ClearSign Technologies Corp: Form 10-Q for the period ended Mar 31, 2024

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 Form 10-Q as well as our audited financial statements and related notes included in our most recent Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not limited to, the risks described in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Overview

We design and develop technologies for the purpose of improving key performance characteristics of combustion systems, including emission and operational performance, energy efficiency and overall cost-effectiveness. Our ClearSign Core™ technology has been proven in full scale industrial test furnaces and boilers and first customer installations are currently operating in normal commercial applications. We have generated nominal revenues from operations to date to meet operating expenses.

We have incurred losses since inception totaling $94.8 million and we expect to experience operating losses and negative cash flow for the foreseeable future. We have historically financed our operations primarily through issuances of equity securities. As of April 23, 2024, we have raised approximately $100.9 million in gross proceeds through the sale of our equity securities. We may need to raise additional capital in the future, however, the significant volatility in the capital markets may negatively affect our ability to raise this additional capital.

In order to generate meaningful revenues, our technologies must gain market recognition and acceptance to develop sufficient recurring sales. In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through co-development agreements, strategic partnering agreements, or equity or debt financing to support commercialization of our research and development efforts, protect intellectual property, form relationships with strategic partners and provide for working capital and general corporate purposes. There can be no assurance that we will be successful in achieving our long-term plans, or that such plans, if consummated, will result in profitable operations or enable us to continue in the long-term as a going concern.

Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for prototype development and manufacture, costs associated with development activities including materials, sub-contractors, travel and administration, legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly traded technology company. We currently have 16 full-time employees. Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur ongoing consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current level of activities.

The amount that we spend for any specific purpose may vary significantly, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our sales and marketing strategies.

Research, development, and commercial acceptance of new technologies are, by their nature, unpredictable. Although we undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology to the extent needed to create sufficient future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.

We cannot assure that our technologies will be accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, we have no committed source of financing, and we cannot assure that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our development by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations.

Recent Developments

ATM Suspension

On March 18, 2024, we filed a prospectus supplement suspending the sales of common stock under our At-the-Market (“ATM”) program pursuant to that certain Sales Agreement between us and Virtu Americas LLC, as sales agent, dated December 23, 2020 (the “Sales Agreement”). We will not make any sales of our shares of common stock pursuant to the Sales Agreement unless and until a new prospectus supplement is filed with the Securities and Exchange Commission (the “SEC”); however, the Sales Agreement remains in full force and effect.

Public Offering and Concurrent Private Placement

On April 23, 2024, we completed an underwritten public offering, whereby we sold 4,620,760 shares of common stock and 5-year redeemable warrants to purchase up to 4,620,760 shares of common stock, (plus a 45-day option to purchase up to an additional 693,114 shares of common stock and 5-year redeemable warrants to purchase up to 693,114 shares of common stock, or up to 693,114 shares of common stock only) at a price of $0.92 per set of one share of common stock and one redeemable warrant. Concurrently, we completed a private placement, whereby we sold 2,249,763 shares of common stock, pre-funded warrants to purchase up to 3,155,642 shares of common stock and 5-year redeemable warrants to purchase up to 8,108,106 shares of common stock. The offering prices in the private placement were $0.91 per share and $0.01 per redeemable warrants, or $0.9099 per pre-funded warrant and $0.01 per redeemable warrants, as applicable. The warrants issued in both offerings have an exercise price equal to $1.05 per share.

In connection with these offerings, we issued Public Ventures, LLC (“Public Ventures”) 5-year warrants to purchase up to 369,660 shares of common stock at an exercise price of $1.1375 per share as part of their underwriter compensation, which warrants will become exercisable on October 16, 2024. We also issued Public Ventures 5-year warrants to purchase up to 432,432 shares of common stock at an exercise price of $1.1375 per share as part of their placement agent compensation for the private placement, which warrants will become exercisable on October 16, 2024. Both sets of warrants may be exercised on a cashless basis based on a formula set forth therein.

Subsequently, on May 15, 2024, Public Ventures exercised its option in full to purchase an additional 693,114 shares of common stock and 5-year redeemable warrants to purchase up to 693,114 shares of common stock at a price of $0.92 per set of one share of common stock and one redeemable warrant.

The public offering and the concurrent private placement resulted in combined gross proceeds of approximately $9.3 million, and net proceeds of approximately $8.1 million. The exercise of Public Ventures’ option to purchase additional shares of common stock and redeemable warrants resulted in additional gross and net proceeds of approximately $0.6 million, respectively.

Nasdaq Listing Rules Compliance

Nasdaq Compliance Notice

As previously disclosed, on November 24, 2023, we were notified by Nasdaq that we were not in compliance with Nasdaq Listing Rules 5605(b)(1) and 5605(c)(2)(A) because our Board of Directors (the “Board”), at the time of such notification, did not have a majority of directors who would be considered “independent directors,” as that term is defined in Nasdaq Listing Rule 5605(a)(2), and the Board’s Audit & Risk Committee (the “Audit Committee”) consisted of only two independent directors as a result of the resignation of Gary DiElsi from the Board. We were initially given a cure period in order to regain compliance (i) until the earlier of the Company’s next annual stockholders’ meeting or November 11, 2024, or (ii) if the next annual stockholders’ meeting was to be held before May 7, 2024, then we would need to evidence compliance by no later than May 7, 2024.

To regain compliance, we were required to identify and select a member for the Board who qualified as “independent” and would meet the Audit Committee criteria set forth in Nasdaq Listing Rule 5605. This requirement was met on April 23, 2024, when David M. Maley was appointed as a member of the Board and Audit Committee, which appointment was disclosed in a Current Report on Form 8-K filed with the SEC on April 24, 2024.

On April 25, 2024, we received a letter from Nasdaq informing us that we had regained compliance with the Board and Audit Committee composition requirements as set forth in Nasdaq Listing Rules 5605(b)(1) and 5605(c)(2)(A), respectively.

Nasdaq Deficiency Notice

On May 2, 2024, we received a letter (the “Notice”) from Nasdaq’s Listing Qualifications Staff (the “Staff”) indicating that, based upon our common stock’s closing bid price for the last 30 consecutive business days beginning on March 20, 2024 and ending on May 1, 2024, we no longer meet the requirement to maintain a minimum bid price of $1 per share, as set forth in Nasdaq Listing Rule 5550(a)(2).

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until October 29, 2024, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, our common stock’s closing bid price must be at least $1 per share for a minimum of ten consecutive business days during this 180 day period. In the event that we do not regain compliance within this 180 day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with the exception of the bid price requirement, and provide written notice to Nasdaq of our intent to cure the deficiency during this second compliance period, by effecting a reverse stock split, if necessary. However, if it appears to the Staff that we will not be able to cure the deficiency, or if we are not otherwise eligible, Nasdaq will provide notice to us that our common stock will be subject to delisting.

The Notice does not result in the immediate delisting of our common stock from Nasdaq, and we intend to monitor our common stock’s closing bid price and consider its available options in the event that our common stock’s closing bid price remains below $1 per share.

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. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations. These policies and estimates require the application of significant judgment by management. These estimates can be materially affected by changes from period to period as economic factors and conditions outside of our control change. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. We believe the current assumptions and other considerations used to estimate amounts reflected in the condensed consolidated financial statements included in this Form 10-Q are appropriate.

This Form 10-Q and our most recent Annual Report on Form 10-K include discussions of our accounting policies, as well as methods and estimates used in the preparation of our audited consolidated financial statements. For further information on our critical accounting policies and estimates, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K, the notes to our audited consolidated financial statements included in our most recent Annual Report on Form 10-K and Note 2 of our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. Since our most recent Annual Report on Form 10-K, we have not experienced a material change to our critical accounting policies or the methods and applications used to develop our accounting estimates.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2024 and 2023

Highlights of our quarter financial performance are as follows:

(in thousands, except per share data)

Revenues and Gross Profit

Consolidated revenues for the three months ended March 31, 2024 were $1,102 thousand compared to $894 thousand for the same period in 2023. Revenues for the three months ended March 31, 2024, were predominately generated from our process burner line. Specifically, we shipped multiple process burners, executed consulting services, and delivered spare parts related to orders from our California refinery customer. For a different customer, an engineering study and Computational Fluid Dynamic (“CFD”) analysis was successfully accepted by the customer, and such analysis marked completion of a contractual performance obligation for this customer per ASC 606 standards. Revenues for the three months ended March 31, 2023 were predominately related to our process burner product line and an associated burner performance test. The associated burner performance test satisfied a contractual performance obligation, per ASC 606 standards, that required our customer to witness a successful burner performance test that met their engineering specifications.

Gross profit for the three months ended March 31, 2024, increased by $331 thousand compared to $106 thousand in profit for the same period in 2023. The favorable increase in profit was driven by the higher margin profile for the shipment of multiple process burners during the first quarter of 2024 as compared to the margin from a customer witness test in the same period in 2023. This margin profile difference was expected since customer witness tests typically produce lower margins.

Operating Expenses

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

Research and Development

R&D expenses for the three months ended March 31, 2024, increased by $121 thousand, or 75.7%, when compared to the same period in 2023. This unfavorable year-over-year difference in R&D expenses is primarily driven by additional head count and related benefit costs of $89 thousand, that did not exist in the comparable period in 2023.

General and Administrative

G&A expenses for the three months ended March 31, 2024, decreased $242 thousand, or 14.7%, when compared to the same period in 2023. This favorable year-over-year difference in G&A expenses is primarily comprised of $187 thousand for vesting of restricted stock units triggered by the departure of a Board member during the prior year comparable quarter.

Other Income

Other income decreased by $131 thousand, or 47.7%, for the three months ending March 31, 2024, as compared to the same period in 2023. The unfavorable change is primarily due to the $119 thousand sale of materials from the decommissioning of our Seattle office during the comparable period in 2023.

Net Loss

Net loss for the three months ended March 31, 2024, was $1,108 thousand as compared to $1,429 thousand for the same quarter in 2023, or an approximate 22.5% decrease. The $321 thousand decrease is primarily attributable to the $331 thousand increase in gross profit referenced in the above explanation.

Liquidity and Capital Resources

At March 31, 2024, our cash and cash equivalent balance totaled $4,624 thousand compared to $5,684 thousand at December 31, 2023, a decrease of $1,060 thousand. The decrease in cash and cash equivalent balance is primarily attributable to our net loss of $1,108 thousand.

At March 31, 2024, our current assets were in excess of current liabilities resulting in working capital of $3,540 thousand as compared to $4,253 thousand at December 31, 2023. Our Annual Report on Form 10-K filed with the SEC on April 1, 2024, contained a “going concern” note in our annual audit report prepared by our independent registered public accounting firm, which raised substantial doubt about our ability to continue operations. We believe that we have alleviated the substantial doubt raised by our independent auditor following the consummation of the public offering and the related over-allotment exercise by the underwriter to purchase additional securities, as well as the concurrent private placement, pursuant to which offerings we raised aggregate gross proceeds of $9.9 million and net proceeds of $8.7 million, after broker discounts and related offering fees. The public offering was consummated pursuant to an effective “shelf” registration statement on Form S-3. See “Recent Developments – Public and Concurrent Private Placement” above for more details on these offerings.

Additionally, because we are subject to the SEC’s “baby shelf rules,” which prohibits companies with a public float of less than $75 million from issuing securities under a “shelf” registration statement in excess of one-third of such company’s public float in a 12-month period (for more details, refer to “Note 7 – Equity” above in the notes to our condensed consolidated financial statements), we suspended our ATM program (see “Recent Developments – ATM Suspension” above for more details), pursuant to which we were able to sell shares of our common stock from time to time. The “shelf” registration statement on Form S-3 was filed with the SEC on July 1, 2022, and declared effective on August 12, 2022. The “shelf” registration statement on Form S-3 allows us to offer common stock, preferred stock, warrants, subscription rights, debt securities and units from time to time, subject to the “baby shelf rules,” and as market conditions permit to fund, to the extent required, the ongoing operations of the Company. Until the growth of revenue increases to a level that covers operating expenses, the Company intends to continue to fund operations in this manner, although the volatility in the capital markets may negatively affect our ability to do so.

Accordingly, after considering the subsequent events following the period covered in this Form 10-Q, we believe we have sufficient cash and expected cash collections to fund current operating expenses for over twelve months. We have no contractual debt obligations and to the extent we may require additional funds beyond twelve months from the date hereof, and customer cash collections cannot fund our needs, we may utilize equity offerings. Historically, we have funded operations predominantly through equity offerings.

Operating activities for the three months ended March 31, 2024, resulted in cash outflows of $1,001 thousand, primarily due to the net loss for the period of $1,108 thousand, offset with non-cash expense of $121 thousand.

Operating activities for the three months ended March 31, 2023, resulted in cash outflows of $554 thousand, primarily due to the loss for the period of $1,429 thousand, offset with non-cash expenses of $329 thousand, and an increase of $392 thousand of contract liabilities, which represents payments from customers in advance of future project costs.

Investing activities for the three months ended March 31, 2024, resulted in cash outflows of $34 thousand, which is attributable to disbursements for patents and other intangible assets.

Investing activities for the three months ended March 31, 2023, resulted in cash outflows of $554 thousand, which is primarily attributable to $2,162 thousand of short-term held-to-maturity U.S. treasury purchases, offset by $1,627 thousand in redemption of the same investments.

Financing activities for the three months ended March 31, 2024, included $22 thousand in disbursements for taxes paid related to vesting of employee restricted stock units.

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

Off-Balance Sheet Transactions

We do not have any off-balance sheet transactions.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal accounting and financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal accounting and financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2024, the end of the period covered by this Form 10-Q. Based upon the evaluation of our disclosure controls and procedures as of March 31, 2024, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal accounting and financial officer) concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal accounting and financial officer), 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 conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon 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. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We incorporate herein by reference the risk factors included under “Part I - Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 which we filed with the SEC on April 1, 2024, and the risk factors included in the reports and other documents we filed with the SEC subsequent to that date. There are no material changes from the risk factors set forth in such prior filings, except as set forth below.

If we do not have sufficient authorized shares, we will be limited in our ability to reserve adequate shares for certain outstanding warrants.

On April 23, 2024, we consummated an underwritten public offering of 4,620,760 shares of our common stock and accompanying redeemable warrants to purchase up to 4,620,760 shares of common stock, as well as a concurrent private placement of 2,249,763 shares of our common stock, pre-funded warrants to purchase up to 3,155,642 shares of our common stock and redeemable warrants to purchase up to 8,108,106 shares of our common stock (the “Private Warrants”). Pursuant to the terms of the Private Warrants, we are required to reserve and maintain at any time after the initial exercise date thereof, which is October 23, 2024, a sufficient amount of shares issuable upon exercise of the Private Warrants. Based on the authorized but unissued and unreserved shares of common stock as of the date of this report, we may not have sufficient shares available to establish and maintain the required amount for such reserve when required, and we may not be able to issue shares of our common stock upon the exercise of the Private Warrants, which may result in a breach by us of the terms of the Private Warrants. Accordingly, we are asking stockholders to approve an amendment to our certificate of incorporation to increase the authorized shares of common stock issuable under our certificate of incorporation to 87,500,000 from 62,500,000 shares currently authorized. If the proposal is not approved by the stockholders, based on the authorized but unissued and unreserved shares of common stock as of the date hereof, we may not have sufficient shares available to establish and maintain the required amount for such reserve when required. There are no assurances that stockholder approval will be obtained and in that event we may not be able to issue shares of our common stock upon the exercise of the Private Warrants, which may result in a breach by us of the terms of the Private Warrants. In addition, without the increase to the number of authorized shares of common stock, we will be limited in the amount of equity we may issue in the future.

If we fail to comply with Nasdaq’s continued minimum closing bid requirements by October 29, 2024 or other requirements for continued listing, including stockholder equity requirements, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is listed for trading on Nasdaq, therefore, we must satisfy Nasdaq’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for 30 consecutive business days. On May 2, 2024, the Nasdaq staff notified us that we did not comply with the minimum $1.00 per share bid price requirement for continued listing, as set forth in Nasdaq Listing Rule 5550(a)(2) during the 30 consecutive business day period beginning on March 20, 2024 and ending on May 1, 2024. We have been granted 180 calendar days, or until October 29, 2024, to regain compliance. In the event that we do not regain compliance within this 180 day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet certain requirements.

There can be no assurance that we will be able to regain compliance with Nasdaq’s listing rules. If we are unable to regain compliance with the minimum closing bid price requirement or if we fail to meet any of the other continued listing requirements, including stockholder equity requirements, our securities may be delisted from Nasdaq, which could reduce the liquidity of our common stock materially and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and business development opportunities.