UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to _______________

 

Commission File Number 001-35521

 

CLEARSIGN TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

 

WASHINGTON (State or other jurisdiction of incorporation or organization)

26-2056298 (I.R.S. Employer Identification No.)

 

12870 Interurban Avenue South

Seattle, Washington 98168

(Address of principal executive offices)

(Zip Code)

 

(206) 673-4848

(Registrant’s telephone number, including area code)

 

No change

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		CLIR		The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x		Smaller reporting company x
		Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

 

As of August 14, 2020, the issuer has 26,731,261 shares of common stock, par value $.0001, issued and outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION	1
Item 1.	Condensed Consolidated Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (Unaudited)	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 (Unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity for the three month periods during the six months ended June 30, 2020 and 2019 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II	OTHER INFORMATION	21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

 

 

PART I-FINANCIAL INFORMATION

 

ITEM 1.            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

ClearSign Technologies Corporation and Subsidiary

Condensed Consolidated Balance Sheets

(Unaudited)

 

		June 30,				December 31,
		2020				2019
ASSETS
Current Assets:
Cash and cash equivalents		$	5,672,000			$	8,552,000
Contract assets			67,000				39,000
Prepaid expenses and other assets			528,000				391,000
Total current assets			6,267,000				8,982,000
Fixed assets, net			528,000				665,000
Patents and other intangible assets, net			1,327,000				1,285,000
Other assets			10,000				10,000
Total Assets		$	8,132,000			$	10,942,000
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable and accrued liabilities		$	673,000			$	845,000
Current portion of lease liabilities			184,000				177,000
Accrued compensation and taxes			298,000				226,000
Contract liabilities			48,000				50,000
Total current liabilities			1,203,000				1,298,000
Long Term Liabilities:
Long term lease liabilities			336,000				418,000
Payroll protection program loan			251,000				-
Total liabilities			1,790,000				1,716,000
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.0001 par value, zero shares issued and outstanding			-				-
Common stock, $0.0001 par value, 26,731,261 and 26,707,261  shares issued and
outstanding at June 30, 2020 and December 31, 2019, respectively			3,000				3,000
Additional paid-in capital			77,680,000				77,210,000
Accumulated deficit			(71,343,000	)			(67,990,000	)
Total stockholders' equity			6,340,000				9,223,000
Noncontrolling Interest			2,000				3,000
Total equity			6,342,000				9,226,000
Total Liabilities and Equity		$	8,132,000			$	10,942,000

 

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

 

 

ClearSign Technologies Corporation and Subsidiary

Condensed Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
		2020				2019				2020				2019
Sales		$	-			$	-			$	-			$	-
Cost of goods sold - warranty adjustment (see note 5)			(153,000	)			-				(153,000	)			1,000
Gross profit (loss)			153,000				-				153,000				(1,000	)
Operating expenses:
Research and development, net of grants			418,000				864,000				1,228,000				1,766,000
General and administrative			1,171,000				1,583,000				2,324,000				3,057,000
Total operating expenses			1,589,000				2,447,000				3,552,000				4,823,000
Loss from operations			(1,436,000	)			(2,447,000	)			(3,399,000	)			(4,824,000	)
Other income:
Other income			44,000				-				44,000				-
Interest income			1,000				21,000				1,000				69,000
Net loss			(1,391,000	)			(2,426,000	)			(3,354,000	)			(4,755,000	)
Net loss attributed to non-controlling interest			1,000				-				1,000				-
Net loss attributed to common stockholders		$	(1,390,000	)		$	(2,426,000	)		$	(3,353,000	)		$	(4,755,000	)
Net loss per share - basic and fully diluted		$	(0.05	)		$	(0.09	)		$	(0.13	)		$	(0.18	)
Weighted average number of shares outstanding - basic and fully diluted			26,712,294				26,699,788				26,709,791				26,698,546

 

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

 

 

ClearSign Technologies Corporation and Subsidiary

Condensed Consolidated Statements of Equity

(Unaudited)

For the Three Month periods during the Six Months Ended June 30, 2020 and 2019

 

		Common Stock								Additional Paid-In				Accumulated				Stockholders'				Noncontrolling
		Shares				Amount				Capital				Deficit				Equity				Interest				Total Equity
Balances at December 31, 2019			26,707,261			$	3,000			$	77,210,000			$	(67,990,000	)		$	9,223,000			$	3,000			$	9,226,000
Shares issued for services ($1.03 per share)			2,500				-				2,000				-				2,000				-				2,000
Fair value of stock options issued in payment of accrued compensation			-				-				215,000				-				215,000				-				215,000
Fair value of stock options issued for board service			-				-				53,000				-				53,000				-				53,000
Share based compensation			-				-				80,000				-				80,000				-				80,000
Net loss			-				-				-				(1,963,000	)			(1,963,000	)			-				(1,963,000	)
Balances at March 31, 2020			26,709,761				3,000				77,560,000				(69,953,000	)			7,610,000				3,000				7,613,000
Shares issued for services ($1.03 per share)			2,500				-				3,000				-				3,000				-				3,000
Shares issued upon exercise of options ($1.90 per share)			5,000				-				10,000				-				10,000				-				10,000
Shares issued upon exercise of options ($.89 per share)			14,000				-				12,000				-				12,000				-				12,000
Fair value of stock options issued for board service			-				-				34,000				-				34,000				-				34,000
Share based compensation			-				-				61,000				-				61,000				-				61,000
Net loss			-				-				-				(1,390,000	)			(1,390,000	)			(1,000	)			(1,391,000	)
Balances at June 30, 2020			26,731,261			$	3,000			$	77,680,000			$	(71,343,000	)		$	6,340,000			$	2,000			$	6,342,000

 

		Common Stock								Additional   Paid-In				Accumulated				Stockholders'				Noncontrolling
		Shares				Amount				Capital				Deficit				Equity				Interest				Total Equity
Balances at December 31, 2018			26,697,261			$	3,000			$	76,417,000			$	(59,511,000	)		$	16,909,000			$	-			$	16,909,000
Shares issued for services ($1.44 per share)			2,500				-				3,000				-				3,000				-				3,000
Fair value of stock options issued in payment of accrued compensation			-				-				100,000				-				100,000				-				100,000
Share based compensation			-				-				233,000				-				233,000				-				233,000
Net loss			-				-				-				(2,329,000	)			(2,329,000	)			-				(2,329,000	)
Balances at March 31, 2019			26,699,761				3,000				76,753,000				(61,840,000	)			14,916,000				-				14,916,000
Shares issued for services ($1.44 per share)			2,500				-				4,000				-				4,000				-				4,000
Fair value of stock options issued for board service			-				-				69,000				-				69,000				-				69,000
Share based compensation			-				-				141,000				-				141,000				-				141,000
Net loss			-				-				-				(2,426,000	)			(2,426,000	)			-				(2,426,000	)
Balances at June 30, 2019			26,702,261			$	3,000			$	76,967,000			$	(64,266,000	)		$	12,704,000			$	-			$	12,704,000

  

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

 

 

ClearSign Technologies Corporation and Subsidiary

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Six Months Ended June 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(3,354,000	)		$	(4,755,000	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock issued for services			5,000				7,000
Share based compensation			238,000				443,000
Depreciation and amortization			108,000				130,000
Abandonment and impairment of capitalized patent costs			-				396,000
Change in operating assets and liabilities:
Contract assets			(28,000	)			(3,000	)
Prepaid expenses and other assets			(137,000	)			(129,000	)
Accounts payable and accrued liabilities			(144,000	)			(136,000	)
Accrued compensation and taxes			277,000				80,000
Contract liabilities			(2,000	)			-
Net cash used in operating activities			(3,037,000	)			(3,967,000	)
Cash flows from investing activities:
Acquisition of fixed assets			-				(17,000	)
Disbursements for patents and other intangible assets			(116,000	)			(243,000	)
Maturity of short term treasury bills			-				4,935,000
Net cash provided by (used in) investing activities			(116,000	)			4,675,000
Cash flows from financing activities:
Proceeds from exercise of stock options			22,000				-
Proceeds from Payroll Protection Program loan			251,000				-
Net cash provided by financing activities			273,000				-
Net increase (decrease) cash and cash equivalents			(2,880,000	)			708,000
Cash and cash equivalents, beginning of period			8,552,000				8,949,000
Cash and cash equivalents, end of period		$	5,672,000			$	9,657,000
Supplemental disclosure of non-cash operating activities:
During the six months ended June 30, 2020, the Company issued stock options to purchase a total of 444,161 shares of common stock to its officers and employees in satisfaction of $205,000 of accrued compensation at December 31, 2019.
During the six months ended June 30, 2019, the Company issued stock options to purchase a total of 159,100 shares of common stock to certain of its officers and employees in satisfaction of $100,000 of accrued compensation at December 31, 2018.

 

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

 

 

ClearSign Technologies Corporation and Subsidiary

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1 – Organization and Description of Business

 

ClearSign Technologies Corporation (ClearSign or the Company) designs and develops products and technologies that have been shown to significantly improve key performance characteristics of industrial and commercial systems, including operational performance, energy efficiency, emission reduction, safety and overall cost-effectiveness. Our patented technologies are designed to be embedded in established OEM products as ClearSign Core™ and ClearSign Eye™ and other sensing configurations in order to enhance the performance of combustion systems and fuel safety systems in a broad range of markets, including the energy (upstream oil production and down-stream refining), commercial/industrial boiler, chemical, petrochemical, transport and power industries. The Company’s primary technology is its ClearSign Core technology, which achieves very low emissions without the need of external flue gas recirculation, selective catalytic reduction, or higher excess air operation. The Company is headquartered in Seattle, Washington and was incorporated in the state of Washington in 2008.  On July 28, 2017, the Company incorporated a subsidiary, ClearSign Asia Limited, in Hong Kong to represent the Company’s business and technological interests throughout Asia. Through ClearSign Asia Limited, the Company has established a Wholly Foreign Owned Enterprise (WFOE) in China – ClearSign Combustion (Beijing) Environmental Technologies Co., LTD.

 

Unless otherwise stated or the context otherwise requires, the terms ClearSign and the Company refer to ClearSign Technologies Corporation and its subsidiary, ClearSign Asia Limited.

 

Going Concern

 

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company’s technologies are currently in field development and have generated nominal revenues from operations to date to meet operating expenses. In order to generate meaningful revenues, the technologies must be fully developed, gain market recognition and acceptance, and develop a critical level of successful sales and product installations.

 

The Company has historically financed its operations primarily through issuances of equity securities, including $11.9 million in proceeds, net of offering costs, from a stock offering completed on February 27, 2018 and $11.6 million in proceeds, net of offering costs, from a stock offering completed on July 20, 2018. The Company has incurred losses since its inception totaling $71,343,000 and expects to experience operating losses and negative cash flows for the foreseeable future. Additionally, the outbreak of COVID-19 has caused significant disruptions to the global financial markets which could impact the Company’s ability to raise additional capital.

 

Based on its current plans, the Company does not have sufficient funds to continue operating its business at current levels for at least 12 months from the date of issuance of these financial statements. In order to continue business operations, the Company currently anticipates that it will need to raise additional capital. Accordingly, these factors, among others raise substantial doubt about the Company’s ability to continue as a going concern. 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 development and 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 plans as set forth above. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed balance sheet at December 31, 2019 has been derived from the Company’s audited financial statements.

 

In the opinion of management, these consolidated financial statements reflect all normal recurring and other adjustments necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of ClearSign and its subsidiary. Intercompany balances and transactions have been eliminated in consolidation.

 

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 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 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 and performance obligations are satisfied. Typically, the Company’s contracts with customers have performance obligations regarding air emissions and operational performance that are satisfied upon completion of service. Since this is the singular performance obligation and cannot be achieved until the air emissions and operational performance have been successfully tested, revenue related to the contracts is recognized upon project completion.

 

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 acceptance by the customer the projects can be recorded as revenue.

 

The Company's contracts with customers contain no variable considerations or incentives or discounts that would cause revenue to be allocated or adjusted over time. Therefore, no separate methods of evaluating the contracts other than consideration of the price at achievement of the performance objectives was used in satisfying the review requirements of ASC 606.

 

Contract Acquisition Costs and Practical Expedients

 

For contracts that have a duration of less than one year, the Company follows ASC 606, Narrow Scope Improvements and Practical Expedients, and expenses those costs when incurred; for contracts with a life exceeding one year, the Company records those costs when performance obligations related to the contract are completed. The Company generally expenses sales commissions when earned. The Company records those costs within 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 warranty experience and current product performance trends, and are recorded as a component of cost of sales at the time revenue is recognized. The warranty liabilities are reduced by material and labor costs used to replace parts over the warranty period in the periods in which the costs are incurred. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary, and such adjustments could be material in the future if estimates differ significantly from actual warranty expense. The warranty liabilities are included in accrued liabilities in the balance sheets.

 

Cash and Cash Equivalents

 

Highly liquid investments purchased with an original maturity of three months or less are considered cash equivalents. Cash is maintained with a commercial bank where accounts are generally guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company’s deposits may at times exceed this limit. The Company also maintains a cash balance in China which is insured up to $70,000 (500,000RMB). The Company has not experienced losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount. An allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management’s judgment, deserve current recognition in estimating bad debts. The determination of the collectability of amounts due from customer accounts requires 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 on the balance sheet at the time of lease inception or modification a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line basis. Operating leases with a term of 1 year or less are recognized on a straight line basis over the term. Depreciation is computed using the straight-line method over the estimated useful lives of the respective 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 two to four years. Maintenance and repairs are expensed as incurred.

 

Patents and Trademarks

 

Patents and trademarks are recorded at cost. Amortization is computed using the straight-line method over the estimated useful lives of the assets once they are awarded.

 

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 to result from the use and eventual disposition of the assets. In that event, 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. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal.

 

 

Fair Value of Financial Instruments

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs used to establish fair value are the following:

 

·

Level 1 – Quoted prices in active markets for identical assets or liabilities;

·

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; 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 and cash equivalents, 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 maturities of these instruments.

 

The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value.

 

Research and Development

 

The cost of research and development is expensed as incurred. Research and development costs consist of salaries, benefits, share based compensation, consulting fees, rent, utilities, depreciation, and consumables.

 

During the six months ended June 30, 2019, the Company received $108,000 to partially fund specific research and development activity relating to its ECC technology. During the six months ended June 30, 2020 the Company received $40,000 to partially fund specific engineering activity relating to the development of burners for a specific Super Major. Since these funds were provided without expectation of reciprocation, other than the notification of research results, the funds received were offset against the related research and development costs incurred.

 

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 these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. Tax benefits from an uncertain tax position are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

 

 

Stock-Based Compensation

 

The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the consolidated financial statements based on the estimated fair value of the awards on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.

 

Foreign Operations

 

The accompanying consolidated financial statements as of June 30, 2020 and December 31, 2019 include assets amounting to approximately $127,000 and $151,000, respectively, relating to operations of the Company in China. It is always possible that unanticipated events in foreign countries could disrupt the Company’s operations, and since the end of January 2020 this has been and currently continues to be the case with the effects of the recent COVID-19 pandemic.

 

Foreign Currency

The functional currency of ClearSign Asia Limited is the U.S. dollar. The Company remeasures the transactions denominated in Chinese Yuan at the average exchange rate in effect during the period. At the end of each reporting period, the Company remeasures ClearSign Asia Limited’s monetary assets and liabilities to the U.S. dollar using exchange rates in effect at the end of the reporting period. The Company remeasures its non-monetary assets and liabilities at historical exchange rates. The Company records gains and losses related to remeasurement in other income (expense), net in the consolidated statements of operations. Foreign currency exchange gain (loss) has not been significant in any period presented and the Company has not undertaken any hedging transactions related to foreign currency exposure.

Noncontrolling Interest

 

The subsidiary of the Company has a minority shareholder representing an ownership interest of 1.00% at June 30, 2020. The Company accounts for this noncontrolling interest pursuant to ASC 810-10-65 whereby gains and losses in a subsidiary with a noncontrolling interest are allocated to the noncontrolling interest based on the ownership percentage of the noncontrolling interest, even if that allocation results in a deficit noncontrolling interest balance.

 

Net Loss per Common Share

 

Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include additional common shares available upon exercise of stock options and warrants using the treasury stock method, except for periods for which no common share equivalents are included because their effect would be anti-dilutive. At June 30, 2020 and 2019, potentially dilutive shares outstanding amounted to 2,755,744 and 2,253,033, respectively.

 

Recently Adopted Accounting Pronouncements

 

In November 2018 FASB issued ASU 2018-18, Topic 808 Collaborative Arrangements. The amendments in this update make targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements as follows: (1) clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements; (2) add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606; (3) require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this standard did not have material effect on the Company’s consolidated financial statements.

 

 

Recently Issued Accounting Pronouncements

 

Management does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s consolidated financial statement presentation or disclosures.

 

Note 3 – Fixed Assets

 

Fixed assets are summarized as follows:

 

		June 30,				December 31,
		2020				2019
		(unaudited)
Machinery and equipment		$	762,000			$	762,000
Office furniture and equipment			177,000				180,000
Leasehold improvements			149,000				149,000
Right of use asset-operating leases			1,140,000				1,140,000
Accumulated depreciation and amortization			(1,700,000	)			(1,566,000	)
		$	528,000			$	665,000

 

The Company has a triple net operating lease for office and laboratory space in Seattle, Washington with a term that initially ended in March 2020 with rent of approximately $12,000 per month plus triple net operating costs. The Company also has a triple net operating lease for office space in Tulsa, Oklahoma with a term that initially ended in August 2019 and monthly rent of approximately $2,000 per month plus triple net operating costs. Both leases included lessee renewal options for three years at the then prevailing market rate. Effective as of July and August 2019, the Company exercised the options to renew both the Seattle lease and the Tulsa lease for three years. The new term of the Seattle lease began in April 2020 and included rent abatement for April and May 2020, although the Company will be responsible for its proportionate share of expenses and taxes. The Company will pay a monthly rent of approximately $13,500 beginning on June 1, 2020 through March 2021. The monthly rent will increase on the first day of April of each succeeding year by approximately 3% until the end of the term in May 2023. The rent for the Tulsa lease is approximately $2,200 a month through August 2022 with an annual 2.5% increase. The Company has an operating lease for office space in Beijing, China through November 2020 with a monthly rent of approximately $6,000.

 

Lease costs for the six months ended June 30, 2020 and 2019 and other quantitative disclosures are as follows (unaudited):

 

 

		For the three months ended June 30,								For the six months ended June 30,
		2020				2019				2020				2019
Lease cost:
Operating lease cost		$	61,000			$	58,000			$	123,000			$	117,000
Total lease cost		$	61,000			$	58,000			$	123,000			$	117,000
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases						$	95,000
For operating lease:
Weighted average remaining lease term (in years)							2.73
Weighted average discount rate							7.17	%

  

Minimum future payments under the Company’s leases at June 30, 2020 and their application to the corresponding lease liabilities are as follows (unaudited):

 

		Discounted lease liability payments				Payments due under lease agreements
2020 (remaining 6 months)		$	102,000			$	119,000
2021			169,000				193,000
2022			178,000				190,000
2023			71,000				73,000
Total		$	520,000			$	575,000

 

Note 4 – Patents and Other Intangible Assets

 

Patents and other intangible assets are summarized as follows:

 

		June 30,				December 31,
		2020				2019
		(Unaudited)
Patents
Patents pending		$	859,000			$	846,000
Issued patents			711,000				619,000
			1,570,000				1,465,000
Trademarks
Trademarks pending			88,000				77,000
Registered trademarks			23,000				23,000
			111,000				100,000
Other			8,000				8,000
			1,689,000				1,573,000
Accumulated amortization			(362,000	)			(288,000	)
		$	1,327,000			$	1,285,000

 

 

Future amortization expense associated with issued patents and registered trademarks as of June 30, 2020 is estimated as follows (unaudited):

 

2020 (remaining 6 months)			76,000
2021			118,000
2022			90,000
2023			57,000
2024			29,000
Thereafter			3,000
		$	373,000

 

Note 5 – Sales, Contract Assets and Contract Liabilities

 

The Company recognized no revenue during the six months ended June 30, 2020 and 2019. The Company recorded an adjustment totaling $153,000 to cost of goods sold for the six months ended June 30, 2020 related to the reversal of accrual for product warranties that expired on six completed projects from years 2016 and 2017, and recorded $1,000 for the six months ended June 30, 2019 related to additional warranty costs incurred for previously completed contracts.

 

Note 6 –Equity

 

Common Stock and Preferred Stock

 

The Company is authorized to issue 62,500,000 shares of common stock and 2,000,000 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.

 

Equity Incentive Plan

 

The Company has adopted and the Company’s shareholders have approved the ClearSign Technologies Corporation 2011 Equity Incentive Plan (the Plan) which permits the Company to grant to eligible participants, including officers, employees, directors, consultants and advisors, options to purchase shares of common stock, stock awards and stock bonuses. The Compensation Committee of the Board of Directors is authorized to administer the Plan and establish the grant terms, including the grant price, vesting period and exercise date. As of June 30, 2020, the number of shares of common stock reserved for issuance under the Plan totaled 4,005,714. The Plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 15% 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. 

 

During the six months ended June 30, 2020, the Company granted stock options for the purchase of an aggregate 444,161 shares of common stock to its employees from the Plan. These were awarded for 2019 in lieu of cash and the expense was recorded during the year ended December 31, 2019. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:

 

Expected life	5.00	years
Weighted average volatility	72	%
Forfeiture rate	15	%
Weighted average risk-free interest rate	1.63	%
Expected dividend rate	0	%

 

 

Outstanding stock option awards at June 30, 2020 and December 31, 2019 totaled 2,675,744 shares and 2,131,058 shares, respectively, with the right to purchase 2,320,583 shares and 1,461,073 shares being vested and exercisable at June 30, 2020 and December 31, 2019, respectively. The recognized compensation expense associated with stock option awards for the three and six months ended June 30, 2020 and 2019 totaled $48,000 and $115,000, and $115,000 and $289,000 respectively. On June 30, 2020 the number of shares reserved under the Plan but unissued totaled 738,091. At June 30, 2020, there was $180,000 of total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1 year. The intrinsic value of outstanding stock options was $1,600,000 at June 30, 2020.

 

The Company’s directors are compensated solely in stock option awards. In addition to being paid for their services as directors, individual directors are paid for committee membership, for services as a committee chair and for services as a lead director. On April 1, 2020, the Company awarded from the Plan to certain directors stock options for the purchase of 94,500 shares of common stock as payment for services rendered to the Company in the first quarter of 2020.  The stock options have an exercise price based on the grant date fair value, which was $0.72. On May 18, 2020 the Company awarded from the Plan to certain directors stock options for the purchase of 79,500 shares of common stock as payment for services rendered to the Company in the second quarter of 2020, The stock options have an exercise price based on the grant date fair value, which was $0.54. All of the options have a contractual life of 10 years.  The recognized compensation expense associated with director stock option awards for the three and six months ended June 30, 2020 and 2019 totaled $34,000 and $87,000, and $69,000 and $69,000 respectively.

 

2020 Director Awards
Expected life		10.00	years
Weighted average volatility		78	%
Forfeiture rate		0	%
Weighted average risk-free interest rate		0.68	%
Expected dividend rate		0	%

 

Consultant Stock Plan

 

The Company has a Consultant Stock Plan (the Consultant Plan) which 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 awards from the Consultant Plan. The Compensation Committee of the Board of Directors is authorized to administer the Consultant Plan and establish the grant terms. The number of shares reserved for issuance under the Consultant Plan on June 30, 2020 totaled 253,442 with 185,192 of those shares unissued. The Consultant Plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 1% of any new shares issued by the Company during the quarter immediately prior to the adjustment date or such lesser amount as the Board of Directors shall determine. The Company granted 10,000 shares of common stock to a consultant under the Consultant Plan for contracted services performed during the period from August 13, 2018 to August 31, 2019. The fair value of the stock at the time of grant was $1.44 per share for a total value of $14,000, which the Company recognized on a quarterly pro-rated basis as to 2,500 shares in general and administrative expense. The contract was renewed and the consultant was granted an additional 10,000 shares for services to be performed from September 1, 2019 through August 31, 2020. The fair value of the stock at the time of grant was $1.03 per share for a total value of $10,000, which the Company is recognizing on a quarterly pro-rated basis as to 2,500 shares in general and administrative expense. The Consultant Plan expense for the three and six months ended June 30, 2020 and 2019 was $3,000 and $5,000 and $4,000 and $7,000, respectively.

 

Inducement Stock Options

 

Pursuant to the rules of The Nasdaq Stock Market, the Company has the ability to issue equity awards, including stock options, as an inducement to an individual to accept employment with the Company. These awards need not be granted from a plan approved by the Company’s shareholders. During the six months ending June 30, 2019 the Company granted options for the purchase of 600,000 shares of common stock to its President and Chief Executive Officer as an inducement to accept the Company’s offer of employment. (see Note 7). The stock options have exercise prices at the award date fair value ranging from $1.16 to $2.25 per share, contractual lives of 10 years, and vest over 2 years. An option to purchase 258,618 shares of common stock was issued from the Company’s 2011 Equity Incentive Plan and is accounted for with the stock options described above. Non-qualified stock options covering the remaining 341,382 shares of common stock were issued from the Company’s reserve of authorized but unissued shares of common stock. The fair value of the non-qualified stock options estimated on the date of grant using the Black-Scholes option valuation model was $176,000. The recognized compensation expense associated with these awards for the three and six months ended June 30, 2020 and 2019 was $13,000 and $26,000 and $26,000 and $85,000, respectively. The remaining unrecognized compensation expense associated with these awards is $39,000.

 

Warrants

 

At June 30, 2020, warrants for the purchase of 80,000 shares of common stock at an exercise price of $1.80 per share were outstanding and had a remaining life of 0.63 years. The intrinsic value of outstanding warrants was $22,000 at June 30, 2020.

 

 

Note 7 – Commitments and Contingencies

 

On January 28, 2019 (the “Effective Date”), the Company and Colin James Deller entered into an employment agreement (the “Agreement”) pursuant to which the Company employed Dr. Deller as its President until April 1, 2019, at which time Dr. Deller became the Company’s Chief Executive Officer. Pursuant to the Agreement, the Company pays Dr. Deller an annual salary of $350,000. As an inducement to accept employment with the Company, Dr. Deller was also granted an option to purchase 400,000 shares of the Company’s common stock at an exercise price of $1.16 per share and an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.25 per share. Each option has a term of 10 years and will vest as follows: the right to purchase one-third of the shares of common stock subject to the option vested on the Effective Date; the right to purchase one-third of the shares will vest on the first anniversary of the grant date; and the right to purchase one-third of the shares will vest on the second anniversary of the grant date. The Company also agreed to pay certain expenses, not to exceed the sum of $100,000, related to Dr. Deller’s move from Tulsa, Oklahoma to Seattle, Washington, including reasonable expenses related to the sale of his home in Tulsa. As a temporary adjustment for the difference in the cost of living between Tulsa and Seattle (the “Relocation Adjustment”), for a period of four years (the “Payment Period”) from the Effective Date, the Company has also agreed to pay up to $6,000 a month to Dr. Deller for expenses related to temporary housing and travel to and from Tulsa to Seattle. If Dr. Deller purchases a home in the Seattle area, the Relocation Adjustment will continue to be paid through the expiration of the Payment Period, although the Relocation Adjustment may be adjusted or terminated upon mutual agreement of Dr. Deller and the Company. The Agreement may be terminated by the Company for cause, as defined in the Agreement, due to Dr. Deller’s death or disability, upon 30 days’ notice to Dr. Deller or as a result of a change in control, as defined in the Agreement. With the exception of a termination for cause, if Dr. Deller’s employment is terminated by the Company, aside from accrued but unpaid salary, bonus (if any) and business expenses, Dr. Deller will receive the balance of the unpaid Relocation Adjustment and six months of his annual salary. During the six months ended June 30, 2020 and 2019, the Company has paid Dr. Deller $18,000 and $16,000, respectively, in Relocation Adjustment payments to reimburse temporary housing costs.

  

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 its business, financial condition or operating results.

 

Notice of Intent to File Lien

 

We received a document dated June 11, 2020 and titled “Notice of Intent to File a Lien” with attachments, and subsequently we received an invoice dated July 8, 2020 in the amount of $3 million from Prairie Star National (the “Notice”). The Notice states that the “account” has been assigned to Prairie Star National for collection by Graciela Zeman Rutkowski, who we believe is the spouse or former spouse of Richard Rutkowski, our former Chief Executive Officer. The Notice does not clearly describe the basis for any claim against the Company, although prior correspondence we received from Prairie Star National suggests that any such claim would relate to Mr. Rutkowski and possibly to compensation paid by us to Mr. Rutkowski and/or claims thereto by Ms. Rutkowski. To our knowledge, neither Ms. Rutkowski nor Prairie Star National has filed a pleading in any court of law. We do not believe that we have any liability to Ms. Rutkowski and, if she were to file a legal action to assert any such claim, we expect to vigorously defend it.

  

Indemnification Agreements

 

The Company maintains indemnification agreements with its 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.

 

 

COVID-19 Pandemic

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, which continues to spread throughout the United States and the rest of the world. The ultimate extent of the impact of COVID-19 on the financial performance of the Company will depend on future developments, including, among other things, the duration and spread of COVID-19, and the overall economy, all of which are highly uncertain and cannot be predicted. The outbreak of COVID-19 has already caused significant disruptions to the global financial markets which may impact the Company’s ability to raise additional capital on acceptable terms or at all. If the financial markets and/or the overall economy are impacted for an extended period, the Company's operating results may be materially and adversely affected.

 

To date the Company has altered its operations through working remotely and only maintaining essential personnel in its offices. This has not resulted in any major impact to the Company’s ability to conduct business.

 

Note 8 - The Paycheck Protection Program (PPP) Loan

 

On May 8, 2020, the Company obtained a loan in the amount of $250,832 (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 can use the PPP loan proceeds to fund designated expenses, including certain payroll costs, rent, utilities and other permitted expenses. The PPP loan is evidenced by a promissory note (the “PPP Note”), dated effective May 1, 2020, issued by the Company to the Lender. The PPP loan is unsecured with a 2-year term, matures on May 7, 2022, and bears interest at a rate of 1.00% per annum, payable monthly commencing on November 8, 2020, following an initial deferral period as specified under the PPP. Under the terms of the PPP, the PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. In addition, up to the entire amount of principal and accrued interest may be forgiven to the extent the PPP loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP (including that up to 75% of such loan funds are used for payroll). The Company intends to use the entire PPP loan amount for designated qualifying expenses and to apply for forgiveness of the loan in accordance with the terms of the PPP. No assurance can be given that the Company will obtain forgiveness of the loan in whole or in part. With respect to any portion of the PPP loan that is not forgiven, the loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the PPP loan and cross-defaults.

 

Note 9 – Subsequent Events

 

On July 10, 2020, the Company received a letter from the Financial Industry Regulatory Authority (“FINRA”) notifying the Company that FINRA is investigating trading in the Company’s securities surrounding the June 15, 2020 announcement that the Company had received a purchase order from ExxonMobil. We have not been made aware of any findings by FINRA or if any determination has been made. The Company has responded to FINRA’s request for information and intend to continue to cooperate in the investigation.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may,” “will” or other similar expressions in this report. In particular, these include statements relating to future actions; prospective products, applications, customers, or technologies; future performance or results of anticipated products; anticipated expenses; and future financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to:

 

•

our history of losses;

	•	our ability to successfully develop and implement our technology and achieve profitability;
	•	our ability to successfully negotiate and complete strategic partnership agreements with established equipment supply companies in our target industries;
	•	our limited operating history;
	•	emerging competition and advancing technology in our industry that may outpace our technology;
	•	changes in government regulations that could substantially reduce, or even eliminate, the need for our technology;
	•	customer demand for the products and services we develop;
	•	the impact of competitive or alternative products, technologies and pricing;
	•	our ability to manufacture any products we design;
	•	our ability to hire and retain personnel with the experience and talent to develop our products and business;

 

 

•

general economic conditions and events and the impact they may have on us and our potential customers;

	•	our ability to obtain adequate financing in the future;
	•	the financial and operational impacts of the coronavirus pandemic on our business and results of operations, including impacts on our day-to-day operations, collaborative arrangements, revenue and marketing efforts and suppliers;

•

our ability to protect our intellectual property;

•

the impact of a cybersecurity incident or other technology disruption;

•

our doing business in China and related risks with respect to intellectual property protection, currency exchange, contract enforcement and rules on foreign investment;

•

our ability to continue as a going concern;

•

our success at managing the risks involved in the foregoing items; and

•

other factors discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K.

 

Forward-looking statements may appear throughout this report, including, without limitation, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.

 

Unless otherwise stated or the context otherwise requires, the terms “ClearSign,” “we,” “us,” “our” and the “Company” refer to Clearsign Technologies Corporation and its subsidiary.

 

ITEM 2.

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 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 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. Our ClearSign Core™ technology is currently in test furnace and field development. We have generated nominal revenues from operations to date to meet operating expenses.

 

We have incurred losses since inception totaling $71,343,000 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 $72.0 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 relating to the ongoing spread of the coronavirus may negatively affect our ability to do so.

 

 

In order to attempt to mitigate the coronavirus pandemic in the State of Washington, where our headquarters are located, on March 23, 2020 Governor Jay Inslee issued a “Stay Home, Stay Healthy” order which, among other things, (i) directed all individuals living in Washington to shelter at their places of residence (subject to limited exceptions), (ii) closed all businesses except “essential businesses,” and (iii) prohibited all gatherings for social, spiritual and recreational purposes. This order continued until May 31, 2020, with modifications for a phased reopening which started on May 5, 2020. King County, which includes Seattle, entered phase 2 of Washington’s Safe Start plan on June 19, 2020. However, on July 28, 2020, Governor Inslee paused the continuation of the reopening phase progression under the Safe Start plan due to the continued spread of and rise of coronavirus cases statewide. The pause will continue indefinitely. After a review of our business and subsequent clarifications from State agencies, we determined that our business is an “essential business” and therefore a limited number of employees are currently working from our facility in Seattle. Employees currently engaged in optimizing the fire tube boiler for demonstration in China, working on our process burner to meet specific customer performance requirements and commercializing our sensing technologies are able to work from our Seattle facility. Not all contractors, suppliers or parts are available, or can be obtained as expeditiously as before. As a result, the timelines for these projects have been delayed. Our operations in China have also been impacted by the severity of the pandemic, including attendant limitations on travel, and this has and may continue to delay the completion of the water tube and fire tube demonstration projects. Our administrative staff in Seattle and our employees located in our Tulsa office are continuing, for the most part, to work remotely.

 

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, the 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. We currently anticipate that the establishment of the fire tube boiler burner product could be delayed until the fall or beyond. Developments to the water tube boiler burner product in China have already been delayed and this may continue beyond the next heating season. As a result, potential revenue streams that may be associated with the sale of those products in the Chinese market could also be delayed.

 

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. In order to generate meaningful revenues, our technologies must be fully developed, gain market recognition and acceptance and develop a critical level of successful sales and product installations. 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 adequately support 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 the Company will be successful in achieving its plans as set forth above. Based on our current plans, we do not have sufficient funds to continue our business at current levels for at least 12 months from the date of issuance of this report. As a result, management has concluded that there is a substantial doubt about the Company’s ability to continue as a going concern.

 

Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for product development and commercialization activities, and administration, travel, 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 consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current levels.

 

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 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 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 and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control. 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 and performance obligations are satisfied. Typically, the Company’s contracts with customers have performance obligations regarding air emissions and operational performance that are satisfied upon completion of service. Since this is the singular performance obligation and cannot be achieved until the air emissions and operational performance have been successfully tested, revenue related to the contracts is recognized upon project completion.

 

Product Warranties. The Company warrants 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 warranty experience and current product performance trends, and are recorded at the time revenue is recognized as a component of cost of sales. The warranty liabilities are reduced by material and labor costs used to repair or replace parts over the warranty period in the periods in which the costs are incurred. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary and such adjustments could be material in the future if estimates differ significantly from actual warranty expense. The warranty liabilities are included in accrued liabilities in the balance sheets.

 

Research and Development. The cost of research and development is expensed as incurred. Research and development costs consist of salaries, benefits, share-based compensation, consulting fees, rent, utilities, depreciation, and consumables.

 

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. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Stock compensation for stock granted 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. 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 Company's financial instruments primarily consist of cash and cash equivalents, accounts payable, and accrued expenses. 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 balance sheets. This is primarily attributed to the short maturities of these instruments. The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value.

 

RESULTS OF OPERATIONS

 

Comparison of the Three and Six Months Ending June 30, 2020 and 2019

 

Sales and Gross Profit. We earned no revenues during the three and six month period ended June 30, 2020 and recorded an adjustment of $153,000 to cost of goods sold. This adjustment represented the reversal of accruals for product warranties that expired during the period. We earned no revenues during the three and six month periods ended June 30, 2019 and we incurred $0 and $1,000 in additional warranty costs for previously completed contracts.

 

Operating Expenses. Operating expenses, consisting of research and development (R&D) and general and administrative (G&A) expenses, decreased by approximately $858,000, or approximately 35%, to $1,589,000 for the three month period ended June 30, 2020, as compared to $2,447,000 for the three month period ended June 30, 2019. The Company decreased its R&D expenses by $446,000, or approximately 52%, to $418,000 for the three month period ended June 30, 2020 as compared to $864,000 for the three month period ended June 30 2019. The decrease in R&D expenses was due primarily to decreased field testing and laboratory related costs. G&A expenses decreased by $412,000, or approximately 26%, to $1,171,000 in the three month period ended June 30, 2020 as compared to $1,583,000 in the three month period ended June 30, 2019, resulting primarily from a reduction of share-based compensation, consulting services and legal fees. During the six month period ended June 30, 2020, operating expenses decreased by approximately 26% or $1,271,000, to $3,552,000, as compared to $4,823,000 for the six month period ended June 30, 2019. The Company decreased its R&D expenses by $538,000 during the six month period ended June 30, 2020, or approximately 30%, due to decreases in field testing costs. G&A expenses during the six month period ended June 30, 2020 decreased by $733,000, or approximately 24%, to $2,324,000, due to a reduction of share-based compensation, consulting services and legal fees.

 

Loss from Operations. Our loss from operations decreased during the three months ended June 30, 2020 by $1,011,000, to $1,436,000 from $2,447,000 in the three months ended June 30, 2020 and decreased for the six months ended June 30, 2020 by $1,425,000, to $3,399,000 as compared with $4,824,000 for the six months ended June 30 2019. Decrease in loss from operations was due to reasons described above.

 

Other income. Other income of $44,000 in the three months ended June 30, 2020 resulted from a non-recurring sale of spare materials and parts for an installation site on a previously completed contract.

 

Interest Income. Our interest income during the three months ended June 30, 2020 decreased by approximately $20,000 to $1,000 from $21,000 during the three months ended June 30, 2019, and decreased during the six months ended June 30, 2020 by $68,000 to 1,000 from $69,000 during the six months ended June 30,2019. The decreases were due to the maturities of short-term investments consisting of U.S. Treasury bills, the proceeds of which were consumed in operations.

 

Net Loss. Primarily as a result of the warranty adjustment recorded in cost of goods sold and decreased operating expenses, our net loss for the three month period ended June 30, 2020 was $1,391,000 as compared to a net loss of $2,426,000 for the three month period ended June 30, 2019, resulting in a decrease in net loss of $1,035,000, and our net loss for the six month period ended June 30, 2020 was $3,354,000 as compared to a net loss of $4,755,000 for the same period in 2019, resulting in decreased net loss of $1,401,000 or approximately 29%.

 

Liquidity and Capital Resources

 

At June 30, 2020, our cash and cash equivalent balance totaled $5,672,000 compared to $8,552,000 at December 31, 2019, a decrease of $2,880,000 that resulted primarily from operating costs.

 

Based on our current plans, we do not have sufficient funds to continue operating our business at current levels for at least 12 months from the date of issuance of this report. In order to continue business operations beyond that point, we currently anticipate that we will need to raise additional capital. Our development and general administrative costs are ongoing and we expect to require additional funding to meet these expenses. To that end we may undertake offerings of our securities, debt financing, selling or licensing our developed intellectual or other property, or other alternatives. We filed a Form S-3 shelf registration statement with the Securities and Exchange Commission on June 27, 2019 that was declared effective on July 12, 2019. The registration statement 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 the ongoing operations of the Company. Until the growth of revenue streams increases to a level that covers operating expenses it is the Company’s plan to continue to fund operations in this manner although, as noted above, the significant volatility in the capital markets relating to the ongoing spread of the coronavirus may negatively affect our ability to do so. As a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern.

 

 

At June 30, 2020, our current assets were in excess of current liabilities resulting in working capital of $5,064,000 compared to $7,684,000 at December 31, 2019. The decrease in working capital resulted primarily from the funds used in operations and invested in intangible assets.

 

Operating activities for the six months ended June 30, 2020 resulted in cash outflows of $3,037,000 which were due primarily to the loss for the period of $3,354,000. The cash outflows were offset primarily by non-cash expenses of $108,000 and services paid with common stock and stock options of $243,000. Operating activities for the six months ended June 30, 2019 resulted in cash outflows of $3,967,000, which were due primarily to the loss for the period of $4,755,000. These were offset primarily by non-cash expenses of $130,000, impairment loss of $396,000, and services paid with common stock and stock options of $450,000.

 

Investing activities for the six months ended June 30, 2020 resulted in cash outflows of $116,000 in disbursements for development of patents, compared to cash inflows of $4,675,000 from the maturity of short-term treasury bills, offset by $243,000 in disbursements for patent development and $17,000 for the acquisition of fixed assets during the same period of 2019.

 

Financing activities for the six months ended June 30, 2020 resulted in cash inflows of $251,000 from PPP loan funding and $22,000 in proceeds from exercise of stock options, compared to no financing activities during the same period of 2019.

 

Off-Balance Sheet Transactions

 

We do not have any off-balance sheet transactions.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide this information.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our Chief Executive Officer (CEO) (principal executive officer) and our Chief Financial Officer (CFO) (principal financial and accounting officer), has concluded that, as of June 30, 2020, our disclosure controls and procedures are effective.

 

Changes in Internal Control over Financial Reporting

 

There have been no material changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

 

PART II-OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

From time to time we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

ITEM 1A.

RISK FACTORS

 

We incorporate herein by reference the risk factors included under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 which we filed with the Securities and Exchange Commission on March 30, 2020.

 

On July 10, 2020, we received a letter from the Financial Industry Regulatory Authority (“FINRA”) notifying us that FINRA is investigating trading in our securities surrounding the June 15, 2020 announcement that we received a purchase order from ExxonMobil.  We cannot predict the outcome of the investigation.  Potential negative outcomes could adversely affect our ability to raise future financing and the investigation itself could distract our management, both of which could increase the risk that you would suffer a loss on your investment.

 

We have been advised that FINRA is conducting a review of trading in our common stock surrounding the June 15, 2020 announcement of the purchase order we received from ExxonMobil. We have been responding to FINRA’s request for information and intend to continue to cooperate in the investigation.

 

Although we cannot, at this time, assess either the duration or the likely outcome or consequences of this investigation, any FINRA action that adversely affects us could also adversely affect the trading price of our common stock.  In addition, to the extent that the FINRA investigation distracts our management from pursuing our business plan, our results and the trading price of our common stock could be adversely affected.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On June 30, 2020 we issued 2,500 shares of common stock, having a per share value of $1.03, the closing price of our common stock on October 30, 2019, the date of grant, from our 2013 Consultant Stock Plan to our investor relations firm, Firm IR, for services provided in the six months ended June 30, 2020.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

 

We received a document dated June 11, 2020 and titled “Notice of Intent to File a Lien” with attachments, and subsequently we received an invoice dated July 8, 2020 in the amount of $3 million, from Prairie Star National (the “Notice”). The Notice states that the “account” has been assigned to Prairie Star National for collection by Graciela Zeman Rutkowski, who we believe is the spouse or former spouse of Richard Rutkowski, our former Chief Executive Officer. Mr. Rutkowski left our employ on December 10, 2014. The Notice states that a UCC-1 financing statement and security agreement have been filed, although the Notice does not say where the filing was made. The Notice also indicates that copies of the UCC-1 financing statement and security agreement were attached to the Notice, although we did not receive the attachments. The Notice does not clearly describe the basis for any claim against the Company, although prior correspondence we received from Prairie Star National suggests that any such claim would relate to Mr. Rutkowski and possibly to compensation paid by us to Mr. Rutkowski and/or claims thereto by Ms. Rutkowski. We believe these claims may have arisen in connection with a dissolution of their marriage or a division of their community property. To our knowledge, neither Ms. Rutkowski nor Prairie Star National has filed a pleading in any court of law. We have not executed a security agreement in favor of Ms. Rutkowski and we conducted an online search of the UCC filings in Washington state and we have found no record of any UCC filings creating a lien against our assets. We do not believe that we have any liability to Ms. Rutkowski and, if she were to file a legal action to assert any such claim, we expect to vigorously defend it.

 

ITEM 6.

EXHIBITS

 

Exhibit Number		Document
3.1		Articles of Incorporation of ClearSign Technologies Corporation (1)
3.2		Bylaws (2)
3.2.1		Amendment to Bylaws (3)
4.1		Form of Common Stock Certificate (4)
10.1		Promissory Note issued to Bank of America on May 8, 2020*
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer*
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer*
32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer+
101.INS		XBRL Instant Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

*Filed herewith

+Furnished herewith

 

(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.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	CLEARSIGN TECHNOLOGIES CORPORATION
	(Registrant)
Date: August 14, 2020	By:	/s/ Colin James Deller
		Colin James Deller
		Chief Executive Officer
	By:	/s/ Brian G. Fike
		Brian G. Fike
		Chief Financial Officer