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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 65 added, 67 removed, 80 unchanged (62% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

In addition to historical information, this discussion and analysis here and throughout this Form 10-K contains forward-looking statements that involve risks, uncertainties and assumptions.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with

the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

In addition to

historical information, this discussion and analysis here and throughout this Form 10-K contains forward-looking statements that

involve risks, uncertainties and assumptions.

Our actual results may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not limited to, the risks described in the section titled “Risk Factors”.

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As of December 31, 2023, our China asset balance totaled $334 thousand, or approximately 4%, compared to our total asset balance of $7,620 thousand.

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

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

During the years ended December 31, 2023, and 2022, our China operations reported zero revenues.

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

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

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

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

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

Recent Developments

Letter of Intent for Four ClearSign Core TM (Rogue) Boilers

On February 21, 2024, we announced that our collaborative partner California Boiler, received a letter of intent for four boilers to be fitted with the ClearSign Core™ (Rogue) burners as well as the purchase order for the first boiler burner of the series, and has in turn placed their order with ClearSign for the first burner.

This purchase order relates to an end customer that is a fruit and vegetable multi-juice processing company located in California’s Central Valley.

The additional burner orders will be issued concurrent with the construction of additional planned fruit processing lines of the customer.

ATM Suspension

On March 18, 2024, we filed a prospectus supplement suspending the sales of common stock under our At-the-Market (“ATM”) program pursuant to that certain Sales Agreement between us and Virtu Americas LLC, as sales agent, dated December 23, 2020 (the “Sales Agreement”).

We will not make any sales of our shares of common stock pursuant to the Sales Agreement unless and until a new prospectus supplement is filed with the SEC;

however, the Sales Agreement remains in full force and effect.

Critical Accounting Policies

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Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.

See Note 2 to our audited consolidated financial statements included elsewhere in this report for a more complete description of our significant accounting policies.

See Note 2 to our audited condensed consolidated financial statements included elsewhere in this report for a more complete description of our significant accounting policies.

Revenue Recognition and Cost of Goods Sold.

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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.

Losses on long-lived assets to be disposed of are determined in a similar manner, except those fair values are reduced for the cost of disposal.

Product Warranties

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The Company periodically assesses the adequacy of our recorded warranty liabilities and adjusts the amounts as necessary, and such adjustments could be material if estimates differ significantly from actual warranty expense.

The warranty liabilities are included in accounts payable and accrued liabilities in the unaudited condensed consolidated balance sheets.

The warranty liabilities are included in accounts payable and accrued liabilities in the audited condensed consolidated balance sheets.

Research and Development

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

During the year

ended December 31, 2023, the Company received $60 thousand from such arrangements.

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

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

Stock-Based Compensation

The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the condensed consolidated financial statements based on the estimated fair value of the awards on the grant date.

The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the audited, condensed 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.

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Cost of goods sold

Gross profit (loss)

Research and development

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Operating Expenses

Other income, net

Basic and diluted net income per common share

NM = Not meaningful

Sales and Gross Loss

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

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

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

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

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

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

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

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

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

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

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

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

Revenues and Gross Profit

Consolidated revenues for the year ended December 31, 2023 totaled $2,403 thousand, compared to $374 thousand for the same period in 2022.

During the three months ended December 31, 2023, we recognized $1,274 thousand of revenues for a shipment of process burners to a California refinery customer.

This shipment supplied burners for one of the two heaters associated with such customer order.

Revenues for the year ended December 31, 2023 were generated from orders related to both our product lines, process burners and boiler burners, with the predominate amount of revenues generated from our process burner product line.

Revenues for the year ended December 31, 2022 were generated predominantly from the closeout of our ExxonMobil technology validation project.

Gross profit for the year ended December 31, 2023, increased by $701 thousand compared to gross profit reported for the year ended December 31, 2022.

For the year ended December 31, 2023, gross profit was approximately 34.0% of revenues, resulting in an increase in gross profit margin of approximately 2.9% compared to the same period in 2022.

The gross profit increase in 2023 was due to increased product shipments and burner performance tests for our customers in California, whereas in 2022 our gross profit was predominately generated by a technology validation project.

The change in gross profit margin is a result of the lower margin profile for the technology validation project compared to a typical production order due to cost overruns.

Operating Expenses

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

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

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

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

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

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

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

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

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

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

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

This compensation decrease was attributed to two key factors:

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

Refer to Note 8 - Equity for further details.

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

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

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

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

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

Treasury investments.

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

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

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

Operating expenses consist of research and development (“R&D”) and general and administrative (“G&A”) expenses.

These are addressed separately below.

Research and Development

R&D expenses for the year ended December 31, 2023 increased by $234 thousand, or 46.4%, when compared to the same period in 2022.

This year-over-year difference in R&D expenses is primarily due to expenses related to the hiring of our new Chief Technology Officer, which was comprised of a non-cash, non-recurring expense for the vesting of $43 thousand in inducement stock options, and $40 thousand human capital costs.

We also incurred $60 thousand burner development costs during the year ended December 31, 2023, primarily due to our hydrogen burner project.

The hydrogen burner development project costs are offset by government assistance monies (refer to the “Other Income” note below for further details).

General and Administrative

During the year ended December 31, 2023, G&A expenses increased by $331 thousand, or 5.8%, when compared to the same period in 2022.

This year-over-year difference in G&A expenses is primarily due to an increase of $172 thousand for a non-cash, non-recurring expense for the vesting of restricted stock units triggered by the departure of a member of our board directors, and $81 thousand for the non-cash, non-recurring impairment of demonstration burners.

These demonstration burners were intended to showcase our burner catalog in operation to potential customers as part of a marketing campaign.

These specific burners showcased an older design that we have chosen to retire from our demonstration marketing campaign.

During the year ended December 31, 2023, other income increased by $428 thousand or 119.3%, compared to the same time period in 2022.

During the year ended December 31, 2023, interest income from our money market account and short-term investments increased by $241 thousand compared to same period in 2022 due to rising interest rates and timing of year-over-year cash balances.

During the year ended December 31, 2023, other income increased by $197 thousand compared to same period in 2022 predominately due to our Seattle office decommission project, which focused on selling used equipment and materials.

During the year ended December 31, 2023, asset sales decreased by $33 thousand compared to the same period in 2022 strictly due to timing and prioritization of asset sales during our Seattle office decommissioning project.

Net loss for the year ended December 31, 2023, was $5,194 thousand as compared to $5,758 thousand for the same period in 2022, or an approximate 9.8% decrease.

The $564 thousand decrease in net loss is primarily attributable to the $701 thousand increase in gross profit referenced in the above explanation.

Liquidity and Capital Resources

At December 31, 2023, our cash and cash equivalent balance totaled $5,684 thousand compared to $6,451 thousand at December 31, 2022, a decrease of $767 thousand.

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

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

The decrease in cash and cash equivalent balance is primarily attributable to our net loss of $5,194 thousand, which was offset by a decrease in short-term held-to-maturity investments of $2,606 thousand due to working capital needs and an increase in contract liabilities of $869 thousand, representing payments from customers in advance of future project costs.

At December 31, 2023, our current assets were in excess of current liabilities resulting in working capital of $4,253 thousand as compared to $8,586 thousand at December 31, 2022.

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

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

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

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

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

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

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

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

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

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

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

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

We have no contractual debt obligations, and we have historically funded operations predominantly through equity offerings.

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

As of the date of this report, we do not have sufficient working capital to fund our operating expenses for the next 12 months.

However, we are contemplating a capital raise through a public offering pursuant to our Form S-3 shelf registration statement in April 2024, and we expect that, to the extent this public offering is consummated, we will not need additional equity capital for a period of 12 months or more following this public offering.

During the year ended December 31, 2023, working capital was funded predominately through customer cash collections for payment milestones outlined in our customer contracts.

The Form S-3 shelf registration statement filed with the SEC on July 1, 2022 was declared effective on August 12, 2022.The registration statement on Form S-3 allows us to offer common stock, preferred stock, warrants, subscription rights, debt securities and units from time to time, as market conditions permit to fund, to the extent required beyond the 12 months from the date hereof, the ongoing operations of the Company.

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

Operating activities for the year ended December 31, 2023 resulted in cash outflows of $3,233 thousand, primarily due to the loss for the period of $5,194 thousand, offset with non-cash expenses of $1,045 thousand, and an increase of $869 thousand of contract liabilities, which represents payments from customers in advance of future project costs.

Operating activities for the year ended December 31, 2022 resulted in cash outflows of $4,992 thousand, primarily due to the loss for the period of $5,758 thousand, offset with non-cash expenses of $627 thousand.

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

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

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

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

Investing activities for the year ended December 31, 2023 resulted in cash inflows of $2,490 thousand, which is primarily attributable to the redemption $4,847 thousand of short-term held-to-maturity U.S.

treasuries, offset by $2,162 thousand of purchases for the same type of investments.

Investing activities for the year ended December 31, 2022 resulted in cash outflows of $2,686 thousand, which is primarily attributable to the redemption $3,337 thousand of short-term held-to-maturity U.S.

treasuries, offset by $5,898 thousand of purchases for the same type of investments.

Financing activities for the year ended December 31, 2023 included $15 thousand in disbursements for taxes paid related to vesting of employee restricted stock units.

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

Off-Balance Sheet Transactions

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

What changed 10-K

Item 7. Management’s Discussion and Analysis