ClearSign Technologies (CLIR) - 2022 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis of ClearSign Technologies Corporation Item 1. Unaudited Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for ClearSign Technologies Corporation, including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, significant accounting policies, and specific financial line items Unaudited Condensed Consolidated Balance Sheets Presents the company's financial position, detailing changes in cash, total assets, liabilities, and equity over the period | Metric (in thousands) | March 31, 2022 | December 31, 2021 | Change (in thousands) | % Change | | :-------------------- | :------------- | :---------------- | :-------------------- | :------- | | Cash and cash equivalents | $6,667 | $7,607 | $(940) | -12.36% | | Total current assets | $7,339 | $8,024 | $(685) | -8.54% | | Total Assets | $8,644 | $9,363 | $(719) | -7.68% | | Total current liabilities | $786 | $731 | $55 | 7.52% | | Total liabilities | $1,080 | $1,081 | $(1) | -0.09% | | Total equity | $7,564 | $8,282 | $(718) | -8.67% | Unaudited Condensed Consolidated Statements of Operations Details the company's financial performance, showing revenues, cost of goods sold, operating expenses, and net loss for the reporting periods | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (in thousands) | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | :------- | | Revenues | $0 | $363 | $(363) | -100.0% | | Cost of goods sold | $0 | $225 | $(225) | -100.0% | | Gross Income | $0 | $138 | $(138) | -100.0% | | Operating expenses | $1,517 | $2,159 | $(642) | -29.74% | | Net Loss | $(1,490) | $(2,021) | $531 | -26.27% | | Net loss per share - basic and fully diluted | $(0.05) | $(0.07) | $0.02 | -28.57% | Unaudited Condensed Consolidated Statements of Stockholders' Equity Outlines changes in stockholders' equity, including common shares, additional paid-in capital, and accumulated deficit, reflecting equity movements | Metric (in thousands) | Balances at December 31, 2021 | Balances at March 31, 2022 | Change (in thousands) | | :-------------------- | :---------------------------- | :------------------------- | :-------------------- | | Common Shares | 31,582 | 32,155 | 573 | | Additional Paid-In Capital | $91,035 | $91,807 | $772 | | Accumulated Deficit | $(82,765) | $(84,255) | $(1,490) | | Total Stockholders' Equity | $8,282 | $7,564 | $(718) | Unaudited Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities, indicating the net change in cash and equivalents | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (in thousands) | | :-------------------- | :-------------------------------- | :-------------------------------- | :-------------------- | | Net cash used in operating activities | $(1,503) | $(1,513) | $10 | | Net cash used in investing activities | $(15) | $(88) | $73 | | Net cash provided by financing activities | $578 | $3,502 | $(2,924) | | Net change in cash and cash equivalents | $(940) | $1,901 | $(2,841) | | Cash and cash equivalents, end of period | $6,667 | $10,725 | $(4,058) | Notes to Unaudited Condensed Consolidated Financial Statements Provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements Note 1 – Organization and Description of Business Describes the company's business, technologies, operational locations, and historical financial performance including accumulated losses - ClearSign Technologies Corporation designs and develops products to improve industrial and commercial combustion systems, focusing on operational performance, energy efficiency, emission reduction, safety, and cost-effectiveness, with key technologies including ClearSign Core™ and ClearSign Eye™[19] - The company relocated its headquarters from Seattle, Washington to Tulsa, Oklahoma in January 2022 and has a subsidiary, ClearSign Asia Limited, in Hong Kong with a Wholly Foreign Owned Enterprise (WFOE) in China[20] - ClearSign has incurred $84.3 million in losses since inception and expects continued operating losses and negative cash flows, relying on equity issuances and future funding through co-development, strategic partnerships, or debt/equity financing for commercialization[24] Note 2 – Summary of Significant Accounting Policies Outlines the significant accounting policies applied in preparing the financial statements, including revenue recognition, asset impairment, and share-based compensation - The financial statements are prepared in accordance with SEC rules for Form 10-Q, condensing certain information and footnote disclosures, and reflect all normal recurring and other adjustments necessary for fair presentation[26][27] - Revenue and cost of goods sold are recognized under ASC 606 when goods or services are delivered to customer control or non-refundable performance obligations are satisfied, typically upon delivery of drawings or equipment[30][117] - The company tests long-lived assets (fixed assets, patents, other intangibles) for impairment when circumstances indicate the carrying amount may not be recoverable, recognizing a loss if the carrying amount exceeds fair value[41][120] - Research and development costs, including salaries, benefits, share-based compensation, consumables, and consulting fees, are expensed as incurred[47][122] - The company accounts for income taxes using an asset and liability approach, providing a valuation allowance for deferred tax assets if realization is not more likely than not[48] - Share-based compensation costs for employee stock options and other equity arrangements are recognized based on estimated fair value at grant date over the service period or upon milestone completion for performance options[49][123] - The company does not expect the adoption of ASU 2016-13 (Financial Instruments) or ASU 2021-10 (Government Assistance) to have a material impact on its financial statements[55][56] Note 3 Fixed Assets Details the company's fixed assets, including machinery, office equipment, leasehold improvements, and associated depreciation and lease liabilities Fixed Assets (in thousands) | Fixed Assets (in thousands) | 2022 | 2021 | | :-------------------------- | :----- | :----- | | Machinery and equipment | $666 | $722 | | Office furniture and equipment | $224 | $218 | | Leasehold improvements | $192 | $192 | | Total | $1,082 | $1,132 | | Accumulated depreciation and amortization | $(1,006) | $(1,055) | | Operating lease ROU assets, net | $417 | $453 | | Total Fixed Assets, net | $493 | $530 | - Depreciation expense for the three months ended March 31, 2022, and 2021, totaled $7 thousand and $8 thousand, respectively[57] - The company leases office space in Seattle, Tulsa, and Beijing, with Seattle and Tulsa leases being operating leases with remaining terms of one to six years, and the Beijing lease being short-term; the company plans to exit the Seattle lease as part of its headquarters relocation to Tulsa[58][59][62] Lease Liabilities (in thousands) | Lease Liabilities (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------- | :------------- | :---------------- | | Current lease liabilities | $212 | $205 | | Long term lease liabilities | $294 | $350 | | Total lease liabilities | $506 | $555 | Note 4 – Patents and Other Intangible Assets Presents the company's intangible assets, including patents and trademarks, their amortization, and intellectual property protection strategies Intangible Assets (in thousands) | Intangible Assets (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------- | :------------- | :---------------- | | Patents pending | $473 | $439 | | Issued patents | $577 | $577 | | Trademarks pending | $1 | $3 | | Registered trademarks | $95 | $94 | | Total | $1,154 | $1,121 | | Accumulated amortization | $(352) | $(322) | | Net Intangible Assets | $802 | $799 | - Future amortization expense for issued patents and registered trademarks is projected to be $320 thousand, with amortization lives ranging from three to five years for patents and ten years for trademarks, while pending patents and trademarks are not amortized[67] - The company continues to pursue intellectual property protection and will impair intangible assets that do not directly align with its core technology, writing off monies to research and development expense[68][69] Note 5 – Revenue, Contract Assets and Contract Liabilities Analyzes revenue recognition, cost of goods sold, and changes in contract assets and liabilities for the reporting periods - The company recognized no revenues for the three months ended March 31, 2022, a significant decrease from $363 thousand in revenue from a burner product contract in the same period of 2021[70] - Cost of goods sold was zero for Q1 2022, compared to $250 thousand from the burner contract, $18 thousand from an estimated loss contract, and $8 thousand in residual costs in Q1 2021, with Q1 2021 COGS offset by a $51 thousand reversal of product warranty accruals[71] Contract Balances (in thousands) | Contract Balances (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------- | :------------- | :---------------- | | Contract assets | $244 | $39 | | Contract liabilities | $84 | $84 | Note 6 – Equity Details equity transactions, including common stock issuances, share-based compensation, and outstanding options and restricted stock units - The company is authorized to issue 62.5 million shares of common stock and 2.0 million shares of preferred stock, with no preferred stock issued to date[74] - During Q1 2022, the company issued approximately 496 thousand shares of common stock at an average price of $1.24 per share, generating $614 thousand in gross proceeds through its At-The-Market (ATM) Offering Sales Agreement[76] - As of March 31, 2022, the company has issued approximately 1.6 million shares under the ATM program, with gross proceeds of $6.1 million and net cash proceeds of $5.9 million[76] Equity Incentive Plan (in thousands) | Equity Incentive Plan (in thousands) | March 31, 2022 | December 31, 2021 | | :----------------------------------- | :------------- | :---------------- | | Outstanding options and restricted stock units | 3,307 | 3,076 | | Reserved but unissued shares under the Plans | 2,758 | 2,901 | | Total authorized shares under the Plans | 6,065 | 5,977 | - Compensation expense for stock option awards decreased significantly to $42 thousand for Q1 2022 from $410 thousand for Q1 2021[84] - As of March 31, 2022, there was $1.8 million of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements[86] - The vesting of RSU grants for board services is contingent on future events, so no stock-based compensation was recognized for Q1 2022 or Q1 2021; however, 59 thousand RSUs were issued for board services in Q1 2022, amounting to $85 thousand of unrecognized compensation[89] - In January 2022, the company issued 97 thousand RSUs to employees as retention bonuses, resulting in $35 thousand of recognized compensation and $105 thousand of unrecognized compensation for Q1 2022[90] - The company issued 66 thousand shares of common stock with a fair value of $1.44 per share to employees in Q1 2022 in lieu of cash for 2021 accrued bonuses, totaling $125 thousand[91] Consultant Stock Plan Compensation Expense | Consultant Stock Plan Compensation Expense | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Compensation Expense (in thousands) | $7 | $9 | | Weighted Average Value Per Share | $1.93 | $2.33 | Note 7 – Commitments and Contingencies Addresses potential future obligations and legal matters, including pending legal proceedings and indemnification agreements - The company is not currently a party to any material pending legal proceedings or claims that are expected to have a material adverse effect on its business, financial condition, or operating results[97] - Indemnification agreements are maintained with directors and officers to indemnify them against liabilities arising from their status or service, as permitted by law[98] Note 8 – The Paycheck Protection Program (PPP) Loan Reports on the status and forgiveness of the company's Paycheck Protection Program loan - The company's $251 thousand Paycheck Protection Program (PPP) loan, obtained in May 2020, was fully forgiven by the Small Business Administration (SBA) in the second quarter of 2021, resulting in a $251 thousand gain on forgiveness of debt and accrued interest[99] Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key financial performance, critical accounting policies, and liquidity. It also includes forward-looking statements and associated risks - ClearSign designs and develops technologies to improve combustion systems, with its ClearSign Core™ technology proven in industrial tests and operating in first customer installations; however, the company has generated nominal revenues to date[107] - The company has incurred $84.3 million in losses since inception and expects continued operating losses and negative cash flow, having historically financed operations through equity issuances totaling $84.6 million[108] - Future success depends on market recognition, acceptance of technologies, and adequate funding through co-development, strategic partnerships, or equity/debt financing to support commercialization, intellectual property protection, and working capital[110] OVERVIEW Provides a general business overview, outlining operational costs, technology commercialization challenges, and future profitability uncertainties - The company's costs include employee salaries and benefits, consultant compensation, materials for prototype development, legal and accounting expenses, sales and marketing, and general and administrative costs[112] - The company cannot assure that its technologies will be accepted, that it will earn sufficient revenues to support operations, or that it will ever be profitable, and lacks a committed source of financing[115] CRITICAL ACCOUNTING POLICIES Highlights key accounting policies requiring significant management judgment and estimates, such as revenue recognition and product warranty accruals - The financial statements are prepared in conformity with GAAP, requiring significant management judgment and estimates that can be materially affected by changing economic factors and conditions[116] - Revenue and cost of goods sold are recognized under FASB ASC 606 when performance obligations are satisfied, typically upon delivery of documents or equipment; progress payments are offset against project costs, recorded as contract assets or liabilities[117][119] - Product warranty accruals are based on expected experience and performance trends, recorded as a component of cost of sales at revenue recognition, and adjusted periodically[121] RESULTS OF OPERATIONS Compares the company's financial performance for the three months ended March 31, 2022, and 2021, across key income statement metrics Comparison of Three Months Ended March 31, 2022 and 2021 | Metric (in thousands) | Q1 2022 | Q1 2021 | Change (in thousands) | % Change | | :-------------------- | :------ | :------ | :-------------------- | :------- | | Revenues | $0 | $363 | $(363) | -100.0% | | Gross Profit | $0 | $138 | $(138) | -100.0% | | Operating Expenses | $1,517 | $2,159 | $(642) | -29.7% | | Net Loss | $(1,490)| $(2,021)| $531 | -26.3% | | Basic and diluted net income per common share | $(0.05) | $(0.07) | $0.02 | -28.6% | - Research and Development (R&D) expenses decreased by $718 thousand (86.9%) to $108 thousand in Q1 2022, primarily due to reassignment of engineers to business development, headcount decreases, incentive reductions, and lower product development costs[129] - General and Administrative (G&A) expenses increased by $76 thousand (5.7%) to $1,409 thousand in Q1 2022, driven by increased accounting costs and the shift of engineer salaries from R&D, partially offset by a $210 thousand decrease in board of director compensation due to a change in payment method and deferred expense recognition[130] - Other income for Q1 2022 included a $23 thousand gain from the sale of fixed assets at the Seattle office, following the board's approval to relocate headquarters to Tulsa[134] Liquidity and Capital Resources Assesses the company's cash position, working capital, and future capital requirements, including funding strategies Cash and Working Capital | Metric (in thousands) | March 31, 2022 | December 31, 2021 | Change (in thousands) | | :-------------------- | :------------- | :---------------- | :-------------------- | | Cash and cash equivalent balance | $6,667 | $7,607 | $(940) | | Working capital | $6,553 | $7,293 | $(740) | - The company has sufficient funds for at least 12 months but anticipates needing additional capital beyond that point, planning to raise funds through securities offerings, debt financings, or intellectual property sales/licensing[137] - Operating activities resulted in cash outflows of $1,503 thousand in Q1 2022, primarily due to the net loss, a slight improvement from $1,513 thousand outflow in Q1 2021[139] - Investing activities resulted in cash outflows of $15 thousand in Q1 2022, a significant improvement from $88 thousand outflow in Q1 2021, driven by lower disbursements for fixed and intangible assets and proceeds from asset sales[140] - Financing activities provided $578 thousand in net proceeds from ATM offerings in Q1 2022, a substantial decrease from $3,502 thousand in Q1 2021, which included proceeds from stock options and warrants[141][143] Off-Balance Sheet Transactions Confirms the absence of any off-balance sheet arrangements or transactions - The company does not have any off-balance sheet transactions[144] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, ClearSign Technologies Corporation is not required to provide quantitative and qualitative disclosures about market risk - The company is exempt from providing quantitative and qualitative disclosures about market risk due to its status as a smaller reporting company[144] Item 4. Controls and Procedures This section details the company's disclosure controls and procedures, confirming their effectiveness as of March 31, 2022, and noting no material changes in internal control over financial reporting. It also acknowledges the inherent limitations of any control system - As of March 31, 2022, management, including the CEO and VP & Controller, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[146] - There have been no changes in internal control over financial reporting during Q1 2022 that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[147] - Management acknowledges that no control system can prevent or detect all errors and fraud, as control systems provide only reasonable, not absolute, assurance due to inherent limitations like faulty judgments, simple errors, circumvention by individuals, or management override[148][150] PART II OTHER INFORMATION Presents additional information not covered in the financial statements, including legal matters, risk factors, and equity transactions Item 1. Legal Proceedings The company is not currently involved in any legal proceedings or claims that are expected to have a material adverse effect on its business, financial condition, or operating results - The company is not aware of any material pending legal proceedings or claims that would significantly harm its business, financial condition, or operating results[152] Item 1A. Risk Factors This section incorporates by reference the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent filings - The company incorporates by reference the risk factors from its Annual Report on Form 10-K for the year ended December 31, 2021, and subsequent SEC filings[153] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported an unregistered sale of 3,750 shares of common stock to its investor relations firm for services provided, relying on the Section 4(a)(2) exemption from registration - On March 31, 2022, the company issued 3,750 shares of common stock at $1.93 per share to its investor relations firm, Firm IR, for services provided, under the 2013 Consultant Stock Plan, relying on the Section 4(a)(2) exemption from registration[154] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable[155] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable[156] Item 5. Other Information This section discloses an amendment to the CEO's employment agreement, expanding bonus compensation options and increasing cash severance payments - On May 11, 2022, the company amended CEO Colin James Deller's employment agreement to expand bonus compensation options to include cash or various equity securities under the 2021 Equity Incentive Plan[158] - The amendment also increased Mr. Deller's cash severance payment from six months to one year of his annual base salary in case of termination by the company or a Change of Control[158] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including articles of incorporation, bylaws, certifications, and XBRL-related documents - The exhibits include Articles of Incorporation, Bylaws, Rule 13a-14(a)/15d-14(a) Certifications of Principal Executive and Financial Officers, Section 1350 Certification, and various Inline XBRL documents[161] SIGNATURES The report is duly signed on behalf of ClearSign Technologies Corporation by its Chief Executive Officer, Colin James Deller, and Vice President and Controller, Brent Hinds, as of May 16, 2022 - The report is signed by Colin James Deller, Chief Executive Officer, and Brent Hinds, Vice President and Controller, on May 16, 2022[163]