The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of
these condensed consolidated financial statements.
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.
These markets include, 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, but with nominal fully operational commercial installations,
and have generated nominal revenues from operations to date to meet operating expenses. In order to generate meaningful revenues, the
technologies must be fully developed, gain market recognition and acceptance, and develop a critical level of successful sales and product
installations.
The Company has historically financed our operations primarily
through issuances of equity securities, including $4.6 million in gross proceeds raised from its At-The-Market stock in which the
Company issued a total of 940,748 shares of common stock at an average price of $4.93 per share during the three months ended March
31, 2021. Cost associated with the offering totaled approximately $100,000 and the Company received net cash proceeds approximating
$4.5 million, of which $1.1 million was received in April 2021.
The Company has incurred losses since its inception totaling $76,895,000
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.
Management believes that the successful growth and operation of the
Company’s 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 product commercialization efforts, protect intellectual property,
form relationships with strategic partners, and provide for working capital and general corporate purposes. There can be no assurance
that the Company will be successful in achieving its long-term plans as set forth above, or that such plans, if consummated, will result
in profitable operations or enable the Company to continue in the long-term as a going concern.
Note 2 – Summary of Significant
Accounting Policies
Basis of Presentation
The accompanying
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, 2020 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, 2020. 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 or non-refundable performance obligations
are satisfied. The Company’s contracts with customers generally have performance obligations and a schedule of non-refundable cancellation
obligations. The contracts generally will be fully performed upon delivery of certain drawings or equipment. Revenue related to the contracts
is recognized in accordance with ASC 606 in accordance with the non-refundable performance obligations which are laid out in each sales
order.
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 the projects can be recorded
as revenue. For any contract that is expected to incur costs in excess of the contract price, the Company accrues the estimated loss in
full in the period such determination is made.
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 were
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, and shortcomings in performance compared to contractual guarantees 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 our 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 $76,000 (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 lease term. Depreciation is
computed using the straight-line method over the estimated useful lives of the respective lease assets. Leasehold improvements are
depreciated over the life of the lease or their useful life, whichever is shorter. All other fixed assets are depreciated over two
to four years. Maintenance and repairs are expensed as incurred.
Patents and Trademarks
Patents and trademarks are recorded
at cost, less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the
assets once they are awarded. Patent application costs are deferred pending the outcome of patent applications. Costs associated with
unsuccessful patent applications and abandoned intellectual property are expensed when determined to have no recoverable value. We evaluate
the potential alternative uses of all intangible assets, as well as the recoverability of the carrying values of intangible assets, on
a recurring basis.
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.
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 March 31, 2021 and December 31, 2020 include assets amounting to approximately $62,000 and $103,000, 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 first quarter of 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 March 31, 2021. 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 March 31, 2021 and 2020, potentially dilutive shares outstanding amounted to 3,630,994 and 2,643,470, 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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Machinery and equipment
|
|
$
|
720,000
|
|
|
$
|
720,000
|
|
Office furniture and equipment
|
|
|
180,000
|
|
|
|
180,000
|
|
Leasehold improvements
|
|
|
149,000
|
|
|
|
149,000
|
|
Right of use asset-operating leases
|
|
|
1,235,000
|
|
|
|
1,024,000
|
|
|
|
|
2,284,000
|
|
|
|
2,073,000
|
|
Accumulated depreciation and amortization
|
|
|
(1,594,000
|
)
|
|
|
(1,657,000
|
)
|
|
|
|
690,000
|
|
|
|
416,000
|
|
Construction in progress
|
|
|
65,000
|
|
|
|
11,000
|
|
|
|
$
|
755,000
|
|
|
$
|
427,000
|
|
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 was responsible for our proportionate share of expenses and taxes. For the
period beginning on June 1, 2020 through March 2021, the Company paid a monthly rent of approximately $13,500. 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 was approximately $2,200 a month through August 2022 with an annual 2.5% increase. However, in January 2021, the lease was
amended for a larger office space in the same building. The amended lease terms commenced in April 2021, and expire in September 2027.
The new rent amount for the Tulsa lease will be approximately $5,100 a month 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. It was renewed for an additional
18 months through May 2022, and is being treated as a short term lease with a monthly rent of approximately $4,500.
Lease costs for the three months ended
March 31, 2021 and 2020 and other quantitative disclosures are as follows (unaudited):
|
|
For the three months ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
46,000
|
|
|
$
|
62,000
|
|
Short-term lease cost
|
|
|
5,000
|
|
|
|
-
|
|
Total lease cost
|
|
$
|
51,000
|
|
|
$
|
62,000
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
|
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
|
|
For operating lease:
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
|
|
|
4.47
|
|
Weighted average discount rate
|
|
|
|
|
|
|
5.98
|
%
|
Minimum future payments under the Company’s
leases at March 31, 2021 and their application to the corresponding lease liabilities are as follows (unaudited):
|
|
Discounted
lease liability
payments
|
|
|
Payments due
under lease
agreements
|
|
2021 (remaining 9 months)
|
|
$
|
143,000
|
|
|
$
|
171,000
|
|
2022
|
|
|
207,000
|
|
|
|
233,000
|
|
2023
|
|
|
122,000
|
|
|
|
136,000
|
|
2024
|
|
|
54,000
|
|
|
|
65,000
|
|
2025
|
|
|
59,000
|
|
|
|
66,000
|
|
Thereafter
|
|
|
114,000
|
|
|
|
118,000
|
|
Total
|
|
$
|
699,000
|
|
|
$
|
789,000
|
|
Note 4 – Patents and Other
Intangible Assets
Patents and other intangible assets
are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(Unaudited)
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
763,000
|
|
|
$
|
731,000
|
|
Issued patents
|
|
|
883,000
|
|
|
|
883,000
|
|
|
|
|
1,646,000
|
|
|
|
1,614,000
|
|
Trademarks
|
|
|
|
|
|
|
|
|
Trademarks pending
|
|
|
107,000
|
|
|
|
105,000
|
|
Registered trademarks
|
|
|
23,000
|
|
|
|
23,000
|
|
|
|
|
130,000
|
|
|
|
128,000
|
|
Other
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
1,784,000
|
|
|
|
1,750,000
|
|
Accumulated amortization
|
|
|
(486,000
|
)
|
|
|
(448,000
|
)
|
|
|
$
|
1,298,000
|
|
|
$
|
1,302,000
|
|
Future amortization expense associated
with issued patents and registered trademarks as of March 31, 2021 is estimated as follows (unaudited):
2021 (remaining 9 months)
|
|
|
114,000
|
|
2022
|
|
|
125,000
|
|
2023
|
|
|
91,000
|
|
2024
|
|
|
63,000
|
|
Thereafter
|
|
|
27,000
|
|
|
|
$
|
420,000
|
|
Note 5 –
Sales, Contract Assets and Contract Liabilities
The Company
recognized revenue of $363,000 during the three months ended March 31, 2021 from the completion and delivery of a burner under a product
contract with an infrastructure company during the quarter and no revenue during the three months ended March 31, 2020.
During the
three months ended March 31, 2021, the Company recognized cost of goods sold of $250,000 from the burner contract. Additionally, the Company
recognized $18,000 in cost of goods sold on a contract that the Company anticipates will show a loss upon completion and $8,000 in
residual costs associated with a contract that was completed during 2020. The recognized cost of goods sold was offset by adjustments
totaling $51,000 related to the reversal of accrual for product warranties that expired on three completed projects from the year 2018.
The Company
did not record any cost of goods sold for the three months ended March 31, 2020.
The Company
had contract assets of $339,000 and $92,000 and contract liabilities of $48,000 and $94,000 at March 31, 2021 and December 31, 2020,
respectively.
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.
During the three months ended March 31, 2021 the Company issued common
stock pursuant to our At-The-Market Offering Sales Agreement, dated December 23, 2020, with Virtu Americas LLC, as sales agent pursuant
to which we may sell shares of common stock with an aggregate offering price of up to $15,000,000 (the “ATM”). As of March 31, 2021,
we had sold 940,748 shares of our common stock under the ATM program, at an average price of $4.93 per share. Gross proceeds totaled approximately
$4.6 million and net cash proceeds approximated $4.5 million. Of these amounts, 190,748 shares representing net proceeds of approximately
$1.1 million were sold as of March 31, 2021, but settled during April 2021.
Equity Incentive Plan
The Company had adopted and the Company’s shareholders had approved
the ClearSign Technologies Corporation 2011 Equity Incentive Plan (the “Plan”) which permitted 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 March 31, 2021 the number of shares of common stock reserved for issuance under
the Plan totaled 3,630,994.
During the three months ended March 31, 2021, the Company granted
stock options for the purchase of an aggregate 885,000 shares of common stock to our employees from the Plan. 80,000 of these options
were awarded for 2020 bonuses in lieu of cash and the expense of $192,000 was recorded during the year ended December 31, 2020. The remaining
805,000 options for the purchase of common stock were awarded with vesting dependent on the achievement of certain performance objectives.
The fair values of these options totaled $1.9 million. The following weighted-average assumptions were utilized in the calculation of
the fair value of the stock options:
2021 Employee Awards
|
|
|
|
|
|
2021
|
|
Expected life
|
|
|
5.75 years
|
|
Weighted average volatility
|
|
|
94
|
%
|
Forfeiture rate
|
|
|
0
|
%
|
Weighted average risk-free interest rate
|
|
|
0.47
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
Outstanding stock option awards at March 31, 2021 and December
31, 2020 totaled 3,630,994 shares and 2,697,119 shares, respectively, with the right to purchase 2,780,735 shares and 2,379,752
shares being vested and exercisable at March 31, 2021 and December 31, 2020, respectively. The recognized compensation expense
associated with stock option awards for the three months ended March 31, 2021 and 2020 totaled $410,000 and $126,000 respectively.
On January 27, 2021 the Plan expired so there are no remaining shares available to award under this plan. At March 31, 2021, there
was $234,000 of total unrecognized compensation cost related to performance incentive awards that are probable of vesting and
another $1.4 million in performance incentive awards that are currently deemed as not probable of vesting related to
share based compensation arrangements awarded under the Plan. The cost of the awards in which vesting was assessed as probable is
expected to be recognized over a weighted average period of 1 year. Awards for which vesting was assessed as not probable will be
reassessed at the end of each reporting period. The intrinsic value of outstanding stock options was $11.8 million at March 31,
2021.
The Company’s directors are currently
compensated solely in stock option awards. In addition to being compensated for their services as directors, individual directors are
also compensated for committee membership, for services as a committee chair and for services as a lead director. On January 22, 2021,
the Company awarded from the Plan to certain directors stock options for the purchase of 62,500 shares of common stock as payment
for services rendered to the Company in the first quarter of 2021. The stock options have an exercise price based on the grant
date fair value, which was $3.97. All of the options have a contractual life of 10 years. The recognized compensation expense associated
with director stock option awards for the three months ended March 31, 2021 and 2020 totaled $210,000 and $53,000, respectively. The
following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:
2021 Director Awards
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2021
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Expected life
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10.00 years
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Weighted average volatility
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88
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%
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Forfeiture rate
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0
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%
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Weighted average risk-free interest rate
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1.10
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%
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Expected dividend rate
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0
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%
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Stock Grants
During the three months ended March 31, 2021, the Company issued 64,439
shares of common stock with a fair value of $3.37 per share to its employees. These shares were issued for payment of 2020 bonuses in
lieu of cash and the expense of $217,000 was recorded during the year ended December 31, 2020.
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 March 31, 2021 totaled 287,118 with 208,868 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, 2019 to 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 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 15,000 shares for services performed from September 1, 2020
through August 31, 2021. The fair value of the stock at the time of grant was $2.33 per share for a total value of $35,000, which
the Company is recognizing 3,750 shares in general and administrative expense on a quarterly pro-rated basis. The Consultant Plan expense for the three months
ended March 31, 2021 and 2020 was $9,000 and $2,000, 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. In January, 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 with fair values ranging from $1.16 to $2.25
per share, contractual lives of 10 years, and that vest over 2 years. Of these options to purchase 600,000 shares of common stock, an
option to purchase 258,618 shares of common stock was issued from the 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 each of the three months ended
March 31, 2021 and 2020 was $13,000 and $13,000. There is no remaining unrecognized compensation expense associated with these awards.
Warrants
During the quarter ended March 31, 2021,
37,500 warrants were redeemed at an exercise price of $1.80 and 42,500 warrants expired during the quarter. As of March 31, 2021 the
Company had no warrants outstanding for the purchase of shares of common stock.
Note 7 – Commitments and Contingencies
On July 10, 2020, the Company received a letter from the Financial
Industry Regulatory Authority (“FINRA”) notifying the Company that FINRA was investigating trading in the Company’s
securities surrounding the June 15, 2020 announcement that the Company had received a purchase order from ExxonMobil. On April 1, 2021 the Company received a letter from FINRA stating
that it had concluded its investigation without any findings.
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 three months ended
March 31, 2021 and 2020, the Company has paid Dr. Deller $5,000 and $12,000, 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 our business, financial condition or operating
results.
Indemnification Agreements
The Company maintains indemnification agreements with our directors
and officers that may require the Company to indemnify these individuals against liabilities that arise by reason of their status or service
as directors or officers, except as prohibited by law.
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 on 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 was permitted to use the PPP loan proceeds to fund
designated expenses, including certain payroll costs, rent, utilities, and other permitted expenses. The PPP loan is evidenced by a promissory
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. 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 (“SBA”) under the PPP (including that up to 75% of such loan funds are used
for payroll). The Company submitted an application with the SBA for forgiveness in January 2021. Payments under this note have been
deferred by the bank until the forgiveness status of the loan is ascertained. The Company used the entire PPP loan amount for designated
qualifying expenses and has applied 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT
This Quarterly Report
on Form 10-Q 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, and technologies; future performance or results of any 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:
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our limited cash, history of losses, and our expectation that we will continue
to experience operating losses and negative cash flows in the near future;
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our limited operating history;
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emerging competition and advancing technology in our industry that may
outpace our technology;
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changes in government regulations that could substantially reduce, or even
eliminate, the need for our technology;
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customer demand for the products and services we develop;
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the impact of competitive or alternative products, technologies, and pricing;
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our ability to manufacture any products we design;
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our doing business in China and related risks with respect to intellectual
property protection, currency exchange, contract enforcement and rules on foreign investment;
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the impact of a cybersecurity incident or other technology disruption;
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our ability to protect our intellectual property;
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our ability to obtain adequate financing in the future;
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our ability to retain and hire personnel with the experience and talent
to develop our products and business;
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general economic conditions and events and the impact they may have on
us and our potential customers;
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our ability to obtain adequate financing in the future to support our operations;
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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;
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our success at managing the risks involved in the foregoing items; and
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other factors discussed in this report and in the section titled “Risk
Factors” in our most recent Annual Report on Form 10-K.
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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, ClearSign Asia Limited.