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Note 5 - Stock-based Compensation; Changes in Equity | 9 Months Ended
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Sep. 30, 2020
Notes to Financial Statements |
Share-based Payment Arrangement [Text Block] | 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. The Company has applied the Black-Scholes model to value stock-based awards and issued warrants related to notes payable. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest, 0.42% - 1.65%, to be applied, the estimated dividend yield and expected volatility, 153.73% - 161.48%, of our common stock. The risk-free rate of interest is the related U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The dividend yield on our common stock is estimated to be 0% , as the Company did not issue dividends during 2020 and 2019. The expected volatility is based on historical volatility of the Company's common stock. The Company's net loss for the three months ended September 30, 2020 and 2019 includes approximately none and $20,000, respectively, of compensation costs related to share based payments. The Company's net loss for the nine months ended September 30, 2020 and 2019 includes approximately none and $72,000, respectively, of compensation costs related to share based payments. As of September 30, 2020, there was no unrecognized compensation expense related to non-vested stock option grants and stock grants. On 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 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 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 |  |  | (347,483 | ) |  |  | 1.19 |
Outstanding at September 30, 2020 |  |  | 479,802 |  |  |  | 1.10 |
Exercisable at September 30, 2020 |  |  | 19,625 |  |  | $ | 5.49 |
The instruments above have no aggregate intrinsic value (the difference between the closing price of the Company's common stock on the last trading day of the quarter ended September 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 September 30, 2020. On January 3, 2020, the Company entered into a stock purchase agreement, as amended on February 24, 2020 and April 13, 2020 ( the “LF Purchase Agreement”), pursuant to which the Company agreed to issue and sell, and LF International Pte. Ltd., a Singapore private limited company (the “LF International”), which is controlled by Company director Mr. Yubao Li, agreed to purchase, up to 500,000 shares of the Company's newly created shares of Series A Preferred, with each share of Series A Preferred initially convertible into ten shares of the Company's common stock, at a purchase price of $10.00 per share, for aggregate gross proceeds of $5,000,000 (the “LF International Offering”). As permitted by the Purchase Agreement, the Company may, in its discretion issue up to an additional 200,000 shares of Series A Preferred for a purchase price of $10.00 per share (the “Additional Shares Offering,” and collectively with the LF International Offering, the “Offering”). On January 13, 2020, the Company conducted its first closing of the LF International Offering, resulting in the sale of 250,000 shares of Series A Preferred for aggregate gross proceeds of $2,500,000. Pursuant to the LF Purchase Agreement, LF International received the right to nominate and elect one member to the Company's board of directors (the “Board”) (subject to certain adjustments), effective as of the first closing. Pursuant to LF International's nomination, effective January 13, 2020, the Board appointed Mr. Yubao Li as a director of the Company. Additionally, pursuant to the LF Purchase Agreement, on March 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. 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 nine months ending September 30, 2020 the Company accrued $255,341 of these dividends. During the three months ended September 30, 2020, 332,000 shares of the Company's common stock were issued upon the exercise of 500,000 warrants. During the third quarter 2020, 42,660 convertible preferred shares were converted into 426,600 shares of common stock. An additional 18,007 shares of common stock were issued as satisfaction of the accrued dividend on the preferred shares. In 2020, the Company issued 15,000 shares to its former president in satisfaction of his stock compensation plan which accelerated upon his resignation. In September 2020, the Company received $1.5 million from an unrelated third party as an advance on a proposed sale of Series B Redeemable Convertible Preferred Stock. As of September 30, 2020, the Company was in the process of negotiating and finalizing the terms of the arrangement. On November 17, 2020, the Company finalized the associated stock purchase agreement for the sale of 170,000 new issued shares of Series B Redeemable Convertible Preferred Stock. Each share is convertible into ten shares of the Company's common stock and Holders of the Series B 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. The stock purchase agreement is subject to customary conditions for closing. As the agreement was not finalized as of September 30, 2020, the $1.5 million advance is classified as Advance from Investor within liabilities on the accompanying balance sheet.

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