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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-31 · 76 added, 64 removed, 71 unchanged (66% of the section changed)

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We design and develop technologies for the purpose of improving key performance characteristics of combustion systems, including emission and operational performance, energy efficiency and overall cost-effectiveness.

Our ClearSign Core technology is currently installed in limited commercial applications.

Our ClearSign Core technology has been proven in full scale industrial test furnaces and boilers, and first customer installations are currently operating in normal commercial applications.

We have generated nominal revenues from operations to date to meet operating expenses.

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We may need to raise additional capital in the future, however, the significant volatility in the capital markets may negatively affect our ability to raise this additional capital.

It is not possible at this time to estimate the full impact that the coronavirus pandemic will have on our business or on our potential customers, suppliers or other business partners.

However, the continued spread of the coronavirus, the measures taken by the governments of affected countries, actions taken to protect employees, the limitations placed on travel and border crossings, and the impact of the pandemic on various business activities in affected countries could adversely impact our operational results and financial condition.

In order to generate meaningful revenues, our technologies must gain market recognition and acceptance to develop sufficient recurring sales.

In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through co-development agreements, strategic partnering agreements, or equity or debt financing to adequately support commercialization of our research and development efforts, protect intellectual property, form relationships with strategic partners and provide for working capital and general corporate purposes.

In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through co-development agreements, strategic partnering agreements, or equity or debt financing to support commercialization of our 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 we will be successful in achieving our long-term plans, or that such plans, if consummated, will result in profitable operations or enable us to continue in the long-term as a going concern.

With respect to our China operations, we have a satellite office located in Beijing, China to support our commercialization efforts.

At this time, these operations in China are immaterial compared to total company operations.

As of December 31, 2022, our China asset balance totaled $172 thousand, or approximately 1.6%, compared to our total asset balance of $10,925 thousand.

During the year ended December 31, 2022, our China operations reported zero revenues.

During the same period in 2021, revenues attributable to our China operations were $21 thousand, or approximately 3.4% compared to our total revenues of $607 thousand.

Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for prototype development and manufacture, costs associated with development activities including materials, sub-contractors, travel and administration, legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company.

As of December 31, 2021, we have 12 full-time employees.

Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current levels.

We currently have 16 full-time employees.

Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur ongoing consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current level of activities.

The amount that we spend for any specific purpose may vary significantly, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our sales and marketing strategies.

Research, development, and commercial acceptance of new technologies are, by their nature, unpredictable.

Although we undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology to the extent needed to create future sales to sustain operations.

If the net proceeds from these offerings are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual property, or other alternatives.

We cannot assure that our technologies will be accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable.

Furthermore, we have no committed source of financing and we cannot assure that we will be able to raise money as and when we need it to continue our operations.

If we cannot raise funds as and when we need them, we may be required to scale back our development and deployment plans by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations.

If we cannot raise funds as and when we need them, we may be required to scale back our development by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations.

Critical Accounting Policies

The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control.

Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations.

These policies and estimates require the application of significant judgment by management.

These estimates can be materially affected by changes from period to period as economic factors and conditions outside of our control change.

As a result, they are subject to an inherent degree of uncertainty.

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The Company’s contracts with customers generally have performance obligations and a schedule of non-refundable cancellation obligations.

The contracts generally will be fully performed upon delivery of certain drawings or equipment.

The contracts generally will be fully performed upon delivery of certain documents or equipment.

Revenue related to the contracts is recognized following the completion of non-refundable performance obligations as defined in the contract.

The Company’s contracts generally include progress payments from customers 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

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 collectability is determined, revenue can be recorded.

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Research and development costs consist of salaries, benefits, share based compensation, consumables, and consulting fees, including costs to develop and test prototype equipment and parts.

Research and Development costs have been offset by funds received from strategic partners in cost sharing, collaborative projects.

During the year ended December 31, 2021, the Company received $50 thousand from such arrangements and during the year ended December 31, 2020, the Company received $40 thousand to partially fund specific engineering activity relating to the development of burners for a Super Major and $50 thousand to partially fund the engineering and installation of a product for an air quality demonstration project.

Since these funds were provided without expectation of reciprocation, other than the notification of research results, the funds received were offset against the related research and development costs incurred.

Research and development costs are offset by any funds received from strategic partners in cost sharing, collaborative projects.

During the year ended December 31, 2022, the Company received no monies from strategic partners.

During the year ended December 31, 2021, the Company received $44 thousand from such arrangements.

Stock-Based Compensation

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Fair Value of Financial Instruments

The Company's financial instruments primarily consist of cash and cash equivalents, accounts payable, accrued expenses and short-term investments in government securities.

As of the balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheets.

The Company's financial instruments primarily consist of cash equivalents, accounts payable, accrued expenses and short-term investments in government securities.

As of the balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the consolidated balance sheets.

This is primarily attributed to the short maturities of these instruments.

5 unchanged sentences

Cost of goods sold

Gross profit (loss)

Research and development

General and administrative

Operating Expenses

Other income, net

Basic and diluted net income per common share

NM = Not meaningful

Sales and Gross Loss

Consolidated revenues for the 2021 year totaled $607 thousand, whereas no sales were reported in 2020.

Revenues in 2021 include $499 thousand from contracts related to process burners, boiler burners and installation services.

Current year demand for our products and services came from a range of customers and geographies, such as a United States infrastructure company, a European refinery owned by a global energy company, and a Chinese boiler burner rental company.

An additional $108 thousand in sales were recorded from two prior year projects where constraints relating to collectability were eliminated in the current year.

Gross loss increased by $173 thousand, or 62.0% compared with 2020.

In 2021, gross loss was unfavorably impacted by contract losses reported in costs of goods sold, which amounted to $762 thousand.

These contract losses were incurred by refinery projects with most of the loss derived from our ExxonMobil project.

Consolidated revenues for the year ended December 31, 2022 totaled $374 thousand compared to $607 thousand reported for the year ended December 31, 2021, mainly due to the timing of performance obligations associated with certain projects during the period.

Because our contracts generally include progress payments from customers upon completion of defined milestones, the timing of these performance obligations can affect our recognition of revenue per ASC 606.

Revenues recognized in 2022 were related to the closeout of our ExxonMobil technology validation project, and the sale of our ClearSign Core TM enclosed oxidizer product for a hydrogen production plant.

ExxonMobil revenues were recognized upon receipt of cash to close out the contract.

This cash receipt eliminated collectability concerns, thus allowing recognition of revenue per ASC 606.

During the year 2021, we recognized $499 thousand from contracts related to process burners, boiler burners and installation services.

Additionally, $108 thousand in revenues related to 2020 projects where collectability constraints were eliminated in 2021, thus allowing the recognition of revenues per ASC 606.

Product and service revenues in 2021 came from a range of customers and locations, such as a United States infrastructure company, a European refinery owned by a global energy company, and a Chinese boiler burner rental company.

Gross profit for the year end December 31, 2022 increased $568 thousand compared to gross profit reported for the year end December 31, 2021, mainly due to recognizing revenues from our ExxonMobil technology validation project.

During 2021, a gross loss occurred primarily due to project losses amounting to $762 thousand.

These contract losses were incurred by refinery projects with the majority of the loss generated by our ExxonMobil project.

The ExxonMobil loss was caused by rigorous product testing and product development costs.

In contrast, gross loss was favorably impacted by expired product warranties reducing costs of goods sold by $86 thousand.

During the year ended December 31, 2020, gross loss was unfavorably impacted by contract losses of $450 thousand, offset by favorable warranty expirations of $171 thousand.

In September of 2021, the Company received verbal notification from ExxonMobil that our project at their Baytown, Texas refinery would be placed on hold.

At that time, we were fully prepared for a formal witness acceptance test by ExxonMobil, which would have allowed their staff to move into the final phases of the project.

ExxonMobil noted their engineers had insufficient time to meet their targeted 2022 refinery turnaround.

ClearSign and ExxonMobil are continuing to discuss contractual obligations related to the Baytown project.

Operating Expenses

Operating expenses consist of research and development (“R&D”) and general and administrative (“G&A”) expenses, which are addressed separately below.

R&D expenses increased by $651 thousand or approximately 32.1% to $2,680 thousand for the year ended December 31, 2021, as compared to $2,029 thousand during the year ended December 31, 2020.

In 2021, we incurred additional costs year over year of approximately $315 thousand for product development.

A majority of this spend related to boiler burner product lines that were developed in collaboration with our strategic partners California Boiler and Zeeco.

As a result, ClearSign developed a 125 horsepower (hp) and 500hp fire tube boiler burner along with a 2400hp water tube boiler burner.

Furthermore, we assessed our patent and trademark intangible assets to ensure that our ongoing intellectual property investments protect future anticipated cash returns.

The assessment was a two-phased approach with the first phase focused on product alignment, and the second phase focused on a risk, reward cost benefit analysis.

As a result of these assessments, we recognized a $385 thousand non-cash impairment charges, and an additional $50 thousand in accelerated amortization.

These R&D cost increases were offset by approximately $50 thousand for year over year net savings in human capital costs.

R&D expenditures were lower in the year ended December 31, 2020, due to reduced laboratory and customer fieldwork costs, coupled with zero costs for non-cash impairment charges.

R&D expenses decreased by $2,175 thousand, or approximately 81.2%, to $505 thousand for the year ended December 31, 2022, as compared to $2,680 thousand during the same period in 2021.

During 2022, R&D expenses decreased due to an organizational restructure that occurred at the beginning of 2022.

We restructured our organization such that some employees previously performing R&D functions were reassigned to business development functions, which shifted salaries of approximately $527 thousand to G&A expense (as discussed below).

This reassignment was executed as part of our transition from focusing on research to focusing on the commercialization of our technologies.

Decreases in human capital costs also favorably impacted R&D expenses by $438 thousand for the year ended December 31, 2022, when compared to the same period in 2021.

In addition, product development costs trended down by $645 thousand for the for the year ended December 31, 2022, as compared to the same period in 2021, due in large part to costs incurred during 2021 for the development of our water-tube and fire-tube boiler burner product lines.

G&A expenses increased by $715 thousand, or approximately 14.3%, to $5,728 thousand during the year ended December 31, 2022, as compared to $5,013 thousand during the year ended December 31, 2021.

In 2021, we incurred additional costs year over year of approximately $380 thousand for accounting and audit costs.

Most of these costs related to temporary professional staff and recruitment, to reinforce the finance and accounting function after the death of our CFO in July 2021.

The Company accrued $32 thousand for an estimated renovation liability to exit the Seattle lease at the end of its term.

These G&A cost increases were offset by approximately $45 thousand for year over year net savings in human capital costs.

G&A expenditures were lower in the year ended December 31, 2020, due to lower costs related to professional services and travel expenses due in large part to the impact of the COVID 19 pandemic.

Other income for the year ended December 31, 2021 reflects a $251 thousand gain on forgiveness of a Paycheck Protection Program ("PPP") loan and accrued interest under the 2020 CARES Act.

We received notification of the loan forgiveness during the second quarter of 2021.

Other income of $44 thousand for the year ended December 31, 2020 resulted from a non-recurring sale of spare materials and parts for an installation site on a previously completed contract.

Net loss for the year ended December 31, 2021, was $7,892 thousand compared to $6,886 thousand for the year ended December 31, 2020, or an approximate 14.6% increase.

The $1,006 thousand increase in net loss during the year ended December 31, 2021 is primarily attributable to the testing and engineering costs incurred during extensive development of the process burner technology under the initiative of the ExxonMobil technology validation project, as well as costs attributable to product development and commercialization efforts for our fire tube and water boiler burners.

These cost increases were offset by year over year revenue increases for product deliveries and installation services.

Our organizational restructure referenced in the R&D explanation above increased expenses by approximately $527 thousand for the year ended December 31, 2022, compared to the same period in 2021.

Increases in human capital costs also unfavorably impacted G&A expenses by $127 thousand for the year ended December 31, 2022, when compared to the same period in 2021.

Expense increases were offset by year-over-year decreases in board compensation expenses of approximately $147 thousand, for the year ended December 31, 2022, compared to the same period in 2021.

This compensation decrease was attributed to two key factors:

(i) changing payment of director compensation from stock options to restricted stock units, and (ii) deferring compensation expense as required by accounting standard ASC 718 Stock Compensation.

Refer to Note 8 - Equity for further details.

Other income increased by $106 thousand, or approximately 41.9%, to $359 thousand for the year ended December 31, 2022, as compared to $253 thousand during the same period in 2021.

During 2022, we received $232 thousand in government assistance which consisted of two government programs:

(i) Small Business Innovative Research (SBIR) grant from the Department of Energy (“DOE”) and (ii) Oklahoma 21 st Century Jobs Act.

Refer to financial statement Note 12 – Government Assistance for more details about these programs.

In addition, during 2022 we earned $83 thousand in interest from our money market account and short-term U.S.

Treasury investments.

Other income during 2021 reflects a $251 thousand gain on forgiveness of a Paycheck Protection Program ("PPP") loan and accrued interest under the 2020 CARES Act.

Net loss for the year ended December 31, 2022, was $5,758 thousand compared to $7,892 thousand for the year ended December 31, 2021, or an approximate 27.0% decrease.

The $2,134 thousand decrease in net loss during the year ended December 31, 2022, is primarily attributable to the reduced R&D costs throughout the year, as further explained in the above discussion.

Liquidity and Capital Resources

At December 31, 2022, our cash and cash equivalent balance totaled $6,451 thousand compared to $7,607 thousand at December 31, 2021, a decrease of $1,156 thousand.

During 2022, we invested in short-term held-to-maturity U.S.

treasuries of which we had $2,606 thousand outstanding as of December 31, 2022.

At December 31, 2022, our current assets were in excess of current liabilities resulting in working capital of $8,586 thousand as compared to $7,293 thousand at December 31, 2021.

Based on our current plans, we have sufficient funds to continue operating our business at current levels for at least 12 months from the date of issuance of this report.

In order to continue business operations beyond that point, we currently anticipate that we will need to raise additional capital.

Our development and general administrative costs are ongoing, and we expect to require additional funding to meet these expenses.

To that end we may undertake offerings of our securities, debt financing, selling or licensing intellectual property, or other alternatives.

We filed a Form S-3 shelf registration statement with the Securities and Exchange Commission on June 27, 2019 that was declared effective on July 12, 2019.

The registration statement allows us to offer common stock, preferred stock, warrants, subscription rights, debt securities and units from time to time as market conditions permit to fund the ongoing operations of the Company.

Until the growth of revenue increases to a level that covers operating expenses it is the Company’s plan to continue to fund operations in this manner, although, as noted above, the significant volatility in the capital markets may negatively affect our ability to do so.

During the year ended December 31, 2021, working capital has been funded with approximately $5,309 thousand in net proceeds from the ATM offering of 1,093 thousand shares of our common stock, offset with operating expenses.

Additionally, we received $385 thousand from the exercise of option awards and warrants.

Subsequent to the year ended December 31, 2021, the Company raised an additional $602 thousand in net proceeds from the ATM by issuing 496 thousand shares, prior to the close of business on March 29, 2022.

During the year ended December 31, 2020, we raised $6,053 thousand in net proceeds from the sale of our equity securities and received $126 thousand from the exercise of option awards.

We have no contractual debt obligations, and the Company has sufficient working capital to fund current operating expenses for over twelve months.

To the extent the Company requires additional funds more than 12 months from the date hereof, and customer cash collections cannot fund our needs, the Company may utilize equity offerings to raise these funds.

Historically, the Company has funded operations predominately through equity offerings.

Currently, the Company can sell shares of common stock through its ATM program.

As noted in Note 8 – Equity, the remaining aggregate offering price on the ATM is approximately $8.7 million.

During 2022, working capital was funded with approximately $6,539 thousand in net cash proceeds from our equity offerings during the year.

Refer to financial statement Note 8 – Equity for further details about our equity offerings.

We filed a Form S-3 shelf registration statement with the SEC on July 1, 2022 that was declared effective on August 12, 2022.

The registration statement on Form S-3 allows us to offer common stock, preferred stock, warrants, subscription rights, debt

securities and units from time to time, as market conditions permit to fund, to the extent required beyond the 12 months from the date hereof, the ongoing operations of the Company.

Until the growth of revenue increases to a level that covers operating expenses, the Company intends to continue to fund operations in this manner, although, the volatility in the capital markets and potential upcoming recession may negatively our ability to do so.

Operating activities for the year ended December 30, 2022, resulted in cash outflows of $4,992 thousand, primarily due to the loss for the period of $5,758 thousand, offset with non-cash expenses of $627 thousand.

Operating activities for the year ended December 31, 2021, resulted in cash outflows of $6,707 thousand primarily due to the loss for the period of $7,892 thousand, offset with non-cash expenses of $1,394 thousand.

Investing activities for the year ended December 31, 2021, resulted in cash outflows of $213 thousand in disbursements for fixed and intangible assets, compared to cash outflows of $194 thousand for the year ended December 31, 2020.

Financing activities for the year ended December 31, 2021, include $5,309 thousand in net proceeds from the sale of 1,093 thousand shares of our common stock through our ATM program at an average price of $5.03 per share and $385 thousand from the exercise of option awards and warrants.

Financing activities for the year ended December 31, 2020, include proceeds from a $6,053 thousand private equity offering, $251 thousand from a PPP loan funding and $126 thousand in proceeds from the exercise of stock options.

Investing activities for the year ended December 31, 2022, resulted in cash outflows of $2,686 thousand, which is primarily attributable to $2,561 thousand of net investments in short-term held-to-maturity US treasuries, and $154 thousand of disbursements for patents and other intangibles.

December 31, 2021, resulted in cash outflows of $213 thousand, primarily due to $140 thousand of disbursements for patents and other intangibles.

Financing activities for the year ended December 31, 2022, included $6,539 thousand in net proceeds from the sale of 501 thousand shares of our common stock through our ATM program at an average price of $1.24 per share, sale of 4.2 million shares of our common stock through a public offering at a price of $1.11 per share, and sale of 1.6 million shares of our common stock at a price of $1.11 per share pursuant to the Participant Right with clirSPV LLC.

Financing activities for the year ended December 31, 2021 resulted in $5,309 thousand in net proceeds from the sale of 1,093 thousand shares of our common stock through our ATM program at an average price of $5.03 per share and $385 thousand from the exercise of option awards and warrants.

Off-Balance Sheet Transactions

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis