The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
right of use assets and related lease liabilities by $505,000.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial
Statements
Note 1 – Organization and Description
of Business
ClearSign Technologies Corporation (ClearSign or the Company)
designs and develops products and technologies for the purpose of improving key performance characteristics of industrial and commercial
systems, including operational performance, energy efficiency, emission reduction, safety and overall cost-effectiveness.
Our patented technologies, embedded in established OEM products as ClearSign Core™, and ClearSign Eye™ and other
sensing configurations, enhance the performance of combustion systems and fuel safety systems in a broad range of markets, including
the energy (upstream oil production and down-stream refining), commercial/industrial boiler, chemical, petrochemical, transport
and power industries. The Company’s primary technology is its ClearSign Core technology, which achieves very low emissions
without the need of external flue gas recirculation, selective catalytic reduction, or higher excess air operation. The Company
is headquartered in Seattle, Washington and was incorporated in the state of Washington in 2008. On July 28, 2017, the
Company incorporated a subsidiary, ClearSign Asia Limited, in Hong Kong to represent the Company’s business and technological
interests throughout Asia. Through ClearSign Asia Limited, the Company has established a Wholly Foreign Owned Enterprise (WFOE)
in China – ClearSign Combustion (Beijing) Environmental Technologies Co., LTD.
Unless otherwise stated or the context otherwise requires, the
terms ClearSign and the Company refer to ClearSign Technologies Corporation and its subsidiary, ClearSign Asia Limited.
Liquidity
The Company’s technologies are currently in field development
and have generated nominal revenues from operations to date to meet operating expenses. In order to generate meaningful revenues,
the technologies must be fully developed, gain market recognition and acceptance, and develop a critical level of successful sales
and product installations. The Company has historically financed its operations primarily through issuances of equity securities,
including $11.9 million in proceeds, net of offering costs, from a stock offering completed on February 27, 2018 and $11.6 million
in proceeds, net of offering costs, from a stock offering completed on July 20, 2018. The Company has incurred losses since its
inception totaling $67,990,000 and expects to experience operating losses and negative cash flows for the foreseeable future. On
January 15, 2020, the Company received a letter from The Nasdaq Stock Market advising that for 30 consecutive trading days preceding
the date of the letter, the bid price of the Company’s common stock had closed below the $1.00 per share minimum required
for continued listing on The Nasdaq Capital Market pursuant to listing rules, and therefore the Company could become subject to
delisting if it did not regain compliance within the compliance period (or the compliance period as may be extended). Additionally,
the outbreak of COVID-19 has caused significant disruptions to the global markets which could impact the Company’s ability
to raise additional capital. Based on the Company’s current plans, it has sufficient funds to continue to support its operations
for at least twelve months from the date of issuance of these consolidated financial statements. In order to continue business
operations beyond twelve months from the date of issuance of these consolidated financial statements, the Company currently anticipates
that it will need to raise additional capital. Management believes that the successful growth and operation of the Company’s
business is dependent upon its ability to obtain adequate sources of funding through co-development agreements, strategic partnering
agreements, or equity or debt financing to adequately support research and development efforts, protect intellectual property,
form relationships with strategic partners, and provide for working capital and general corporate purposes. There can be no assurance
that the Company will be successful in achieving its long-term plans as set forth above, or that such plans, if consummated, will
result in profitable operations or enable the Company to continue in the long-term as a going concern.
Note 2 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of ClearSign and its subsidiary. Intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition and Cost of Sales
The Company recognizes revenue and related cost of goods sold
in accordance with FASB ASC 606 Revenue from Contracts with Customers (ASC 606). Revenues and cost of goods sold are recognized
once the goods or services are delivered to the customer’s control and performance obligations are satisfied. Typically,
the Company’s contracts with customers have performance obligations regarding air emissions and operational performance that
are satisfied upon completion of service. Since this is the singular performance obligation and cannot be achieved until the air
emissions and operational performance have been successfully tested, revenue related to the contracts is recognized upon project
completion.
The Company’s contracts generally include progress payments
from the customer upon completion of defined milestones. As these payments are received, they are offset against accumulated project
costs and recorded as either contract assets or contract liabilities. Upon completion of the performance obligations and acceptance
by the customer the projects can be recorded as revenue.
The Company's contracts with customers contain no variable considerations
or incentives or discounts that would cause revenue to be allocated or adjusted over time. Therefore, no separate methods of evaluating
the contracts other than consideration of the price at achievement of the performance objectives was used in satisfying the review
requirements of ASC 606.
Contract Acquisition Costs and Practical expedients
For contracts that have a duration of less than one year, the
Company follows ASC 606, “Narrow Scope Improvements and Practical Expedients,” and expenses those costs when incurred;
for contracts with a life exceeding one year, the Company records those costs when performance obligations related to the contract
are completed. The Company generally expenses sales commissions when earned. The Company records those costs within general and
administrative expenses.
Product Warranties
The Company warrants all installed products against defects
in materials and workmanship for a period specified in each contract by replacing failed parts. Accruals for product warranties
are based on historical warranty experience and current product performance trends, and are recorded at the time revenue is recognized
as a component of cost of sales. The warranty liabilities are reduced by material and labor costs used to replace parts over the
warranty period in the periods in which the costs are incurred. The Company periodically assesses the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary, and such adjustments could be material in the future if estimates differ
significantly from actual warranty expense. The warranty liabilities are included in accrued liabilities in the balance sheets.
Cash and Cash Equivalents
Highly liquid investments purchased with an original maturity
of three months or less are considered cash equivalents. Cash is maintained with a commercial bank where accounts are generally
guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company’s deposits may at times exceed this limit.
The Company also maintains a cash balance in China which is insured up to $70,000 (500,000RMB). The Company has not experienced
losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Short-Term Investments
Short-term investments consist of U.S. Treasury bills with original
maturities of twelve months or less and greater than three months. These short-term investments are classified as held to maturity
and are recorded on an amortized cost basis which approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount. An
allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management’s
judgment, deserve current recognition in estimating bad debts. The determination of the collectability of amounts due from customer
accounts requires the Company to make judgments regarding future events and trends. Allowances for doubtful accounts are determined
based on assessing the Company’s portfolio on an individual customer and on an overall basis. This process consists of a
review of historical collection experience, current aging status of the customer accounts, and the financial condition of the Company’s
customers. Based on a review of these factors, the Company may establish or adjust the allowance for specific customers and the
accounts receivable portfolio as a whole.
Fixed Assets and Leases
Fixed assets are recorded at cost. Leases are recorded
in accordance with FASB ASC 842 Leases. For those leases with a term greater than one year, the Company recognizes on the
balance sheet at the time of lease inception or modification a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line
basis. Operating leases with a term of 1 year or less are recognized on a straight line basis over the term. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated
over the life of the lease or their useful life, whichever is shorter. All other fixed assets are depreciated over two to four
years. Maintenance and repairs are expensed as incurred.
Patents and Trademarks
Patents and trademarks are recorded at cost. Amortization is
computed using the straight-line method over the estimated useful lives of the assets once they are awarded.
Impairment of Long-Lived Assets
The Company tests long-lived assets, consisting of fixed assets,
patent and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition
of the assets. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the
long-lived assets. Fair value is determined based on the present value of estimated expected cash flows using a discount rate commensurate
with the risks involved, quoted market prices, or appraised values depending upon the nature of the assets. Loss on long-lived
assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities
measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the
inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The three levels of inputs used to establish fair value
are the following:
|
·
|
Level 1 – Quoted prices in active markets for identical assets
or liabilities;
|
|
·
|
Level 2 – Inputs other than Level 1 that are observable, either
directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets
or liabilities; and
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company's financial instruments primarily consist of cash
and cash equivalents, short-term investments, accounts payable and accrued expenses. As of the balance sheet dates, the estimated
fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheets.
This is primarily attributable to the short-term maturities of these instruments.
The Company did not identify any other non-recurring assets
and liabilities that are required to be presented in the balance sheets at fair value.
Research and Development
The cost of research and development is expensed as incurred.
Research and development costs consist of salaries, benefits, share based compensation, consulting fees, rent, utilities, depreciation,
and consumables.
In 2019 and 2018, the Company received $108,000 and $44,000,
respectively, to partially fund specific research and development activity relating to its ECC technology. Since these funds were
provided without expectation of reciprocation, except notification of research results, the funds received were offset against
the related research and development costs incurred.
Income Taxes
The Company accounts for income taxes using an asset and liability
approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax
benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future deductibility is uncertain. Tax benefits from an uncertain
tax position are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements
from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate resolution.
Stock-Based Compensation
The costs of all employee stock options, as well as other equity-based
compensation arrangements, are reflected in the consolidated financial statements based on the estimated fair value of the awards
on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange
for the award. Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received
or the fair value of equity instruments issued, whichever is more reliably measured.
Foreign Operations
The accompanying consolidated financial
statements as of December 31, 2019 and 2018 include assets amounting to approximately $151,000 and $199,000, respectively, relating
to operations of the Company in China. It is always possible unanticipated events in foreign countries could disrupt the Company’s
operations, and since the end of January 2020 this has been and currently continues to be the case with the effects of the recent
COVID-19 pandemic.
Foreign Currency
The functional currency of ClearSign Asia Limited is the U.S.
dollar. The Company remeasures the transactions denominated in Chinese Yuan at the average exchange rate in effect during the period.
At the end of each reporting period, the Company remeasures ClearSign Asia Limited’s monetary assets and liabilities to the
U.S. dollar using exchange rates in effect at the end of the reporting period. The Company remeasures its non-monetary assets and
liabilities at historical exchange rates. The Company records gains and losses related to remeasurement in other income (expense),
net in the consolidated statements of operations. Foreign currency exchange gain (losses) has not been significant in any period
presented and the Company has not undertaken any hedging transactions related to foreign currency exposure.
Noncontrolling Interest
The subsidiary of the Company has a minority
shareholder representing an ownership interest of 1.00% at December 31, 2019. The Company accounts for this noncontrolling interest
pursuant to ASC 810-10-65 whereby gains and losses in a subsidiary with a noncontrolling interest are allocated to the noncontrolling
interest based on the ownership percentage of the noncontrolling interest, even if that allocation results in a deficit noncontrolling
interest balance.
Net Loss per Common Share
Basic loss per share is computed by dividing loss available
to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar
to basic loss per share except that the denominator is increased to include additional common shares available upon exercise of
stock options and warrants using the treasury stock method, except for periods for which no common share equivalents are included
because their effect would be anti-dilutive. At December 31, 2019 and 2018, potentially dilutive shares outstanding amounted to
2,211,058 and 3,376,061, respectively.
Recently Adopted Standards
In June 2018 FASB issued
ASU No. 2018-07 Compensation-Stock Compensation. The amendments in this update expand the scope of Topic 718 to include
share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of
Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that
is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments
specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used
or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718
does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with
Customers. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, including interim periods
within those years. The Company currently does not believe this amendment applies to any of its transactions at this time.
Recently Issued Accounting
Pronouncements
In November 2018 FASB
issued ASU 2018-18 Topic 808 Collaborative Arrangements, The amendments in this update make targeted improvements
to generally accepted accounting principles (GAAP) for collaborative arrangements as follows: (1) clarify that certain transactions
between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement
participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied,
including recognition, measurement, presentation, and disclosure requirements; (2) add unit-of-account guidance in Topic 808 to
align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative
arrangement or a part of the arrangement is within the scope of Topic 606; (3) require that in a transaction with a collaborative
arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue
recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. For
public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. The Company currently does not believe this amendment applies to any of its transactions at
this time.
Management does not believe that any other recently issued,
but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s consolidated
financial statement presentation or disclosures.
Note 3 – Fixed Assets
Fixed assets are summarized as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
762,000
|
|
|
$
|
853,000
|
|
Office furniture and equipment
|
|
|
180,000
|
|
|
|
186,000
|
|
Leasehold improvements
|
|
|
149,000
|
|
|
|
150,000
|
|
Right of use asset-operating leases
|
|
|
1,140,000
|
|
|
|
637,000
|
|
Accumulated depreciation and amortization
|
|
|
(1,566,000
|
)
|
|
|
(1,369,000
|
)
|
|
|
$
|
665,000
|
|
|
$
|
457,000
|
|
The Company has a triple net operating lease for office and
laboratory space in Seattle, Washington through March 2020 with rent of approximately $12,000 per month plus triple net operating
costs. The Company also has a triple net operating lease for office space in Tulsa, Oklahoma with a term that was to end in
August 2019 and monthly rent of approximately $2,000 per month plus triple net operating costs. Both leases include lessee renewal
options for three years at the then prevailing market rate. Effective as of July and August 2019, the Company exercised the option
to renew both the Seattle lease and the Tulsa lease for three years. The new term of the Seattle lease will begin in April 2020
and rent will be abated for April and May 2020, although the Company will be responsible for its proportionate share of expenses
and taxes. The Company will pay a monthly rent of approximately $13,500 beginning on June 1, 2020 through March 2021. The monthly
rent will increase on the first day of April of each succeeding year by approximately 3% until the end of the term in May 2023.
The rent for the Tulsa lease is approximately $2,200 a month beginning September 2019 through August 2022 with an annual 2.5% increase.
The Company has an operating lease for office space in Beijing, China through November 2020 with a monthly rent of approximately
$6,000.
Lease costs for the years ended December 31, 2019 and 2018 and
other quantitative disclosures are as follows:
|
|
For the year ended December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
238,000
|
|
|
$
|
218,000
|
|
Total lease cost
|
|
$
|
238,000
|
|
|
$
|
218,000
|
|
Other information:
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
238,000
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
505,000
|
|
For operating lease:
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
3.12
|
|
Weighted average discount rate
|
|
|
7.17
|
%
|
Minimum future payments under the Company’s leases at
December 31, 2019 and their application to the corresponding lease liabilities are as follows:
|
|
Discounted lease liability payments
|
|
|
Payments due under lease agreements
|
|
2020
|
|
$
|
177,000
|
|
|
$
|
215,000
|
|
2021
|
|
|
169,000
|
|
|
|
193,000
|
|
2022
|
|
|
178,000
|
|
|
|
190,000
|
|
2023
|
|
|
71,000
|
|
|
|
73,000
|
|
Total
|
|
$
|
595,000
|
|
|
$
|
671,000
|
|
Note 4 – Patents and Other Intangible Assets
Patents and other intangible assets are summarized as follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
846,000
|
|
|
$
|
1,202,000
|
|
Issued patents
|
|
|
619,000
|
|
|
|
761,000
|
|
|
|
|
1,465,000
|
|
|
|
1,963,000
|
|
Trademarks
|
|
|
|
|
|
|
|
|
Trademarks pending
|
|
|
77,000
|
|
|
|
55,000
|
|
Registered trademarks
|
|
|
23,000
|
|
|
|
23,000
|
|
|
|
|
100,000
|
|
|
|
78,000
|
|
Other
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
1,573,000
|
|
|
|
2,049,000
|
|
Accumulated amortization
|
|
|
(288,000
|
)
|
|
|
(290,000
|
)
|
|
|
$
|
1,285,000
|
|
|
$
|
1,759,000
|
|
Future amortization expense associated with awarded patents
and registered trademarks as of December 31, 2019 is estimated as follows:
2020
|
|
|
131,000
|
|
2021
|
|
|
100,000
|
|
2022
|
|
|
69,000
|
|
2023
|
|
|
41,000
|
|
2024
|
|
|
13,000
|
|
|
|
$
|
354,000
|
|
In 2019, the Company continued to reassess
its patent portfolio in order to ensure that both the cost-effectiveness and the value created through the intellectual property
portfolio were maximized and to focus resources on its most promising patents. Those patents considered to be the most beneficial
were retained and those pending patents projected to be unnecessarily costly that could be disposed of without meaningfully degrading
the quality of the remaining intellectual property portfolio were abandoned. As a result, during the year ended December 31, 2019,
the Company recorded impairment loss of $733,000 of capitalized patents costs and $322,000 during the year ended December 31, 2018.
Note 5 – Sales, Contract Assets
and Contract Liabilities
The
Company recognized no revenue during the year ended December 31, 2019. During 2018, the Company recognized revenue totaling $360,000
from completed flare projects, $128,000 of revenue from completion of a once through steam generator (OTSG) project and revenue
of $42,000 from a small project. To date, all of the Company’s sales have been Duplex or ClearSign Core products sold in
the United States. The cost of goods sold of $1,000 recognized during the year ended December 31, 2019 related to additional warranty
costs incurred for previously completed contracts.
Note 6 – Product Warranties
A summary of the Company’s warranty liability activity,
which is included in accrued liabilities in the accompanying balance sheets as of December 31, 2019 and 2018, is as follows:
|
|
2019
|
|
|
2018
|
|
Warranty liability, beginning of year
|
|
$
|
257,000
|
|
|
$
|
181,000
|
|
Accruals
|
|
|
-
|
|
|
|
51,000
|
|
Payments
|
|
|
(1,000
|
)
|
|
|
(32,000
|
)
|
Adjustments and other
|
|
|
1,000
|
|
|
|
57,000
|
|
Warranty liability, end of year
|
|
$
|
257,000
|
|
|
$
|
257,000
|
|
Note 7 – Income Taxes
Through December 31, 2019, the Company incurred net operating
losses for federal tax purposes of approximately $62,600,000. The Company experienced an “ownership change” within
the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, during April 2012. The ownership change will subject
net operating loss carryforwards to an annual limitation, which may restrict the ability to use them to offset taxable income
in periods following the ownership change. In general, the annual use limitation equals the aggregate value of the Company’s
stock at the time of the ownership change multiplied by a tax-exempt interest rate specified by the Internal Revenue Service.
The Company analyzed the available information to determine the amount of the annual limitation. Based on information available,
the 2012 limitation is estimated to be $686,000 annually. The availability of the Company’s net operating loss carry forwards
may be subject to further limitation if a change in the ownership of more than 50% occurs within any three-year period since the
last ownership change. The net operating loss carry forwards generated before 2018 may be used to reduce taxable income through
the years 2028 to 2037. Net operating loss carryforwards generated for year 2018 and thereafter do not expire.
A reconciliation of the expected
tax computed at the statutory federal income tax rate to the provision for income taxes is as follows:
|
|
2019
|
|
|
2018
|
|
Expected tax benefit at 21%
|
|
$
|
(1,781,000
|
)
|
|
$
|
(1,970,000
|
)
|
Tax Reform
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
1,595,000
|
|
|
|
1,890,000
|
|
Other
|
|
|
186,000
|
|
|
|
80,000
|
|
Provision for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The net deferred tax asset at December
31, 2019 and 2018 was $13,505,000 and $11,910,000, respectively. In assessing the potential realization of these deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during
the periods in which those temporary differences become deductible. At December 31, 2019 and 2018, management was unable to determine
if it is more likely than not that the Company’s deferred tax assets will be realized and has therefore recorded an appropriate
valuation allowance against deferred tax assets at such dates. Significant components of the deferred tax assets (liabilities),
are approximately as follows:
|
|
2019
|
|
|
2018
|
|
Net operating loss carry forwards
|
|
$
|
13,216,000
|
|
|
$
|
11,540,000
|
|
Accrued liabilities
|
|
|
217,000
|
|
|
|
280,000
|
|
Stock compensation
|
|
|
(48,000
|
)
|
|
|
(50,000
|
)
|
Depreciation
|
|
|
145,000
|
|
|
|
160,000
|
|
Prepaid expenses
|
|
|
(21,000
|
)
|
|
|
(20,000
|
)
|
Other
|
|
|
(4,000
|
)
|
|
|
-
|
|
Deferred tax assets, net
|
|
|
13,505,000
|
|
|
|
11,910,000
|
|
Valuation allowance
|
|
|
(13,505,000
|
)
|
|
|
(11,910,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Although the Company is not under examination,
the tax years for 2016 and forward are subject to examination by United States tax authorities.
The Company’s practice is to recognize
interest and penalties related to income tax matters in income tax expense. As of December 31, 2019, and 2018, there were no accrued
interest or penalties related to uncertain tax positions.
Note 8 – Equity
Common Stock and Preferred Stock
The Company is authorized to issue 62,500,000
shares of common stock and 2,000,000 shares of preferred stock. Preferences, limitations, voting powers and relative rights of
any preferred stock to be issued may be determined by the Company’s Board of Directors. The Company has not issued any shares
of preferred stock.
In February 2018, the Company completed
an offering of common stock whereby 5,750,000 shares of common stock at a price of $2.25 per share were issued and sold for net
cash proceeds of approximately $11.9 million.
In July 2018, the Company completed a private
equity offering of 5,213,543 shares of common stock at a price of $2.25 per share to ClirSPV, LLC (Investor). Gross proceeds from
the offering totaled $11.7 million and net cash proceeds approximated $11.6 million. The Stock Purchase Agreement permitted the
Investor to purchase from the Company up to an aggregate 478,854 shares of common stock at a price of $4 per share (Additional
Purchase Right). Pursuant to the terms of the Additional Purchase Right, the Investor had the right to purchase shares of common
stock from the Company, as the warrants previously issued to the investors by the Company in its January 25, 2017 rights offering
were exercised and the warrant shares were issued. These warrants have expired unexercised on January 25, 2019. The Additional
Purchase Right expired on February 1, 2019. The Additional Purchase Right was considered an equity instrument accounted for as
a component of the actual price per common share paid by the Investor in the private offering. For basic earnings per share, the
common shares associated with the Additional Purchase Right were treated as contingently issuable shares and were not included
in basic earnings per share for the year ended December 31, 2018.
The Stock Purchase Agreement also permits the Investor to participate
in future capital raising transactions (Participation Right) on the same terms as other investors participating in such transactions.
The Participation Right will expire on December 31, 2023.
In no event may the Participation Right be exercised to the
extent it would cause the Investor or any of its affiliates to beneficially own 20% or more of the Company’s then outstanding
common stock or hold shares with 20% or more of the voting power.
The Company filed a registration statement to register the shares
issued in this private offering and shares underlying the Additional Purchase Right. The registration statement was declared effective
by the SEC on September 21, 2018.
Issuance of Shares of Subsidiary to Noncontrolling Interest
In December 2019, the Company issued shares of its subsidiary
representing a 1% ownership interest to an executive. The fair value of the shares at the date of the issuance was estimated to
be $6,000 and was recorded as stock based compensation expense during the year ended December 31, 2019.
Equity Incentive Plan
The ClearSign Technologies Corporation
2011 Equity Incentive Plan (the Plan) provides for the granting of options to purchase shares of common stock, stock awards to
purchase shares at no less than 85% of the value of the shares, and stock bonuses to officers, employees, board members, certain
consultants, and advisors. At the Company’s Annual Meeting held on May 8, 2019, the shareholders approved an amendment to
the Plan that (i) increased the number of shares of common stock in the reserve by 1,231,593 to a total of 4,004,214 shares of
common stock, representing approximately 15% of the number of shares of the Company’s stock outstanding and (ii) increased
the number of shares that may be issued pursuant to the evergreen provision, if any, to the lesser of 15% of any new shares issued
by the Company during the quarter immediately prior to the adjustment date or such lesser amount as the Board of Directors shall
determine. The Compensation Committee of the Board of Directors is authorized to administer the Plan and establish the grant terms,
including the grant price, vesting period and exercise date. As of December 31, 2019, the number of shares reserved for issuance
under the Plan totaled 4,004,964 shares. Activity under the Plan is as follows:
|
|
2019
|
|
|
2018
|
|
Reserved but unissued shares under the Plan, beginning of year
|
|
|
1,296,462
|
|
|
|
191,656
|
|
Increases in the number of authorized shares under the Plan
|
|
|
1,236,346
|
|
|
|
1,106,088
|
|
Grants of stock options
|
|
|
(1,328,718
|
)
|
|
|
(224,000
|
)
|
Stock option forfeitures
|
|
|
77,937
|
|
|
|
337,583
|
|
Exercise of stock options
|
|
|
-
|
|
|
|
-
|
|
Stock grants
|
|
|
-
|
|
|
|
(114,865
|
)
|
Stock grant forfeitures
|
|
|
-
|
|
|
|
-
|
|
Reserved but unissued shares under the Plan, end of year
|
|
|
1,282,027
|
|
|
|
1,296,462
|
|
Stock Options
In the year ended December 31, 2019, the Company made
awards of stock options for the purchase of an aggregate 1,328,718 shares of common stock to its employees and directors from
the Plan. Of these awards, options covering 159,100 shares of common stock were awarded in lieu of cash bonuses for 2018 and the
expense was recorded during the year ended December 31, 2018. An option for the purchase of 258,618 shares of common stock was
issued from the Plan to the Company’s Chief Executive Officer as part of options for the purchase of an aggregate 600,000
shares of common stock granted to him in conjunction with his recruitment and employment, as described below (see Inducement Stock
Options). Options covering an additional 381,000 shares of common stock have been issued as payment to the Company’s directors
and are described below. The remaining stock option awards covering 530,000 shares of common stock were granted to certain members
of management. The 2019 stock option awards have exercise prices either specified at $2.25 or at the grant date fair value ranging
from $0.87 to $1.21 per share, contractual lives of 10 years, and vest over a period of one to three years. The fair values of
the stock options estimated on the dates of grant using the Black-Scholes option valuation model totaled $664,000.
In 2018, the Company awarded from the Plan to certain employees
stock options for the purchase of 224,000 shares of stock. The stock options have exercise prices based on the grant date fair
values ranging from $1.85 to $2.10 per share with a weighted average of $1.94 per share, a contractual life of 10 years, and vesting
over three to four years.
As permitted by SAB 107, due to the Company’s insufficient
history of option activity, management utilized the simplified approach to estimate the expected term of the options, which represents
the period of time that options granted are expected to be outstanding. Expected volatility was determined through the Company’s
historical stock price volatility. The Company estimated the forfeiture rate at the time of grant and will revise it, if necessary,
in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes compensation costs only for those
equity awards that are expected to vest. The risk-free rate for periods within the contractual life of the option is based on the
U.S. Treasury yield in effect at the time of grant. The Company has never declared or paid dividends and has no plans to do so
in the foreseeable future. The following weighted-average assumptions were utilized in the calculation of the fair value of the
stock options:
|
|
2019
|
|
|
2018
|
|
Expected life
|
|
|
5.75
|
years
|
|
|
6.20
|
years
|
Weighted average volatility
|
|
|
71
|
%
|
|
|
70
|
%
|
Forfeiture rate
|
|
|
20
|
%
|
|
|
15
|
%
|
Weighted average risk-free interest rate
|
|
|
2.52
|
%
|
|
|
2.74
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
A
summary of the Company’s stock option activity and related information is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Options to Purchase Common Stock
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
|
Options to Purchase Common Stock
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding at January 1
|
|
|
880,277
|
|
|
$
|
4.32
|
|
|
|
6.49
|
|
|
|
993,860
|
|
|
$
|
4.81
|
|
|
|
6.94
|
|
Granted
|
|
|
1,328,718
|
|
|
$
|
1.32
|
|
|
|
9.16
|
|
|
|
224,000
|
|
|
$
|
1.94
|
|
|
|
9.23
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired/Exchanged
|
|
|
(77,937
|
)
|
|
$
|
2.11
|
|
|
|
-
|
|
|
|
(337,583
|
)
|
|
$
|
4.19
|
|
|
|
-
|
|
Outstanding at December 31
|
|
|
2,131,058
|
|
|
$
|
2.53
|
|
|
|
7.99
|
|
|
|
880,277
|
|
|
$
|
4.32
|
|
|
|
9.04
|
|
Exercisable at December 31
|
|
|
1,461,073
|
|
|
$
|
2.90
|
|
|
|
7.58
|
|
|
|
587,962
|
|
|
$
|
5.17
|
|
|
|
6.49
|
|
A summary of the status of the Company’s non-vested stock
options at December 31 and changes during the year is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Number of Options
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Number of Options
|
|
|
Weighted Average Grant Date Fair Value
|
|
Non-vested stock options at January 1
|
|
|
292,315
|
|
|
$
|
2.61
|
|
|
|
238,871
|
|
|
$
|
4.27
|
|
Granted
|
|
|
1,328,718
|
|
|
$
|
1.32
|
|
|
|
224,000
|
|
|
$
|
1.94
|
|
Vested
|
|
|
(902,268
|
)
|
|
$
|
1.40
|
|
|
|
(122,647
|
)
|
|
$
|
4.15
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired/Exchanged
|
|
|
(48,780
|
)
|
|
$
|
2.14
|
|
|
|
(47,909
|
)
|
|
$
|
3.82
|
|
Non-vested stock options at December 31
|
|
|
669,985
|
|
|
$
|
1.71
|
|
|
|
292,315
|
|
|
$
|
2.61
|
|
The estimated aggregate pretax intrinsic value of the Company’s
outstanding vested stock options at December 31, 2019 is $0. The intrinsic value is the difference between the Company’s
common stock price and the option exercise prices multiplied by the number of in-the-money options. This amount changes based on
the fair value of the Company’s common stock.
At December 31, 2019, there was
$300,000 of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted
under the Plan that will be recognized over a remaining weighted average period of 1.4 years. That cost is expected to be
recognized in future years as follows:
2020
|
|
|
207,000
|
|
2021
|
|
|
84,000
|
|
2022
|
|
|
9,000
|
|
|
|
$
|
300,000
|
|
The recognized compensation cost associated with the Plan is
as follows:
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
174,000
|
|
|
$
|
145,000
|
|
General and administrative
|
|
|
394,000
|
|
|
|
79,000
|
|
Effect on net loss
|
|
$
|
568,000
|
|
|
$
|
224,000
|
|
Effect on net loss per share
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
Stock Grants
In May 2018, the Company authorized shares of common stock to
be issued under the Plan to its non-executive directors in accordance with board agreements. The shares were earned quarterly for
service in 2018. The Company recognized $212,000, represented by 114,865 shares, in general and administrative expense through
December 31, 2018. There were no such stock grants during the year ended December 31, 2019.
Consultant Stock Plan
The 2013 Consultant Stock Plan (the Consultant Plan) provides
for the granting of shares of common stock to consultants who provide services related to capital raising, investor relations,
and making a market in or promoting the Company’s securities. The Company’s officers, employees, and board members
are not entitled to receive grants from the Consultant Plan. The Compensation Committee of the Board of Directors is authorized
to administer the Consultant Plan and establish the grant terms. The number of shares reserved for issuance under the Consultant
Plan on December 31, 2019 totaled 190,142 shares. The Consultant Plan provides for quarterly increases in the available number
of authorized shares equal to the lesser of 1% of any new shares issued by the Company during the quarter immediately prior to
the adjustment date or such lesser amount as the Board of Directors shall determine.
The Company granted 7,500 shares of common stock in 2018,
under the Consultant Plan to a consultant for services for the period from January 1, 2018 to September 30, 2018. The fair value
of the stock at the time of grant was $3.50 per share for a total value of $26,000 in 2018, which the Company recognized in general
and administrative expense. The Company also granted 10,000 shares of common stock to a second consultant under the Consultant
Plan for services performed and to be performed during the period from August 13, 2018 to August 31, 2019. The fair value of the
stock at the time of grant was $1.44 per share for a total value of $14,000, for which the Company recognized $4,000 for 2,500
shares in general and administrative expense on a pro-rated quarterly basis in the fourth quarter of 2018 and $10,000 in the first
three quarters of 2019. The contract with the second consultant was renewed and the second consultant was granted 10,000 shares
for services from September 1, 2019 through August 31, 2020. The fair value of the stock at the time of grant was $1.03 per share
for a total value of $10,000. The Consultant Plan expense for 2019 and 2018 was $14,000 and $30,000, respectively.
Activity under the Consultant Plan is as follows:
|
|
2019
|
|
|
2018
|
|
Reserved but unissued shares under the Consultant Plan at January 1
|
|
|
199,705
|
|
|
|
99,159
|
|
Increases in the number of authorized shares under the Consultant Plan
|
|
|
437
|
|
|
|
110,546
|
|
Stock grants
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Reserved but unissued shares under the Consultant Plan at Period End
|
|
|
190,142
|
|
|
|
199,705
|
|
Inducement Stock Options
Pursuant to the rules of The Nasdaq
Stock Market, and in compliance with those rules, the Company may issue equity awards, including stock options, as an
inducement to an individual to accept employment with the Company. Inducement awards need not be approved by the
Company’s shareholders. During the year ended December 31, 2019, the Company granted options to purchase 600,000 shares
of common stock as an inducement to its President and Chief Executive Officer to accept the Company’s offer of
employment. (See Note 11.) The stock options have exercise prices ranging from $1.16 to $2.25 per share, contractual lives of
10 years, and vest over 2 years. An option to purchase 258,618 shares was issued from the Company’s 2011 Equity
Incentive Plan and are accounted for with the stock options described above. Non-qualified stock options covering the
remaining 341,382 shares were issued from the Company’s reserve of authorized but unissued shares of common stock. The
fair value of the non-qualified stock options estimated on the date of grant using the Black-Scholes option valuation model
was $176,000. The recognized compensation expense associated with these awards for the year ended December 31, 2019 was
$111,000. The remaining unrecognized compensation expense associated with these awards is $65,000. The following
weighted-average assumptions were utilized in the calculation of the fair value of the stock options:
|
|
2019
|
|
|
Expected life
|
|
|
5.75
|
years
|
|
Weighted average volatility
|
|
|
71
|
%
|
|
Forfeiture rate
|
|
|
20
|
%
|
|
Weighted average risk-free interest rate
|
|
|
2.55
|
%
|
|
Expected dividend rate
|
|
|
0
|
%
|
|
Warrants
A summary of the Company’s warrant activity and related
information is as follows:
|
|
2019
|
|
|
2018
|
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at January 1
|
|
|
2,495,784
|
|
|
$
|
3.98
|
|
|
|
2,495,784
|
|
|
$
|
3.98
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(2,415,784
|
)
|
|
$
|
4.05
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31
|
|
|
80,000
|
|
|
$
|
1.80
|
|
|
|
2,495,784
|
|
|
$
|
3.98
|
|
The following table summarizes the number of warrants, the weighted
average exercise price, and weighted average life (in years) by price for both total outstanding warrants and total exercisable
warrants at December 31, 2019:
|
|
Total Outstanding Warrants
|
|
Exercise Price
|
|
Warrants
|
|
|
Wtd. Avg. Exercise Price
|
|
|
Remaining Life
(in years)
|
|
$1.80
|
|
|
80,000
|
|
|
$
|
1.80
|
|
|
|
1.14
|
|
The intrinsic value of the outstanding warrants was $0 at December
31, 2019.
Note 9 – Retirement Plan
The Company has a defined contribution retirement plan covering
all of its employees whereby the Company matches employee contributions up to 3% of each employee’s 2019 and 2018 earnings.
The Company’s matching contribution expense totaled $58,000 and $85,000 in 2019 and 2018, respectively.
Note 10 – Related Party Transactions
In November 2018, one of the Company’s shareholders, who
is also a co-founder and member of MDB Capital Group LLC, filed a draft solicitation statement with the SEC seeking the support
of the Company’s shareholders in making a demand that the Company call a special meeting of its shareholders. In January
2019, the Company entered into a Cooperation Agreement with this shareholder pursuant to which the shareholder withdrew his request
to hold a special meeting. The Cooperation Agreement among other things, includes certain standstill provisions. The term
of the Cooperation agreement will continue until the earlier of (i) the day immediately following the date of 2020 annual meeting
or (ii) December 31, 2020. Pursuant to the terms of the Cooperation Agreement the Company reimbursed the shareholder $40,000 for
expenses, which is included in accounts payable and accrued liabilities at December 31, 2018. Costs incurred in connection with
this matter, including the amount reimbursed to the shareholder, were recorded in general and administrative expenses and totaled
approximately $101,000 and $364,000 for the years ended December 31, 2019 and 2018, respectively.
Note 11 – Commitments and Contingencies
On January 28, 2019 (the “Effective Date”), the
Company and Colin James Deller entered into an employment agreement (the “Agreement”) pursuant to which the Company
employed Dr. Deller as its President until April 1, 2019, at which time Dr. Deller became the Company’s Chief Executive Officer.
Pursuant to the Agreement, the Company pays Dr. Deller an annual salary of $350,000. As an inducement to accept employment with
the Company, Dr. Deller was also granted an option to purchase 400,000 shares of the Company’s common stock at an exercise
price of $1.16 per share and an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.25
per share. Each option has a term of 10 years and will vest as follows: the right to purchase one-third of the shares of common
stock subject to the option vested on the Effective Date; the right to purchase one-third of the shares will vest on the first
anniversary of the grant date; and the right to purchase one-third of the shares will vest on the second anniversary of the grant
date. The Company also agreed to pay certain expenses, not to exceed the sum of $100,000, related to Dr. Deller’s move from
Tulsa, Oklahoma to Seattle, Washington, including reasonable expenses related to the sale of his home in Tulsa. As a temporary
adjustment for the difference in the cost of living between Tulsa and Seattle (the “Relocation Adjustment”), for a
period of four years (the “Payment Period”) from the Effective Date, the Company has also agreed to pay up to $6,000
a month to Dr. Deller for expenses related to temporary housing and travel to and from Tulsa to Seattle. If Dr. Deller purchases
a home in the Seattle area, the Relocation Adjustment will continue to be paid through the expiration of the Payment Period, although
the Relocation Adjustment may be adjusted or terminated upon mutual agreement of Dr. Deller and the Company. The Agreement may
be terminated by the Company for cause, as defined in the Agreement, due to Dr. Deller’s death or disability, upon 30 days’
notice to Dr. Deller or as a result of a change in control, as defined in the Agreement. With the exception of a termination for
cause, if Dr. Deller’s employment is terminated by the Company, aside from accrued but unpaid salary, bonus (if any) and
business expenses, Dr. Deller will receive the balance of the unpaid Relocation Adjustment and six months of his annual salary.
Through December 31, 2019, the Company has paid Dr. Deller $33,000
in Relocation Adjustment payments to reimburse temporary housing costs.
Litigation
From time to time the Company may become involved in various
lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties
and an adverse result in any such matter may harm the Company’s business. As of the date of these financial statements, the
Company is not a party to any material pending legal proceedings.
Indemnification Agreements
The Company maintains indemnification agreements with its directors
and officers that may require the Company to indemnify these individuals against liabilities that arise by reason of their status
or service as directors or officers, except as prohibited by law.
Note 12 – Quarterly Results (unaudited)
Quarterly results for the years ended
December 31, 2019 and 2018 are as follows:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
For the year ended December 31, 2019
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross Profit (Loss)
|
|
$
|
(1,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Operating Expense
|
|
$
|
2,376,000
|
|
|
$
|
2,447,000
|
|
|
$
|
2,138,000
|
|
|
$
|
1,621,000
|
|
Net loss attributed to common stockholders
|
|
$
|
(2,329,000
|
)
|
|
$
|
(2,426,000
|
)
|
|
$
|
(2,108,000
|
)
|
|
$
|
(1,616,000
|
)
|
Net Loss per share - basic and fully diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
530,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross Profit (Loss)
|
|
$
|
135,000
|
|
|
$
|
(20,000
|
)
|
|
$
|
(9,000
|
)
|
|
$
|
(3,000
|
)
|
Operating Expense
|
|
$
|
2,413,000
|
|
|
$
|
2,370,000
|
|
|
$
|
2,306,000
|
|
|
$
|
2,585,000
|
|
Net loss attributed to common stockholders
|
|
$
|
(2,278,000
|
)
|
|
$
|
(2,389,000
|
)
|
|
$
|
(2,292,000
|
)
|
|
$
|
(2,541,000
|
)
|
Net Loss per share - basic and fully diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
Note 13 – Subsequent Events
NASDAQ Listing Requirements
On January 15, 2020, the Company received a letter from The
Nasdaq Stock Market LLC ("Nasdaq") indicating that, based upon the closing bid price of the Company's common stock for
the previous 30 consecutive business days, the common stock did not meet the minimum bid price of $1.00 per share required for
continued listing on the Nasdaq Capital Market pursuant to Nasdaq Marketplace Rule 5550(a)(2). The letter also indicates that the
Company will be provided with a compliance period of 180 calendar days, or until July 13, 2020, in which to regain compliance,
pursuant to Nasdaq Marketplace Rule 5810(c)(3)(A). The letter further indicates that if, at any time during the 180-day compliance
period, the closing bid price of the common stock is at least $1.00 for a minimum of ten consecutive business days, Nasdaq will
provide the Company with written confirmation that it has achieved compliance with the minimum bid price requirement. The Company
intends to continue to monitor the bid price levels for the common stock, and will consider appropriate alternatives to achieve
compliance within the 180-day compliance period or any extension thereof.
Coronavirus Impacts
In March 2020, the World Health Organization
declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic, which continues to spread throughout the
United States. The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future
developments, including the duration and spread of COVID-19, and the overall economy, all of which are highly uncertain and cannot
be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company's operating
results may be materially and adversely affected.