What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-03-31 compared with 2022-03-31 · 2 added, 586 removed, 4 unchanged (99% of the section changed)

2 unchanged sentences

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ClearSign Technologies Corporation

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ANNUAL FINANCIAL INFORMATION

Report of Independent Registered Public Accounting Firm (PCAOB ID 207 )

Report of Independent Registered Public Accounting Firm (PCAOB ID 285 )

Consolidated Balance Sheets at December 31, 2021 and 2020

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2021 and 2020

Consolidated Statements of S tockholders’ Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

ClearSign Technologies Corporation and Subsidiary

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ClearSign Technologies Corporation and subsidiary (the "Company") as of December 31, 2021 , and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for the year ended December 31, 2021 , and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 , and the results of its operations and its cash flows for the year ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

Patents and Other Intangible Assets Impairment Assessment

As described in Notes 2 and 4 to the consolidated financial statements, the Company’s patents and other intangible assets balance was $0.8 million as of December 31, 2021, which primarily consists of patents and trademarks.

Patent and other intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

We identified the carrying value of intangible assets as a critical audit matter.

The methods and underlying assumptions in an impairment analysis involve high levels of management estimates and judgment, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence.

The following are the primary procedures we performed to address this critical audit matter.

We reviewed current and previous operating conditions for indications of impairment.

We reviewed patent committee and board minutes and news for indications of impairment.

We reviewed documents from current and potential future customers for evidence of future recoverability.

Santa Monica, California

March 31, 2022

We have served as the Company's auditor since 2011.

To the Board of Directors and Stockholders of

ClearSign Technologies Corporation and Subsidiary

Opinions on the Financial Statements

We have audited the accompanying consolidated balance sheet of ClearSign Technologies Corporation and subsidiary (the "Company") as of December 31, 2020, and the related consolidated statements of operations, equity, and cash flows, for the year ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for year ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.

Accordingly, we express no such opinion.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

As more fully described in Note 1 to the consolidated financial statements as of and for the year ended December 31, 2020, the Company has incurred significant operating losses and negative operating cash flows since its inception.

The Company’s continued operations are dependent upon its ability to raise additional funds through equity or debt financing and attain profitable operations.

Additionally, the outbreak of COVID-19 has caused significant disruptions to the global financial markets which could impact the Company’s operations and its ability to raise additional capital.

/s/ Gumbiner Savett Inc.

Santa Monica, California

March 31, 2021

ClearSign Technologies Corporation

Consolidated Balance Sheets

(in thousands, except share and per share data)

Current Assets:

Cash and cash equivalents

Accounts Receivable, net

Contract assets

Prepaid expenses and other assets

Total current assets

Fixed assets, net

Patents and other intangible assets, net

LIABILITIES AND EQUITY

Current Liabilities:

Accounts payable and accrued liabilities

Current portion of lease liabilities

Accrued compensation and related taxes

Contract liabilities

Total current liabilities

Long Term Liabilities:

Long term lease liabilities

Payroll protection program loan

Total liabilities

Commitments and contingencies

Stockholders’ Equity:

Preferred stock, $ 0.0001 par value, zero shares issued and outstanding

Common stock, $ 0.0001 par value, 31,581,666 and 30,077,436 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

Total ClearSign Technologies Corporation stockholders' equity

Noncontrolling Interest

Total Liabilities and Equity

The accompanying notes are an integral part of these consolidated financial statements.

ClearSign Technologies Corporation

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

For the Year Ended

Cost of goods sold

Operating expenses:

Research and development, net of grants

General and administrative

Total operating expenses

Loss from operations

Other income, net

Interest income

Net loss attributed to non-controlling interest

Net loss attributed to ClearSign Technologies Corporation common stockholders

Net loss per share - basic and fully diluted

Weighted average number of shares outstanding - basic and fully diluted

Comprehensive loss

Change in foreign currency translation

Comprehensive loss

The accompanying notes are an integral part of these condensed consolidated financial statements.

ClearSign Technologies Corporation

Condensed Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31,2021 and 2020

Total ClearSign

Technologies Corp.

(in thousands)

Comprehensive

Stockholders’

Noncontrolling

Paid-In Capital

Balances at December 31, 2020

Shares issued through use of At The Market issuance ( $ 5.03 average per share)

Exercised Options ($ 3.80 per share)

Exercised Options ($ 3.10 per share)

Exercised Options ($ 2.93 per share)

Exercised Options ($ 1.90 per share)

Exercised Options ($ 1.85 per share)

Exercised Options ($ 1.21 per share)

Exercised Options ($ 0.98 per share)

Exercised Options ($ 0.89 per share)

Exercised Warrants ($ 1.80 per share)

Shares issued for services ($ 2.33 per share)

Shares issued for services ($ 1.93 per share)

Fair value of stock options issued in payment of accrued compensation

Fair value of stock options issued for board service

Share based compensation

Foreign-Exchange Translation Adjustment

Balances at December 31, 2021

Total ClearSign

Technologies Corp.

Comprehensive

Stockholders’

Noncontrolling

Paid-In Capital

Balances at December 31, 2019

Secondary Offering ($ 2.00 per share)

Shares issued for services ($ 2.33 per share)

Shares issued for services ($ 1.03 per share)

Exercised Options ($ 1.90 per share)

Exercised Options ($ .89 per share)

Exercised Options ($ 1.00 per share)

Exercised Options ($ 0.72 per share)

Fair value of stock options issued in payment of accrued compensation

Share based compensation

Fair value of stock options issued for board service

Balances at December 31, 2020

The accompanying notes are an integral part of these condensed consolidated financial statements.

ClearSign Technologies Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

For the Years Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Common stock issued for services

Share-based compensation

Depreciation and amortization

Abandonment and impairment

Gain on forgiveness of Payroll Protection Program Loan and interest

Change in operating assets and liabilities:

Contract assets

Accounts receivable

Prepaid expenses and other assets

Accounts payable and accrued liabilities

Accrued compensation and related taxes

Contract liabilities

Net cash used in operating activities

Cash flows from investing activities:

Acquisition of fixed assets

Disbursements for patents and other intangible assets

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from issuance of common stock, net of offering costs

Proceeds from exercise of stock options

Proceeds from Payroll Protection Program loan

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Cash and cash equivalents:

Net increase (decrease) cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Supplemental disclosure of cash flow information:

Officer and employee stock awards for prior year accrued compensation

The accompanying notes are an integral part of these condensed consolidated financial statements.

ClearSign Technologies Corporation

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 that have been shown to significantly improve key performance characteristics of industrial and commercial systems, including operational performance, energy efficiency, emission reduction, safety, and overall cost-effectiveness.

Our patented technologies are designed to be embedded in established OEM products as ClearSign Core™ and ClearSign Eye™ and other sensing configurations in order to enhance the performance of combustion systems and fuel safety systems in a broad range of markets.

These markets include, 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.

The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company’s technologies are currently in field development, but with nominal fully operational commercial installations, 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 $ 5.5 million in gross proceeds raised from its At-The-Market program (ATM) during the year ended December 31, 2021, in which the Company issued a total of 1,093 thousand shares of common stock at an average price of $ 5.03 per share.

Costs associated with the ATM program totaled approximately $ 190 thousand and the Company received net cash proceeds approximating $ 5.3 million.

During the year ended December 31, 2020, the Company completed stock offerings on August 24 and September 30, 2020, where it received $ 4.8 million in proceeds, net of offering costs, and $ 1.3 million in proceeds, net of offering costs, respectively, and issued a total of 3,242 thousand shares of common stock at an average price of $ 2.00 per share.

The Company has incurred losses since its inception totaling $ 82.8 million and expects to experience operating losses and negative cash flows for the foreseeable future.

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 product commercialization 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

Basis of Presentation

The accompanying consolidated financial statements include the accounts of ClearSign and its subsidiary.

Intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, these consolidated financial statements reflect all normal recurring and other adjustments necessary for a fair presentation.

Use of Estimates

The preparation of consolidated 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 the 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification 606 Revenue from Contracts with Customers (ASC 606).

When applying ASC 606, the Company performs the following five steps:

(i) identify the contract(s) with a customer;

(ii) identify the promises and performance obligations in the contract;

(iii) determine the transaction price;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) the performance obligations are satisfied.

Revenues and cost of goods sold are recognized once the goods or services are delivered to the customer’s control or non-refundable performance obligations are satisfied.

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.

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 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 collectability is determined, revenue is recorded.

For any contract that is expected to incur costs in excess of the contract price, the Company accrues the estimated loss in full in the period such determination is made.

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 amortizes those costs within general and administrative expenses over the life of the contract.

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 or expected warranty experience and current product performance trends and are recorded as a component of cost of sales at the time revenue is recognized.

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

Cash and cash equivalents consist of cash on deposit and high-quality, short-term money market instruments with an original maturity of three months or less.

Cash equivalents, which consist of short-term US treasury bills, are based on quoted market prices, a Level 1 fair value measure.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivables are recorded at the contractual invoiced amount.

An allowance for doubtful accounts is established, as necessary, based on past experience and management’s judgment.

The determination of the collectability of amounts due from customers require 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.

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 a right-of-use asset and a lease liability measured at the present value of the lease payments at the time of the lease inception or modification.

Lease costs are recognized in the income statement over the lease term on a straight-line basis.

Leases with a term of 1 year or less are considered short term leases with rent expense recognized over the lease term.

Depreciation is computed using the straight-line method over the estimated useful lives of the respective lease 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 three to four years .

Maintenance and repairs are expensed as incurred.

Patents and Trademarks

Third-party expenses related to patents and trademarks are recorded at cost, less accumulated amortization.

Amortization is computed using the straight-line method over the estimated useful lives of the assets once they are awarded.

Patent application costs are deferred pending the outcome of patent and trademark applications.

Costs associated with unsuccessful patent applications and abandoned intellectual property are expensed when determined to have no continuing value in current business activity.

We evaluate the recoverability of the carrying values of intangible assets on a recurring basis.

Impairment of Long-Lived Assets

The Company tests long-lived assets, consisting of fixed assets, patents, 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 from the use and eventual disposition of the assets.

In the event an asset is not fully recoverable 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.

Losses on long-lived assets to be disposed of is determined in a similar manner, except those 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;

● 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 equivalents, accounts receivable, accounts payable, accrued expenses and note payable.

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, 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 $ 44 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 refinery company 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.

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 the Company would not be able to realize their benefits, or that future deductibility is uncertain.

Tax benefits are recognized only if it is more likely than not that the tax benefits will be utilized in the foreseeable future.

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, or in the case of performance options, expense is recognized upon completion of a milestone as defined in the grant agreement.

Stock-based compensation for stock grants 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, 2021 and 2020 include assets amounting to approximately $ 274 thousand and $ 103 thousand, respectively, relating to operations of the Company in China.

The Beijing registered capital requirement is $ 350 thousand, which is required to be paid by 2027.

It is always possible that unanticipated events in foreign countries could disrupt the Company’s operations, and since the first quarter of 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.

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, net in the consolidated statements of operations.

Foreign currency exchange gain (loss) 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, 2021 and 2020.

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, 2021 and 2020, potentially dilutive shares outstanding amounted to 3,076 thousand and 2,777 thousand, respectively.

Recently Issued Accounting Pronouncements

In June 2017, the FASB issued ASU 2016-13, Financial Instruments (Topic 326) Measurement of Credit Losses on Financial Instruments , which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost.

The standard replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses.

ASU 2016-13, and related amendments, are effective for fiscal years beginning after December 15, 2022.

The Company has not completed its assessment of the standard but does not expect the adoption to have a material impact on its financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance , which outlines disclosure requirements for entities that receive assistance from a government body.

ASU 2021-10, and related amendments, are affective for annual reports beginning after December 15, 2021.

The Company does not expect the adoption to have a material impact on its financial statements.

Note 3 – Fixed Assets and Operating Leases

(in thousands)

Machinery and equipment

Office furniture and equipment

Leasehold improvements

Accumulated depreciation and amortization

Construction in progress

Operating lease ROU assets

Depreciation expense for the years ended December 31, 2021 and 2020 totaled $ 38 thousand and $ 54 thousand, respectively.

Operating Leases

The Company leases office space in Seattle Washington, Tulsa Oklahoma and Beijing China.

The Beijing lease is treated as a short-term lease.

The monthly rent for the Beijing lease is approximately $ 5 thousand.

The Seattle and Tulsa leases are classified as operating leases, with remaining terms ranging from one to six years ;

contractual language requires renewal negotiations to occur at or near termination.

These leases are normal and customary for office space, in that, contractual guarantees exist requiring the lessee to return the premises to its original functional state.

In 2021, the Company accrued an estimated cost of $ 32 thousand to prepare for the restoration of the Seattle office.

The Company plans to exit the Seattle lease on or before contract termination as part of our headquarters move from Seattle to Tulsa.

In preparation for this move, the Company entered into the Tulsa operating lease agreement in April 2021.

The Seattle and Tulsa leases contain fixed annual lease payments that increase annually, which is customary for long-term lease agreements.

Lease payments increase annually by factors that range between 2 % to 3 %.

Total monthly minimum rent is approximately $ 24 thousand.

Contractual agreements contain expiration dates ranging from less than twelve months to less than six years .

Supplemental balance sheet information related to operating leases is as follows:

(in thousands)

Right-of-use assets, net

Lease Liabilities:

Current lease liabilities

Long term lease liabilities

Total lease liabilities

Operating lease costs

Weighted average remaining lease term (in years):

Weighted average discount rate:

Supplemental cash flow information related to leases is as follows:

For the Year Ended

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Non-cash impact of new leases and lease modifications

New operating lease liabilities

Impairment of ROU assets

Minimum future payments under the Company’s lease liabilities at December 31, 2021 are as follows:

(in thousands)

At December 31, 2021, $ 63 thousand of our future minimum lese payments represented interest.

Note 4 – Patents and Other Intangible Assets

Patents and other intangible assets are summarized as follows:

(in thousands)

Patents pending

Issued patents

Trademarks pending

Registered trademarks

Accumulated amortization

Future amortization expense associated with awarded patents and registered trademarks as of December 31, 2021 is as follows:

(in thousands)

The amortization life for patents ranges between three to five years , with trademark lives remaining consistent at ten years .

The Company does not amortize patents or trademarks classified as pending.

During the year ended December 31, 2021, and 2020, the Company assessed its patent and trademark assets.

The Company also evaluated its strategic approach to the pursuit and protection of its intellectual property.

It is the intent of the Company to continue to define the scope of pursuing intellectual property protection to be more aligned with core technology critical to the design of product offerings.

The Company identified certain assets where the intellectual property was not directly related to the core technology within current products or was loosely affiliated with the core technology.

Based on the results of the assessment, the Company impaired $ 385 thousand of assets previously classified as pending patent costs and $ 36 thousand of assets previously classified as pending trademark costs.

This non-cash expense is reflected in the current year operating results as Research and Development and General and Administrative expenses, respectively.

For certain issued patents where the protected intellectual property was not directly aligned with current products, the Company accelerated the amortization by $ 50 thousand to reduce the financial net carrying value of capitalized patent costs and an additional $ 40 thousand in accelerated amortization to align trademark net capitalized costs with trademark registration dates.

Note 5 – Revenue, Contract Assets and Contract Liabilities

The Company recognized $ 607 thousand of revenue during the year ended December 31, 2021 and no revenues during the year ended December 31, 2020.

Revenues were generated in the current year from the completion and delivery of multi burner products and from prior year projects for which performance obligations were completed and constraints relating to collectability were eliminated.

During the years ended December 31, 2021 and 2020, the Company recognized cost of goods sold of $ 1,059 thousand and $ 279 thousand, respectively.

Cost of sales during the year ended December 31, 2021 consisted of $ 433 thousand upon completion of the burner contracts and $ 712 thousand in loss related to the ExxonMobil project.

These amounts were offset by adjustments totaling $ 86 thousand related to the reversals of accruals for product warranties that had expired.

During the year ended December 31, 2020, the Company recognized cost of goods sold of $ 450 thousand from the ExxonMobil project, which was anticipated to show a loss on the project when completed, and a second project that was completed but deemed as potentially uncollectable.

These amounts were offset by $ 171 thousand for the reversal of accruals for product warranties that expired on seven completed projects from the years 2016 and 2017.

In September of 2021, the Company received verbal notification from ExxonMobil to put on hold the testing of its ClearSign Core TM process burners to be installed at the Baytown, Texas refinery because there was insufficient time for ExxonMobil to engineer their inclusion during the targeted 2022 refinery turnaround.

The Company had contract assets of $ 39 thousand and $ 92 thousand and contract liabilities of $ 84 thousand and $ 94 thousand at December 31, 2021 and 2020, respectively.

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, 2021 and 2020, is as follows:

(in thousands)

Warranty liability, beginning of year

Adjustments and other

Warranty liability, end of year

Note 7 - Income Taxes

The Company is subject to taxation in the United States of America (“U.S.”) and files tax returns in the U.S.

federal jurisdiction and several state jurisdictions.

Through December 31, 2021, the Company incurred net operating losses for federal tax purposes of approximately $ 76,403 thousand.

The Company experienced an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code in April 2012, subjecting net operating loss carryforwards (incurred prior to the ownership change) to an annual limitation, which may restrict the ability to use those losses to offset taxable income in periods following the ownership change.

The Company analyzed the available information to determine the amount of the annual limitation and based on that information estimated the limitation to be $ 686 thousand annually.

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:

Expected tax benefit at 21 %

Change in valuation allowance

Provision for income taxes

Due primarily to the net operating loss carryforwards, the Company has a net deferred tax asset at December 31, 2021 of $ 16,388 thousand and at December 31, 2020 of $ 14,830 thousand.

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, 2021 and 2020, management concluded that there was not sufficient positive evidence of future taxable income to determine that it is more likely than not that the Company’s deferred tax assets will be realized.

Consequently, the Company has recorded an appropriate valuation allowance against deferred tax assets at such dates.

It is management’s intent to continue maintaining a full valuation allowance on the deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

Significant components of the deferred tax assets (liabilities), are approximately as follows:

Net operating loss carry forwards

Accrued liabilities

Stock compensation

Prepaid expenses

Deferred tax assets, net

Valuation allowance

Net deferred tax asset

Although the Company is not under examination, all tax years for which the Company incurred a net operating loss are subject to examination by United States tax authorities to the extent of the loss carried forward.

The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense.

As of December 31, 2021, and 2020, 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 62.5 million shares of common stock and 2.0 million 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 July 2018, the Company completed a private equity offering and executed a Stock Purchase Agreement with clirSPV, LLC which permits participation 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 clirSPV, LLC 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.

In August 2020, the Company completed an offering of common stock whereby approximately 2.6 million shares of common stock at a price of $ 2.00 per share were issued and sold for net cash proceeds of approximately $ 4.8 million.

In September 2020, the Company completed a sale of common stock to clirSPV, LLC under the 2018 Stock Purchase Agreement described above (Participation Right) whereby approximately 654 thousand shares of common stock at a price of $ 2.00 per share were issued and sold for net cash proceeds of approximately $ 1.3 million.

During the year ended December 31, 2021, the Company issued common stock pursuant to an At-The-Market Offering Sales Agreement, dated December 23, 2020, with Virtu Americas LLC, as sales agent pursuant to which it may sell shares of common stock with an aggregate offering price of up to $ 15.0 million (ATM).

As of December 31, 2021, the Company issued approximately 1.1 million shares of common stock under the ATM program, at an average price of $ 5.03 per share.

Gross proceeds totaled approximately $ 5.5 million and net cash proceed was approximately $ 5.3 million.

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 value assigned to this interest was $ 0 and $ 1 thousand as of December 31, 2021 and 2020, respectively.

Equity Incentive Plans

On June 17, 2021, (the Effective Date) the Company's shareholders approved and the Company adopted the ClearSign Technologies Corporation 2021 Equity Incentive Plan (2021 Plan) which permits the Company to grant Incentive Stock Options, Non-statutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units, and Performance Shares, to eligible participants, which includes employees, directors and consultants.

The Compensation Committee of the Board of Directors is authorized to administer the 2021 Plan.

The 2021 Plan provides for an annual increase in available shares equal to the lessor of (i) 10 % of the aggregate number of shares of Common Stock issued by the Company in the prior fiscal year;

or (ii) such number provided by the Compensation Committee;

provided, however, that the total cumulative increase in the number of shares available for issuance pursuant to this automatic share increase shall not exceed 400 thousand shares of common stock.

The prior incentive plan (2011 Plan) expired January 2021 and outstanding awards from this plan were assigned to the 2021 Plan.

The total amount of carryover awards from the 2011 plan amounted to 3,381 thousand.

Any forfeiture or expiration of carryover awards will be added to the 2021 Plan.

Ending balances of the Plans are as follows:

( in thousands )

Outstanding options and restricted stock units

Reserved but unissued shares under the Plans

Total authorized shares under the Plans

Stock Options

Under the terms of the 2021 Plan, incentive stock options and nonstatutory stock options must have an exercise price at or above the fair market value on the date of the grant.

At the time of grant, the Company will determine the period within which the option may be exercised and will specify any conditions that must be satisfied before the option vests and may be exercised.

The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option-pricing model.

As permitted by SAB 107, 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 has been determined through the Company’s historical stock price volatility.

The Company has not made an estimate of forfeitures at the time of the grant, but rather accounts for forfeitures at the time they occur.

The risk-free rate for periods within the expected 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 stock options:

Expected life

Weighted average volatility

Weighted average risk-free interest rate

Expected dividend rate

A summary of the Company’s stock option activity and changes is as follows:

( in thousands )

Outstanding at January 1

Forfeited/Expired/Exchanged

Outstanding at December 31

Exercisable at December 31

The estimated aggregate pretax intrinsic value of the Company’s outstanding vested stock options at December 31, 2021 is $ 513 thousand.

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, 2021, there was $ 1,725 thousand of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements.

Vesting criteria ranges from time-based to performance-based, the Company records costs for time-based arrangements ratably across the timeframe, whereas performance-based arrangements require management to continually evaluate predetermined goals against actual circumstances.

Restricted Stock Units

On July 28, 2021, the Company approved compensation for board service to be paid to its independent directors in restricted stock units (“RSUs”) under the 2021 Plan.

Such compensation was earned on a quarterly basis commencing with services performed in the second quarter of 2021 and continuing through the end of 2021.

The target value of compensation was approved at $ 85 thousand per quarter.

A RSU grant is to be awarded to each independent director in the beginning of the quarter in which services will be rendered, and the number of RSUs granted is to be based on the trading value of the Company's stock on the date of the award.

The vesting criteria of the RSU grants are contingent upon the occurrence of one of four future events which the Company cannot predict or control.

Accordingly, stock based compensation has not been recognized for services performed during the year ended December 31, 2021 in accordance with FASB Accounting Standards Codification, Topic 718, Compensation-Stock Compensation (ASC 718).

During the year ended December 31, 2021, the Company issued 112 thousand RSU's for services performed amounting to $ 255 thousand of unrecognized compensation.

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 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 15 thousand shares of common stock under the Consultant Plan to a consultant for the period October 1, 2021 to September 30, 2022.

The fair value of the stock at the time of grant was $ 1.93 per share for a total value of $ 29 thousand for which the Company has recognized expense of $ 7 thousand, for 3.7 thousand shares during the year ended December 31, 2021.

The Company granted 15 thousand shares of common stock under the Consultant Plan to the same consultant for the period September 1, 2020 through September 30, 2021.

The fair value of the stock at the time of grant was $ 2.33 per share for a total value of $ 35 thousand, for which the Company has recognized expense of $ 26 thousand, for 11.3 thousand shares during the year ended December 31, 2021 and recognized expense of $ 9 thousand, for 3.7 thousand shares during the year ended December 31, 2020.

The Company granted 10 thousand shares of common stock under the Consultant Plan to the same consultant for the period 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 thousand, for which the Company recognized expense of $ 8 thousand, for 7.5 thousand shares during the year ended December 31, 2020.

The Consultant Plan expense, reflected as general and administrative expense, for the years ended December 31, 2021 and 2020 was $ 33 thousand and $ 17 thousand, respectively.

( in thousands )

Reserved but unissued shares January 1

Increases in the number of authorized shares

Reserved but unissued shares December 31

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 341 thousand non-qualified stock options to its Chief Executive Officer.

The fair value of the non-qualified stock options estimated on the date of grant using the Black-Scholes valuation model was $ 176 thousand.

The compensation expense recognized for these awards for the years ended December 31, 2021 and 2020 was $ 13 thousand and $ 52 thousand.

There is no remaining unrecognized compensation expense associated with these awards, and the intrinsic value was $ 31 thousand, at December 31, 2021.

A summary of warrant activity and related information is as follows:

( in thousands )

Outstanding at January 1

Forfeited/Expired

Outstanding at December 31

There were no outstanding warrants at December 31, 2021.

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 2021 and 2020 earnings.

The Company’s matching contribution expense totaled $ 43 thousand and $ 51 thousand in 2021 and 2020, respectively.

Note 10 – The Paycheck Protection Program (PPP) Loan

On May 8, 2020, the Company obtained a loan in the amount of $ 251 thousand (the “PPP loan”) from Bank of America (the “Lender”), pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economics Security Act (the “CARES Act”) that was signed into law in March 2020.

In accordance with the PPP, the Company was permitted to use the PPP loan proceeds to fund designated expenses, including certain payroll costs, rent, utilities, and other permitted expenses.

The PPP loan was evidenced by a promissory note, dated effective May 1, 2020, issued by the Company to the Lender.

The PPP loan was unsecured with a 2 -year term and bore interest at a rate of 1.00 % per annum.

The Company applied with the Small Business Administration, ("SBA") for loan forgiveness in January 2021.

Payments under this note were deferred by the Lender until the forgiveness status of the loan was ascertained.

In the second quarter of 2021, the Company received documentation from the SBA stating that this loan was forgiven in full.

As a result, the Company recorded a $ 251 thousand gain on forgiveness of debt and accrued interest during the year ended December 31, 2021.

Note 11 – Commitments and Contingencies

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 this report, the Company is not a party to any material pending legal proceedings or claims that the Company believes will have a material adverse effect on the business, financial condition or operating results.

Investigation

On July 10, 2020, the Company received a letter from the Financial Industry Regulatory Authority (“FINRA”) notifying the Company that FINRA was investigating trading in the Company’s securities surrounding the June 15, 2020 announcement that the Company had received a purchase order from ExxonMobil.

On April 1, 2021 the Company received a letter from FINRA stating that it had concluded its investigation without any findings.

Indemnification Agreements

The Company maintains indemnification agreements with our 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, 2021 and 2020 are as follows:

(in thousands, except per share data)

For the year ended December 31, 2021

Gross Profit (Loss)

Operating Expense

Net loss attributed to common stockholders

Net Loss per share - basic and fully diluted

For the year ended December 31, 2020

Gross Profit (Loss)

Operating Expense

Net loss attributed to common stockholders

Net Loss per share - basic and fully diluted

Note 13 – Subsequent Events

The Company evaluates subsequent events and transactions that occur after the balance sheet date up to date that the financial statements are issued.

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.

Other than events described in these consolidated financial statements, the Company did not identify any other subsequent events that would have required adjustment or disclosure to the financial statements.

Please see the financial statements beginning on page F-1 located in this Annual Report on Form 10-K and incorporated

herein by reference.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

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 7A. Quantitative and Qualitative Disclosures About Market Risk