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 ~~September~~June 30 ~~2017~~, 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 ~~INDUSTRIES CORPORATION~~LTD.

(Exact name of ~~Registrant~~registrant as specified in its charter)

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


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

~~(847) 382-1000~~

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 þ☑ 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,”~~company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨	☐	Accelerated filer¨		~~Non-accelerated filer~~ ¨	~~Smaller Reporting Company~~ þ☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company¨	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

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

The number of shares outstanding of the ~~Registrant’s~~registrant’s common stock as of ~~November 1, 2017~~August 11, 2020 was ~~3,525,227.~~5,055,907 (excluding treasury shares).

INDEX

Part I – Financial Information

Item No. 1.	Financial Statements
	Condensed Consolidated Balance Sheets at ~~September~~June 30, ~~2017~~2020 (unaudited) and December 31, ~~2016~~2019 (audited)	1
	Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~September~~June 30, ~~2016~~2019	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~September~~June 30, ~~2016~~2019	3
	Condensed Consolidated ~~Earnings per Share~~Statements of Shareholders' Equity (unaudited) for the ~~nine~~six months ended ~~September~~June 30, ~~2017 and September 30, 2016~~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	1624
Item No. 3	Quantitative and Qualitative Disclosures Regarding Market Risk	2430
Item No. 4	Controls and Procedures	2430

Part II – Other Information

Item No. 1	Legal Proceedings	2431
Item No. 1A	Risk Factors	2431
Item No. 2	Unregistered Sales of Equity Securities and Use of Proceeds	2431
Item No. 3	Defaults Upon Senior Securities	2431
Item No. 4	Submission of Matters to a Vote of Security Holders	2432
Item No. 5	Other Information	2432
Item No. 6	Exhibits	2532
	Signatures	2633
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32

Item 1. Financial Statements

~~PART 1 - FINANCIAL INFORMATION~~Yunhong CTI, LTD (f/k/a CTI Industries Corporation)

~~Item 1. Financial Statements~~

~~CTI Industries Corporation and Subsidiaries~~

Condensed Consolidated Balance Sheets

September 30, 2017 December 31, 2016
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents (VIE $3,000 and $51,000, respectively) $ 324,712 $ 563,043
Accounts receivable, (less allowance for doubtful accounts of $127,000 and $137,000, respectively) (VIE $29,000 and $6,000, respectively) 9,481,084 14,838,978
Inventories, net (VIE $611,000 and $719,000, respectively) 19,348,108 18,348,011
Prepaid expenses (VIE $39,000 and $18,000, respectively) 665,437 678,689
Other current assets (VIE $200 and $0, respectively) 675,821 530,669

Total current assets 30,495,162 34,959,390

Property, plant and equipment:
Machinery and equipment (VIE $0 and $0, respectively) 26,892,832 26,348,443
Building 3,387,323 3,379,636
Office furniture and equipment (VIE $260,000 and $154,000, respectively) 3,277,226 3,597,158
Intellectual property 752,044 482,088
Land 250,000 250,000
Leasehold improvements 415,549 395,603
Fixtures and equipment at customer locations 3,302,868 3,302,868
Projects under construction 102,477 493,859
38,380,319 38,249,655
Less : accumulated depreciation and amortization (VIE $35,000 and $29,000, respectively) (33,416,436 ) (32,938,267 )

Total property, plant and equipment, net 4,963,883 5,311,388

Other assets:
Goodwill (VIE $440,000 and $440,000, respectively) 1,473,176 1,473,176
Net deferred income tax asset 2,023,781 1,696,690
Other assets (due from related party $50,000 and $47,000, respectively) 408,428 473,095

Total other assets 3,905,385 3,642,961

TOTAL ASSETS $ 39,364,430 $ 43,913,739

LIABILITIES AND EQUITY
Current liabilities:
Checks written in excess of bank balance $ 518,076 $ 1,688,675
Trade payables (VIE $156,000 and $92,000, respectively) 6,101,567 5,861,932
Line of credit (VIE $356,000 and $408,000, respectively) 8,567,174 11,263,531
Notes payable - current portion (net discount of $0 and $113,000, respectively) (VIE $0 and $0, respectively) 7,445,091 1,709,220
Notes payable officers - current portion - 180,000
Notes payable affiliates - current portion 10,109 8,141
Capital Lease - current portion 14,283 40,660
Accrued liabilities (VIE $147,000 and $140,000, respectively) 2,934,652 3,127,425

Total current liabilities 25,590,952 23,879,584

Long-term liabilities:
Notes payable - affiliates 213,669 218,858
Notes payable, net of current portion (net discount of $0 and $0, respectively) (VIE $196,000 and $301,000, respectively) 195,722 5,301,491
Notes payable - officers, subordinated 1,490,332 1,416,138
Capital Lease - 4,690
Deferred gain (non current) 251,372 297,521

Total long-term debt, net of current portion 2,151,095 7,238,698

Warrants Payable - 817,880

Total long-term liabilities 2,151,095 8,056,578

Equity:
CTI Industries Corporation stockholders' equity:
Preferred Stock -- no par value, 3,000,000 shares authorized, 0 shares issued and outstanding -
Common stock - no par value, 15,000,000 shares authorized, 3,568,885 shares issued and 3,525,227 shares outstanding 13,898,494 13,898,494
Paid-in-capital 2,230,145 2,250,235
Accumulated earnings 1,580,967 2,323,326
Accumulated other comprehensive loss (5,100,978 ) (5,593,878 )
Less: Treasury stock, 43,658 shares (160,784 ) (160,784 )

Total CTI Industries Corporation stockholders' equity 12,447,844 12,717,393

Non controlling interest (825,461 ) (739,816 )

Total Equity 11,622,383 11,977,577

TOTAL LIABILITIES AND EQUITY $ 39,364,430 $ 43,913,739

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

Total current assets		21,568,903			27,624,716

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

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

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

Total other assets		531,389			1,165,295

TOTAL ASSETS	$	24,259,486		$	31,321,083

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

Total current liabilities		18,602,388			27,524,405

Long-term liabilities:
Notes payable - affiliates		8,622			14,340
Notes payable, net of current portion		1,688,015			1,024,441
Operating Lease Liabilities		112,649			388,064
Notes payable - officers, subordinated		1,090,639			1,058,486
Deferred gain (non current)		852			184,840
Total long-term debt, net of current portion		2,900,777			2,670,171

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

TOTAL LIABILITIES		21,503,165			30,194,576

Stockholders' Equity:
Yunhong CTI, Ltd stockholders' equity:
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		4,356,097			3,587,287
Accumulated deficit		(12,159,046	)		(9,992,841	)
Accumulated other comprehensive loss		(6,645,988	)		(5,348,812	)
Less: Treasury stock, 43,658 shares		(160,784	)		(160,784	)
Total Yunhong CTI, Ltd Stockholders' Equity		3,400,268			1,983,344
Noncontrolling interest		(643,947	)		(856,837	)
Total Stockholders' Equity		2,756,321			1,126,507
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	24,259,486		$	31,321,083

See accompanying notes to condensed consolidated unaudited financial statements

~~CTI Industries Corporation and Subsidiaries~~
Yunhong CTI, LTD (f/k/a CTI Industries Corporation)td
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016

Net Sales $ 13,225,954 $ 13,476,157 $ 41,397,288 $ 42,831,655

Cost of Sales 10,039,044 10,064,066 31,475,520 31,661,039

Gross profit 3,186,910 3,412,091 9,921,768 11,170,616

Operating expenses:
General and administrative 1,923,315 1,808,299 5,691,186 5,470,523
Selling 861,856 977,928 2,771,150 3,162,083
Advertising and marketing 454,927 581,143 1,548,709 1,643,852
Gain on sale of assets (27,426 ) (27,700 ) (119,127 ) (27,700 )
Other operating income - - (1,416 ) -

Total operating expenses 3,212,672 3,339,670 9,890,502 10,248,758

(Loss) Income from operations (25,762 ) 72,421 31,266 921,858

Other (expense) income:
Interest expense (367,391 ) (358,643 ) (1,100,038 ) (1,074,295 )
Change in fair value of warrants (3,809 ) 47,617 19,999 (179,261 )
Foreign currency loss (11,430 ) 9,663 (92,382 ) 77,341

Total other expense, net (382,630 ) (301,363 ) (1,172,421 ) (1,176,215 )

Net (loss) before taxes (408,392 ) (228,942 ) (1,141,155 ) (254,357 )

Income tax expense (125,678 ) (28,655 ) (313,151 ) (16,804 )

Net (loss) (282,714 ) (200,287 ) (828,004 ) (237,553 )

Less: Net (loss) income attributable to noncontrolling interest (8,014 ) (19,812 ) (85,645 ) 19,089

Net loss attributable to CTI Industries Corporation $ (274,700 ) $ (180,475 ) $ (742,359 ) $ (256,642 )

Other Comprehensive Income (Loss)
Foreign currency adjustment (260,469 ) (236,133 ) 492,900 (840,144 )
Comprehensive Income (Loss) $ (535,169 ) $ (416,608 ) $ (249,459 ) $ (1,096,786 )

Basic loss per common share $ (0.08 ) $ (0.05 ) $ (0.20 ) $ (0.07 )

Diluted loss per common share $ (0.08 ) $ (0.05 ) $ (0.20 ) $ (0.07 )

Weighted average number of shares and equivalent shares of common stock outstanding:
Basic 3,641,439 3,541,582 3,641,439 3,541,582

Diluted 3,641,439 3,714,239 3,789,081 3,703,732

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2020

2019

2020

2019

Net Sales
$ 5,745,353 $ 9,202,406 $ 12,812,854 $ 17,882,423

Cost of Sales
5,135,641 9,134,616 10,721,700 15,857,627

Gross profit
609,712 67,790 2,091,154 2,024,796

Operating expenses:

General and administrative
1,484,008 1,419,277 2,186,439 2,783,916
Selling
26,636 109,721 80,390 229,109
Advertising and marketing
81,165 177,903 201,994 336,737
Impairment of long-lived assets
- 258,566 - 1,511,742
Gain on sale of assets
(20,016 ) (23,662 ) (45,700 ) (47,209 )

Total operating expenses
1,571,793 1,941,805 2,423,123 4,814,295

Loss from operations
(962,081 ) (1,874,015 ) (331,969 ) (2,789,499 )

Other (expense) income:

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 income (expense), net
102,841 (617,251 ) (534,753 ) (1,484,203 )

Loss from continuing operations before taxes
(859,240 ) (2,491,266 ) (866,722 ) (4,273,702 )

Income tax expense
- - - -

Loss from continuing operations
(859,240 ) (2,491,266 ) (866,722 ) (4,273,702 )

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

Net Loss
$ (1,459,196 ) $ (1,760,580 ) $ (1,953,315 ) $ (4,317,055 )

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

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

Other Comprehensive Income (Loss)

Foreign currency adjustment
66,327 61,333 (1,297,176 ) 297,209
Comprehensive Loss
$ (1,461,182 ) $ (1,183,145 ) $ (3,463,381 ) $ (3,441,356 )

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

Net Loss attributable to Yunhong CTI Ltd Shareholders
$ (1,699,006 ) $ (1,183,145 ) $ (6,082,149 ) $ (3,441,356 )

Basic income (loss) per common share

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

Diluted income (loss) per common share

Continuing operations
$ (0.27 ) $ (0.51 ) $ (0.88 ) $ (0.96 )
Discontinued operations
(0.14 ) 0.19 (0.26 ) (0.01 )
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
4,352,292 3,835,950 4,184,521 3,835,950

Diluted
4,352,292 3,835,950 4,184,521 3,835,950

See accompanying notes to condensed consolidated unaudited financial statements

2
Yunhong CTI, LTD (f/k/a CTI Industries Corporation)
2
Condensed Consolidated Statements of Cash Flows (Unaudited)

~~CTI Industries Corporation and Subsidiaries~~
~~Condensed Consolidated Statements of Cash Flows (Unaudited)~~
For the Nine Months Ended September 30,
2017 2016

Cash flows from operating activities:
Net (loss) income $ (828,004 ) $ (237,553 )
Adjustment to reconcile net income to cash provided by operating activities:
Depreciation and amortization 1,163,736 1,153,688
Amortization of debt discount 112,622 125,689
Change in fair value of warrants (19,999 ) 179,261
Stock based compensation - 28,719
Amortization of deferred gain on sale/leaseback (84,759 ) -27700
Provision for losses on accounts receivable (20,882 ) 28,685
Provision for losses on inventories 94,518 (31,259 )
Deferred income taxes (409,621 ) (170,653 )
Change in assets and liabilities:
Accounts receivable 5,864,010 807,687
Inventories (324,813 ) (5,597,774 )
Prepaid expenses and other assets 16,362 (77,839 )
Trade payables (60,770 ) 3,461,400
Accrued liabilities (272,183 ) 102,981

Net cash provided by (used in) operating activities $ 5,230,217 $ (254,668 )

Cash flows from investing activities:
Proceeds from equipment sale-leaseback - 783,134
Cash used in investment in subsidiary - (87,500 )
Purchases of property, plant and equipment (735,567 ) (555,961 )

Net cash (used in) provided by investing activities $ (735,567 ) $ 139,673

Cash flows from financing activities:
Change in checks written in excess of bank balance (1,170,599 ) 31,560
Net change in revolving line of credit (2,758,809 ) (590,594 )
Proceeds from issuance of long-term debt - 1,180,000
Repayment of long-term debt (related parties $0 and $0) (466,638 ) (652,903 )
Proceeds from issuance of stock - 638,324
Cash paid for deferred financing fees (20,298 ) -
Contributions received by Variable Interest Entity - 288,750
Redemption of Variable Interest Entity members - (455,000 )

Net cash (used in) provided by financing activities $ (4,416,344 ) $ 440,137

Effect of exchange rate changes on cash (316,637 ) (47,666 )

Net decrease in cash and cash equivalents (238,331 ) 277,476

Cash and cash equivalents at beginning of period 563,043 346,404

Cash and cash equivalents at end of period $ 324,712 $ 623,880

Supplemental disclosure of cash flow information:
Cash payments for interest 934,057 910,414
Cash payments for taxes 300,000 -

Supplemental Disclosure of non-cash investing and financing activity
Exchange of Note Payable for Warrants $ 797,881 $ -
Property, Plant & Equipment acquisitions funded by liabilities $ 19,580 $ 35,012
Contributed Capital to Clever Container
Stock - $ 122,500
Debt - $ 43,750
Accounts Receivable - $ 183,750
~~See accompanying notes to condensed consolidated unaudited financial statements~~
3

For the Six Months Ended June 30,

2020

2019

Cash flows from operating activities:

Net loss
$ (1,953,315 ) $ (4,317,056 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization
249,551 522,670
Amortization of deferred gain on sale/leaseback
(45,700 ) (54,948 )
Gain on forgiveness of PPP Funding (800,146 ) -
Provision for losses on accounts receivable
20,457 393,938
Provision for losses on inventories
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
- 1,252,283
Stock Based Compensation
- 52,396
Loss on disposition of Asset
- 17,480
Change in assets and liabilities:

Accounts receivable
1,153,616 2,162,480
Inventories
1,681,646 (474,804 )
Prepaid expenses and other assets
37,772 530,172
Trade payables
(1,832,090 ) 1,998,495
Accrued liabilities
10,897 (593,960 )

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
(71,867 ) (72,662 )

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
- 394,227
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
5,426,600 -
Cash paid for stock issuance costs
(1,024,313 ) -
Cash paid for deferred financing fees
(43,263 ) (55,170 )
Proceeds from PPP
1,047,700 -

Net cash used in financing activities
(346,470 ) (3,726,435 )

Effect of exchange rate changes on cash
705,050 351,532

Net decrease in cash and cash equivalents
(741,430 ) (249,852 )

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

Cash and cash equivalents at end of period
$ 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.”

Supplemental disclosure of cash flow information:

Cash payments for interest
$ 778,148 $ 1,045,943
Common stock issued for accounts payable
- 303,000
Conversion of debt to Series A Preferred
478,000 -
Accrued dividend on preferred stock
150,000 -
Issuance of Placement agent warrants in connection with Series A Preferred offering
919,000 -
Issuance of Common stock to placement agent
306,000 -
Amortization of beneficial conversion feature and deemed dividend on Series A Preferred stock
2,500,000 -
Common stock issued for Notes Payable
- 600,000
~~CTI Industries Corporation and Subsidiaries~~
~~Condensed Consolidated Earnings per Share (unaudited)~~
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Basic
Average shares outstanding:
Weighted average number of common shares outstanding 3,641,439 3,541,582 3,641,439 3,541,582

Net loss:
Net loss attributable to CTI Industries Corporation $ (274,700 ) $ (180,475 ) $ (742,359 ) $ (256,642 )

Per share amount $ (0.08 ) $ (0.05 ) $ (0.20 ) $ (0.07 )

Diluted
Average shares outstanding:
Weighted average number of common shares outstanding 3,641,439 3,541,582 3,641,439 3,541,582

Effect of dilutive shares - 172,657 147,642 162,150

Weighted average number of shares and equivalent shares of common stock outstanding 3,641,439 3,714,239 3,789,081 3,703,732

Net loss:
Net loss attributable to CTI Industries Corporation $ (274,700 ) $ (180,475 ) $ (742,359 ) $ (256,642 )

Per share amount $ (0.08 ) $ (0.05 ) $ (0.20 ) $ (0.07 )

See accompanying notes to condensed consolidated unaudited financial statements

3
Yunhong CTI, Ltd (f/k/a CTI Industries Corporation)
4
Consolidated Statements of Stockholders' Equity

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

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, 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

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
See accompanying notes to condensed consolidated unaudited financial statements

4
Yunhong CTI ~~Industries Corporation~~Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation

The accompanying condensed (a) consolidated balance sheet as of ~~December 31, 2016,~~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 ~~September~~June 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2017.~~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, ~~2016.~~2019.

Principles of consolidation and nature of operations:

~~The condensed consolidated financial statements include the accounts of~~Yunhong CTI Ltd. (formerly CTI Industries ~~Corporation and its wholly-owned subsidiaries, CTI Balloons Limited and CTI Supply, Inc.~~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.), its German subsidiary (CTI Europe GmbH) and CTI ~~Europe gmbH, as well as~~Supply, Inc. (collectively, the ~~accounts of Venture Leasing S. A. de R. L., Venture Leasing L.L.C~~“Company”) (i) design, manufacture and ~~Clever Container Company, L.L.C. (the “Company”). The last three entities have been consolidated as variable interest entities. All significant intercompany transactions~~distribute metalized and ~~accounts have been eliminated in consolidation. The Company (i) designs, manufactures and distributes~~latex balloon products throughout the 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, and (iii) distributes vacuum sealing products and home organization products~~products. As discussed in Note 2 Discontinued Operations, effective in the ~~United States.~~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.
5

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. ~~There are three entities that have been consolidated as variable interest entities.~~

The Company has variable interests in VL and Clever. Through June 30, 2019, the Company had determined that it was the primary beneficiary of 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.
5

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 per share:

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

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

As of ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, shares to be issued upon the exercise of options and warrants aggregated ~~205,144~~792,660 and ~~288,048,~~471,144, respectively. The number of ~~anti-dilutive~~ shares ~~(not~~ included in the determination of earnings on a diluted ~~basis)~~basis for the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 were 281,819 and 0, respectively. The number of anti-dilutive shares (not included in the determination of earnings on a diluted basis) for the nine months ended September 30, 2017 and 2016 were 178,350 and 0, respectively.none, as doing so would have been anti-dilutive.
6

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, ~~2016.~~2019. There were no significant changes to these accounting policies during the three ~~and nine~~or six months ended ~~September~~June 30, ~~2017.~~2020.

~~Reclassification:~~On January 1, 2019, we adopted ASC Topic 842 (Leases). The adoption of this standard significantly increased 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.
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.
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. Revenue is recognized at the point in time when we transfer the promised products to the customer and the customer obtains control over the 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.
The Company provides 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.
Prior Period Reclassification

Certain ~~2016~~ amounts in prior periods have been reclassified to conform ~~to the 2017 presentation. (See footnote regarding ASU 2015-17.)~~with current period presentation and had no effect on prior period net loss or stockholders’ equity.

7
~~Recent Accounting Pronouncements:~~
Note 2 – Discontinued Operations

In ~~August 2014,~~July 2019 management and the ~~FASB issued ASU 2014-15,~~~~Presentation~~Board engaged in a review of ~~Financial Statements – Going Concern (Subtopic 205-40): Disclosure~~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 ~~Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance amended~~July 19, 2019, the ~~existing requirements for disclosing information about an entity’s ability to continue as a going concern, requires~~board authorized management to ~~assess an entity’s ability~~divest of CTI Balloons and CTI Europe. These actions are being taken to ~~continue as a going concern~~focus our resources and then to provide related disclosure in certain circumstances. This guidance is effective for annual reporting periods ending after December 2016 and for annual and interim reporting periods thereafter. See Note 2 for management’s assessment of its ability to continue as a going concern.
6
In 2014, the FASB issued guidance on revenue recognition, which provides for a single five-step model to be applied to all revenue contracts with customers. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The guidance provides an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. In 2015, the FASB issued a deferral of the effective date of the guidance to 2018, with early adoption permitted in 2017. In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes. We are currently evaluating the impact of this guidanceefforts on our ~~financial statements~~core business activities, particularly foil balloons and ancillary products based in North America. The Company determined that these entities met the ~~timing~~held-for-sale and discontinued operations accounting criteria. Accordingly, the Company has reported the results of ~~adoption,~~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 ~~not yet selected a transition approach.~~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 ~~November 2015,~~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 ~~FASB issued ASU 2015-17,~~~~Balance Sheet Classification~~Ziploc® Brand Vacuum Sealer System. The terms of ~~Deferred Taxes~~,the Agreement included a run-off provision which allowed us to ~~eliminate~~sell products under the ~~current requirements~~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.
CTI Balloons recorded losses from discontinued operations, net of taxes of ($96,000) and ($169,000) for the three and six months ended June 30, 2019.
CTI Europe recorded a gain from discontinued operations, net of taxes of $92,000 for the three months ended June 30, 2020, compared to ~~classify deferred~~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, were ($11,000) and ($158,000) for the three and six month periods ended June 30, 2019, respectively.
Our Ziploc product line recorded a loss from discontinued operations, net of taxes of ($746,000) and ($1,550,000) for the three and six months ended June 30, 2020. The net gain, net of taxes, was $842,000 and $284,000 for the three and six month periods ended June 30, 2019, respectively.
8
Summarized Discontinued Operations Financial Information
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 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

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
9
The following table summarizes the carrying amounts of major classes of assets and liabilities ~~between current and noncurrent. To simplify the presentation~~ of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public business entities, the amendments in this update are effectivediscontinued operations for ~~financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as~~each of the beginning of an interim or annual reporting period. The Company has adopted the standard and the impact to our consolidated financial statements for the period ending September 30, 2017 is a reclassification of $779,000 in deferred tax assets to noncurrent, and a reclassification of $773,000 in deferred tax assets to noncurrent for the period ending December 31, 2016.periods presented:

June 30, 2020

December 31, 2019

Balance Sheet

Assets

Current Assets

Cash on hand and Banks
$ 151,680 $ 4,307
Accounts Receivable
424,296 539,910
Inventory
- 74,383
Prepaid and Other
78,471 135,912

TOTAL Current Assets
654,447 754,512

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

Other Assets

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

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

TOTAL Assets
$ 788,388 $ 756,031

Liabilities

Current Liabilities

Trade Accounts Payable
$ 74,095 $ 384,333
Operating Lease Liabilities - Current
123,153 203,291
Other/Accrued Liabilities
18,486 19,562
TOTAL Current Liabilities
215,734 607,186

Non-Current Liabilities

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

TOTAL Liabilities
$ 306,889 $ 656,753

~~In February 2016,~~The cash flows related to discontinued operations have not been segregated and are included in the ~~FASB issued ASU 2016-02,~~~~Leases~~(~~Topic 842), aimed at making leasing activities more transparent and comparable.~~Consolidated Statements of Cash Flows. The new standard requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including today’s operating leases. For public business entities,following table summarizes depreciation from discontinued operations for each of the ~~standard is effective for fiscal years beginning after December 15, 2018, including interim~~ periods within those fiscal years. Early application is permitted. When the standard becomes effective, we expect that our property, plant and equipment will increase significantly due to the addition of assets under lease and the lease liabilities will correspondingly increase. There is not expected to be a significant impact on the income statement.presented:

Six Months Ended

June 30,

2020

2019

Depreciation
213,491 178,997
7
10

~~On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15,~~~~Statement of Cash Flows (Topic 230)~~, a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2018. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s consolidated financial statements.
Note 23 – 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 ~~BMO Harris. The Company has historically used availability under this revolving~~PNC Bank, National Association (“PNC”) (the “Credit Agreement”) (see Note 4). As indicated in Note 4, twice during 2018 we violated covenants in our credit facility ~~to fund operations.~~
~~For~~and during March 2019 we entered into a forbearance agreement with PNC. Under the ~~nine months ended September~~terms of this agreement, financial covenants as of March 31, 2019 were not considered and all previously identified compliance failures were waived, but we remained out of compliance with the terms of our credit facility, as amended, including the covenants as of June 30, ~~2017,~~2019 calculated on or about July 31, 2019. On August 1, 2019, PNC issued a Default and Reservation of Rights letter to the Company, ~~generated~~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, 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, 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 ~~cash from operating activities~~proceeds of the Offering first to the Term Loans (as defined in the ~~amount of $5,230,000, although~~Loan Agreement), and agreed that the Company ~~did incur a loss for~~shall instead apply the ~~quarter ended September 30, 2017 of $275,000 and for the nine months ended September 30, 2017 of $742,000.~~
~~Assuming a continuation~~net proceeds of the ~~revolving credit~~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 PNC under the ~~Credit~~Loan Agreement ~~the Company has forecast~~for a ~~profit for the fourth quarter of the year, which is expected to generate sufficient cash flow for the Company to meet its current obligations.~~
As of September 30, 2017, the Company was in compliance with all of the financial covenants under the Credit Agreement with Harris Bank and the Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“BMO Private Equity”).
As of September 30, 2017, the Company had total borrowings outstanding under the Credit Agreement with BMO Harris of $9,852,000, including $8,211,000 on the revolving credit loan and $1,641,000 on the mortgage facility. In addition, the balance of the indebtedness of the Company to BMO Private Equity as of September 30, 2017 was approximately $5,965,000.period ending no later than December 31, 2020.

The ~~obligations~~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 Company’s standalone US business would have complied with the Credit Agreement’s requirement that the Company maintain a 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 ~~BMO Harris were to mature on~~the aforementioned events of default. On July 17, ~~2017. The obligations~~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 ~~Note~~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 Board authorized the Company to seek such funding and ~~Warrant~~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.
11
During 2019, we attempted to execute a major capital event with a partner that would infuse money, among other attributes. That effort was unsuccessful as envisioned. We were subsequently successful in obtaining new financing during 2020. On January 3, 2020 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, ~~among the Company and BMO Equity are~~we were authorized to ~~mature on January 18, 2018.~~
~~By Amendment~~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 30, 2020, including to an investor which converted an accounts receivable of $478,000 owed to the ~~Credit Agreement dated July 18, 2017, BMO Harris agreed to extend~~investor by the ~~maturity date of the agreement to October 18, 2017. BMO Equity consented to this extension~~Company in exchange for 48,200 shares of Series A Preferred. There were several closings with the LF International from January 2020 through June 2020. The majority of the funds received reduced our bank debt. We issued a ~~fee~~total of 400,000 shares of common stock to LF International and, ~~for~~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 ~~exercise at any~~name three directors to serve on our Board. They are Mr. Yubao Li, our Chairman of the Board, Ms. Wan Zhang and Ms. Yaping Zhang.
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, we believe that the result raises substantial doubt about our ability to continue as a going concern one year from the date these financial statements are issued.
Additionally, 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 our suppliers may be closed for sustained periods of time ~~its put~~and industry-wide shipment of ~~warrants issued to it under~~products may be negatively impacted, the ~~Note and Warrant Purchase Agreement. The extension provides retention~~severity of which may exceed the $1 million in Payroll Protection Program funds received by the Company ~~of a consultant~~from the US Federal Government. COVID-19 has also delayed certain strategic transactions the Company intended to ~~advise as to planning, forecasting, cost management and financing.~~
~~On August 17, 2017, BMO Equity exercised its put~~close on in the ~~warrants~~near future and the Company ~~issued~~does not know if and when such transactions will be completed.
12
Finally, claims have been filed in court by certain vendors regarding claims of non-payment pursuant to ~~BMO Equity a Warrant Conversion Note~~contractual obligations. While many have been resolved, the sum of the outstanding claims made or threatened exceeds $0.5 million in the ~~amount~~aggregate. The cost of ~~$797,881 for~~defense and potential ultimate resolution increases the ~~purchase of the warrants. The principal balance of the Warrant Conversion Note, plus accrued and unpaid interest thereon, is payable~~strain on ~~January 18, 2018. The principal balance of the Warrant Conversion Note accrues interest at the rate of 11.5% per annum compounded daily.~~
On October 17, 2017, the Company and BMO Harris entered into Amendment No. 11 to the Credit Agreement in which (i) the Company acknowledged its indebtedness to the Bank for a Mortgage Loan balance in the amount of $1,664,456 and for a balance of $8,211,467 with respect to the Revolving Loans, (ii) the maturity date on the Mortgage Loan and the Revolving Credit were extended to November 30, 2017, and (iii) the Bank provided a temporary over advance line of $1,000,000 for the period from October 17, 2017 through November 30, 2017. Amendment No. 11 included certain additional covenants including that, on or before October 20, 2017, the Company would deliver to the Bank an executed letter of intent from a third-partyour financial institution providing for refinancing and payment of the Company’s debt obligations to the Bank. Also, on October 17, 2017, the Registrant entered into Amendment No. 6 to the Note and Warrant Agreement among Registrant and BMO Private Equity (U.S.) Inc. (BMO Private Equity). In the Amendment, (i) the Company acknowledged its indebtedness to BMO Private Equity for a subordinated note in the principal amount of $5,000,000 and, for a note issued in connection with the conversion by BMO Private Equity of warrants, in the amount of $815,139, (ii) BMO Private Equity agreed to defer payment of interest due on October 2, 2017 in the amount of $150,139 to December 1, 2017. Amendment No. 6 includes covenants similar to that of Amendment No. 11 with the Bank.
8
On October 19, 2017, the Company delivered to the Bank and to BMO Equity an executed non-binding Preliminary Memorandum of Terms and Conditions (“Preliminary Term Sheet”) from a financing institution providing for an aggregate of up to $24,000,000 in senior secured financing to (i) refinance existing senior bank and mezzanine debt, (ii) fund certain capital expenditures and (iii) provide for ongoing working capital needs of Registrant. The Preliminary Term Sheet is non-binding and is subject to diligence and to the execution of a definitive agreement.resources.

Management’s ~~Plans.~~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)
Exploring alternative funding sources.

Management ~~is engaged in efforts~~Assessment
Considering both quantitative and qualitative information, we believe that our plans to obtain ~~re-financing of its obligations~~additional financing may provide us with an ability to ~~BMO Harris~~finance our operations through 2020 and, ~~BMO Private Equity, is in accordance with~~if successfully executed, may mitigate the Preliminary Term Sheet and is engaged in a diligence and loan documentation process. While no assurance can be given that the re-financing will be completed, management has a reasonable expectation that both the re-financing will be completed and that the Company willsubstantial doubt about our ability to continue as a going concern.

~~Management is also engaged in efforts to implement cost and operational improvements and to fulfill strong order flow in order to achieve profitable operations for the fourth quarter.~~
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.
13
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.
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 PNC and the Company became effective, pursuant to which 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 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.
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:
o
Borrow money;
o
Pay dividends and make distributions;
o
Make certain investments;
o
Use assets as security in other transactions;
o
Create liens;
o
Enter into affiliate transactions;
o
Merge or consolidate; or
o
Transfer and sell assets.
●
Financial Covenants: The Credit Agreement includes a series of financial covenants we are required to meet including:
o
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.
14
o
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
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, Mr. Schwan was owed a total of $1,099,000, with additional accrued interest of $400,000, by the Company. As part of the December 2017 financing with PNC, Mr. Schwan executed a subordination agreement related to these amounts due him, as evidenced by a related note representing the amount owed to Mr. Schwan. 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 six months ended June 30, 2020, with $32,000 and $30,000, respectively, of interest recorded as an expense during the first 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 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. 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 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.

15
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 ~~2017~~2020 and ~~2016.~~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 ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 includes approximately ~~$2,000~~none and ~~$5,000,~~$29,000, respectively, of compensation costs related to share based payments. The Company’s net loss for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 includes approximately ~~$12,000~~none and $29,000, respectively, of compensation costs related to share based payments. As of ~~September~~June 30, ~~2017,~~2020, there ~~is $13,000 of~~was no unrecognized compensation expense related to non-vested stock option grants and stock grants. We expect approximately $2,000 of additional stock-based compensation expense to be recognized over the remainder of 2017, $7,000 to be recognized during 2018, $3,000 to be recognized during 2019 and $1,000 to be recognized during 2020.
As of September 30, 2017, the Company had three stock-based compensation plans pursuant to which stock options were, or may be, granted. The Plans provide for the award of options, which may either be incentive stock options (“ISOs”) within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended (the “Code”) or non-qualified options (“NQOs”) which are not subject to special tax treatment under the Code, as well as for stock grants.
9

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 ~~authorizes~~and subsequent awards categorized as inducement of employment authorized the issuance of up to ~~250,000~~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 ~~September~~June 30, ~~2017,~~2020, options for ~~250,000 shares had been granted and options for 143,094~~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 Weighted
Average
Remaining
Contractual Life Aggregate
Intrinsic
Value
Balance at December 31, 2016 143,094 $ 5.22 2.9 $ 89,494
Granted - - - -
Cancelled/Expired 14,625 5.14 - -
Exercised - - - -
Outstanding at September 30, 2017 128,469 $ 5.23 1.3 $ 0

Exercisable at September 30, 2017 100,788 $ 5.21 0.8 $ 0
On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Private Equity (U.S.), Inc. (“BMO Equity”) pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. The term of the loan provided for in this Agreement is five and a half years. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. As of September 30, 2017, the Company was in compliance with all of the financial covenants under the Note and Warrant Purchase Agreement.
On July 29, 2016, the Company and certain accredited investors entered into a Securities Purchase Agreement wherein the investors purchased 152,850 shares of common stock of the Company at a price of $6.00 per share. As additional consideration for the purchases of the shares in the offering, each investor received, with each share of common stock purchased, one-half of a warrant, with one warrant entitling the investor to purchase one share of the Company’s common stock at the price of $7.00. The warrants are exercisable between six months and three years from the investment date. As a result of the completion of the sale under the Purchase Agreement, warrants to purchase 76,675 shares of common stock at $7.00 per share were issued.
In addition to the Purchase Agreement, the Company and each of the investors entered into a Registration Rights Agreement pursuant to which the Company agreed to file a Registration Statement with the SEC to register the common stock sold to the investors.
10

Shares under
Option

Weighted
Average
Exercise
Price

Balance at December 31, 2019
471,144 $ 3.95
Granted
792,660 1.00
Cancelled/Expired
(436,519 ) 3.95
Exercised/Issued
(15,000 ) 5.48
Outstanding at June 30, 2020
812,285 1.21

Exercisable at June 30, 2020
19,625 $ 5.49

~~A summary of the Company’s stock warrant activity and related information is as follows:~~
Shares
under
Warrant Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life Aggregate
Intrinsic
Value
Balance at December 31, 2016 216,723 $ 2.48 4.49 $ 817,880
Granted - - - -
Cancelled - - - -
Exercised 140,048 0.01 - $ 642,820
Outstanding at September 30, 2017 76,675 $ 7.00 1.8 $ -

Exercisable at September 30, 2017 76,675 $ 7.00 1.8 $ -
~~A summary of the Company’s stock option activity by grant date as of September 30, 2017 is as follows:~~
Options Outstanding Options Vested
Options by
Grant Date Shares Weighted
Avg. Remain.
Life Intrinsic
Val Shares Weighted
Avg. Remain.
Life Intrinsic Val
Dec 2005 - - - - - - - -
Dec 2010 - - - - - - - -
Jan 2011 - - - - - - - -
Nov 2012 79,000 $ 5.17 0.2 $ 0 79,000 $ 5.17 0.2 $ 0
Nov 2013 5,000 $ 5.75 1.1 $ 0 4,000 $ 5.75 1.1 $ 0
Dec 2015 44,469 $ 5.29 3.3 $ 0 17,788 $ 5.27 3.3 $ 0
TOTAL 128,469 $ 5.23 1.3 $ 0 100,788 $ 5.21 0.8 $ 0

The ~~aggregate intrinsic value in the tables~~instruments above ~~represents the total pre-tax~~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 ~~September~~June 30, ~~2017~~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 ~~September~~June 30, ~~2017.~~2020.
16
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 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 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 LF International 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 LF International 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 LF International the right to appoint and elect a third member to the Board and ii) agreed to issue to LF International 260,000 shares of common stock.
17
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.
Note 46 - Legal Proceedings

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

During 2019 and 2020, claims have been filed against us claiming failure to pay contractually obligated amounts. Approximately $0.5 million in aggregate claims are outstanding as of June 30, 2020. These claims are being disputed, the ultimate outcome of which is unknown.
Note 57 - Other Comprehensive Income

In the ~~three and nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Company incurred other comprehensive loss ~~and income~~ of approximately ~~($260,000) and $493,000, respectively, all~~$1,297,000 from foreign currency translation adjustments. The main contributing factor was a sudden 22% decline in the valuation of the Mexican peso related to the COVID-19 pandemic discussed above and resulting large-scale, rapid impacts to the world economy.

The following table sets forth the accumulated balance of other comprehensive income and each component.

11

Foreign Currency Items

Total
Accumulated Other
Comprehensive Income

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

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

Ending Balance as of June 30, 2020
$ (6,645,988 ) $ (6,645,988 )
18

Foreign Currency Items Total
Accumulated Other
Comprehensive Income

Beginning balance as of January 1, 2017 $ (5,593,878 ) $ (5,593,878 )

Current period change, net of tax 492,900 492,900

Ending Balance as of September 30, 2017 (5,100,978 ) (5,100,978 )
~~Note 6~~-~~Inventories, Net~~

September 30,
2017
December 31,
2016
Raw materials $ 3,485,026 $ 3,310,310
Work in process 2,873,071 1,942,600
Finished goods 13,881,057 13,889,328
Allowance for excess quantities (891,046 ) (794,227 )
Total inventories $ 19,348,108 $ 18,348,011
Note 78 - Geographic Segment Data

The Company has determined that it operates primarily in one business segment that designs, manufactures, and distributes film and film related products for use in packaging, storage, and novelty balloon products. The Company operates in foreign and domestic regions. Information about the Company's continuing operations by geographic area is as follows:

Net Sales to Outside Customers

For the Six Months Ended

June 30,

2020

2019

United States
$ 9,969,000 $ 13,779,000
Mexico
2,844,000 4,103,000

$ 12,813,000 $ 17,882,000
12

Net Sales to Outside Customers

For the Three Months Ended

June 30,

2020

2019

United States
$ 4,543,000 $ 7,180,000
Mexico
1,202,000 2,022,000

$ 5,745,000 $ 9,202,000

Total Assets at

June 30, December 31,

2020

2019

United States
$ 15,163,000 $ 19,668,000
Mexico
8,308,000 10,897,000
Assets Held for Sale International Subsidiaries
788,000 756,000

$ 24,259,000 $ 31,321,000
19
Note 9 - Inventories, Net of Continuing Operations

June 30, 2020

December 31, 2019

Raw materials
$ 1,175,412 $ 1,544,949
Work in process
3,017,870 3,110,296
Finished goods
7,434,520 9,766,060
In Transit
95,991 99,923
Allowance for excess quantities
(696,429 ) (561,729 )
Total inventories
$ 11,027,364 $ 13,959,499

Net Sales to Outside Customers Net Sales to Outside Customers
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2017 2016 2017 2016

United States $ 9,039,000 $ 10,392,000 $ 30,165,000 $ 33,527,000
Europe 1,261,000 761,000 3,125,000 1,927,000
Mexico 2,627,000 1,723,000 6,605,000 5,438,000
United Kingdom 299,000 600,000 1,502,000 1,940,000

$ 13,226,000 $ 13,476,000 $ 41,397,000 $ 42,832,000
Total Assets at
September 30, December 31,
2017 2016

United States $ 27,689,000 $ 33,108,000
Europe 3,176,000 2,418,000
Mexico 9,020,000 7,064,000
United Kingdom 847,000 1,324,000

$ 40,732,000 $ 43,914,000
Note 810 - Concentration of Credit Risk

Concentration of credit risk with respect to trade accounts receivable is generally limited due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations and provides an allowance for potential credit losses against the portion of accounts receivable which is estimated to be uncollectible. Such losses have historically been within management's expectations. During the ~~three and nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, there ~~were two customers~~was one customer whose purchases represented more than 10% of the Company’s consolidated net ~~sales, respectively.~~sales. Sales to these customers for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 are as follows:

Three Months Ended Three Months Ended
Three Months Ended

Three Months Ended

September 30, 2017 September 30, 2016
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 $ 3,195,000 24.2 % $ 3,088,000 22.9 % $ 2,508,000 43 % $ 2,769,000 30 %
Customer B $ 2,283,000 17.3 % $ 3,070,000 22.8 %

13

Six Months Ended

Six Months Ended

June 30, 2020

June 30, 2019

Customer

Net Sales

% of Net
Sales

Net Sales

% of Net
Sales

Customer A
$ 5,675,000 44 % $ 6,630,000 37 %

Nine Months Ended Nine Months Ended
September 30, 2017 September 30, 2016
Customer Net Sales % of Net
Sales Net Sales % of Net
Sales
Customer A $ 11,489,000 27.8 % $ 11,859,000 27.7 %
Customer B $ 6,457,000 15.6 % $ 7,870,000 18.4 %

As of ~~September~~June 30, ~~2017,~~2020, the total amounts owed to the Company by ~~these customers~~this customer were approximately ~~$1,491,000~~$1,757,000 or ~~19.6%, and $1,631,000 or 21.5%,~~25% of the Company’s consolidated net accounts ~~receivable, respectively.~~receivable. The amounts owed at ~~September~~June 30, ~~2016~~2019 by ~~these customers were~~this customer was approximately ~~$1,411,000~~$1,044,000 or ~~13.9%, and $2,653,000 or 26.1%~~15% of the Company’s consolidated net accounts ~~receivable, respectively.~~receivable.

Note 9 11- Related Party Transactions
Stephen M. Merrick, President of the Company, is of counsel to the law firm of Vanasco Genelly and Miller PC which provides legal services to the Company. Legal fees paid by the Company to this firm for the three months ended September 30, 2017 and 2016, respectively, were $29,000 and $57,000. Legal fees paid by the Company to this firm for the nine months ended September 30, 2017 and 2016, respectively, were $93,000 and $128,000.
Interest payments have been made or accrued to John H. Schwan, Chief Executive Officer of the Company, for loans made to the Company. During the three months ended September 30, 2017 and 2016, these interest accruals totaled $24,000 and $23,000, respectively. During the nine months ended September 30, 2017 and 2016, these interest accruals totaled $59,000 and $69,000, respectively.

John H. Schwan, ~~Chief Executive Officer~~who resigned as Chairman of the ~~Company, through an investment entity, and Stephen M. Merrick, President~~Board on June 1, 2020, is the brother of Gary Schwan, one of the owners of Schwan Incorporated, which provides building maintenance services to the Company. The Company ~~also through an investment entity own, in aggregate, a 50% interest in Clever Container Company L.L.C., an Illinois limited liability company (“Clever Container”).~~ made payments to Schwan Incorporated of approximately $2,700 and $8,000 during the six months ended June 30, 2020 and 2019, respectively.
20
During the ~~three months ended September 30, 2017 and 2016, Clever Container purchased various products~~period from January 2003 to the Company in the amount of $262,000 and $191,000, respectively. During the nine months ended September 30, 2017 and 2016, Clever Container purchased various products from the Company in the amount of $716,000 and $669,000, respectively. As of September 30, 2017 and 2016, the balance of accounts receivable from Clever Containerpresent, John H. Schwan has made loans to the Company ~~were $924,000~~which have outstanding balances, for the Company of $1.6 million as of December 31, 2018. During January 2019 he converted $0.6 million to equity at the then market price of our stock. Including accrued interest, his balance was $1.1 million as of June 30, 2020. During the first six months of 2020 and ~~$192,000,~~2019, interest expense on these outstanding loans was $15,000 and $16,000, respectively. ~~The Company owns a 28.5% interest in Clever Container.~~

Items identified as Notes Payable Affiliates in the Company's Consolidated Balance Sheet as of June 30, 2020 and 2019 include loans by shareholders to Flexo Universal totaling $9,000 and $14,000, respectively.
On July 1, 2019, the Company deconsolidated Clever which resulted in a note receivable at that time of $1.387 million. During the six months ended June 30, 2020 the company recorded a reserve of $350,000. One of owners of Clever is Mr. Schwan, above.
Note 10 12-Derivative Instruments; Fair Value

The ~~following tables represents information about~~Company accounts for derivative instruments in accordance with U.S. GAAP, which requires that all derivative instruments be recognized on the ~~Company’s assets and liabilities measured~~balance sheet at fair value. We may enter into interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to reduce the potential volatility in our interest expense that would otherwise result from changes in market interest rates. Our derivative instruments are recorded at fair value and are included in accrued liabilities of our consolidated balance sheet. Our accounting policies for these instruments are based on whether they meet our criteria for designation as hedging transactions, which include the instrument’s effectiveness, risk reduction and, in most cases, a ~~recurring basis as of September 30, 2017 and December 31, 2016, and indicate the fair value hierarchy~~one-to-one matching of the ~~valuation techniques utilized by the Company~~derivative instrument to ~~determine~~our underlying transaction. As of June 30, 2020, we had no such ~~fair value:~~instrument.
Note 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.
14
21
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 June 30, 2020
Assets

As of
June 30, 2020

Operating lease right-of-use assets
$ 1,417,000
Accumulated amortization
(962,000)
Net lease assets
455,000

Liabilities

Current

Operating
343,000
Noncurrent

Operating
112,000
Total lease liabilities
455,000

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

Weighted average discount rate – operating leases
11.25%
During the six months ended June 30, 2020, we recorded expenses related to
Operating right-of-use lease asset amortization
$ 416,000

Total expense during six months ended June 30, 2020
416,000
Operating lease expenses were approximately $416,000 for the six months ended 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 $416,000 for the six months ended June 30, 2020.
22
The following table summarizes the maturities of our lease liabilities for all operating leases as of June 30, 2020:

(in thousands)

2020
$ 234
2021
364
2022 and thereafter
49
Total lease payments
647
less: Imputed interest
(192 )
Present value of lease liabilities
$ 455

~~Amount as of~~
~~Description~~ ~~9/30/2017~~ ~~Level 1~~ ~~Level 2~~ ~~Level 3~~
~~Warrant Liability~~ $ - - $ - -
$ - - $ - -
Amount as of
Description 12/31/2016 Level 1 Level 2 Level 3

Warrant Liability $ 818,000 - $ 818,000 -

$ 818,000 $ 818,000
Note ~~11 –~~14 - Subsequent Events

On ~~November 9, 2017,~~July 17, 2020, PNC provided the Company ~~and S.C. Johnson & Son Inc. entered into~~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 ~~Fourth Amendment~~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 ~~Trademark License Agreement among them dated December, 2011, extending~~Company. On July 22, 2020, the ~~term~~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 2020, warrants were issued in conjunction with the equity financing as described herein and the rebranding of the ~~Trademark License Agreement~~Company. The majority of these warrants were exercised during July 2020. During July 2020, Tradigital Marketing Group exercised 250,000 warrants in exchange for 171,000 shares of the 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 Company’s common stock. During August 2020, an investor (Tobin) in the 2020 convertible preferred equity program exercised all 27,660 shares of convertible preferred stock into 276,600 shares of common stock. An additional 11,000 shares of common stock were issued to ~~December 31, 2019.~~
the same investor representing the 8% interest on the convertible preferred shares.

15
23

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

Forward Looking Statements

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.

Overview

We produce film products for novelty, packaging and container applications. These products include foil balloons, latex balloons and related ~~latex toy~~ 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 which~~Candy Blossoms and party goods.
As of January 1, 2018, we ~~purchase~~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 ~~supplier~~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.
24
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 ~~market~~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 ~~sell home organizing~~are accounted for as described herein. Sales taxes assessed by governmental authorities are accounted for on a net basis and ~~container products.~~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.
Summary of Subsequent Events
As previously disclosed on a Current Report on Form 8-K of Yunhong CTI Ltd., on December 14, 2017, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan Agreement”) with PNC Bank, National Association (“Lender”).
Prior to January 13, 2020, certain events of default under the Loan Agreement had occurred (the "Prior Defaults"). On January 13, 2020, a Limited Waiver, Consent, Amendment No. 5 and Forbearance Agreement (the “Forbearance Agreement”) 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 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.
25
The Lender has continued to make advances to the Company (“Discretionary Advances”), although it is not required to do so under the terms of the Loan Agreement due to the Events of 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, to ensure that the Company met the Lender’s equity funding commitment deadline, Mr. Yubao Li, the Company’s Chairman, 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 the rebranding of the Company. The majority of these warrants were exercised during July 2020. During July 2020, Tradigital Marketing Group exercised 250,000 warrants in exchange for 171,000 shares of the 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 Company’s common stock. During August 2020, an investor (Tobin) in the 2020 convertible preferred equity program exercised all 27,660 shares of convertible preferred stock into 276,600 shares of common stock. An additional 11,000 shares of common stock were issued to the same investor representing the 8% interest on the convertible preferred shares.
Comparability
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 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.

Results of Operations

Net Sales. For the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017,~~2020, net sales were ~~$13,226,000~~$5,745,000 and $12,813,000, compared to net sales of ~~$13,476,000~~$9,202,000 and $17,882,000 for the same ~~period~~periods of ~~2016, a decrease of 1.9%.~~ 2019, respectively.
For the ~~quarters~~three month period ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, net sales by product category were as follows:

16

Three Months Ended

June 30, 2020

June 30, 2019

$

% of

$

% of

Product Category

(000) Omitted

Net Sales

(000) Omitted

Net Sales

Metalized Balloons
3,372 59 % 2,857 31 %

Latex Balloons
1,115 20 % 2,231 24 %

Film Products
371 6 % 478 5 %

Other
887 15 % 3,636 40 %

Total
5,745 100 % 9,202 100 %

26
Three Months Ended
September 30, 2017 September 30, 2016
$ % of $ % of
Product Category (000) Omitted Net Sales (000) Omitted Net Sales

Foil Balloons 5,767 44 % 6,178 46 %

Latex Balloons 2,620 20 % 1,875 14 %

Vacuum Sealing Products 2,397 18 % 2,594 19 %

Film Products 658 5 % 1,137 8 %

Other Sales 1,784 13 % 1,692 13 %

Total 13,226 100 % 13,476 100 %

For the ~~nine months~~six month period ended ~~September~~June 30, ~~2017, net sales were $41,397,000 compared to net sales of $42,382,000 for the same period of 2016, a decrease of 3.4%. For the nine months ended September 30, 2017~~2020 and ~~2016,~~2019 net sales by product category were as follows:

Nine Months Ended
Six Months Ended

September 30, 2017 September 30, 2016
June 30, 2020

June 30, 2019

$ % of $ % of
$

% of

$

% of

Product Category (000) Omitted Net Sales (000) Omitted Net Sales
(000) Omitted

Net Sales

(000) Omitted

Net Sales

Foil Balloons 21,447 52 % 20,540 48 %
Metalized Balloons
7,864 61 % 8,411 47 %

Latex Balloons 6,969 17 % 6,182 14 % 2,698 21 % 3,970 22 %

Vacuum Sealing Products 5,668 14 % 7,362 17 %

Film Products 2,194 5 % 3,508 8 % 586 5 % 1,239 7 %

Other Sales 5,119 12 % 5,240 13 %
Other
1,665 13 % 4,262 24 %

Total 41,397 100 % 42,832 100 % 12,813 100 % 17,882 100 %

Foil Balloons. ~~During~~Revenues from the sale of foil balloons increased during the three months ~~ended September~~period from $2,857,000 ending June 30, ~~2017, revenues~~2019 compared to $3,372,000 during the three month period of 2020. Revenues from the sale of foil balloons decreased ~~by 6.6%~~during the six month period from $8,411,000 ending June 30, 2019 compared to $7,864,000 during the prior year period from $6,178,000 to $5,767,000. For the nine months ended September 30, 2017, revenues from the sale of foil balloons increased by 4.4% compared to the prior year period, from $20,540,000 to $21,447,000. In that period, foil balloon sales to our largest customer decreased to $11,489,000 from $9,958,000 in the first three quarters of 2016. However, during that ninesix 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 ~~of foil~~period. Anticipated delays by customers caused shipments to be lower during April and May. As balloons were 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 ~~other customers increased~~close for extended periods during shelter-in-place restrictions that began March 2020 and began to $10,818,000 from $8,715,000 for the same period last year. These increased sales represent certain new customers but principally increases in sales to significant existing customers in each of the United States, Mexico, the United Kingdomreopen during May and ~~Europe.~~June 2020.

Latex Balloons. ~~During the three months ended September 30, 2017, revenues~~Revenues from the sale of latex balloons ~~increased by 39.8%~~were $1,115,000 and $2,698,000 during the three and six month periods ended June 30, 2020, compared to the prior year period, from $1,875,000 to $2,620,000. During the nine months ended September 30, 2017, revenues from the sale of latex balloons increased by 12.7% compared to the prior year period from $6,182,000 to $6,969,000. Substantially all of the increases in sales of latex balloons$2,231,000 and $3,970,000 during the ~~third quarter and the nine month period have been sales by Flexo Universal to existing and new customers principally in Mexico. These include sales to several major chains and to distributors.~~
17
~~Vacuum Sealing Products. During the three months ended September 30, 2017, revenues from the sale~~same periods of pouches and vacuum sealing machines decreased by 7.6% compared to the prior year, from $2,594,000 to $2,397,000. During the nine months ended September 30, 2017, revenues from the sale of pouches and vacuum sealing machines decreased by 23.0% compared to the prior year from $7,362,000 to $5,668,000. We believe that sales2019. Latex balloons encountered a similar COVID-19 constraint, as production activities were ~~affected during both the first and second quarters~~severely limited by the selloff of excess inventory of vacuum sealing machines held by a principal customer due to a sales promotion the customer implemented during the fourth quarter of 2016 for which a large quantity of machines were purchased.Mexican government.

Films. ~~During the three months ended September 30, 2017, revenues~~Revenues from the sale of ~~laminated film products decreased by 42.2%~~commercial films were $371,000 and $586,000 during the three and six month periods ended June 30, 2020, compared to $478,000 and $1,239,000 during the ~~prior year period from $1,137,000~~same periods of 2019. Our main customer had restructured their program in the first quarter both related to ~~$658,000. During~~COVID-19 disruption and also the ~~nine months ended September 30, 2017, revenues from the sale~~integration of ~~laminated film products decreased by 37.4% compared to the prior year period from $3,508,000 to $2,194,000. Virtually all of the sales of this product line were to~~ a single long-term customer. Sales to the customer have declined due to the elimination of one product previously purchased. However, we continue to maintain a long term relationship with the customer with respect to other products.merger partner.
27

Other Revenues. ~~During the three months ended September 30, 2017, revenues~~Revenues from the sale of ~~various~~ other products ~~increased by 5.4% to $1,784,000~~were $887,000 and $1,665,000 during the three and six month periods ended June 30, 2020, compared to ~~revenues from other products in~~$3,636,000 and $4,262,000 during the same ~~period in 2016~~periods of $1,692,000. During the nine months ended September 30, 2017, revenues from the sale of various other products decreased by 2.3% to $5,119,000 compared to revenues from other products in the same period in 2016 of $5,240,000.2019. The revenues from the sale of other products during ~~2017~~the first six months of 2020 include (i) sales of a line of “Candy Blossoms” and ~~“Candy Loons”~~similar products consisting of candy and small inflated balloons sold in small containers and (ii) the sale of accessories and supply items related to balloon products, (iii) sales by Clever Container Company, L.L.C. which engages in the direct sale of container and organizing products through a network of independent distributors and (iv) sales of party goods in Mexico by Flexo Universal.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 June 30, 2020 and ~~nine months ended September 30, 2017 and 2016.~~2019.

Three Months Ended September 30, Nine Months Ended September 30,
Three Months Ended June 30,

% of Sales % of Sales
% of Sales

2017 2016 2017 2016
2020

2019

Top 3 Customers 47.5 % 53.9 % 48.5 % 54.0 % 69 % 63 %

Top 10 Customers 66.1 % 70.0 % 65.4 % 68.3 % 83 % 81 %

18

Six Months Ended June 30,

% of Sales

2020

2019

Top 3 Customers
68 % 60 %

Top 10 Customers
81 % 78 %

During the ~~three and nine months~~six month period ended ~~September~~June 30, ~~2017,~~2020, there ~~were two customers~~was one customer whose purchases represented more than 10% of the Company’s consolidated net sales. Sales to ~~these customers~~this customer for the ~~three months~~six month period ended ~~September~~June 30, ~~2017 were $3,195,000~~2020 was $5,675,000, or ~~24.2%, and $2,283,000 or 17.3%,~~44% of consolidated net ~~sales, respectively.~~sales. Sales to ~~these customers~~this customer for the ~~three~~six months ended ~~September~~June 30, ~~2016 were $3,088,000~~2019 was $6,630,000, or ~~22.9%, and $3,070,000 or 22.8%,~~37% of consolidated net ~~sales, respectively. Sales~~sales. As of June 30, 2020, the total amount owed to ~~these customers for~~ the ~~nine months ended September 30, 2017 were $11,489,000~~Company by this customer was approximately $1,757,000, or 27.8%, and $6,457,000 or 15.6%, of consolidated net sales, respectively. Sales to these customers for the nine months ended September 30, 2016 were $11,859,000 or 27.7%, and $7,870,000 or 18.4%, of consolidated net sales, respectively. The amounts owed at September 30, 2017 by these customers were $1,491,000 or 19.6%, and $1,631,000 or 21.5%,25% of the Company’s consolidated net accounts ~~receivable, respectively. As of September~~receivable. The amount owed at June 30, ~~2016, the total amounts owed to the Company~~2019 by ~~these customers were $1,411,000~~this customer was approximately $1,044,000, or ~~15.7%, and $2,653,000 or 29.4%~~15% of the Company’s consolidated net accounts ~~receivable, respectively.~~receivable.

Cost of Sales. During the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017,~~2020, the cost of sales ~~represented 75.9% of net sales~~was $5,136,000 and $10,722,000, compared to ~~74.7%~~$9,135,000 and $15,858,000, respectively, for the ~~three months ended September 30, 2016. During the nine months ended September 30, 2017, the~~same periods of 2019. The reduction in cost of sales ~~represented 76.0%~~was largely due to the termination of ~~net sales compared to 73.9% for~~ the ~~nine months ended September 30, 2016. The decline in gross margin both~~vacuum sealing product line, reduced presence in the ~~third quarter~~form of discontinued subsidiaries, and ~~for the nine month period is attributable principally~~a temporary reduction in orders related to changes in the mix of products sold. Gross margin rates on latex balloon products are lower than certain of our other products so the increase in latex product sales in these periods have affected overall gross margins. Vacuum sealing products generally carry higher gross margins so the decline in sales of that line has tended to reduce the overall gross margin rate. We did not experience significant changes in the cost of raw materials or direct labor during the period.COVID-19.
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General and Administrative. During the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017,~~2020, general and administrative expenses were ~~$1,923,000 or 14.5% of net sales,~~$1,484,000 and $2,186,000 as compared to ~~$1,808,000 or 13.4% of net sales~~$1,419,000 and $2,784,000 respectively, for the same ~~period~~periods in 2016. During the nine months ended September 30, 2017, general and administrative expenses were $5,691,000 or 13.7% of net sales, compared to $5,471,000 or 12.8% of net sales for the same period in 2016. Some elements of general and administrative costs have declined during the third quarter and the nine month period ended September 30, 2017. These include items incorporated in our cost reduction program, in particular salaries (reduced by over $200,000 over the nine months.) However, we incurred additional costs related to our financing, including consulting fees of $184,000 for the third quarter and $316,000 for the nine months ended September 30, 2017 and legal fees of $54,000 for the third quarter and $138,000 for the nine month period.
We have initiated a program in which we expect to achieve overall reductions in general and administrative, selling, marketing and related expenses at the rate of at least $2.4 million on an annualized basis. Some of these expense reductions are reflected in the third quarter and will be reflected in the fourth quarter and throughout 2018.2019.

Selling. During the three months ended September 30, 2017, selling expenses were $862,000 or 6.5% of net sales, compared to $978,000 or 7.3% of net sales for the same period in 2016. During the nine months ended September 30, 2017, selling expenses were $2,771,000 or 6.7% of net sales, compared to $3,162,000 or 7.4% of net sales for the same period in 2016. The reduction in selling expenses reflects a reduction in salary expenses and service fees.
, Advertising and Marketing. During the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017,~~2020, selling, advertising and marketing expenses were ~~$455,000 or 3.4% of net sales for the period,~~$108,000 and $288,000 as compared to ~~$581,000 or 4.3% of net sales~~$282,000 and $566,000, respectively, for the same period of 2016. During the nine months ended September 30, 2017, advertising and marketing expenses were $1,549,000 or 3.7% of net sales for the period, compared to $1,644,000 or 3.8% of net sales for the same period of 2016. The reduction reflects principally the elimination of a consulting expense as of June 30, 2017 which totals $133,000 to date.periods in 2019.
19

Other Income (Expense). During the three ~~months~~and six month periods ended ~~September~~June 30, ~~2017,~~2020, the Company incurred interest expense of ~~$367,000,~~$337,000 and $778,000 as compared to interest expense of $533,000 and $1,097,000 during the same ~~period~~periods of ~~2016 in the amount of $359,000.~~2019. During the ~~nine~~three months ended ~~September 30, 2017,~~June 30,2020 the Company ~~incurred interest expense~~recorded $800,000 of ~~$1,100,000, compared~~other income for the Payroll Protection Program, PPP, anticipated grant related to interest expense during the same period of 2016 in the amount of $1,074,000. In addition to interest expense, there is a variable charge relating to the change in value of our outstanding warrants issued in connection with our mezzanine loan by reason of change in market price of our common stock. The amount of that change was $4,000 in the third quarter of 2017, compared to ($48,000) in the third quarter of 2016.payroll, utility and rent payments.

For the three ~~months~~month and six month periods ended ~~September~~June 30, ~~2017,~~2020, the Company had a foreign currency transaction ~~loss~~gain/(loss) of ~~$11,000~~$(30,000) and $(184,000) as compared to a ~~foreign currency transaction gain~~gain/(loss) of ~~$10,000~~$9,000 and $3,000 during the same ~~period~~periods of 2016. For the nine months ended September 30, 2017, the Company had a foreign currency transaction loss of $92,000 compared to a foreign currency transaction gain of $77,000 during the same period of 2016.2019.

~~Income Taxes~~. For the three months ended September 30, 2017, the Company reported a consolidated income tax benefit of $126,000, compared to a consolidated income tax benefit of $29,000 for the same period of 2016. For the nine months ended September 30, 2017, the Company reported a consolidated income tax benefit of $313,000, compared to a consolidated income tax expense of $4,000 for the same period of 2016. For the nine months ended September 30, 2017, this income tax expense was composed of an income tax benefit in the United States, income tax expense in Mexico of Flexo Universal, our Mexican subsidiary, an income tax benefit in the United Kingdom of CTI Balloons Limited, our United Kingdom subsidiary and income tax expense in Europe of CTI Europe gmbH, our Germany subsidiary.
~~Net Income.~~ For the three months ended September 30, 2017, the Company had net loss of ($275,000) or ($0.08) per share (basic and diluted,) compared to net loss of ($180,000) for the same period of 2016 or ($0.05) per share (basic and diluted.) For the nine months ended September 30, 2017, the Company had net loss of ($742,000) or ($0.20) per share (basic and diluted,) compared to net loss of ($257,000) for the same period of 2016 or ($0.07) per share (basic and diluted.) For the nine months ended September 30, 2017, the Company had income from operations of $38,000 compared to income from operations during the same period in 2016 of $922,000.
Financial Condition, Liquidity and Capital Resources

Cash Flow Items.

Operating Activities. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, net cash used in operations was $228,000, compared to net cash provided by operations ~~was $5,230,000, compared to net cash used in operations~~ during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 of ~~$255,000.~~$3,198,000.
20

Significant changes in working capital items during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 included:

·
●
A decrease in accounts receivable of ~~$5,864,000~~$1,154,000 compared to a decrease in accounts receivable of ~~$808,000~~$2,162,000 in the same period of ~~2016.~~2019.
·
●
~~An increase~~
A decrease in inventory of ~~$325,000~~$1,682,000 compared to an increase in inventory of ~~$5,598,000~~$475,000 in ~~2016.~~2019.
·
●
A decrease in trade payables of ~~$61,000~~$1,832,000 compared to an increase in trade payables of ~~$3,461,000~~$1,998,000 in ~~2016.~~2019.
·
●
A
An increase in accrued liabilities of $11,000 compared to a decrease in accrued liabilities of ~~$272,000 compared to an increase~~$594,000 in ~~accrued liabilities of $107,000 in 2016.~~2019.

Investing Activity. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, cash used in investing activity was ~~$736,000,~~$72,000, compared to cash ~~provided by~~used in investing activity for the same period of ~~2016~~2019 in the amount of ~~$140,000. Activity consisted principally of investment in equipment and equipment maintenance.~~$73,000.

Financing Activities. During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, cash used in financing activities was ~~$4,416,000~~$949,000 compared to cash ~~provided by~~used in financing activities for the same period of ~~2016~~2019 in the amount of ~~$440,000.~~$3,726,000. Financing activity consisted principally of ~~reduction~~changes in the balances of revolving and ~~long term~~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.

Liquidity and Capital Resources ~~and Going Concern~~. The Company’s liquidity is dependent significantly on its bank financing and the Company relies on its revolving line of credit to maintain liquidity. On April 29, 2010, the Company entered into a Credit Agreement with BMO Harris Bank N.A. (“BMO Harris”). Under the Credit Agreement, BMO Harris agreed to provide loans and credits to the Company in the aggregate maximum amount of $14,417,000. The arrangement included:
i. ~~A revolving credit line up to a maximum amount of $9,000,000 based upon a borrowing base of 85% of eligible receivables and 60% of eligible inventory (up to a maximum of $5,000,000);~~
~~ii.~~ ~~A mortgage loan in the principal amount of $2,333,350, amortized over 25 years;~~
~~iii.~~ ~~A term loan in the principal amount of $583,333 maturing in monthly principal installments of $58,333; and~~
~~iv.~~ An equipment loan commitment in the amount of up to $2,500,000 providing for loan advances from time to time until April 29, 2012 based upon 100% of the purchase price of equipment purchased, the loans to be amortized on a five year basis commencing April 29, 2012.
~~The Credit Agreement included various representations, warranties and covenants of the Company, including various financial covenants.~~
The Credit Agreement, as amended, provides that the outstanding balance of all loans under the agreement will bear interest with reference to a base rate or, at the option of the Company, with reference to an adjusted LIBOR. At September 30, 2017, the effective rate on the outstanding loan balances was 4.5%.
~~As of September 30, 2017, the outstanding balances on the loans with BMO Harris were: (i) revolving line of credit, $8,211,000, (ii) mortgage loan, $1,641,000, and (iii) equipment loan, $0.~~
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On July 17, 2012, the Company entered into Amendment Number 3 to the Credit Agreement among the Company and BMO Harris pursuant to which (i) the amount of the loan commitment on the revolver loan of BMO Harris was increased from $9 million to $12 million, (ii) BMO Harris consented to a transaction among the Company and BMO Private Equity (U.S.), Inc. (“BMO Equity”) and (iii) the term of credit and loans to the Company provided in the Credit Agreement and BMO Harris was extended to July 17, 2017. The loans subject to the Credit Agreement originally matured on July 17, 2017 and have been extended as noted below.
On July 17, 2012, the Company entered into a Note and Warrant Purchase Agreement with BMO Equity pursuant to which (i) BMO Equity advanced to the Company the sum of $5 million and (ii) the Company issued to BMO Equity a warrant to purchase up to Four Percent (4%) of the outstanding shares of common stock of the Company on a fully-diluted basis (140,048 shares of common stock of the Company) at the price of One Cent ($0.01) per share. Interest is payable on the outstanding balance of the loan at the rate of 11.5% per annum. The loan matures on January 17, 2018.
~~The Note and Warrant Purchase Agreement included provisions for:~~
~~(i)       a closing fee of $100,000~~
~~(ii)       payment of the principal amount in five and a half years with optional prepayment subject to certain prepayment premiums;~~
~~(iii)       security for the note obligations in all assets of the Company junior to the security interest of BMO Harris;~~
~~(iv)       various representations and warranties and covenants of the Company;~~
~~(v)       financial covenants including an applicable senior leverage ratio, fixed charge coverage ratio and tangible net worth amount.~~

At ~~September~~June 30, ~~2017,~~2020, the Company had cash balances of ~~$325,000~~$104,000 compared to cash balances of ~~$624,000~~$178,000 for the same period of ~~2016.~~2019.

22
29

~~Also at September~~As of June 30, ~~2017, the Company had a working capital balance of $4,904,000 compared to a working capital balance of $11,080,000 on December 31, 2016.~~
~~Further, as of September 30, 2017,~~2020, the Company was not in compliance with ~~all~~its credit facility, operating under a forbearance agreement. For this reason, $1.7 million of ~~the financial covenants under the Credit Agreement and the Note and Warrant Purchase Agreement.~~
As of September 30, 2017, the Company had total borrowings outstanding under the Credit Agreement with BMO Harris of $9,852,000, including $8,211,000 on the revolving credit loan and $1,641,000 on the mortgage facility. In addition, the balance of the indebtedness of the Company to BMO Private Equitylong-term debt was reclassified as current debt as of ~~September~~June 30, ~~2017 was approximately $5,965,000.~~
~~The obligations of the Credit Agreement~~2020. Failure to ~~BMO Harris were to mature on July 17, 2017. The obligations of the Note and Warrant Purchase Agreement among the Company and BMO Equity are to mature on January 18, 2018.~~
By Amendment to the Credit Agreement dated July 18, 2017, BMO Harris agreed to extend the maturity date of the agreement to October 18, 2017. BMO Equity consented to this extension in exchange for a fee and for the right to exercise at any time its put of warrants issued to it under the Note and Warrant Purchase Agreement. The extension provides retention by the Company of a consultant to advise as to planning, forecasting, cost management and financing.
On August 17, 2017, BMO Equity exercised its put on the warrants and the Company issued to BMO Equity a Warrant Conversion Note in the amount of $797,881 for the purchase of the warrants. The principal balance of the Warrant Conversion Note, plus accrued and unpaid interest thereon, is payable on January 18, 2018. The principal balance of the Warrant Conversion Note accrues interest at the rate of 11.5% per annum compounded daily.
On October 17, 2017, the Company and BMO Harris entered into Amendment No. 11 to the Credit Agreement in which (i) the Company acknowledged its indebtedness to the Bank for a Mortgage Loan balance in the amount of $1,664,456 and for a balance of $8,211,467 with respect to the Revolving Loans, (ii) the maturity date on the Mortgage Loan and the Revolving Credit were extended to November 30, 2017, and (iii) the Bank provided a temporary over advance line of $1,000,000 for the period from October 17, 2017 through November 30, 2017. Amendment No. 11 included certain additional covenants including that, on or before October 20, 2017, the Company would deliver to the Bank an executed letter of intent from a third-party financial institution providing for refinancing and payment of the Company’s debt obligations to the Bank. Also, on October 17, 2017, the Registrant entered into Amendment No. 6 to the Note and Warrant Agreement among Registrant and BMO Private Equity (U.S.) Inc. (BMO Private Equity). In the Amendment, (i) the Company acknowledged its indebtedness to BMO Private Equity for a subordinated note in the principal amount of $5,000,000 and, for the balance under a note issued in connectionultimately regain compliance with the ~~conversion by BMO Private Equity~~terms of ~~warrants, in the amount of $797,881, (ii) BMO Private Equity agreed~~our credit agreement, or enter into a suitable replacement financing vehicle, could negatively impact our ability to ~~defer payment of interest due~~carry on ~~October 2, 2017 in the amount of $150,139 to December 1, 2017. Amendment No. 6 includes covenants similar to that of Amendment No. 11 with the Bank.~~
On October 19, 2017, the Company delivered to the Bank and to BMO Equity an executed non-binding Preliminary Memorandum of Terms and Conditions (“Preliminary Term Sheet”) from a financing institution providing for an aggregate ofour business up to ~~$24,000,000 in senior secured financing~~and including our ability to (i) refinance existing senior bank and mezzanine debt, (ii) fund certain capital expenditures and (iii) provide for ongoing working capital needs of Registrant. The Preliminary Term Sheet is non-binding and is subject to diligence and to the execution of a definitive agreement.
~~Management’s Plans.~~
Management is engaged in efforts to obtain re-financing of its obligations to BMO Harris and BMO Private Equity, is in accordance with the Preliminary Term Sheet and is engaged in a diligence and loan documentation process. While no assurance can be given that the re-financing will be completed, management has a reasonable expectation that both the re-financing will be completed and that the Company will 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 3 for additional discussion.

~~Management is also engaged in efforts to implement cost and operational improvements and to fulfill strong order flow in order to achieve profitable operations for the fourth quarter.~~
Seasonality

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

Please see pages 25-28 of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~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 ~~September~~June 30, ~~2017.~~2020.
23

Item 3.Quantitative and Qualitative Disclosures Regarding Market Risk

Not applicable.

Item 4.Controls and Procedures

As
(a)   Disclosure Controls and Procedures
        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 ~~by Rule 13a-15(b)~~to be disclosed in the reports filed or submitted under the Exchange Act, ~~we conducted~~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 ~~Principal~~Chief Executive Officer (principal executive officer) and ~~Principal~~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 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 ~~September~~June 30, ~~2017,~~2020, the end of the period covered by this ~~report. Based upon~~Quarterly Report on Form 10-Q due to the material weaknesses described below.
30
(b)   Management's Report on Internal Control over Financial Reporting
        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 ~~evaluation,~~controls may become inadequate because of changes in conditions, or that the ~~Principal Executive Officer and Principal Financial Officer concluded that~~degree of compliance with the policies or procedures may deteriorate.
        Management has assessed the effectiveness of our ~~disclosure controls and procedures were effective~~internal control over financial reporting as of ~~September~~June 30, ~~2017, to ensure~~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 ~~information required to~~registrant's annual or interim financial statements will not be ~~disclosed by us in~~prevented or detected on a timely basis. As a result of our evaluation of our internal control over financial reporting, management identified the reports that we file or submit under Security Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including officers, as appropriate, to allow for timely decisions regarding required disclosure. There were nofollowing material ~~changes~~weaknesses in our internal control over financial ~~reporting during~~reporting:
We lacked a sufficient number of accounting professionals with the ~~three months ended September 30, 2017~~necessary knowledge, experience and training to adequately account for significant, unusual transactions that resulted in misapplications of GAAP, particularly with regard to the timing of recognition of certain non-cash charges, and
We are overly dependent upon our Chief Financial Officer and Chief Executive Officer within an environment that is highly manual in nature.
        As a result of the material weaknesses, we have ~~materially affected or are reasonably likely to materially affect our~~concluded that we did not maintain effective internal ~~controls~~control over financial ~~reporting.~~reporting as of June 30, 2020.

Part II.OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

Not applicable.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.Defaults Upon Senior Securities

Not applicable.

Item 4.~~Submission of Matters to a Vote of Security Holders~~Mine Safety Disclosures

Not applicable.

Item 5.Other Information

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.

Item 6.Exhibits

The following are being filed as exhibits to this report:

Exhibit Number		Description

~~3.1~~ 31.1		~~Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015).~~
~~3.2~~		~~Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017).~~
~~10.1~~		~~Senior Secured Subordinated Warrant Conversion Note between BMO Private Equity (U.S.) Inc. and the Company dated August 17, 2017.~~
~~10.2~~		~~Amendment No. 11 to Credit Agreement between BMO Harris Bank, N.A., BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017.~~
~~10.3~~		~~Amendment No. 6 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017.~~
~~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 ~~September~~June 30, ~~2017,~~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.

SIGNATURES

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.

~~Dated: November 14, 2017~~Date: August 19, 2020	Yunhong CTI ~~INDUSTRIES CORPORATION~~

	~~By:~~	~~/s/ John H. Schwan~~
		~~John H. Schwan~~
		~~Chief Executive Officer~~

	~~By:~~	~~/s/ Stephen M. Merrick~~
		~~Stephen M. Merrick~~
		~~President~~

	~~By:~~	~~/s/ Timothy S. Patterson~~
		~~Timothy S. Patterson~~
		~~Chief Financial Officer~~
		~~Senior Vice President Finance~~

26Ltd.

~~Exhibit Index~~

~~Exhibit~~ ~~Number~~		~~Description~~
~~3.1~~		~~Restated Articles of Incorporation (Incorporated by reference to Exhibit A to Registrant’s Schedule 14A Definitive Proxy Statement filed April 29, 2015.)~~

~~3.2~~		~~Amended and Restated By-Laws of CTI Industries Corporation (Incorporated by reference to Exhibit 3.2, contained in Registrant’s Form 8-K filed on March 17, 2017)~~

~~10.1~~		~~Senior Secured Subordinated Warrant Conversion Note between BMO Private Equity (U.S.) Inc. and the Company dated August 17, 2017.~~

~~10.2~~		~~Amendment No. 11 to Credit Agreement between BMO Harris Bank, N.A., BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017.~~

~~10.3~~		~~Amendment No. 6 to Note and Warrant Purchase Agreement between BMO Private Equity (U.S.) Inc. and the Company dated October 17, 2017.~~

~~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~~ By: /s/ Jennifer M. Connerty Jennifer M. Connerty 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~~ By: /s/ Frank J. Cesario Frank J. Cesario President, 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 ended September 30, 2017, 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.Secretary