Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal accounting and financial officer, as appropriate, to allow timely decisions regarding required disclosure.
27
Table of Contents
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer (principal executive officer) and our Vice President and Controller (principal accounting and financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022, the end of the period covered by this Annual Report on Form 10-K. Based upon the evaluation of our disclosure controls and procedures as of December 31, 2022, our Chief Executive Officer (principal executive officer) and our Vice President and Controller (principal accounting and financial officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our Chief Executive Officer (principal executive officer) and our Vice President and Controller (principal accounting and financial officer) are responsible for establishing and maintaining internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework). Based on this assessment, our management, with the participation of our Chief Executive Officer (principal executive officer) and our Vice President and Controller (principal accounting and financial officer), has concluded that, as of December 31, 2022, our internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable
28
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2022.
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics that applies to all of our ClearSign employees and directors. The Code of Business Conduct and Ethics is posted on the Company’s website at www.clearsign.com . We will post any amendments to or waivers from the Code of Business Conduct and Ethics at that location. We have also adopted Governance Guidelines for the Board of Directors and a written committee charter for each of our Audit Committee and Compensation Committee.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2022.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2022.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2022.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the year ended December 31, 2022.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Consolidated Financial Statements
The financial statements filed as part of this report are listed and indexed in the Index to Consolidated Financial Statements on page 33 located in this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not applicable, or the required information has been included elsewhere in this report.
(a) (2) Financial Statement Schedules
Not applicable.
29
Table of Contents
(a) (3) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Table below. The Company has identified in the Exhibit Table each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(a) (3) of Form 10-K.
(b) The exhibits set forth in the following index of exhibits are filed or incorporated by reference as a part of this Annual Report on
Form 10-K:
30
Table of Contents
Exhibit
No.
Description of Document
3.1
Articles of Incorporation of ClearSign Technologies Corporation (1)
3.2
Bylaws of ClearSign Technologies Corporation (2)
3.2.1
Amendment to Bylaws (3)
4.1
Form of Common Stock Certificate (4)
4.2
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (12)
10.1
Office Lease Agreement (2)
10.2
Form of Confidentiality and Proprietary Rights Agreement (2)
10.3
ClearSign Technologies Corporation 2011 Equity Incentive Plan (2)+
10.4
Form of Director and Officer Indemnification Agreement (2)+
10.5
ClearSign Combustion Corporation 2013 Consultant Stock Plan (5)
10.6
First Amendment to Office Lease Agreement dated December 17, 2013 (6)
10.7
Second Amendment to Office Lease Agreement dated September 29, 2016 (7)
10.8
Third Amendment to Office Lease Agreement dated July 18, 2019 (9)
10.9
Employment Agreement dated January 28, 2019 between the registrant and Colin James Deller (10)+
10.10
Stock Purchase Agreement dated July 12, 2018 between the registrant and CLIRSPV, LLC (11)
10.11
At-the-Market Sales Agreement, dated December 23, 2020, by and between ClearSign Technologies Corporation and Virtu Americas LLC (13)
10.12
ClearSign Technologies Corporation 2021 Equity Incentive Plan (14)
10.13
2021 Equity Incentive Plan Form of Stock Option Award Agreement (15)
10.14
2021 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement (15)
10.15
2021 Equity Incentive Plan Form of Restricted Stock Award Agreement (15)
10.16
Letter Agreement dated April 20, 2021 by and between the Company and Brian G. Fike (16)
10.17
Offer Letter dated October 18, 2021 by and between the Company and Brent Hinds (17)
10.18
Lease Agreement, entered into as of June 20, 2016, between Paradigm Realty Advisors, L.L.C. and ClearSign Technologies Corporation (15)
10.19
First Amendment to Lease, entered into as of July 29, 2019, between Tulsa Portfolio Oklahoma Realty LP and ClearSign Technologies Corporation (15)
10.20
Second Amendment to Lease, entered into as of January 14, 2020, between Tulsa Portfolio Oklahoma Realty LP and ClearSign Technologies Corporation (15)
10.21
Purchase Right Waiver of clirSPV LLC (18)
10.22
Gary DiElsi’s Offer Letter (19)
10.23
Amendment to Employment Agreement between the Company and Colin James Deller (20)+
21
Subsidiaries of the registrant (7)
23.1
Consent of BPM CPA LLP, Independent Registered Public Accounting Firm*
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101INS
Inline XBRL Instance Document*
101.SCH
Inline XBRL Taxonomy Extension Schema*
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase*
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase*
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase*
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase*
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)*
31
Table of Contents
*Filed herewith.
**Furnished herewith.
+Agreement with management or compensatory plan or arrangement
(1)
Incorporated by reference from the registrant’s Form 10-Q for the quarter ended September 30, 2019 filed with the Securities and Exchange Commission on November 13, 2019.
(2)
Incorporated by reference from the registrant’s registration statement on Form S-1, as amended, file number 333-177946, originally filed with the Securities and Exchange Commission on November 14, 2011.
(3)
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 12, 2019.
(4)
Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2015.
(5)
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, filed with the Securities and Exchange Commission on May 6, 2013.
(6)
Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2014.
(7)
Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2019.
(8)
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 10, 2019.
(9)
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 28, 2019.
(10)
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2019.
(11)
Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 17, 2018.
(12)
Incorporated by reference from the registrant’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020
(13) Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 23, 2020.
(14) Incorporated herein by reference from Appendix A to the registrant’s Proxy Statement on Schedule 14A, filed with the
Securities and Exchange Commission on May 7, 2021.
(15) Incorporated by reference from the registrant’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 31, 2022
(16)
Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed with the Securities and Exchange Commission on August 20, 2021.
(17) Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021,
filed with the Securities and Exchange Commission on November 12, 2021.
(18) Incorporated by reference from the registrant’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on May 31, 2022.
(19) Incorporated by reference from the registrant’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on August 2, 2022.
(20) Incorporated by reference from the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, filed
with the Securities and Exchange Commission on August 15, 2022.
ITEM 16. FORM 10-K SUMMARY
None
32
Table of Contents
ClearSign Technologies Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
No.
ANNUAL FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm (PCAOB ID 207 )
F-1
Consolidated Balance Sheets at December 31, 2022 and 2021
F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2022 and 2021
F-4
Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2022
F-5
Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2021
F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021
F-7
Notes to Consolidated Financial Statements
F-8
33
Table of Contents
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, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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.
Carrying Value of Patents and Other Intangible Assets
As described in Notes 2 and 4 to the consolidated financial statements, the Company’s patents and other intangible assets, net balance was $0.8 million as of December 31, 2022. The Company capitalizes third-party legal costs and filing fees, if any, associated with obtaining patents or other intangible assets. Once a patent asset has been placed in service, the Company amortizes these costs over the shorter of the asset’s legal or estimated economic life using the straight-line method. The Company also evaluates for potential impairment of long-lived assets, including intangible assets composed of patents, no less frequently than annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
F-1
Table of Contents
The principal considerations for our determination that performing procedures relating to the carrying value of intangible assets is a critical audit matter are the significant amount of judgment by management in developing the assumptions of future economic benefit in an impairment analysis, which in turn led to significant auditor judgment, subjectivity and effort in performing audit procedures and evaluating audit evidence relating to the analysis.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, reviewing current and forecasted operating conditions for indication of impairment. We also reviewed board minutes, news, and industry reports for indications of impairment. Last, we obtained an understanding of potential future customers indicating future recoverability.
/s/ BPM CPA LLP
Santa Monica, California
March 31, 2023
We have served as the Company's auditor since 2011.
F-2
Table of Contents
ClearSign Technologies Corporation
Consolidated Balance Sheets
(in thousands, except share and per share data)
December 31,
2022
2021
ASSETS
Current Assets:
Cash and cash equivalents
$
6,451
$
7,607
Short-term held-to-maturity investments
2,606
—
Accounts receivable, net
79
33
Contract assets
20
39
Prepaid expenses and other assets
577
345
Total current assets
9,733
8,024
Fixed assets, net
384
530
Patents and other intangible assets, net
798
799
Other assets
10
10
Total Assets
$
10,925
$
9,363
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable and accrued liabilities
$
296
$
224
Current portion of lease liabilities
133
205
Accrued compensation and related taxes
471
218
Contract liabilities
247
84
Total current liabilities
1,147
731
Long Term Liabilities:
Long term lease liabilities
226
350
Total liabilities
1,373
1,081
Commitments and contingencies (note 11)
Stockholders’ Equity:
Preferred stock, $ 0.0001 par value, zero shares issued and outstanding
—
—
Common stock, $ 0.0001 par value, 38,023,701 and 31,581,666 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively
4
3
Additional paid-in capital
98,079
91,035
Accumulated other comprehensive income (loss)
( 8 )
9
Accumulated deficit
( 88,523 )
( 82,765 )
Total equity
9,552
8,282
Total Liabilities and Equity
$
10,925
$
9,363
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
ClearSign Technologies Corporation
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
For the Year Ended
December 31,
2022
2021
Revenues
$
374
$
607
Cost of goods sold
258
1,059
Gross profit (loss)
116
( 452 )
Operating expenses:
Research and development
505
2,680
General and administrative
5,728
5,013
Total operating expenses
6,233
7,693
Loss from operations
( 6,117 )
( 8,145 )
Other income
Interest, net
83
1
Government assistance
232
251
Gain from sale of assets
38
—
Other income, net
6
1
Total other income
359
253
Net loss
( 5,758 )
( 7,892 )
Net loss attributed to non-controlling interest
—
1
Net loss attributed to common stockholders
$
( 5,758 )
$
( 7,891 )
Net loss per share - basic and fully diluted
$
( 0.16 )
$
( 0.25 )
Weighted average number of shares outstanding - basic and fully diluted
35,338,712
31,230,806
Comprehensive loss
Net loss
$
( 5,758 )
$
( 7,892 )
Foreign-exchange translation adjustments
( 17 )
9
Comprehensive loss
$
( 5,775 )
$
( 7,883 )
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
ClearSign Technologies Corporation
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 31, 2022
Total ClearSign
Accumulated Other
Technologies Corp.
(in thousands, except per share data)
Common Stock
Additional
Comprehensive
Accumulated
Stockholders’
Noncontrolling
Shares
Amount
Paid-In Capital
Income (loss)
Deficit
Equity
Interest
Total Equity
Balances at December 31, 2021
31,582
$
3
$
91,035
$
9
$
( 82,765 )
$
8,282
$
—
$
8,282
Shares issued upon exercise of options ($ 0.89 per share)
11
—
—
—
—
—
—
—
Shares issued upon exercise of options ($ 2.93 per share)
3
—
—
—
—
—
—
—
Fair value of stock issued in payment of accrued compensation
66
—
95
—
—
95
—
95
Fair value of stock options granted in payment of accrued compensation
—
—
12
—
—
12
—
12
Share based compensation
67
—
373
—
—
373
—
373
Shares issued through the use of At-The Market issuance ($ 1.24 average per share)
501
—
587
—
—
587
—
587
Shares issued for services ($ 1.93 per share)
13
—
25
—
—
25
—
25
Shares issued for services ($ 0.66 per share)
2
—
1
—
—
1
—
1
Shares issued in stock offering ($ 1.11 per share)
4,186
1
4,210
—
—
4,211
—
4,211
Shares issued pursuant to purchase right ($ 1.11 per share)
1,592
—
1,741
—
—
1,741
—
1,741
Foreign-Exchange Translation Adjustment
—
—
—
( 17 )
—
( 17 )
—
( 17 )
Net loss
—
—
—
—
( 5,758 )
( 5,758 )
—
( 5,758 )
Balances at December 31, 2022
38,023
$
4
$
98,079
$
( 8 )
$
( 88,523 )
$
9,552
$
—
$
9,552
F-5
Table of Contents
ClearSign Technologies Corporation
Consolidated Statements of Stockholders’ Equity
For the Year Ended December 31, 2021
Total ClearSign
Accumulated Other
Technologies Corp.
Common Stock
Additional
Comprehensive
Accumulated
Stockholders'
Noncontrolling
Total
Shares
Amount
Paid-In Capital
Income (loss)
Deficit
Equity
Interest
Equity
Balances at December 31, 2020
30,077
$
3
$
84,411
$
—
$
( 74,874 )
$
9,540
$
1
$
9,541
Shares issued through the use of At-The Market issuance ($ 5.03 average per share)
1,093
—
5,309
—
—
5,309
—
5,309
Shares issued upon exercise of options ($ 3.80 per share)
9
—
36
—
—
36
—
36
Shares issued upon exercise of options ($ 3.10 per share)
18
—
54
—
—
54
—
54
Shares issued upon exercise of options ($ 2.93 per share)
6
—
—
—
—
—
—
—
Shares issued upon exercise of options ($ 1.90 per share)
6
—
12
—
—
12
—
12
Shares issued upon exercise of options ($ 1.85 per share)
3
—
6
—
—
6
—
6
Shares issued upon exercise of options ($ 1.21 per share)
166
—
155
—
—
155
—
155
Shares issued upon exercise of options ($ 0.98 per share)
23
—
—
—
—
—
—
—
Shares issued upon exercise of options ($ 0.89 per share)
64
—
55
—
—
55
—
55
Shares issued upon exercise of options ($ 1.80 per share)
38
—
67
—
—
67
—
67
Shares issued for services ($ 2.33 per share)
11
—
26
—
—
26
—
26
Shares issued for services ($ 1.93 per share)
4
—
7
—
—
7
—
7
Fair value of stock issued in payment of accrued compensation
64
—
217
—
—
217
—
217
Fair value of stock options issued for board service
—
—
262
—
—
262
—
262
Share based compensation
—
—
418
—
—
418
—
418
Foreign-Exchange Translation Adjustment
—
—
—
9
—
9
—
9
Net loss
—
—
—
—
( 7,891 )
( 7,891 )
( 1 )
( 7,892 )
Balances at December 31, 2021
31,582
$
3
$
91,035
$
9
$
( 82,765 )
$
8,282
$
—
$
8,282
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
ClearSign Technologies Corporation
Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended December 31,
2022
2021
Cash flows from operating activities:
Net loss
$
( 5,758 )
$
( 7,892 )
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock issued for services
26
33
Share-based compensation
373
680
Depreciation and amortization
161
260
Impairment of intangible assets
19
484
Gain from sale of fixed assets
( 38 )
—
Right of use asset amortization
131
188
Realized gain from market securities
( 45 )
—
Gain on forgiveness of Payroll Protection Program Loan and interest
—
( 251 )
Change in operating assets and liabilities:
Contract assets
19
53
Accounts receivable
( 46 )
( 33 )
Prepaid expenses and other assets
( 232 )
121
Accounts payable and accrued liabilities
( 125 )
( 393 )
Accrued compensation and related taxes
360
53
Contract liabilities
163
( 10 )
Net cash used in operating activities
( 4,992 )
( 6,707 )
Cash flows from investing activities:
Acquisition of fixed assets
( 10 )
( 73 )
Disbursements for patents and other intangible assets
( 154 )
( 140 )
Proceeds from sale of fixed assets
39
—
Purchases of held-to-maturity short-term US treasuries
( 5,898 )
—
Redemption of held-to-maturity US treasuries
3,337
—
Net cash used in investing activities
( 2,686 )
( 213 )
Cash flows from financing activities:
Proceeds from issuance of common stock, net of offering costs
6,539
5,309
Proceeds from exercise of stock options and warrants
—
385
Net cash provided by financing activities
6,539
5,694
Effect of exchange rate changes on cash and cash equivalents
( 17 )
9
Cash and cash equivalents:
Net change in cash and cash equivalents
( 1,156 )
( 1,217 )
Cash and cash equivalents, beginning of period
7,607
8,824
Cash and cash equivalents, end of period
$
6,451
$
7,607
Supplemental disclosure of cash flow information:
Officer and employee equity awards for prior year accrued compensation
$
107
$
217
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
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. The Company’s 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 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 or selective catalytic reduction.
The Company was incorporated in the State of Washington in 2008. During January 2022, the Company relocated its headquarters from Seattle, Washington to Tulsa, Oklahoma. On July 28, 2017, the Company incorporated a subsidiary, ClearSign Asia Limited, in Hong Kong to represent the Company’s business and technological interests throughout Asia. Through ClearSign Asia Limited, the Company has established a Wholly Foreign Owned Enterprise (WFOE) in China – ClearSign Combustion (Beijing) Environmental Technologies Co., LTD.
Unless otherwise stated or the context otherwise requires, the terms ClearSign and the Company refer to ClearSign Technologies Corporation and its subsidiary, ClearSign Asia Limited.
Liquidity
The Company's consolidated 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. As of December 31, 2022, the Company’s cash and cash equivalents totaled $ 6,451 thousand, and short-term held-to-maturity investments totaled $ 2,606 thousand, which is sufficient to fund current operating expenses beyond twelve months from the date hereof. 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.
Historically, the Company has financed operations primarily through issuances of equity securities. Since inception, the Company has raised approximately $ 91 million in gross proceeds through the sale of its equity securities. During the year ended December 31, 2022, the Company raised approximately $ 6.5 million in net proceeds by issuing approximately 6.3 million shares of common stock.
The Company has incurred losses since its inception totaling $ 88.5 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.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and 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 Topic 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
The Company capitalizes project costs until performance obligations related to the contract are completed. The Company expenses selling and marketing expenses when incurred within the statement of operations in General and Administrative expenses.
Product Warranties
The Company warrants all installed products against defects in materials and workmanship for a period specified in each contract by replacing failed parts. Accruals for product warranties are based on historical 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. Product warranties are included in accrued liabilities in the consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit in a checking and savings account, and 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.
Short-Term Investments
Short-term investments consist of U.S. treasuries with original maturities of twelve months or less and greater than three months. These short-term investments are classified as held to maturity and are recorded on an amortized cost basis, based on the Company’s positive intent and ability to hold these securities to maturity. As of December 31, 2022, the Company has not experienced any other-than-temporary impairment of its short-term investments. A decline in the market value of any held-to-maturity security below cost that is deemed other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. The company evaluates whether the decline in fair value of its investments is other-than temporary at each quarter-end.
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The cost basis for our short-term investments totaled approximately $ 2,606 thousand and zero for the periods December 31, 2022, and 2021, respectively. The unrealized holding gains for our short-term investments totaled approximately $ 4 thousand and zero for the periods December 31, 2022, and 2021, respectively. We have not experienced any continuous unrealized holding losses on these investments. The fair value for our short-term investments totaled approximately $ 2,610 thousand and zero for the periods December 31, 2022, and 2021, respectively.
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. Based on a review of these factors, the Company may establish or adjust the allowance for specific customers and the accounts receivable portfolio as a whole.
Fixed Assets and Leases
Fixed assets are recorded at cost. Leases are recorded in accordance with FASB ASC 842, Leases . For those leases with a term greater than one year, the Company recognizes a right-of-use asset, which is included in fixed assets, net on the consolidated balance sheets, 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 consolidated statement of operations 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. The Company evaluates the recoverability of the carrying values of intangible assets each reporting period.
Impairment of Long-Lived Assets
The Company tests long-lived assets, consisting of fixed assets, patents, trademarks, 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 are 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.
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● Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
● Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s financial instruments primarily consist of cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses. As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheets. This is primarily attributable to the short-term nature of these instruments.
The Company did not identify any other recurring or 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, if any, from strategic partners in cost sharing, collaborative projects. During the year ended December 31, 2022, the Company did not receive funds from these arrangements. During December 31, 2021, the Company received $ 44 thousand from these arrangements.
Government Assistance
We have adopted Accounting Standards Update (“ASU”) 2021-10, Government Assistance (Topic 832) Disclosures by Business Entities about Government Assistance, which requires footnote disclosure of assistance received from government entities. We record gross monies received from government entities in other income, and associated expenses such as salaries and supplies are recorded in Research and Development or General and Administration, depending on the nature of expenditure. We accrue for reimbursement requests submitted to government entities in accounts receivable.
Income Taxes
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not 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.
Share-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. Share-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 balance sheets as of December 31, 2022 and 2021 include assets amounting to approximately $ 172 thousand and $ 274 thousand, respectively, relating to operations of ClearSign Asia Limited. The Beijing registered capital requirement is $ 350 thousand, which is required to be paid by 2027, and of which the Company has not paid any as of December 31, 2022. 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 COVID-19 pandemic.
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Foreign Currency
Assets and liabilities of ClearSign Asia Limited with non-U.S. Dollar functional currency are translated to U.S. Dollars using exchange rates in effect at the end of the period. Revenue and expenses are translated to U.S. Dollars using rates that approximate those in effect during the period. The resulting translation adjustments are included in the Company’s consolidated balance sheets in the stockholders’ equity section as a component of accumulated other comprehensive income (loss).
Noncontrolling Interest
The subsidiary of the Company has a minority shareholder agreement representing an ownership interest of 1.00 % of ClearSign Asia Limited. The Company accounts for this noncontrolling interest pursuant to FASB Topic ASC 810, Consolidation, 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. As of December 31, 2022, the noncontrolling interest balance was de minimus.
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, 2022 and 2021, potentially dilutive shares outstanding amounted to 3.5 million and 3.1 million, respectively.
Recently Issued Accounting Pronouncements
In June 2017, the FASB issued an Accounting Standards Update (“ASU”) 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 does not expect the adoption of this standard to have a material impact on its accounts receivable or short-term investment balances.
Note 3 – Fixed Assets
Fixed Assets
Fixed assets are summarized as follows:
December 31,
(in thousands)
2022
2021
Machinery and equipment
$
390
$
722
Office furniture and equipment
177
218
Leasehold improvements
192
192
759
1,132
Accumulated depreciation and amortization
( 697 )
( 1,055 )
62
77
Operating lease ROU assets, net
322
453
Total
$
384
$
530
Depreciation and amortization expense for the years ended 2022 and 2021 totaled $ 24 thousand and $ 38 thousand, respectively.
Leases
The Company leases office space in Seattle, Washington, Tulsa, Oklahoma and Beijing, China. During June 2022, the Company entered into a new lease agreement for its Beijing office space for a period of one year with monthly rent at approximately $ 2
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thousand. We classified this lease as an operating lease since it is more likely than not the lease will be renewed at the end of its term. Prior to entering into this new lease agreement, the monthly rent for the old Beijing office space was approximately $ 5 thousand, equating to an annual total short term lease expense of $ 23 thousand prior to termination in June 2022.
The Seattle, Tulsa, and Beijing leases are classified as operating leases, with remaining terms ranging from five months 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. The Company accrued an estimated cost of $ 55 thousand and $ 32 thousand in 2022 and 2021, respectively, for a total of approximately $ 87 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 by factors that range between 2 % to 3 %. The Seattle, Tulsa, and Beijing total monthly minimum rent is approximately $ 22 thousand. Operating lease costs for the years ended December 31, 2022 and 2021 were $ 186 thousand and $ 257 thousand, respectively.
Supplemental balance sheet information related to operating leases is as follows:
December 31,
December 31,
(in thousands)
2022
2021
Operating lease ROU assets, net
$
322
$
453
Lease Liabilities:
Current lease liabilities
$
133
$
205
Long term lease liabilities
226
350
Total lease liabilities
$
359
$
555
Weighted average remaining lease term (in years):
2.6
Weighted average discount rate:
5.5
%
Supplemental cash flow information related to leases is as follows:
For the Year Ended
2022
2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used in operating leases
$
251
$
218
Non-cash impact of new leases and lease modifications
New operating lease liabilities
$
25
$
320
Impairment of operating lease ROU assets
$
—
$
63
Minimum future payments under the Company’s lease liabilities as of December 31, 2022 are as follows:
Discounted
Payments
lease
due under
(in thousands)
liability
lease
payments
agreements
2023
$
134
$
148
2024
54
65
2025
59
65
2026
62
67
2027
50
51
Total
$
359
$
396
At December 31, 2022, $ 37 thousand of our future minimum lease payments represents interest.
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Note 4 – Patents and Other Intangible Assets
Patents and other intangible assets are summarized as follows:
December 31,
(in thousands)
2022
2021
Patents
Patents pending
$
307
$
439
Issued patents
815
577
1,122
1,016
Trademarks
Trademarks pending
6
3
Registered trademarks
95
94
101
97
Other
8
8
1,231
1,121
Accumulated amortization
( 433 )
( 322 )
$
798
$
799
Future amortization expense associated with issued patents and registered trademarks as of December 31, 2022 is as follows:
(in thousands)
2023
$
147
2024
126
2025
96
2026
61
2027
39
Thereafter
8
$
477
The amortization life for patents ranges between three to five years , with trademark lives set at ten years . The Company does not amortize patents or trademarks classified as pending.
During the years ended December 31, 2022, and 2021, 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 pursue intellectual property protection.
If the Company identifies certain assets where the intellectual property does not directly align with its core technology, the Company will impair the intangible asset and write-off the asset as an expense. During the years ended December 31, 2022 and 2021, the Company impaired $ 5 thousand and $ 385 thousand, respectively, of assets classified as pending patent costs. During the years ended December 31, 2022 and 2021, the Company impaired $ 14 thousand and zero , respectively, of assets classified as issued patents. During the years ended December 31, 2022 and 2021, the Company impaired zero and $ 36 thousand, respectively, of assets previously classified as pending trademark costs. These non-cash expenses for patents and trademarks are reflected in the operating results as Research and Development and General and Administrative expenses, respectively.
During the year ended December 31, 2021, 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.
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Note 5 – Revenue, Contract Assets and Contract Liabilities
The Company recognized $ 374 thousand of revenues and $ 258 thousand of cost of goods sold during the year ended December 31, 2022. The revenue and cost of goods sold are mostly in connection with the completion of a technology validation project. Cost of goods sold also includes $ 41 thousand in anticipated contract losses upon completion of a contract.
The Company recognized $ 607 thousand of revenues and $ 1,059 thousand of cost of goods sold during the year ended December 31, 2021. Revenues were generated from the completion and delivery of our process burner products to a global supermajor oil company and domestic infrastructure company. Cost of goods sold consisted of $ 433 thousand recorded upon completion of process burner contracts and $ 712 thousand in anticipated contract losses upon completion of related contracts. These amounts were offset by adjustments totaling $ 86 thousand related to the reversals of accruals for product warranties that expired.
The Company had contract assets of $ 20 thousand and $ 39 thousand and contract liabilities of $ 247 thousand and $ 84 thousand at December 31, 2022 and 2021, 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, 2022 and 2021, is as follows:
December 31,
(in thousands)
2022
2021
Warranty liability, beginning of year
$
—
$
96
Accruals
5
—
Payments
—
( 10 )
Adjustments and other
—
( 86 )
Warranty liability, end of year
$
5
$
—
Note 7 - Income Taxes
For the years ended December 31, 2022 and 2021, the Company's loss before provision for income taxes were as follows:
For the Year Ended
December 31,
( in thousands )
2022
2021
Domestic
$
( 5,649 )
$
( 7,686 )
Foreign
( 109 )
( 200 )
Loss before provision for income taxes
$
( 5,758 )
$
( 7,886 )
There was no provision for income taxes for the years ended December 31, 2022 and 2021 due to the Company's taxable losses.
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Income tax benefit attributable to loss from continuing operations differed from the amounts computed by applying the statutory U.S federal income tax rate of 21 % to pretax loss from continuing operations as a result of the following:
For the Year Ended
December 31,
( in thousands )
2022
2021
Tax Benefit at Federal statutory rate
$
( 1,209 )
$
( 1,657 )
Tax Benefit at State rate
( 197 )
—
Meals and Entertainment
4
—
Prior Year Deferred Tax True Ups
( 2,805 )
—
Other
( 82 )
99
Change in Valuation Allowance
4,289
1,558
$
—
$
—
The significant components of the Company's deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows:
For the Year Ended
December 31,
( in thousands )
2022
2021
Deferred Tax Assets:
Accrued Expenses
$
74
$
22
Stock-Based Compensation
337
263
Depreciation
102
26
Prepaid Expenses
( 31 )
43
Accrued Vacation
( 3 )
—
ASC 842 Lease Standard
( 16 )
—
Net Operating Loss carryforwards
20,263
16,044
Gross Deferred Tax Assets
20,726
16,398
Valuation Allowance
( 20,677 )
( 16,388 )
Total deferred tax assets, net of valuation allowance
49
10
Deferred Tax Liabilities
Other
( 49 )
( 10 )
Net Deferred Tax Assets
$
—
$
—
For the year ended December 31, 2022, based on all available objective evidence, including the existence of cumulative losses, the Company determined that it was not more likely than not that the net deferred tax assets were fully realizable as of December 31, 2022. Accordingly, the Company established a full valuation allowance against its deferred tax assets.
As of December 31, 2022, the Company had $ 82.1 million of federal and $ 45.9 million of state net operating loss carryforwards available to reduce future taxable income, of which federal net operating loss carryforwards of $ 35.3 million have an indefinite life. The remaining federal net operating losses begin to expire in 2028, while state net operating losses begin to expire in 2025.
The Company experienced an “ownership change” within the meaning of Section 382 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 these losses to offset taxable income in periods following the ownership change. The Company determined the amount of the annual limitation to be $ 686 thousand annually. The net operating loss carryforwards generated before 2018 may be used to reduce taxable income through the years 2028 to 2037. Federal net operating loss carryforwards generated for year 2018 and thereafter do not expire.
The Company files income tax returns in the U.S. federal, state and foreign jurisdictions. All tax years generally remain subject to examination by the IRS and various state taxing authorities, although the Company is not currently under examination in any jurisdiction.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2022 and 2021, there was no accrued interest or penalties related to uncertain tax positions.
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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 (“clirSPV”) which permits participation in future capital raising transactions (the “Participation Right”) on the same terms as other investors participating in such transactions. In no event may the Participation Right be exercised to the extent it would cause clirSPV or any of its affiliates to beneficially own 20 % or more of the Company’s then outstanding common stock. In May 2022, the Company signed an agreement with clirSPV, that provides for an election right to extend the Participation Right beyond the original expiration date of December 31, 2023, but to no later than June 30, 2027. This election is pursuant to specific terms and conditions and expires on December 31, 2023.
On June 1, 2022, the Company completed a firm commitment underwritten public offering pursuant to an underwriting agreement, dated May 27, 2022, by and between the Company and Newbridge Securities Corporation by issuing 4,186 thousand shares of common stock at a price to the public of $ 1.11 per share, resulting in gross proceeds of approximately $ 4.6 million and net cash proceeds of approximately $ 4.2 million. During July 2022, the Company issued approximately 1,592 thousand shares to clirSPV pursuant to the Participation Right, at a price per share of $ 1.11 , resulting in net cash proceeds to the Company of approximately $ 1.7 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 currently sell shares of common stock with an aggregate offering price of up to $ 8.7 million (ATM). During the year ended December 31, 2022, the Company issued approximately 501 thousand shares of its common stock at an average price of $ 1.24 per share for gross proceeds of approximately $ 624 thousand and net cash proceeds of approximately $ 587 thousand. During the year ended 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 proceeds was approximately $ 5.3 million. As of December 31, 2022, the Company has issued approximately 1.6 million shares of common stock under the ATM program, at an average price of $ 3.84 per share. Gross proceeds totaled approximately $ 6.1 million and net cash proceeds was approximately $ 5.9 million.
The Company is currently subject to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period. These rules may limit future issuances of shares by the Company under our shelf registration statement on Form S-3, our ATM Offering Sales Agreement or other common stock offerings.
Equity Incentive Plan
On June 17, 2021, the Company's shareholders approved and the Company adopted the ClearSign Technologies Corporation 2021 Equity Incentive Plan (the “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 lesser 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 were added to the 2021 Plan. In 2022, the board of directors approved an increase of 150,423 shares available for issuance pursuant to future awards in accordance with the terms of the 2021 Plan.
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Ending balances for the 2021 Plan is as follows:
December 31,
December 31,
( in thousands )
2022
2021
Outstanding options and restricted stock units
3,202
3,076
Reserved but unissued shares under the Plans
2,777
2,901
Total authorized shares under the Plans
5,979
5,977
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 SEC Staff Accounting Bulletin (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.
During the year ended December 31, 2022, the following weighted-average assumptions were utilized in the calculation of the fair value of stock options:
December 31,
2022
2021
Expected life
5.71 years
6.01 years
Weighted average volatility
77.64
%
91.89
%
Weighted average risk-free interest rate
1.39
%
0.59
%
Expected dividend rate
0
%
0
%
Compensation expense associated with stock option awards for the years ended December 31, 2022 and 2021 totaled $ 118 thousand and $ 425 thousand, respectively.
A summary of the Company’s stock option activity and changes is as follows:
December 31,
2022
( in thousands )
Options to Purchase Common Stock
Weighted Average Exercise Price
Weighted Average Remaining Contractual Life (in years)
Outstanding at beginning of year
2,964
$
2.06
6.89
Granted
88
$
1.26
9.01
Exercised
( 43 )
$
0.89
—
Forfeited/Expired
( 230 )
$
1.99
—
Outstanding at end of year
2,779
$
2.05
6.43
Exercisable at end of year
1,986
$
1.70
5.89
The estimated aggregate pretax intrinsic value of the Company’s outstanding vested stock options at December 31, 2022 is zero . 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.
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At December 31, 2022, there was $ 1.1 million 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
The Company awards employees and directors restricted stock units (“RSUs”) in lieu of cash payment for compensation. These awards are granted from the Company’s Equity Incentive Plan. Employee vesting criteria is time based, and compensation expense is recognized ratably across the timeframe. Director vesting criteria is contingent upon the occurrence of one of four future events, which the Company cannot predict or control. Therefore, compensation expense for director RSUs is not recognized until one of these four future events occur, which is in accordance with FASB Accounting Standards Codification , Topic 718 , Compensation-Stock Compensation, (ASC 718). Unrecognized compensation expense for director services amounted to $ 491 thousand and $ 255 thousand for the years ended December 31, 2022 and December 31, 2021, respectively. Director compensation is earned on a quarterly basis with the target value of compensation set at $ 85 thousand per quarter.
A summary of the Company’s RSUs activity and changes is as follows:
December 31,
December 31,
2022
2021
( in thousands )
Number of Shares
Weighted Average Grant Date Fair Value
Number of Shares
Weighted Average Grant Date Fair Value
Nonvested at beginning of year
112
$
2.28
—
$
—
Granted
376
$
1.30
112
$
2.28
Vested
( 65 )
$
1.77
-
$
—
Nonvested at end of year
423
$
1.49
112
$
2.28
A summary of the Company’s RSU compensation expense is as follows:
For the Year Ended
December 31,
2022
2021
Compensation Expense
$
252
$
-
Weighted Average Value Per Share
$
1.57
$
-
Stock Awards
The Company awards employees stock in lieu of cash payment for compensation, typically to satisfy accrued bonus compensation. The awards are granted from the Company’s Equity Incentive Plan.
For the Year Ended
December 31,
2022
2021
Fair value
$
98
$
217
Weighted Average Value Per Share
$
1.43
$
3.37
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
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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 Consultant Plan activity and change is as follows:
December 31,
( in thousands )
2022
2021
Reserved but unissued shares at beginning of year
211
212
Increases in the number of authorized shares
—
14
Grants
( 15 )
( 15 )
Reserved but unissued shares at end of year
196
211
The Consultant Plan compensation expense is summarized as follows:
For the Year Ended
December 31,
2022
2021
Compensation Expense
$
26
$
33
Weighted Average Value Per Share
$
1.61
$
2.23
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, 2022 and 2021 was zero and $ 13 thousand.
Warrants
A summary of warrant activity and related information is as follows:
December 31,
2022
2021
Weighted
Weighted
Average
Average
Exercise
Exercise
( in thousands )
Warrants
Price
Warrants
Price
Outstanding at beginning of year
—
$
—
80
$
1.80
Granted
—
—
—
—
Exercised
—
—
( 38 )
1.80
Forfeited/Expired
—
—
( 43 )
1.80
Outstanding at end of year
—
$
—
—
$
—
There were no outstanding warrants at December 31, 2022 and 2021.
Note 9 – Retirement Plan
The Company has a defined contribution retirement plan covering all of its U.S. employees whereby the Company matches employee contributions up to 3 % of their base salary. The Company’s matching contribution expense totaled $ 54 thousand and $ 43 thousand in 2022 and 2021, respectively.
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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 on 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
Litigation
From time to time the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in any such matter may harm the Company’s business. As of the date of 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.
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 – Government Assistance
During 2022, the Company was awarded a research grant from the Department of Energy (“DOE”) for approximately $ 250 thousand with an estimated completion occurring in the first three months of 2023. The purpose of the grant is to produce a research paper for a flexible fuel ultra-low NOx process burner capable of burning 100% hydrogen fuel. The award allows the Company to request reimbursements for expenditures such as labor, material, and administrative costs. During the year ended December 31, 2022, the Company recognized $ 181 thousand in reimbursements from DOE.
Beginning in 2021, the Company received funds relating to the Oklahoma 21 st Century Quality Jobs Act. The estimated duration of the program is up to 10 years and is designed to attract growth industries to Oklahoma. By reporting quarterly salary statistics and meeting agreed upon employment thresholds, the state remits benefit monies to the Company. For the year ended December 31, 2022, the Company recognized $ 51 thousand in government assistance. The Company did not recognize benefit monies for this program during the year ended December 31, 2021.
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Note 12 – Quarterly Results (unaudited)
Quarterly results for the years ended December 31, 2022 and 2021 are as follows:
(in thousands, except per share data)
First
Second
Third
Fourth
For the year ended December 31, 2022
Quarter
Quarter
Quarter
Quarter
Revenue
$
—
$
—
$
324
$
50
Gross Profit (Loss)
$
—
$
—
$
123
$
( 7 )
Operating Expense
$
1,517
$
1,660
$
1,558
$
1,498
Net loss attributed to common stockholders
$
( 1,490 )
$
( 1,638 )
$
( 1,312 )
$
( 1,318 )
Net Loss per share - basic and fully diluted
$
( 0.05 )
$
( 0.05 )
$
( 0.03 )
$
( 0.03 )
For the year ended December 31, 2021
Revenue
$
363
$
—
$
190
$
54
Gross Profit (Loss)
$
138
$
( 505 )
$
( 88 )
$
3
Operating Expense
$
2,159
$
2,037
$
2,269
$
1,228
Net loss attributed to common stockholders
$
( 2,021 )
$
( 2,290 )
$
( 2,353 )
$
( 1,227 )
Net Loss per share - basic and fully diluted
$
( 0.07 )
$
( 0.07 )
$
( 0.07 )
$
( 0.04 )
Note 13 – Subsequent Events
The Company has evaluated subsequent events as of the date of this report, and has none to report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEARSIGN TECHNOLOGIES CORPORATION
Date: March 31, 2023
By:
/s/ Colin J. Deller
Colin J. Deller
Chief Executive Officer
Date: March 31, 2023
By:
/s/ Brent Hinds
Brent Hinds
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Date: March 31, 2023
/s/ Colin J. Deller
Colin J. Deller
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 31, 2023
/s/ Brent Hinds
Brent Hinds
Vice President and Controller
(Principal Financial and Accounting Officer)
Date: March 31, 2023
/s/ Robert T. Hoffman Sr.
Robert T. Hoffman Sr., Director
Date: March 31, 2023
/s/ Judith S. Schrecker
Judith S. Schrecker, Director
Date: March 31, 2023
/s/ Catharine Marie de Lacy
Catharine Marie de Lacy, Director
Date: March 31, 2023
/s/ Gary J. DiElsi
Gary J. DiElsi, Director
27
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.