Note

- 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.

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

as the Company did

not

issue dividends during

2020

and

2019.

The expected volatility is based on historical volatility of the Company's common stock.

The Company's net loss for the

three

months ended

June 30, 2020

and

2019

includes approximately

none

and

$29,000,

respectively, of compensation costs related to share based payments. The Company's net loss for the

six

months ended

June 30, 2020

and

2019

includes approximately

none

and

$29,000,

respectively, of compensation costs related to share based payments. As of

June 30, 2020,

there was

unrecognized compensation expense related to non-vested stock option grants and stock grants.

April 10, 2009,

the Board approved for adoption, and on

June 5, 2009,

the shareholders of the Corporation approved, a

2009

Stock Incentive Plan (

“2009

Plan”). The

2009

Plan and subsequent awards categorized as inducement of employment authorized the issuance of up to

510,000

shares of stock or options to purchase stock of the Company (including cancelled shares reissued under the plan.) On

June 8, 2018,

our shareholders approved the

2018

Stock Incentive Plan (

“2018

Plan”). The

2018

Plan authorized the issuance of up to

300,000

shares of our common stock in the form of equity-based awards. Because

registration on Form S-

was filed for these additional shares within

months of approval by our shareholders, those additional shares are

not

available for issuance in the normal course. As of

June 30, 2020,

options for

20,000

shares remain outstanding.

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

	Shares under Option			Weighted Average Exercise Price
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

The instruments above have

aggregate intrinsic value (the difference between the closing price of the Company's common stock on the last trading day of the quarter ended

June 30, 2020

and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the holders exercised their options on

June 30, 2020.

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.

January 30, 2020,

the Company sold

20,600

shares of Series A Preferred to an investor for an aggregate purchase price of

$206,000.

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.

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.

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.

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

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.