CLEARSIGN TECHNOLOGIES CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited financial statements and related notes included in our most recent Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Form 10-Q 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" in our Annual Report on Form 10-K.
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. OurClearSign Core™ technology has been proven in full scale industrial test furnaces and boilers and first customer installations are currently operating in normal commercial use. We have generated nominal revenues from operations to date to meet operating expenses. We have incurred losses since inception totaling$85.9 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$89.2 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. It is not possible at this time to estimate the full impact that the coronavirus pandemic will have on our business or on our potential customers, suppliers, or other business partners. However, the continued spread of the coronavirus, the measures taken by the governments of affected countries, actions taken to protect employees, the limitations placed on travel and border crossings, and the impact of the pandemic on various business activities in affected countries could adversely impact our operational results and financial condition. In order to generate meaningful revenues, our technologies must gain market recognition and acceptance to develop sufficient recurring sales. In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through co-development agreements, strategic partnering agreements, or equity or debt financing to 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. 20
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With respect to ourChina operations, we have a satellite office located inBeijing, China to support our commercialization efforts. At this time, these operations inChina are immaterial compared to total company operations. As ofJune 30, 2022 , ourChina asset balance totaled$182 thousand , or approximately 2%, compared to our total asset balance of$11,397 thousand . During the year endedDecember 31, 2021 , revenues attributable to ourChina operations were$21 thousand , or approximately 3.4% compared to our total revenues of$607 thousand . Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for prototype development and manufacture, costs associated with development activities including materials, sub-contractors, travel and administration, legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly traded technology company. We currently have 14 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 assure that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our development plans by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted inthe 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 unaudited 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
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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 is 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 unaudited 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. Research and development costs are offset by any funds received from strategic partners in cost sharing, collaborative projects or government grants.
Stock-Based Compensation
The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the unaudited, 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
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financial instruments were not materially different from their carrying values as presented on the balance sheets. This is primarily attributed to the short maturities of these instruments.
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended
Highlights of our quarter financial performance are as follows:
For the Three Months Ended
(in thousands, except per share data) June 30,
2022 2021 $ Change % Change
Revenues $ - $ - $ - NA %
Cost of goods sold - 505 $ (505) 100.0 %
Gross loss - (505) $ 505 100.0 %
Research and development 188 472 $ (284) 60.2 %
General and administrative 1,472 1,565 $ (93) 5.9 %
Operating Expenses 1,660 2,037 $ (377) 18.5 %
Other income, net 22 251 $ (229) 91.2 %
Net loss $ (1,638) $ (2,290) $ 652 28.5 %
Basic and diluted net income per common
share $ (0.05) $ (0.07) $ 0.02 28.6 %
For the Six Months Ended
(in thousands, except per share data) June 30,
2022 2021 $ Change % Change
Revenues $ - $ 363 $ (363) 100.0 %
Cost of goods sold - 730 $ (730) 100.0 %
Gross loss - (367) $ 367 100.0 %
Research and development 296 1,298 $ (1,002) 77.2 %
General and administrative 2,881 2,898 $ (17) 0.6 %
Operating Expenses 3,177 4,196 $ (1,019) 24.3 %
Other income, net 49 251 $ (202) 80.5 %
Net loss $ (3,128) $ (4,312) $ 1,184 27.5 %
Basic and diluted net income per common
share $ (0.09) $ (0.14) $ 0.05 35.7 %
Sales and Gross Profit
Consolidated revenues were zero for the three months ended
Consolidated revenues for the six months endedJune 30, 2022 , were zero compared to revenues of$363 thousand for six months endedJune 30, 2021 . During the six months endedJune 30, 2021 , consolidated revenues included revenues from our burner product line for a sale that occurred inthe United States . Gross loss for the three months endedJune 30, 2022 , decreased by$505 thousand , or 100.0%, compared to the three months endedJune 30, 2021 . During the three months endedJune 30, 2021 , negative gross profit occurred predominantly due to recognizing estimated contract losses from our ExxonMobil project. Gross loss for the six months endedJune 30, 2022 , decreased by$367 thousand , or 100.0%, compared to the six months endedJune 30, 2021 . During the six months endedJune 30, 2021 , negative profit from our estimated ExxonMobil contract losses were offset by positive profit from our burner product line sale and reversals of product warranties that expired.
Research and Development
Research and development ("R&D") expenses decreased by
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30, 2021. During the three months endedJune 30, 2022 , R&D expenses decreased due to an organizational restructure that occurred at the beginning of 2022. We restructured our organization such that three engineers previously performing R&D functions were reassigned to business development functions, which shifted salaries of approximately$174 thousand to G&A expense. This reassignment occurred at the beginning of 2022 and will affect the remainder of the year, and was executed to focus engineers on sales initiatives related to customer technical support. Decreases in human capital costs also favorably impacted R&D expenses by$123 thousand for the three months endedJune 30, 2022 , when compared to the three months endedJune 30, 2021 . R&D expenses decreased by$1,002 thousand , or approximately 77.2%, to$296 thousand for the six months endedJune 30, 2022 , as compared to$1,298 thousand during the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , our organizational restructure favorably impacted R&D expenses by$281 thousand compared to the six months endedJune 30, 2021 . Decreases in human capital related to headcount reductions favorably impacted R&D expenses by$246 thousand for the six months endedJune 30, 2022 , when compared to the six months endedJune 30, 2021 . In additions, product development costs trended down by$181 thousand for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , due to engineers focusing on business development functions.
General and Administrative
General and administrative ("G&A") expenses decreased by $93 thousand , or
approximately 5.9%, to $1,472 thousand for the three months ended June 30, 2022 ,
as compared to $1,565 thousand during the three months ended June 30, 2021 . A
one-time severance accrual for our prior CFO during the three months ended June
30, 2021 , favorably affected G&A by $100 thousand , when compared to the three
months ended June 30, 2022 . Board compensation decreased by $136 thousand in the
three months ended June 30, 2022 , when compared to the three months ended June
30, 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 6 - Equity for further
details. During the three months ended June 30, 2022 , G&A expenses increased by
$174 thousand compared to the prior three months ended June 30, 2021 , due to our
organizational restructure referenced in the R&D explanation above.
G&A expenses decreased by $17 thousand , or approximately 0.6%, to $2,881
thousand for the six months ended June 30, 2022 , as compared to $2,898 thousand
during the six months ended June 30, 2021 . Decreases in board compensation were
offset by increases in G&A expenses for our organizational restructure during
the six months ended June 30, 2022 , when compared to the six months ended June
30, 2021 .
Other Income
The impact of the $251 thousand loan forgiveness during the three and six months
ended June 30, 2021 , primarily drove the unfavorable change when compared to the
three and six months ended June 30, 2022 .
The impact of selling fixed assets from our Seattle office location favorably
impacted other income by $14 thousand and $37 thousand for the three months and
six months ended June 30, 2022 , respectively. In January 2022 , the board of
directors approved the relocation of our headquarters from Seattle, Washington
to Tulsa, Oklahoma . After approval, we began soliciting bids for our used lab
and office equipment.
Net Loss
Net loss for the three months ended June 30, 2022 , was $1,638 thousand compared
to $2,290 thousand for the three months ended June 30, 2021 , or an approximate
28.5% decrease. The $652 thousand decrease in net loss during the three months
ended June, 2022 is primarily attributable to zero gross profit during the three
months ended June 30, 2022 , compared to negative gross profit for the three
months ended June 30, 2021 .
Net loss for the six months ended June 30, 2022 , was $3,128 thousand compared to
$4,312 thousand for the six months ended June 30, 2021 , or an approximate 27.5%
decrease. The $1,184 thousand decrease in net loss during the
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three months ended June, 2022 is primarily attributable to decreased operating expenses during the six months endedJune 30, 2022 , when compared to the six months endedJune 30, 2021 .
Liquidity and Capital Resources
At
AtJune 30, 2022 , our current assets were in excess of current liabilities resulting in working capital of$9,146 thousand as compared to$7,293 thousand atDecember 31, 2021 . During the six months endedJune 30, 2022 , working capital has been funded with approximately$4,798 thousand in net cash proceeds from our equity offerings during 2022. Subsequent to the six months endedJune 30, 2022 , the Company raised an additional$1,742 thousand in net cash proceeds by issuing approximately 1,592 thousand shares to clirSPV LLC. This equity offering was made pursuant to a purchase right agreement between clirSPV LLC and the Company. Refer to Note 9 - Subsequent Events for further details. Operating activities for the six months endedJune 30, 2022 , resulted in cash outflows of$3,347 thousand , primarily due to the loss for the period of$3,128 thousand , offset with non-cash expenses of$179 thousand . Operating activities for the six months endedJune 30, 2021 , resulted in cash outflows of$3,674 thousand , primarily due to the loss for the period of$4,312 thousand , offset with non-cash expenses of$1,124 thousand . Investing activities for the six months endedJune 30, 2022 , resulted in cash outflows of$78 thousand in disbursements for fixed and intangible assets, and cash inflows of$37 thousand in proceeds from fixed asset sales, compared to cash outflows of$94 thousand in disbursements for fixed and intangible assets for the six months endedJune 30, 2021 . Financing activities for the six months endedJune 30, 2022 , included$4,798 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, and sale of 4.2 million shares of our common stock through a public offering at an average price of$1.11 per share. Financing activities for the six months endedJune 30, 2021 , included$5,309 thousand in net proceeds from the sale of 1,093 thousand shares of our common stock at an average price of$5.03 per share through our ATM program. Financing activities for the six months endedJune 30, 2021 , also included$277 thousand from the exercise of option awards and warrants.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
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