0.75 to 1.00
June 30, 2020
0.85 to 1.00
September 30, 2020
0.95 to 1.00
December 31, 2020
1.05 to 1.00
March 31, 2021 and thereafter
1.15 to 1.00

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March 31, 2020	0.75	to	1.00
June 30, 2020	0.85	to	1.00
September 30, 2020	0.95	to	1.00
December 31, 2020	1.05	to	1.00
March 31, 2021 and thereafter	1.15	to	1.00

The credit agreement provides for interest at varying rates in excess of the prime rate, depending on the level of senior debt to EBITDA over time. We believe that, during the first three months of 2020, the standalone US business would have complied with the fixed charge coverage ratio, but consolidated group did not resulting in a new condition of noncompliance.

Failure to comply with these covenants has caused us to pay a higher rate of interest (by 2% per the Agreements), and other potential penalties may impact the availability of the credit facility itself, and thus might negatively impact our ability to remain a going concern. As described above in this Note as well as in Note 3, we remain out of compliance with the terms of this facility.

As of December 2017, ~~John~~Mr. Schwan ~~then Chairman of the Board~~ was owed a total of $1,099,000, with additional accrued interest of $400,000, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. During January 2019, Mr. Schwan converted $600,000 of his balance into approximately 181,000 shares of our common stock at the then market rate. No payments were issued to Mr. Schwan during 2019 or the ~~three~~six months ended ~~March 31,~~June 30, 2020, with ~~$16,000~~$32,000 and ~~$15,000,~~$30,000, respectively, of interest recorded as an expense during the first ~~three~~six months of 2020 and 2019, respectively.

During 2020, Flexo replaced a $260,000 line of credit with three line of credits totaling $260,000. Flexo’s total debt instruments are $1.75 million.

On ~~July 1, 2019,~~April 30, 2020, the Company ~~deconsolidated Clever,~~executed a promissory note (the “Note”) with PNC Bank National Association (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $1,047,700 (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief and ~~as result~~Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). All the funds under the PPP Loan were disbursed to the Company ~~has~~on April 23, 2020. The Note provides for a ~~note receivable~~fixed interest rate of ~~$1.3 million. One~~one percent per year with a maturity date of ~~owners~~April 30, 2022 (the “Maturity Date”). Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of ~~Clever~~disbursement of the PPP Loan. The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is ~~Mr. Schwan.~~forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments. During the three months ended June 30, 2020 the Company recorded $800,000 in other income for the PPP anticipated grant related to payroll utility and rent payment, which resulted in a deferred other income liability balance of $264,854 as of June 30, 2020.

Note 5 - Stock-Based Compensation; Changes in Equity

The Company ~~follows~~has adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the condensed consolidated financial statements based on their grant-date fair values.

The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest, 0.42% - 1.65%, to be applied, the estimated dividend yield and expected volatility, 153.73% - 161.48%, of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0%, as the Company did not issue dividends during 2020 and 2019. The expected volatility is based on historical volatility of the Company’s common stock.

The Company’s net loss for the three months ended ~~March 31,~~June 30, 2020 and 2019 includes approximately none and $29,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the six months ended June 30, 2020 and 2019 includes approximately none and $29,000, respectively, of compensation costs related to share based payments. As of ~~March 31,~~June 30, 2020, there was no unrecognized compensation expense related to non-vested stock option grants and stock grants.

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On April 10, 2009, the Board ~~of Directors~~ approved for adoption, and on June 5, 2009, the shareholders of the Corporation approved, a 2009 Stock Incentive Plan (“2009 Plan”). The 2009 Plan and subsequent awards categorized as inducement of employment authorized the issuance of up to 510,000 shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On June 8, 2018, our shareholders approved the 2018 Stock Incentive Plan (“2018 Plan”). The 2018 Plan authorized the issuance of up to 300,000 shares of our common stock in the form of equity-based awards. Because no registration on Form S-8 was filed for these additional shares within 12 months of approval by our shareholders, those additional shares are not available for issuance in the normal course. As of ~~March 31,~~June 30, 2020, options for 20,000 shares remain outstanding.

A summary of the Company’s stock option activity, which includes grants of restricted stock, non-qualified stock options, incentive stock options, warrants and related information, is as follows:

	Shares under Option		Weighted Average Exercise Price		Shares under Option			Weighted Average Exercise Price
Balance at December 31, 2019		471,144	$	3.95		471,144		$	3.95
Granted		612,660		1.00		792,660			1.00
Cancelled/Expired		432,519		-		(436,519	)		3.95
Exercised/Issued		15,000		5.48		(15,000	)		5.48
Outstanding at March 31, 2020		636,285	$	1.10
Outstanding at June 30, 2020						812,285			1.21

Exercisable at March 31, 2020		19,625	$	5.48
Exercisable at June 30, 2020						19,625		$	5.49

The instruments above have no aggregate intrinsic value (the difference between the closing price of the Company’s common stock on the last trading day of the quarter ended ~~March 31,~~June 30, 2020 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on June 30, 2020.

On January 3, 2020, the Company entered into a stock purchase agreement, as amended on February 24, 2020 and April 13, 2020 (the “LF Purchase Agreement”), pursuant to which the Company agreed to issue and sell, and LF International Pte. Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, agreed to purchase, up to 500,000 shares of the Company’s newly created shares of Series A Preferred, with each share of Series A Preferred initially convertible into ten shares of the Company’s common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As permitted by the Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in the sale of 250,000 shares of Series A Preferred for aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company’s board of directors (the “Board”) (subject to certain adjustments), effective as of the first closing. Pursuant to LF International’s nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March ~~31, 2020.~~12, 2020, the Company changed its name to Yunhong CTI Ltd.

On January 30, 2020, the Company sold 20,600 shares of Series A Preferred to an investor for an aggregate purchase price of $206,000.

On February 21, 2020, the Company sold 22,060 shares of Series A Preferred to an investor for an aggregate purchase price of $220,600.

The Purchase Agreement contemplates a second closing for the purchase and sale of an additional 250,000 shares of Series A Preferred (the “Second Closing”). On February 24, 2020, to permit an interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and LF International entered into an amendment to the Purchase Agreement (the “Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and LF International agreed to purchase, 70,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $700,000 (the “Interim Closing”). As an inducement to enter into the Purchase Agreement Amendment, the Company i) granted to the Investor the right to appoint and elect a second member to the Company’s Board of Directors and ii) agreed to issue to LF International 140,000 shares of the Company’s common stock. On February 28, 2020, the Company and LF International closed on the Interim Closing.

On April 1, 2020, an investor converted an accounts receivable of $482,000 owed to the investor by the Company in exchange for 48,200 shares of Series A Preferred.

On June 5, 2020, the Company and LF International conducted the Second Closing, as modified by the Interim Closing and Additional Interim Closing (the “Final Closing”), and closed on the issuance of 50,000 shares of Series A Preferred at a purchase price of $10.00 per share to LF International for aggregate gross proceeds of $500,000 to the Company. As a result of the Final Closing, LF International held, in the aggregate, approximately 57% of the voting control of the Company, resulting in a change in control of the Company.

The issuance of the Company’s Series A Preferred Stock generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the common stock into which the Series A Preferred was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the closing dates by approximately $2.5 million as of the closing dates. We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series A Preferred Stock. As the Series A Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance. The accretion was recognized as dividend equivalents. Holders of the Series A Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock at the Company’s discretion. In the six months ending June 30, 2020 the Company accrued $150,000 of these dividends.

As of ~~March 31,~~June 30, 2020, the total amounts owed to the Company by this customer were approximately ~~$2,097,000~~$1,757,000 or ~~29%~~25% of the Company’s consolidated net accounts receivable. The amounts owed at ~~March 31,~~June 30, 2019 by this customer was approximately ~~$2,933,000~~$1,044,000 or ~~39%~~15% of the Company’s consolidated net accounts receivable.

Note 13 13-Leases

We adopted ASC Topic 842 (Leases) on January 1, 2019. This standard requires us to record certain operating lease liabilities and corresponding right-of-use assets on our balance sheet. Results for periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 840. We elected the package of practical expedients available for expired or existing contracts, which allowed us to carryforward our historical assessments of whether contracts are (or contain) leases, as well as lease classification tests and treatment of initial direct costs. We also elected to not separate lease components from non-lease components for all fixed payments, and we exclude variable lease payments in the measurement of right-of-use assets and lease obligations.

Upon adoption of ASC 842 we recorded a $2.8 million increase in other assets, a $1.1 million increase in current liabilities, and a $1.7 million increase in non-current liabilities. We did not record any cumulative effect adjustments in opening retained earnings, and adoption of ASC 842 had no impact on cash flows from operating, investing, or financing activities.

1721

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We determine if an arrangement is a lease at inception. Most of our operating leases do not provide an implicit rate of interest so we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. We lease various assets in the course of ordinary business including warehouses and manufacturing facilities, as well as vehicles and equipment used in our operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet as we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of assets and related improvements are limited by the expected lease term unless there is a reasonably certain expected transfer or title or purchase option. Some lease agreements include renewal options at our sole discretion. Any guaranteed residual value is included in our lease liability.

The table below describes our lease position as of ~~March 31, 2020:~~June 30, 2020

Assets	As of March 31, 2020			As of June 30, 2020
Operating lease right-of-use assets	$	1,371,000		$	1,417,000
Accumulated amortization		(699,000	)		(962,000)
Net lease assets		672,000			455,000

Liabilities
Current
Operating		399,000			343,000
Noncurrent
Operating		273,000			112,000
Total lease liabilities		672,000			455,000

Weighted average remaining term (years) – operating leases		2
Weighted average remaining term (years) – operating leases (in years)					2

Weighted average discount rate – operating leases		11.25	%		11.25%

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, we recorded expenses related to

Operating lease ~~expense~~expenses were approximately ~~$251,000~~$416,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2020. Operating lease costs are included within selling, general and administrative expenses on the condensed consolidated statements of operations. The Company does not have any finance leases. Cash paid for amounts included in the measurement of operating lease liabilities were approximately ~~$251,000~~$416,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2020.

Note 14 - Subsequent Events

On April 30, 2020, the Company executed a promissory note (the “Note”) with PNC Bank National Association (the “Lender”) evidencing an unsecured loan in the aggregate principal amount of $1,047,700 (the “PPP Loan”), which was made pursuant to the Paycheck Protection Program (the “PPP”). The PPP was established under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). All the funds under the PPP Loan were disbursed to the Company on April 23, 2020. The Note provides for a fixed interest rate of one percent per year with a maturity date of April 30, 2022 (the “Maturity Date”). Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of disbursement of the PPP Loan. The PPP Loan may be prepaid by the Company at any time prior to the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and the Lender and determined, subject to limitations, based on factors set forth in the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In the event the PPP Loan, or any portion thereof, is forgiven, the amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations and guidelines that the SBA may adopt. The Company will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments

On June 1, 2020, Mr. John Schwan resigned as Chairman of the Board of Directors, Mr. Li was appointed as the Chairman of the Board of Directors, Mr. Stephen Merrick resigned as Director, Corporate Secretary, and General Counsel and Frank Cesario was appointed as Secretary.

On April 13, 2020, to permit an additional interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and the Investor entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and the Investor agreed to purchase, 130,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $1,300,000 (the “Additional Interim Closing”). As an inducement to enter into the Second Purchase Agreement Amendment, the Company i) granted to the Investor the right to appoint and elect a third member to the Board of the Company and ii) agreed to issue to the Investor 260,000 shares of Common Stock. On April 13, 2020, the Company and the Investor closed on the Additional Interim Closing. On June 5, 2020, the Company and the Investor conducted the Second Closing, as modified by the Interim Closing and Additional Interim Closing (the “Final Closing”), and closed on the issuance of 50,000 shares of Series A Preferred at a purchase price of $10.00 per share to the Investor for aggregate gross proceeds of $500,000 to the Company. The Company paid the placement agent for the Offering a fee equal to ten percent (10%) of the gross proceeds from the Final Closing and warrants to purchase shares of Common Stock in an amount equal to ten percent (10%) of the Common Stock issuable upon conversion of the Series A Preferred sold in the Final Closing at an exercise price of $1.00 per share.

~~Note 15 - Equity~~ ~~Transaction~~

On ~~January 3,~~July 17, 2020, PNC provided the Company notice that multiple previously disclosed events, which each constitute an event of default, are continuing to occur. Additionally, PNC required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, PNC advised that it may cease making Discretionary Advances to the Company. On July 22, 2020, the ~~Company entered into a stock purchase agreement (the “Purchase Agreement”), pursuant to which~~Board authorized the Company ~~agreed~~ to ~~issue~~seek such funding and ~~sell,~~Mr. Yubao Li, the Company’s Chairman, to ensure the Company meets PNC’s equity funding commitment deadline, committed that, in the event the Company does not obtain funding of at least $3,000,000 by August 31, 2020, he would provide the necessary funding.

During 2020, warrants were issued in conjunction with the equity financing as described herein and ~~LF International Pte. Ltd. (the “Investor”), agreed to purchase, up to 500,000 shares~~the rebranding of the ~~Company’s newly created Series A Convertible Preferred Stock (“Series A Preferred”), at a purchase price~~Company. The majority of ~~$10.00 per share,~~these warrants were exercised during July 2020. During July 2020, Tradigital Marketing Group exercised 250,000 warrants in exchange for ~~aggregate gross proceeds of $5,000,000 (the “Offering”).~~

Holders of the Series A Preferred will be entitled to receive quarterly dividends at the annual rate of 8% of the stated value ($10 per share). Such dividends may be paid in cash or in shares of common stock in the Company’s discretion. In the event of any liquidation, dissolution or winding up of the Company, the holders of record of shares of Series A Preferred will be entitled to receive, in preference to any distribution to the holders of the Company’s other equity securities (including the Company’s common stock), a liquidation preference equal to $10 per share plus all accrued and unpaid dividends.

Each holder of Series A Preferred shall have the right to convert the stated value of such shares, as well as accrued but unpaid declared dividends thereon (collectively the “Conversion Amount”) into171,000 shares of the Company’s common stock. The number of shares of common stock issuable upon conversion of the Conversion Amount shall equal the Conversion Amount divided by the conversion price of $1.00, subject to certain customary adjustments. Holders of Series A Preferred shall vote together with the holders of the Company’s common stock on an as-if-converted basis, whereby each share of Series A Preferred will be entitled to ten (10) votes, subject to adjustment. In addition, so long as there are more than 50,000 shares of the Series A Preferred outstanding, the Company will be prohibited from taking certain actions without the consent of the holders of at least 80% of the outstanding shares of Series A Preferred. In addition, the Company shall not, without the affirmative vote of the holders ofAlso during July 2020, Garden State Securities and its executive managing director exercised a ~~majority of the then-outstanding shares of the Series A Preferred, amend its Article of Incorporation, the Series A Certificate of Designation or the by-laws of the Company~~combined 250,000 warrants in any manner to decrease the number of authorized shares of common stock or in any manner that would otherwise adversely affect the rights, preferences or privileges of the holders of the Series A Preferred, exceptexchange for an amendment to increase the number of authorized shares of common stock. The voting and conversion rights of the Series A Preferred will be restricted prior to the affirmative vote of holders of a majority of the common stock approving the Offering.

On January 13, 2020, the Company conducted its first closing of the Offering, selling 250,000 Series A Preferred shares resulting in aggregate gross proceeds of $2,500,000. On February 24, 2020, to permit an interim closing prior to the satisfaction of the relevant closing conditions to, and the consummation of, the Second Closing, the Company and the Investor entered into an amendment to the Purchase Agreement (the “Purchase Agreement Amendment”), pursuant to which the Company agreed to issue and sell, and the Investor agreed to purchase, 70,000 shares of Series A Preferred at a purchase price of $10.00 per share, for aggregate gross proceeds of $700,000 (the “Interim Closing”). As an inducement to enter into the Purchase Agreement Amendment, the Company i) granted to the Investor the right to appoint and elect a second member to the Company’s Board of Directors and ii) agreed to issue to the Investor 140,000161,000 shares of the Company’s common stock.

During August 2020, an investor (Tobin) in the ~~first quarter~~ 2020 ~~the Company sold 90,860 additional Series A Preferred to various investors for gross proceeds of $426,600 and conversion of debt of $478,000.~~

~~In connection with the issuance of the Series A Preferred, the Company paid placement agents a fee equal to ten percent (10%) of the gross proceeds from the Interim Closing and warrants to purchase~~convertible preferred equity program exercised all 27,660 shares of the Company’s common stock in an amount equal to ten percent (10%) of the common stock issuable upon conversion of the Series A Preferred sold at an exercise price of $1.00 per share. In total, stock issuance costs inclusive of marketing, legal and placement agents of $1,679,000 were incurred and were treated as a reduction of Additional Paid in Capital, via warrants, and via common stock.

~~Beneficial Conversion Features~~

The issuance of the Company’s Series A Preferred Stock generated a beneficial conversion feature (BCF), which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The fair value of the commonconvertible preferred stock into which the Series A Preferred was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the closing dates by approximately $2.2 million as of the closing dates. We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series A Preferred Stock. As the Series A Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance. The accretion was recognized as dividend equivalents.

~~Warrants~~

The Company evaluates outstanding warrants in accordance with ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. If none of the criteria in the evaluation in these standards are met, the warrants are classified as a component of stockholders’ equity and initially recorded at their grant date fair value without subsequent re-measurement. In connection with the sale of the Series A Preferred, in the first quarter 2020, the Company issued warrants to purchase 612,660276,600 shares of ~~the Company’s~~ common stock. The warrant had an exercise price of $1.00 per share. The Company evaluated the terms of the warrants and concluded that they should be equity-classified. The fair value of the warrants, $753,000, were estimated on the issuance dates using a Black-Scholes pricing model based on the following assumptions: an expected term of 5 years, average expected stock price volatility of approximately 155%, an average risk-free rate of 1.19%, and a dividend yield of 0%. The fair value was treated as stock issuance costs.

~~As of March 31, 2020 and December 31, 2019, the Company reserved the following~~An additional 11,000 shares of common stock ~~for issuance of shares resulting from~~were issued to the ~~exercise of outstanding warrants and options, as well as~~same investor representing the ~~future conversion of~~8% interest on the ~~Series A Preferred Shares:~~


	~~3/31/2020~~	~~12/31/2019~~
~~Conversion of Series A Preferred~~	~~5,296,800~~	-
~~Stock Warrants~~	~~612,600~~	-
~~Stock Options~~	-	-

	~~5,909,400~~	-

convertible preferred shares.

1923

~~Table of Contents~~

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This quarterly 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 quarterly report on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statements after the date of this quarterly report to conform such statements to actual results or to changes in our opinions or expectations.

We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related products, films for packaging and custom product applications, and flexible containers for packaging and consumer storage applications. We produce all of our film products for packaging, container applications and most of our foil balloons at our plant 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 and custom product applications are sold to customers in the United States. We market and sell our novelty items and flexible containers for consumer use in the United States, Mexico, Latin America, and Europe. We also market and sell ~~vacuum sealing machines, home organizing and container products,~~ Candy Blossoms and party goods.

As of January 1, 2018, we adopted Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.

Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration the Company expects to receive in exchange for the transferred products. The Company recognizes revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales, as we have elected the practical expedient included in ASC 606. 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 once it has (i) identified the contract(s) with a customer, (ii) identified the performance obligations in the contract, (iii) determined the transaction price, (iv) allocated the transaction price to the performance obligations in the contract, and (v) recognized revenue as the company satisfies a performance obligation. 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.

We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year and we have elected the practical expedient included in ASC 606. We do not incur incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.

As of January 1, 2019, we adopted ASC Topic 842, Leases (“ASC Topic 842”). Refer to Note 12 for additional information. Our primary leases relate to the facilities we use in Mexico. We also have ancillary leases for items ranging from forklifts to printers. The majority of our leases are classified as operating lease right-of-use (“ROU”) assets and related operating lease liabilities. Finance leases are included in property and equipment and related liabilities. ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at the commencement date for leases that exceed 12 months. The expected lease term includes options to renew when it is reasonably certain that we will exercise such option.

Operating lease expense is recognized on a straight-line basis over the lease term and is included in the cost of sales or sales, general and administrative expense areas. Finance leases are amortized on a straight-line basis and included in similar areas of expense classification. Variable lease payments, non-lease component payments, and short-term rentals (leases less than 12 months in duration) are expensed as incurred.

~~On April 30, 2020,~~As previously disclosed on a Current Report on Form 8-K of Yunhong CTI Ltd., on December 14, 2017, the Company ~~executed~~entered into a ~~promissory note~~Revolving Credit, Term Loan and Security Agreement (the ~~“Note”~~“Loan Agreement”) with PNC Bank, National Association (“Lender”).

Prior to January 13, 2020, certain events of default under the Loan Agreement had occurred (the ~~“Lender”~~"Prior Defaults"). On January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) ~~evidencing~~between Lender and the Company became effective, pursuant to which Lender agreed to, among other things, forebear from exercising the rights and remedies in respect of the Prior Defaults afforded to Lender under the Loan Agreement for a period ending no later than December 31, 2020 (the “Forbearance Period”).

On June 15, 2020, the Lender provided the Company notice (the “Default Notice”) that (i) an ~~unsecured loan~~additional Event of Default (as defined in the ~~aggregate principal amount~~Loan Agreement) had occurred and is continuing as a result of ~~$1,047,700~~the Company's failure to maintain a Fixed Charge Coverage Ratio (as defined in the Loan Agreement) of 0.75 to 1.00 for the three-month period ended March 31, 2020 (the ~~“PPP Loan”~~"March FCCR Default"), ~~which was made pursuant~~(ii) as a result of the occurrence and continuance of the March FCCR Default, the Forbearance Period has ended, and (iii) as a result of the termination of the Forbearance Period, the Lender is entitled to ~~the Paycheck Protection Program (the “PPP”). The PPP was established~~exercise immediately all of its rights and remedies under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, and is administered by the U.S. Small Business Administration (“SBA”). All the funds under the PPP Loan ~~were disbursed~~Agreement including, without limitation, ceasing to make further advances to the Company ~~on April 23, 2020.~~ and declaring all obligations to be immediately due and payable in accordance with the Loan Agreement.

The Note provides for a fixed interest rate of one percent per year with a maturity date of April 30, 2022 (the “Maturity Date”). Monthly principal and interest payments due on the PPP Loan are deferred for a six-month period beginning from the date of disbursement of the PPP Loan. The PPP Loan may be prepaid byLender has continued to make advances to the Company ~~at any time prior~~(“Discretionary Advances”), although it is not required to ~~the Maturity Date with no prepayment penalties or premiums. The Note contains customary event of default provisions. Under~~do so under the terms of the ~~CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion~~Loan Agreement due to the Events of ~~the loans granted under the PPP. Such forgiveness will be subject to approval by the SBA and~~Default. On July 17, 2020, the Lender provided the Company notice that multiple previously disclosed events, which each constitute an Event of Default, are continuing to occur. Additionally, the Lender required that the Company obtain a commitment for third-party equity funding in an amount not less than $3,000,000 by no later than July 31, 2020. Absent such commitment, the Lender advised that it may cease making discretionary advances to the Company. On July 22, 2020, the Company’s board of directors (the “Board”) authorized the Company to seek such funding and, ~~determined, subject~~ to ~~limitations, based on factors set forth~~ensure that the Company met the Lender’s equity funding commitment deadline, Mr. Yubao Li, the Company’s Chairman, committed that, in ~~the CARES Act, including verification of the use of loan proceeds for payment of payroll costs and payments of mortgage interest, rent and utilities. In~~ the event the ~~PPP Loan, or any portion thereof, is forgiven,~~Company does not obtain funding of at least $3,000,000 by August 31, 2020, he would provide the ~~amount forgiven is applied to outstanding principal. The terms of any forgiveness may also be subject to further regulations~~necessary funding.

During 2020, warrants were issued in conjunction with the equity financing as described herein and ~~guidelines that~~ the SBA may adopt. The Company will carefully monitor all qualifying expenses and other requirements necessary to attain loan forgiveness; however, no assurance is provided that the Company will obtain forgivenessrebranding of the ~~PPP Loan~~Company. The majority of these warrants were exercised during July 2020. During July 2020, Tradigital Marketing Group exercised 250,000 warrants in ~~whole or in part. The Company intends to use all proceeds from the PPP Loan to retain employees, maintain payroll and make lease and utility payments~~

~~On June 1, 2020, Mr. John Schwan resigned as Chairman~~exchange for 171,000 shares of the ~~Board of Directors, Mr. Li was appointed as the Chairman~~Company’s common stock. Also during July 2020, Garden State Securities and its executive managing director exercised a combined 250,000 warrants in exchange for 161,000 shares of the ~~Board~~Company’s common stock. During August 2020, an investor (Tobin) in the 2020 convertible preferred equity program exercised all 27,660 shares of ~~Directors, Mr. Stephen Merrick resigned as Director, Corporate Secretary, and General Counsel and Frank Cesario was appointed as Secretary.~~

In July 2019, management and the Board engaged in a review of CTI Balloons and CTI Europe and determined that they are not accretive to the Company overall, add complexity to the Company’s structure and utilize resources. Therefore, as of July 19, 2019, the ~~board~~Board authorized management to divest these international subsidiaries. These actions are being taken to focus our resources and efforts on our core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of these International operations as discontinued operations in the Consolidated Statements of Comprehensive Income and presented the related assets and liabilities as held-for-sale in the Consolidated Balance Sheets. These changes have been applied for all periods presented. The Company divested its CTI Balloons (United Kingdom) subsidiary in the fourth quarter 2019 and expects to divest its CTI Europe (Germany) subsidiary in September 2020.

Net Sales. For the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2020, net sales were ~~$7,068,000,~~$5,745,000 and $12,813,000, compared to net sales of ~~$8,680,000~~$9,202,000 and $17,882,000 for the same ~~period~~periods of ~~2019.~~ 2019, respectively.

For the three month ~~periods~~period ended ~~March 31,~~June 30, 2020 and 2019, net sales by product category were as follows:

For the six month period ended June 30, 2020 and 2019 net sales by product category were as follows:

Foil Balloons. Revenues from the sale of foil balloons ~~decreased~~increased during the three months period from ~~$5,554,000~~$2,857,000 ending June 30, 2019 compared to $3,372,000 during the three month period ~~ended March 31, 2019 by to $4,492,000~~of 2020. Revenues from the sale of foil balloons decreased during the ~~three~~six month period ~~ended March 31, 2020, representing a decrease of 19%. Sales~~from $8,411,000 ending June 30, 2019 compared to ~~our largest balloon customer decreased from $3,861,000~~$7,864,000 during the ~~first three months of 2019 to $3,222,000 during the first three months~~six month period of 2020. Due to COVID-19 related issues, graduation season did not occur as it normally does. This is the third strongest event in our annual sales period. ~~While we believe these orders~~Anticipated delays by customers caused shipments to be lower during April and May. As balloons were ~~delayed and not cancelled, it nonetheless was impactful on our first quarter results.~~featured in many parties, including graduations, during shelter in place, June saw a significant increase in shipments. On a related note, many smaller customers were forced to close for extended periods during shelter-in-place restrictions that began March 2020 and began to reopen during May and June 2020.

Latex Balloons. Revenues from the sale of latex balloons ~~decreased from $1,739,000~~were $1,115,000 and $2,698,000 during the three and six month ~~period~~periods ended ~~March 31, 2019~~June 30, 2020, compared to ~~$1,583,000~~$2,231,000 and $3,970,000 during the ~~three month period ended March 31, 2020, representing~~same periods of 2019. Latex balloons encountered a ~~decrease of 9%.~~similar COVID-19 constraint, as production activities were severely limited by the Mexican government.

Films. Revenues from the sale of commercial films ~~decreased from $761,000~~were $371,000 and $586,000 during the three and six month ~~period~~periods ended ~~March 31, 2019,~~June 30, 2020, compared to ~~$215,000~~$478,000 and $1,239,000 during the ~~three month period ended March 31, 2020, representing a decrease~~same periods of ~~72%.~~2019. Our main customer had restructured their program in the first quarter both related to COVID-19 disruption and also the integration of a merger partner.

Other Revenues. Revenues from the sale of other products ~~increased from $465,000~~were $887,000 and $1,665,000 during the three and six month ~~period~~periods ended ~~March 31, 2019~~June 30, 2020, compared to ~~$778,000~~$3,636,000 and $4,262,000 during the ~~three month period ended March 31, 2020, representing an increase~~same periods of ~~67%.~~2019. The revenues from the sale of other products during the first ~~three~~six months of 2020 include (i) sales of a line of “Candy Blossoms” and similar products consisting of candy and small inflated balloons sold in small containers ~~in the amount of $704,000~~ and (ii) the sale of accessories and supply items related to balloon products.

Sales to a limited number of customers continue to represent a large percentage of our net sales.

The table below illustrates the impact on sales of our top three and ten customers for the ~~three~~six month periods ended ~~March 31,~~June 30, 2020 and 2019.

During the ~~three~~six month period ended ~~March 31,~~June 30, 2020, there was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to this customer for the ~~three~~six month period ended ~~March 31,~~June 30, 2020 ~~were $3,222,000,~~was $5,675,000, or ~~45%~~44% of consolidated net sales. Sales to this customer for the ~~three~~six months ended ~~March 31,~~June 30, 2019 was ~~$3,861,000,~~$6,630,000, or ~~45%~~37% of consolidated net sales. As of ~~March 31,~~June 30, 2020, the total amount owed to the Company by this customer was approximately ~~$2,097,000,~~$1,757,000, or ~~29%~~25% of the Company’s consolidated net accounts receivable. The amount owed at ~~March 31,~~June 30, 2019 by this customer was approximately ~~$2,933,000,~~$1,044,000, or ~~39%~~15% of the Company’s consolidated net accounts receivable.

Cost of Sales. During the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2020, the cost of sales was ~~$5,586,000,~~$5,136,000 and $10,722,000, compared to ~~$6,723,000~~$9,135,000 and $15,858,000, respectively, for the same ~~period ended March 31,~~periods of 2019. The reduction in cost of sales was largely due to ~~lower sales volume, net~~the termination of the vacuum sealing product line, reduced presence in the form of discontinued subsidiaries, and a temporary reduction in orders related ~~inefficiencies.~~to COVID-19.

General and Administrative. During the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2020, general and administrative expenses were ~~$702,000~~$1,484,000 and $2,186,000 as compared to ~~$1,359,000~~$1,419,000 and $2,784,000 respectively, for the same ~~period~~periods in 2019.

Selling, Advertising and Marketing. During the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2020, selling, advertising and marketing expenses were ~~$54,000~~$108,000 and $288,000 as compared to ~~$119,000~~$282,000 and $566,000, respectively, for the same ~~period~~periods in ~~2019.0.~~2019.

Other Income (Expense). During the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2020, the Company incurred interest expense of ~~$441,000~~$337,000 and $778,000 as compared to interest expense of ~~$564,000~~$533,000 and $1,097,000 during the same ~~period~~periods of 2019. During the three months ended June 30,2020 the Company recorded $800,000 of other income for the Payroll Protection Program, PPP, anticipated grant related to payroll, utility and rent payments.

For the three month ~~period~~and six month periods ended ~~March 31,~~June 30, 2020, the Company had a foreign currency transaction ~~loss~~gain/(loss) of ~~$154,000~~$(30,000) and $(184,000) as compared to a gain/(loss) of $9,000 and $3,000 during ~~2019 and $6,000 loss during~~the same ~~period~~periods of 2019. For the three month period ending March 31, 2019 the company recorded a $1.2 million charge related to goodwill impairment and no impairment charge was recorded in the three month period ended March 31, 2020.

Operating Activities. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, net cash ~~provided by~~used in operations was ~~$842,000,~~$228,000, compared to net cash provided by operations during the ~~three~~six months ended ~~March 31,~~June 30, 2019 of ~~$665,000.~~$3,198,000.

Significant changes in working capital items during the ~~nine~~six months ended ~~March 31,~~June 30, 2020 included:

Investing Activity. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, cash used in investing activity was ~~$19,000,~~$72,000, compared to cash used in investing activity for the same period of 2019 in the amount of ~~$52,000.~~$73,000.

Financing Activities. During the ~~three~~six months ended ~~March 31,~~June 30, 2020, cash used in financing activities was ~~$1,700,000~~$949,000 compared to cash used in financing activities for the same period of 2019 in the amount of ~~$808,000.~~$3,726,000. Financing activity consisted principally of changes in the balances of revolving and long-term debt. During 2020, the Company has sold 542,660 shares of Series A Preferred to multiple investors for an aggregate purchase price of $5.4 million.

At ~~March 31, 2019,~~June 30, 2020, the Company had cash balances of ~~$160,000~~$104,000 compared to cash balances of ~~$175,000~~$178,000 for the same period of 2019.

As of ~~March 31,~~June 30, 2020, the Company was not in compliance with its ~~Credit Facility with PNC.~~credit facility, operating under a forbearance agreement. For this reason, ~~$2.0~~$1.7 million of long-term debt was reclassified as current debt as of ~~March 31,~~June 30, 2020. Failure to ultimately regain compliance with the terms of our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to carry on our business up to and including our ability to continue as a going concern. Additionally, we have encountered difficulties with seasonal cash flow needs, including increased costs associated with recruiting and retaining workers in the Chicago area. The failure to either regain compliance with the terms of our credit facility or properly manage seasonal cash needs could put a strain on the Company, up to and including our ability to continue as a going concern. See Note 23 for additional discussion.

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.

Please see pages 25-28 of our Annual Report on Form 10-K for the year ended December 31, 2019 for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three and six months ended ~~March 31,~~June 30, 2020.

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are properly recorded, processed, summarized and reported within the time periods required by the Commission's rules and forms.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of ~~March 31,~~June 30, 2020. Based on this evaluation, the Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were not effective as of ~~March 31,~~June 30, 2020, the end of the period covered by this Quarterly Report on Form 10-Q due to the material weaknesses described below.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Internal control over financial reporting is a process designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of our internal control over financial reporting as of ~~March 31,~~June 30, 2020. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the registrant's annual or interim financial statements will not be prevented or detected on a timely basis. As a result of our evaluation of our internal control over financial reporting, management identified the following material weaknesses in our internal control over financial reporting:

As a result of the material weaknesses, we have concluded that we did not maintain effective internal control over financial reporting as of ~~March 31,~~June 30, 2020.

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.

The Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Part I – Financial Information

Item No. 1.	Financial Statements
	Condensed Consolidated Balance Sheets at ~~March 31,~~June 30, 2020 (unaudited) and December 31, 2019 (audited)	1
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and ~~March 31,~~June 30, 2019	3
	Condensed Consolidated Statements of Shareholders' Equity (unaudited) for the six months ended June 30, 2020	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item No. 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 24
Item No. 3	Quantitative and Qualitative Disclosures Regarding Market Risk	2630
Item No. 4	Controls and Procedures	2730

Part II – Other Information

Item No. 1	Legal Proceedings	2831
Item No. 1A	Risk Factors	2831
Item No. 2	Unregistered Sales of Equity Securities and Use of Proceeds	2831
Item No. 3	Defaults Upon Senior Securities	2831
Item No. 4	~~Mine Safety Disclosures~~Submission of Matters to a Vote of Security Holders	2832
Item No. 5	Other Information	2832
Item No. 6	Exhibits	2932
	Signatures	3033
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

	For the Three Months Ended March 31,						For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020			2019			2020			2019			2020			2019

Net Sales	$	7,067,501		$	8,680,017		$	5,745,353		$	9,202,406		$	12,812,854		$	17,882,423

Cost of Sales		5,586,059			6,723,011			5,135,641			9,134,616			10,721,700			15,857,627

Gross profit		1,481,442			1,957,006			609,712			67,790			2,091,154			2,024,796

Operating expenses:
General and administrative		702,431			1,358,639			1,484,008			1,419,277			2,186,439			2,783,916
Selling		53,754			119,388			26,636			109,721			80,390			229,109
Advertising and marketing		120,829			158,834			81,165			177,903			201,994			336,737
Impairment of long-lived assets		-			1,253,176			-			258,566			-			1,511,742
Gain on sale of assets		(25,684	)		(23,547	)		(20,016	)		(23,662	)		(45,700	)		(47,209	)

Total operating expenses		851,330			2,866,490			1,571,793			1,941,805			2,423,123			4,814,295

Gain (Loss) from operations		630,112			(909,484	)
Loss from operations								(962,081	)		(1,874,015	)		(331,969	)		(2,789,499	)

Other (expense) income:
Interest expense		(441,177	)		(564,160	)
Other Expense		(42,334	)		(303,109	)
Foreign currency loss		(154,083	)		(5,683	)
Interest (expense) income								(336,925	)		(533,256	)		(778,102	)		(1,097,416	)
Gain on Forgiveness of Payroll Protection Program Funding								800,146						800,146
Other (expense) income								(330,006	)		(93,086	)		(372,340	)		(390,194	)
Foreign currency (loss) income								(30,374	)		9,091			(184,457	)		3,407

Total other expense, net		(637,594	)		(872,952	)
Total other income (expense), net								102,841			(617,251	)		(534,753	)		(1,484,203	)

Loss from continuing operations before taxes		(7,482	)		(1,782,436	)		(859,240	)		(2,491,266	)		(866,722	)		(4,273,702	)

Income tax expense		-			-			-			-			-			-


Loss from continuing operations		(7,482)			(1,782,436	)		(859,240	)		(2,491,266	)		(866,722	)		(4,273,702	)


Loss from discontinued operations , net of tax		(486,637	)		(774,040	)
Income (loss) from discontinued operations , net of tax								(599,956	)		730,686			(1,086,593	)		(43,353	)

Net Loss	$	(494,119	)	$	(2,556,476	)	$	(1,459,196	)	$	(1,760,580	)	$	(1,953,315	)	$	(4,317,055	)

Less: Net income (loss) attributable to noncontrolling interest		144,577			(62,388	)
Less: Net (loss) income attributable to noncontrolling interest								68,313			(516,102	)		212,890			(578,490	)

Net loss attributable to Yunhong CTI, Ltd	$	(638,696	)	$	(2,494,088	)	$	(1,527,509	)	$	(1,244,478	)	$	(2,166,205	)	$	(3,738,565	)

Other Comprehensive Income (Loss)
Foreign currency adjustment		(1,363,503)			235,876			66,327			61,333			(1,297,176	)		297,209
Comprehensive Loss	$	(1,857,622)		$	(2,320,600	)	$	(1,461,182	)	$	(1,183,145	)	$	(3,463,381	)	$	(3,441,356	)

Deemed Dividends on preferred stock and amortization of beneficial conversion feature	$	(2,380,944)			-		$	(237,824	)	$	-		$	(2,618,768	)	$	-

Net loss attributable to Yunhong CTI Ltd Shareholders	$	(3,019,640)		$	(2,494,088)
Net Loss attributable to Yunhong CTI Ltd Shareholders							$	(1,699,006	)	$	(1,183,145	)	$	(6,082,149	)	$	(3,441,356	)

Basic loss per common share
Basic income (loss) per common share
Continuing operations	$	(0.64	)	$	(0.46	)	$	(0.27	)	$	(0.51	)	$	(0.88	)	$	(0.96	)
Discontinued operations		(0.12	)		(0.21	)		(0.14	)		0.19			(0.26	)		(0.01	)
Basic loss per common share	$	(0.76	)	$	(0.67	)
Basic income (loss) per common share							$	(0.41	)	$	(0.32	)	$	(1.14	)	$	(0.97	)

Diluted loss per common share
Diluted income (loss) per common share
Continuing operations	$	(0.64	)	$	(0.46	)	$	(0.27	)	$	(0.51	)	$	(0.88	)	$	(0.96	)
Discontinued operations		(0.12	)		(0.21	)		(0.14	)		0.19			(0.26	)		(0.01	)
Diluted loss per common share	$	(0.76	)	$	(0.67	)
Diluted income (loss) per common share							$	(0.41	)	$	(0.32	)	$	(1.14	)	$	(0.97	)

Weighted average number of shares and equivalent shares of common stock outstanding:
Basic		3,973,093			3,735,950			4,352,292			3,835,950			4,184,521			3,835,950

Diluted		3,973,093			3,735,950			4,352,292			3,835,950			4,184,521			3,835,950

	For the Three Months Ended March 31,						For the Six Months Ended June 30,
	2020			2019			2020			2019

Cash flows from operating activities:
Net loss	$	(494,119	)	$	(2,556,476	)	$	(1,953,315	)	$	(4,317,056	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		294,003			308,084			249,551			522,670
Amortization of deferred gain on sale/leaseback		(25,684)			(27,474	)		(45,700	)		(54,948	)
Gain on forgiveness of PPP Funding								(800,146	)		-
Provision for losses on accounts receivable		10,492			6,085			20,457			393,938
Provision for losses on inventories		3,770			(10,656	)		99,169			1,278,561
Other								-			261,075
Impairment of Note Receivable								350,000			-
Impairment of Prepaid, Current and Non Current Assets								-			168,931
Impairment of long-lived assets		-			1,253,176			-			1,252,283
Stock Based Compensation		-			28,967			-			52,396
Loss on disposition of Asset								-			17,480
Change in assets and liabilities:
Accounts receivable		797,188			660,299			1,153,616			2,162,480
Inventories		241,530			(827,084	)		1,681,646			(474,804	)
Prepaid expenses and other assets		133,257			(20,233	)		37,772			530,172
Trade payables		(157,864	)		2,000,334			(1,832,090	)		1,998,495
Accrued liabilities		39,729			(149,957	)		10,897			(593,960	)

Net cash provided by operating activities		842,302			665,065
Net cash provided by (used in) operating activities								(1,028,143	)		3,197,713

Cash flows from investing activities:
Purchases of property, plant and equipment		(18,526	)		(52,243	)		(71,867	)		(72,662	)

Net cash used in investing activities		(18,526	)		(52,243	)
Net cash provided by (used in) investing activities								(71,867	)		(72,662	)

Cash flows from financing activities:
Change in checks written in excess of bank balance		-			18,504			-			394,227
Net change in revolving line of credit		(4,340,992	)		(1,235,126	)
Repayment of long-term debt		(375,437	)		(213,521	)
Repayment of debt and revolving line of credit								(6,657,777	)		(4,715,492	)
Proceeds from issuance of debt								904,583			650,000
Proceeds from issuance of stock		3,626,600			-			5,426,600			-
Cash paid for stock issuance costs		(570,160)			-			(1,024,313	)		-
Cash paid for deferred financing fees		(39,722	)		(27,585	)		(43,263	)		(55,170	)
Proceeds from issuance of long-term debt					650,000
Proceeds from PPP								1,047,700			-

Net cash used in financing activities		(1,699,711	)		(807,728	)		(346,470	)		(3,726,435	)

Effect of exchange rate changes on cash		190,942			(57,802	)		705,050			351,532

Net decrease in cash and cash equivalents		(684,993	)		(252,708	)		(741,430	)		(249,852	)

Cash and cash equivalents at beginning of period		845,098			428,150			845,098			428,150

Cash and cash equivalents at end of period	$	160,105		$	175,442		$	103,668		$	178,298
The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations.”

The cash flows related to discontinued operations have not been segregated, and are included in the Consolidated Statements of Cash Flows. The cash and equivalents amounts presented above differ from cash and equivalents in the Consolidated Balance Sheets due to cash included in “Current assets of discontinued operations.”
Supplemental disclosure of cash flow information:
Cash payments for interest	$	441,000		$	367,000		$	778,148		$	1,045,943
Common stock issued for accounts payable								-			303,000
Conversion of debt to Series A Preferred		478,000			-			478,000			-
Accrued Dividend on preferred stock		53,000			-
Accrued dividend on preferred stock								150,000			-
Issuance of Placement agent warrants in connection with Series A Preferred offering		753,000			-			919,000			-
Issuance of common stock to placement agent		306,000			-
Accrual for Stock Issuance Costs		250,000			-
Issuance of Common stock to placement agent								306,000			-
Amortization of beneficial conversion feature and deemed dividend on Series A Preferred stock		2,300,000			-			2,500,000			-
Common stock issued for notes payable		-			600,000
Common stock issued for Notes Payable								-			600,000

	Three Months Ended June 30, 2019
														Accumulated
											Accumulated			Other			Less
	Preferred Stock				Common Stock				Paid-in		(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount		Shares		Amount		Capital		Earnings			Loss			Shares			Amount			Interest			TOTAL

Balance March 31, 2019		-	$	-		3,779,608	$	13,898,494	$	3,135,404	$	(5,359,575	)	$	(5,814,471	)		(43,658	)	$	(160,784	)	$	(1,134,973	)		4,564,095

Note Conversion - Schwan		-		-		-		-		-		-			-			-			-			-			-
Stock Issued		-		-		100,000		-		303,000		-			-			-			-			-			303,000
Stock Option Expense		-		-		-		-		23,429		-			-			-			-			-			23,429
Net Income		-		-		-		-		-		(1,244,477	)		-			-			-			(516,102	)		(1,760,579	)
Other comprehensive income, net of taxes		-		-		-		-		-		-			-			-			-			-			-
Foreign currency translation		-		-		-		-		-		-			61,333			-			-			-			61,333
Balance June 30, 2019		-	$	-		3,879,608		13,898,494		3,461,833		(6,604,052	)		(5,753,138	)		(43,658	)		(160,784	)		(1,651,075	)		3,191,278

	Six Months Ended June 30, 2019
														Accumulated
											Accumulated			Other			Less
	Preferred Stock				Common Stock				Paid-in		(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount		Shares		Amount		Capital		Earnings			Loss			Shares			Amount			Interest			TOTAL

Balance December 31, 2018		-	$	-		3,578,885	$	13,898,494	$	2,506,437	$	(2,865,486	)	$	(6,050,347	)		(43,658	)	$	(160,784	)	$	(1,072,585	)		6,255,729

Note Conversion - Schwan		-		-		180,723		-		600,000		-			-			-			-			-			600,000
Stock Issued		-		-		120,000		-		303,000		-			-			-			-			-			303,000
Stock Option Expense		-		-		-		-		52,396		-			-			-			-			-			52,396
Net Income		-		-		-		-		-		(3,738,566	)		-			-			-			(578,490	)		(4,317,056	)
Other comprehensive income, net of taxes		-		-		-		-		-		-			-			-			-			-			-
Foreign currency translation		-		-		-		-		-		-			297,209			-			-			-			297,209
Balance June 30, 2019		-	$	-		3,879,608		13,898,494		3,461,833		(6,604,052	)		(5,753,138	)		(43,658	)		(160,784	)		(1,651,075	)		3,191,278

	Yunhong CTI, Ltd
														Accumulated
											Accumulated			Other			Less
	Preferred Stock				Common Stock				Paid-in		(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount		Shares		Amount		Capital		Earnings			Loss			Shares			Amount			Interest			TOTAL


Balance December 31, 2019		-	$	-		3,879,608	$	13,898,494	$	3,587,287	$	(9,992,841	)	$	(5,348,812	)		(43,658	)	$	(160,784	)	$	(856,837	)		1,126,507

Convertible Preferred Stock Issuance - Cash		362,660		3,509,933		140,000		116,667																			3,626,600
Convertible Preferred Stock Issuance - conversion of debt		48,200		478,017																							478,017
Common stock issued for placement agent fees				(306,000)		200,000		306,000																			-
Warrants issued to placement agent and other issuance costs				(752,924)						752,924																	-
Placement agent fees and issuance costs				(820,160)																							(820,160)
Beneficial conversion feature of Preferred Stock				(2,328,473)						2,328,473																	-
Deemed Dividend on beneficial conversion feature of Preferred Stock				2,328,473						(2,328,473)																	-
Accrued Deemed Dividend				52,741						(52,741)																	-
Net loss												(638,696)												144,577			(494,119)
Foreign Currency Translation															(1,363,503)												(1,363,503)
Balance March 31, 2020		410,860	$	2,161,607		4,219,608	$	14,321,161	$	4,287,470	$	(10,631,537	)	$	(6,712,315	)		(43,658	)	$	(160,784	)	$	(712,260	)	$	2,553,342

	Yunhong CTI, Ltd

	Three Months Ended June 30, 2020
																Accumulated
													Accumulated			Other			Less
	Preferred Stock					Common Stock				Paid-in			(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount			Shares		Amount		Capital			Earnings			Loss			Shares			Amount			Interest			TOTAL

Balance March 31, 2020		410,860	$	2,161,607			4,219,608	$	14,321,161	$	4,287,470		$	(10,631,537	)	$	(6,712,315	)		(43,658	)	$	(160,784	)	$	(712,260	)		2,553,342

Convertible Preferred Stock Issuance - cash		180,000		1,583,334			260,000		216,667		-			-			-			-			-			-			1,800,001
Convertible Preferred Stock Issuance - conversion of debt		-		-			-		-		-			-			-			-			-			-			-
Common stock issued for placement agent fees		-		-			-		-		-			-			-			-			-			-			-
Warrants issued to placement agent and other issuance costs		-		(166,181	)		-		-		166,181			-			-			-			-			-			-
Placement agent fees and issuance costs		-		(204,153	)		-		-		-			-			-			-			-			-			(204,153	)
Beneficial Conversion feature on Preferred Stock		-		(140,000	)		-		-		140,000			-			-			-			-			-			-
Deemed Dividend on beneficial conversion feature of Preferred Stock		-		140,000			-		-		(140,000	)		-			-			-			-			-			-
Accrued Deemed Dividend		-		97,554			-		-		(97,554	)		-			-			-			-			-			-
Net Loss		-		-			-		-		-			(1,527,509	)		-			-			-			68,313			(1,459,196	)
Foreign Currency Translation		-		-			-		-		-			-			66,327			-			-			-			66,327
Balance June 30, 2020		590,860		3,472,161			4,479,608		14,537,828		4,356,097			(12,159,046	)		(6,645,988	)		(43,658	)		(160,784	)		(643,947	)		2,756,321

	Six Months Ended June 30, 2020
																Accumulated
													Accumulated			Other			Less
	Preferred Stock					Common Stock				Paid-in			(Deficit)			Comprehensive			Treasury Stock						Noncontrolling
	Shares		Amount			Shares		Amount		Capital			Earnings			Loss			Shares			Amount			Interest			TOTAL

Balance December 31, 2019		-	$	-			3,879,608	$	13,898,494	$	3,587,287		$	(9,992,841	)	$	(5,348,812	)		(43,658	)	$	(160,784	)	$	(856,837	)		1,126,507

Convertible Preferred Stock Issuance - cash		542,660		5,093,267			400,000		333,334		-			-			-			-			-			-			5,426,601
Convertible Preferred Stock Issuance - conversion of debt		48,200		478,017			-		-		-			-			-			-			-			-			478,017
Common stock issued for placement agent fees		-		(306,000	)		200,000		306,000		-			-			-			-			-			-			-
Warrants issued to placement agent and other issuance costs		-		(919,105	)		-		-		919,105			-			-			-			-			-			-
Placement agent fees and issuance costs		-		(1,024,313	)		-		-		-			-			-			-			-			-			(1,024,313	)
Beneficial Conversion feature on Preferred Stock		-		(2,468,473	)		-		-		2,468,473			-			-			-			-			-			-
Deemed Dividend on beneficial conversion feature of Preferred Stock		-		2,468,473			-		-		(2,468,473	)		-			-			-			-			-			-
Accrued Deemed Dividend		-		150,295			-		-		(150,295	)		-			-			-			-			-			-
Net Loss		-		-			-		-		-			(2,166,205	)		-			-			-			212,890			(1,953,315	)
Foreign Currency Translation		-		-			-		-		-			-			(1,297,176	)		-			-			-			(1,297,176	)
Balance June 30, 2020		590,860	$	3,472,161			4,479,608	$	14,537,828	$	4,356,097		$	(12,159,046	)	$	(6,645,988	)		(43,658	)	$	(160,784	)	$	(643,947	)		2,756,321

	03/31/20			03/31/19
Income Statement
Net Sales		1,057,058			3,856,372
Cost of Sales		1,174,045			3,817,207

Gross Margin		(116,987	)		39,165

SG&A		524,550			815,179

Operating Income		(641,537	)		(776,014	)

Other Expense		13,220			(1,974	)

Total pretax loss from discontinued operations		(654,757	)		(774,040	)

Gain from re-measurement of valuation allowance		168,120			-

Net loss prior to non-controlling interest		(486,637	)		(774,040	)

Non-controlling Interest share of profit/loss		152,094			(76,017	)

Net Loss		(638,731	)		(698,023	)

	Three Months Ended
	March 31,
	2020		2019
Depreciation		154,892		89,574

	Six Months Ended
	June 30,
	2020		2019
Depreciation		213,491		178,997

	Foreign Currency Items			Total Accumulated Other Comprehensive Income			Foreign Currency Items			Total Accumulated Other Comprehensive Income

Beginning balance as of January 1, 2020	$	(5,348,812	)	$	(5,348,812	)	$	(5,348,812	)	$	(5,348,812	)

Current period change, net of tax		(1,363,503)			(1,363,503	)		(1,297,176	)		(1,297,176	)

Ending Balance as of March 31, 2020		(6,712,315	)		(6,712,315)
Ending Balance as of June 30, 2020							$	(6,645,988	)	$	(6,645,988	)

	Net Sales to Outside Customers				Net Sales to Outside Customers
	For the Three Months Ended				For the Six Months Ended
	March 31,				June 30,
	2020		2019		2020		2019

United States	$	5,426,000	$	6,600,000	$	9,969,000	$	13,779,000
Mexico		1,642,000		2,080,000		2,844,000		4,103,000

	$	7,068,000	$	8,680,000	$	12,813,000	$	17,882,000

					Net Sales to Outside Customers
	Total Assets at				For the Three Months Ended
	March 31,		December 31,		June 30,
	2020		2019		2020		2019

United States	$	17,770,000	$	19,668,000	$	4,543,000	$	7,180,000
Mexico		8,193,000		10,897,000		1,202,000		2,022,000
Assets Held for Sale International Subsidiaries		881,000		756,000

	$	26,844,000	$	31,321,000	$	5,745,000	$	9,202,000

	March 31, 2020			December 31, 2019			June 30, 2020			December 31, 2019
Raw materials	$	1,555,838		$	1,544,949		$	1,175,412		$	1,544,949
Work in process		3,171,759			3,110,296			3,017,870			3,110,296
Finished goods		8,431,874			9,766,060			7,434,520			9,766,060
In Transit		92,671			99,923			95,991			99,923
Allowance for excess quantities		(565,499	)		(561,729	)		(696,429	)		(561,729	)
Total inventories	$	12,686,643		$	13,959,499		$	11,027,364		$	13,959,499

	Three Months Ended					Three Months Ended					Three Months Ended					Three Months Ended
	March 31, 2020					March 31, 2019					June 30, 2020					June 30, 2019
Customer	Net Sales		% of Net Sales			Net Sales		% of Net Sales			Net Sales		% of Net Sales			Net Sales		% of Net Sales
Customer A	$	3,222,000		45	%	$	3,861,000		45	%	$	2,508,000		43	%	$	2,769,000		30	%

Operating right-of-use lease asset amortization	$	251,000	$	416,000

Total expense during three months ended March 31, 2020		251,000
Total expense during six months ended June 30, 2020				416,000

The following table summarizes the maturities of our lease liabilities for all operating leases as of June 30, 2020:

(in thousands)	3/31/2020
2020	$	382		$	234
2021		277			364
2022 and thereafter		33			49
Total lease payments		692			647
less: Imputed interest		(20	)		(192	)
Present value of lease liabilities	$	672		$	455

	Three Months Ended March 31,						Three Months Ended June 30,
	% of Sales						% of Sales
	2020			2019			2020			2019

Top 3 Customers		56	%		57	%		69	%		63	%

Top 10 Customers		69	%		78	%		83	%		81	%

	Six Months Ended June 30,
	% of Sales
	2020			2019

Top 3 Customers		68	%		60	%

Top 10 Customers		81	%		78	%

Exhibit Number	Description

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).
101	Interactive Data Files, including the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter and six months ended ~~March 31~~June 30, 2020, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.



	By: /s/ Jennifer M. Connerty	Jennifer M. Connerty Chief Financial Officer By:~~/s/~~ /s/ Frank J. Cesario
		Frank J. Cesario
		President,Chief Executive Officer, ~~Chief Financial Officer~~ and Secretary