Note

- Shareholders' Equity

Series A Preferred Stock

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 (“LF International”), which is controlled by Company director, President and Chief Executive Officer, Mr. Yubao Li, agreed to purchase, up to

500,000

shares of the Company's newly created shares of Series A Preferred Stock (“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”). Approximately

million of Series A Preferred has been sold as of

March 31, 2021,

including to an investor which converted an account receivable of

$478,000

owed to the investor by the Company in exchange for

48,200

shares of Series A Preferred. The Company completed several closings with 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. LF International has the right to name

three

directors to serve on our Board. They are Mr. Yubao Li, our Chairman, Ms. Wan Zhang and Ms. Yaping Zhang.

The issuance of the Series A Preferred 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. As the Series A Preferred 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

three

months ending

March 31 2021

and

2020

the Company accrued

$100,000

and

$52,741,

respectively, of these dividends.

Series B Preferred

November 2020,

we issued

170,000

shares of Series B Preferred for an aggregate purchase price of

$1,500,000.

The Series B Preferred have an initial stated value of

$10.00

per share and liquidation preference over common stock. The Series B Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of

$1.00.

The Series B Preferred accrues dividends at a rate of

percent per annum, payable at our election either in cash or shares of the Company's common stock. Initially, the Series B Preferred, in whole or part, was redeemable at the option of the holder (but

not

mandatorily redeemable) at any time on or after

November 30, 2021

for the stated value, plus any accrued and unpaid dividends and thus was classified as mezzanine equity and initially recognized at fair value of

$1.5

million (the proceeds on the date of issuance). In

March 2021,

the terms of the Series B Preferred were modified to eliminate the ability of the holder to redeem the Series B Preferred. As the Series B Preferred is

longer redeemable, the Series B Preferred is

not

classified as mezzanine equity as of

March 31, 2021.

As a result, the carrying value as of

March 31, 2021

amounted to

$1,612,707

which consists of

$1,500,000

original carrying value,

$47,206

accrued dividends and

$65,500

accretion (

$46,937

which occurred in

2021

Series C Preferred

January 2021

we entered into an agreement with a related party, LF International Pte. Ltd. which is controlled by the Chairman of the Board of Directors Mr. Yubao Li, to purchase shares of Series C Preferred stock. We issued

170,000

shares of Series C Preferred for an aggregate purchase price of

$1,500,000.

The Series C Preferred have an initial stated value of

$10.00

per share and liquidation preference over common stock. The Series C Preferred is convertible into shares of our common stock equal to the number of shares determined by dividing the sum of the stated value and any accrued and unpaid dividends by the conversion price of

$1.00.

The Series C Preferred accrues dividends at a rate of

percent per annum, payable at our election either in cash or shares of the Company's common stock. The issuance of the Series C Preferred 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 C Preferred was convertible exceeded the allocated purchase price of the Series C Preferred at the closing dates by greater than the allocated purchase price. Therefore, the BCF was the purchase price of the Series C Preferred (

$1.5

million) and was allocated to Additional Paid-in Capital, resulting in a discount on the Series C Preferred Stock. As the Series C Preferred Stock is immediately convertible, the Company accreted the discount on the date of issuance. The accretion to the carrying value of the Series C Preferred is treated as a deemed dividend, recorded as a charge to Additional Paid in Capital and deducted in computing earnings per share.

Warrants

In connection with the Series A Offering, in

2020

the Company issued

792,660

warrants to purchase

792,660

shares of the Company's common stock for

per share. During

2020,

597,500

warrants were exercised in cash-less exchange for

391,308

shares of the Company's common stock. In

January

and

February 2021,

the remaining

195,160

warrants were exercised in a cash-less exchange for

103,104

shares of the Company's common stock.

The Company has applied the Black-Scholes model to value stock-based awards. That model incorporates various assumptions in the valuation of stock-based awards relating to the risk-free rate of interest to be applied, the estimated dividend yield and expected volatility of the Company's Common Stock. The risk-free rate of interest is the U.S. Treasury yield curve for periods within the expected term of the option at the time of grant. The expected volatility is based on historical volatility of the Company's Common Stock.

The valuation assumptions we have applied to determine the value of warrants granted in

2020

were as follows:

Historical stock price volatility: The Company used the weekly closing price to calculate historical annual volatility.

Risk-free interest rate: The Company bases the risk-free interest rate on the rate payable on US treasury securities with a similar maturity in effect at the time of the grant, which was a range from

.42%

1.65%.

Expected life: The expected life of the warrants represents the period of time warrants were expected to be outstanding. The Company used an expected life of

years.

Dividend yield: The estimate for dividend yield is

0%,

as the Company did

not

issue dividends during

2020

2019

and does

not

expect to do so in the foreseeable future.

Estimated forfeitures: When estimating forfeitures, the Company considers historical terminations as well as anticipated retirements.

A summary of the Company's stock warrant activity is as follows:

	Shares under Option			Weighted Average Exercise Price
Balance at December 31, 2020		195,160		$	1.00
Granted		-			1.00
Cancelled/Expired		-			1.00
Exercised/Issued		(195,160	)		1.00
Outstanding at March 31, 2021		-			1.00

Exercisable at March 31, 2021		-		$	1.00