Item 7. Management’s Discussion and Analysis
ITEM 7. 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. 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”.
Overview
We design and develop technologies for the purpose of improving key performance characteristics of combustion systems, including emission and operational performance, energy efficiency and overall cost-effectiveness. Our ClearSign Core™ technology has been proven in full scale industrial test furnaces and boilers and first customer installations are currently operating in normal commercial applications. We have generated nominal revenues from operations to date to meet operating expenses.
We have incurred losses since inception totaling $93.7 million and we expect to experience operating losses and negative cash flow for the foreseeable future. We have historically financed our operations primarily through issuances of equity securities. Since inception, we have raised approximately $91.0 million in gross proceeds through the sale of our equity securities. We may need to raise additional capital in the future, however, the significant volatility in the capital markets may negatively affect our ability to raise this additional capital.
23
Table of Contents
In order to generate meaningful revenues, our technologies must gain market recognition and acceptance to develop sufficient recurring sales. In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through co-development agreements, strategic partnering agreements, or equity or debt financing to support commercialization of our research and development efforts, protect intellectual property, form relationships with strategic partners and provide for working capital and general corporate purposes. There can be no assurance that we will be successful in achieving our long-term plans, or that such plans, if consummated, will result in profitable operations or enable us to continue in the long-term as a going concern .
With respect to our China operations, we have a satellite office located in Beijing, China to support our commercialization efforts. At this time, these operations in China are immaterial compared to total company operations. As of December 31, 2023, our China asset balance totaled $334 thousand, or approximately 4%, compared to our total asset balance of $7,620 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. We currently have 15 full-time employees. Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur ongoing consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current level of activities.
The amount that we spend for any specific purpose may vary significantly, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our sales and marketing strategies.
Research, development, and commercial acceptance of new technologies are, by their nature, unpredictable. Although we undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology to the extent needed to create sufficient future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.
We cannot assure that our technologies will be accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, we have no committed source of financing, and we cannot 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.
24
Table of Contents
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations. These policies and estimates require the application of significant judgment by management. These estimates can be materially affected by changes from period to period as economic factors and conditions outside of our control change. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. 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 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.
The Company recognizes revenue and related cost of goods sold in accordance with FASB ASC 606 Revenue from Contracts with Customers (ASC 606). 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 documents or equipment. Revenue related to the contracts is recognized following the completion of non-refundable performance obligations as defined in the contract.
The Company’s contracts generally include progress payments from customers upon completion of defined milestones. As these payments are received, they are offset against accumulated project costs and recorded as either contract assets or contract liabilities. Upon completion of the performance obligations and collectability is determined, revenue can be recorded. For any contract in connection with which the Company is expected to incur costs in excess of the contact price, the Company accrues the estimated loss in full in the period such determination is made.
Impairment of Long-Lived Assets
The Company tests long-lived assets, consisting of fixed assets, patents, and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected from the use and eventual disposition of the assets. In the event an asset in not fully recoverable a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Fair value is determined based on the present value of estimated expected cash flows using a discount rate commensurate with the risks involved, quoted market prices, or appraised values depending upon the nature of the assets. Losses on long-lived assets to be disposed of are determined in a similar manner, except those fair values are reduced for the cost of disposal.
Product Warranties
The Company warrants all installed products against defects in materials and workmanship, and shortcomings in performance compared to contractual guarantees for a period specified in each contract. Accruals for product warranties are based on expected warranty experience and current product performance trends which 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 during the warranty period in the periods in which the costs are incurred. 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 audited condensed consolidated balance sheets.
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.
25
Table of Contents
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.
Stock-Based Compensation
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. Stock-based compensation for stock grants to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.
Fair Value of Financial Instruments
The Company’s financial instruments primarily consist of cash equivalents, accounts payable, accrued expenses and short-term investments in government securities. As of the balance sheet date, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the consolidated balance sheets. This is primarily attributed to the short maturities of these instruments.
Results of Operations
Comparison of the Years Ended December 31, 2023 and 2022
Highlights of our annual financial performance are as follows:
For the Year Ended
(in thousands, except per share data)
December 31,
2023
2022
$ Change
% Change
Revenues
$
2,403
$
374
$
2,029
542.6
%
Cost of goods sold
1,586
258
$
1,328
514.8
%
Gross profit
817
116
$
701
604.4
%
Research and development
739
505
$
234
46.4
%
General and administrative
6,059
5,728
$
331
5.8
%
Operating Expenses
6,798
6,233
$
565
9.1
%
Other income
787
359
$
428
119.3
%
Net loss
$
(5,194)
$
(5,758)
$
564
9.8
%
Basic and diluted net income per common share
$
(0.13)
$
(0.16)
$
0.03
18.8
%
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.
26
Table of Contents
Operating Expenses
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.
Other Income
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
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. 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 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
27
Table of Contents
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, 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
We do not have any off-balance sheet transactions.
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.