Note

– Liquidity and Going Concern

The Company's primary sources of liquidity are cash and cash equivalents as well as availability under the credit agreement with PNC Bank, National Association (“PNC”) (the “Credit Agreement”) (see Note

). As indicated in Note

twice during

2018

we violated covenants in our credit facility and during

March 2019

we entered into a forbearance agreement with PNC. Under the 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, 2019

calculated on or about

July 31, 2019.

August 1, 2019,

PNC issued a Default and Reservation of Rights letter to the Company, in which PNC advised that line of credit advances would continue to be available to the Company at PNC's sole discretion, and subject to its terms and conditions. On

October 18, 2019,

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 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

later than

December 31, 2020.

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 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

1.00

for the

three

-month period ended

March 31, 2020 (

the “Fixed Charge Coverage Ratio”).The Company, as a consolidated group, however, did

not

comply with the Fixed Charge Coverage Ratio, resulting in the noncompliance. On

June 15, 2020,

the Company received a letter from PNC notifying the Company of its noncompliance. PNC has continued to make advances to the Company (“Discretionary Advances”), although it is

not

required to do so under the terms of the Credit Agreement due to the aforementioned events of default. On

July 17, 2020,

PNC provided the Company notice that multiple previously disclosed events, which each constitute an event of default, are continuing to occur. Additionally, PNC required that the Company obtain a commitment for

third

-party equity funding in an amount

not

less than

$3,000,000

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 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

August 31, 2020,

he would provide the necessary funding.

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.

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, we were authorized to sell an additional

million shares of Series A to other investors under similar financial terms, approximately

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 investor by the 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 total of

400,000

shares of common stock to LF International and, pursuant to the LF Purchase Agreement, changed our name from CTI Industries Corporation to Yunhong CTI Ltd. During the transaction and subsequent interim closings, LF International had the right to name

three

directors to serve on our Board. 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.

December 2019,

COVID-

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-

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-

have resulted in a period of business disruption, including delays in shipments of products and raw materials. To the extent the impact of COVID-

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 and industry-wide shipment of products

may

be negatively impacted, the severity of which

may

exceed the

million in Payroll Protection Program funds received by the Company from the US Federal Government. COVID-

has also delayed certain strategic transactions the Company intended to close on in the near future and the Company does

not

know if and when such transactions will be completed.

Finally, claims have been filed in court by certain vendors regarding claims of non-payment pursuant to contractual obligations. While many have been resolved, the sum of the outstanding claims made or threatened exceeds

$0.5

million in the aggregate. The cost of defense and potential ultimate resolution increases the strain on our financial resources.

Management's plans include:

(

)

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

(

)

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

(

)

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

(

)

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

(

)

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

(

)

Exploring alternative funding sources.

Management Assessment

Considering both quantitative and qualitative information, we believe that our plans to obtain additional financing

may

provide us with an ability to finance our operations through

2020

and, if successfully executed,

may

mitigate the substantial doubt about our ability to continue as a going concern.