UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment No. 1
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172020
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 COMBUSTIONTECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON | ||
(State or other jurisdiction of | 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)
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 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes¨Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨Nox
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.
Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
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 | Smaller reporting companyx | |
| 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨
Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
As of June 30, 2017,2020, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last sale price of the common equity was $57,000,000.$44,000,000.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
As of March 27, 2018,28, 2021, the registrant has 21,358,85330,900,634 shares of common stock, par value $.0001, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
EXPLANATORY NOTE
Portions ofClearSign Technologies Corporation (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend the registrant's Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated herein by reference in Part III of thisCompany’s Annual Report on Form 10-K to for the extent stated herein. Such proxy statement will beyear ended December 31, 2020 (“Form 10-K”), originally filed with the Securities and Exchange Commission within(the “SEC”) on March 31, 2021. The sole purpose of this Amendment is to include the information required by Items 10 through 14 of Part III of Form 10-K, which was previously omitted from the Form 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above-referenced items to be incorporated in the Form 10-K by reference from the Company’s definitive proxy statement if such statement is filed no later than 120 days after the Company’s fiscal year-end. The Company is filing this Amendment to include Part III information in the Form 10-K because a definitive proxy statement containing such information will not be filed by April 30, 2021. Further, because the Company is a “smaller reporting company,” as defined in Item 10 of Regulation S-K promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company has elected to provide in this Amendment certain scaled disclosures permitted under the Exchange Act for smaller reporting companies. Except as set forth in this Amendment, no other changes are made to the Form 10-K. Unless expressly stated, this Amendment does not reflect events occurring after the filing of the registrant's fiscal year ended December 31, 2017.Form 10-K, nor does it modify or otherwise update in any way the disclosures contained in the Form 10-K. Accordingly, this Amendment should be read in conjunction with the Form 10-K and with the Company’s filings with the SEC subsequent to the filing of the Form 10-K.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment also contains certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which are attached hereto. Because no financial statements have been included in this Amendment and this Amendment does not contain or amend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4, and 5 of the certifications have been omitted.
DOCUMENTS INCORPORATED BY REFERENCE
None.
| 2 |
CombustionTechnologies Corporation
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
CONTAINED IN THIS REPORT
This Annual Report on Form 10-K 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:
Forward-looking statements may appear throughout this report, including without limitation, the following sections: Item 1“Business,” Item 1A “Risk Factors,” and Item 7 “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 Combustion Corporation.
Introduction
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. We believe that our patented Duplex™ technology is capable of enhancing the performance of combustion systems in a broad range of markets, including the energy (upstream oil production and down-stream refining), commercial/industrial boiler, chemical, petrochemical, and power industries. Our Duplex technology, which is our primary technology, uses a porous ceramic tile above a standard burner to significantly reduce flame length and achieve very low emissions without the need for external flue gas recirculation, selective catalytic reduction, or excess air systems. To date, our operations have been funded primarily through sales of our equity securities.We have earned nominal revenue since inception in 2008.
While we have recently begun commercializing our Duplex technology, Duplex has had limited testing and verification by independent third parties and, based on the results of our laboratory and field testing as well as our initial commercialized installations in different applications, we believe that this proprietary technology is capable of improving emissions control performance and operational performance for many types of industrial and commercial combustion systems. As a result, we also believe that Duplex may reduce costs associated with the construction (including refurbishment and upgrade), operation and maintenance of these combustion systems as compared to combustion systems that use no or alternative technology to enhance combustion and control emissions.
Based on the results of our testing, we believe that Duplex compares favorably with current industry-standard air pollution control technologies, such as selective catalytic reduction devices, low- and ultra-low NOx burners (which address nitrogen oxides or NOx), excess air systems and other similar technologies. Such systems are used in our current target market segments of petroleum refining and petrochemical process heaters, large-scale once through steam generators (OTSGs), enclosed ground flares, and packaged boilers.
Corporate History
We were incorporated in Washington on January 23, 2008. The address of our corporate headquarters is 12870 Interurban Avenue South, Seattle, Washington 98168 and our telephone number is (206) 673-4848. Our website can be accessed atwww.clearsign.com. The information contained on or that may be obtained from our website is not a part of this report.
Recent Developments
On July 28, 2017 we formed ClearSign Asia Limited, a Hong Kong corporation. On November 20, 2017, we announced that we received a Letter of Intent from TG CITIC Environment Investment Group (TG CITIC), which is a joint venture between Tangshan Iron and Steel Group Company Limited and CITIC Group Corporation Ltd. The Letter of Intent from TG CITIC indicates their interest in investing in ClearSign Asia Limited as well as assisting in accelerating the marketing and promotion of our products for the Chinese market. We expect to reach a definitive agreement TG CITIC in 2018, however no assurance can be given that any definitive agreement will be entered into. Based in Hong Kong, ClearSign Asia Limited will have exclusive rights in greater China and key markets in the Asia Pacific region to certain of our intellectual property.
Our Industry
The combustion and emissions control markets are significant, both in the wide array of industries in which the systems are used and in the amount of money spent in installing and upgrading systems. These are used to provide heat for all manner of industrial processes, including boilers, furnaces, kilns and turbines. In order to maximize energy efficiency while keeping pace with regulatory guidelines for air pollution emissions, operators of these systems are continually installing, maintaining and upgrading a variety of costly process control, air pollution control and monitoring systems. Although we believe that there are many potential markets for our Duplex technology, to date we have limited the introduction of Duplex to certain segments including petroleum refining process heaters, steam generation, and enclosed ground flares.
Our initial target markets center on the energy sector, including upstream crude oil production through the use of OTSGs and wellhead enclosed flares and downstream oil refineries through the use of process heaters and boilers. In recent years, the energy sector has been significantly affected by the volatile market price of crude oil and marginal economic growth. Crude oil prices have stabilized during 2016 and 2017 and enjoyed appreciation with the general post-election upswing in certain commodities and improved economic outlook. According to the U.S. Energy Information Administration, the spot price of West Texas intermediate crude oil in the last five years has ranged from approximately $110 per barrel to approximately $25 per barrel, with 2017 prices ranging from $42 to $64 per barrel and February 2018 prices approximating $62 per barrel. Regardless of the effect of crude oil price volatility, based upon our experience and feedback from current and prospective customers, we believe that the value of our Duplex technology to the energy sector continues to be validated because of the technology’s ability to cost-effectively lower emissions and drive certain operational efficiencies.
Operators in all of our target markets are under intense pressure to meet current and proposed federal, state and local pollution emissions standards. The standards applicable to our target markets have been developed over the past 50 years with broad political input. Due to the localized effects of poor air quality, we expect these standards to continue to become more stringent regardless of political leadership. We believe this to be the case in the U.S. and worldwide in most major developed and developing countries. As an illustration, air pollution emission standards are most stringent in the states of California and Texas, historically politically leaning in opposite directions. As a result, these standards are a significant driver in our development and sales efforts. We believe that our Duplex technology can provide a unique, cost-effective pollution control solution for operators in comparison to all known competing products.
Emissions standards largely emanate from the Clean Air Act, which is administered by the Environmental Protection Agency (EPA) and regulates six common criteria air pollutants, including ground-level ozone. These regulations are enforced by state and local air quality districts as part of their compliance plans. As a precursor to ground-level ozone, NOx is a regulated emission by local air quality districts in order to achieve the EPA limits. The 8-hour ground-level ozone regulations have been reduced from 84 parts per billion (ppb) in 1997, to 75 ppb in 2008, and 70 ppb in 2015, with the requirement of realizing these levels approximately 25 years following the year of legislation. The areas of non-attainment related to this 1997 limit of 84 ppb are depicted below in the map on the left and the projected areas of non-attainment related to the 2015 limit of 70 ppb are depicted below in the map on the right.
 |  | |
Additionally, we believe that current emissions standards in Europe, China and Canada will continue to trend towards stricter air emission standards as these jurisdictions seek to achieve cleaner air. Existing and new emissions standards in such jurisdictions may create additional market opportunities for us.
We have noted that local air quality districts in EPA designated “severe non-attainment zones” in California are uncertain as to how they will achieve the 2015 standard. As such, we believe that local regulators are in search of additional means beyond those included in the current regulations to comply with the impending standards. For example, although NOx emissions from refineries and other oil production and processing operations are highly regulated since they are historically a significant source of stationary NOx emissions, enclosed ground flares have not historically been viewed as a source requiring the same level of regulation. We believe that our Duplex technology is uniquely able to address the emissions challenges being faced by oil producers and other industries as those challenges relate to both current and reasonably predictable future local air emission standards.
Our Technologies
In the process of attempting to develop our ECC technology beyond laboratory scale for a potential process heater design in 2013, we developed Duplex, which is a simplified application for gaseous fuel. While we continue to pursue development of our ECC technology through laboratory testing, in 2014 we began to pursue field development and conditional sales of our Duplex technology. We engaged in a number of field development projects in which we successfully demonstrated the technology operating with thermal output of up to 62 million BTU/hr in an OTSG and pursued business development and marketing activities with established entities that use steam generators, process heaters, enclosed flares, boilers, and other combustion systems as well as original equipment manufacturers (OEMs).
We have completed several field test projects in three of our five target markets using our Duplex technology: one related to wellhead enclosed flares, four related to process heaters in the oil refining industry, and three related to OTSGs in the enhanced oil recovery industry. We believe that the successful completion of these field development projects, which resulted from years of research and development work, is fundamental to the commercialization of our Duplex product. We reported our first meaningful product sales of $621,000 during the second half of 2016 from the installation of our Duplex technology through retrofits of a wellhead enclosed flare for a major California oil producer, an enhanced oil recovery OTSG, and two refinery process heater projects. Furthermore, we entered into an agreement to supply the oil producer customer with 5 additional wellhead enclosed flare retrofits for $900,000 and in 2017 we delivered three units generating sales revenue of $540,000. The remaining two units were completed and installed in the first quarter of 2018. Our laboratory research currently focuses on enhancing our Duplex products and includes the development of a packaged boiler application that enhances operational performance by eliminating flue gas recirculation.
Product Applications of Duplex
We have to date applied our Duplex technology through retrofits of existing burners. These often involve engineering around an existing burner architecture that can complicate the Duplex installation. Because of this, we believe that the retrofit market is best suited for larger projects and larger applications of Duplex.
Process Heaters in the Oil Refining Industry
We have completed laboratory testing and our first field test at a Texas oil refinery of a new burner product for refinery and industrial process heater applications. To date we have successfully retrofitted two process heaters with the standard Duplex and one with the Duplex Plug & Play™ design. We have two additional installations in process. The Duplex Plug & Play design provides a more simplified, pre-engineered and standardized direct burner replacement for traditional refinery process heaters. We believe that this product will reduce the customized engineering associated with typical retrofits and lend itself to mass production. The product derives its name from the fact that it is designed to allow quick and easy installation into a multi-burner heater or furnace and possibly allow the heater to continue operating during installation rather than be shut down. If field testing continues to confirm this design attribute, the ability to install the Duplex Plug & Play while the remaining burner system is operational will allow customers to limit down time and shorten the sales cycle often prolonged by annual or semi-annual scheduled maintenance. We plan to continue field testing of additional configurations and burner sizes to further enhance the performance and dependability of the product. If successful, we believe that this product, our first complete burner product, will be suitable for licensing and potential manufacturing arrangements with original equipment manufacturers (OEMs) with established manufacturing and distribution capabilities.
Wellhead Enclosed Ground Flares
A major California oil producer approached us in early 2016 to address a unique emission compliance need relating to wellhead enclosed ground flares. We developed a Duplex application, completed the wellhead enclosed ground flare retrofit and received payment in the third quarter of 2016, thereby recognizing $260,000 of revenue. This was an important milestone because it demonstrated the broad application of our Duplex technology. As a result, we entered into an agreement to supply this oil producer with five additional wellhead enclosed flare retrofits for $900,000, with three units completed during 2017. The remaining two units were completed in the first quarter of 2018. We previously received 40% of the contract amount as an initial payment on these units, which is standard for the industry for this stage of completion. These funds, netted against costs through the 2017 year end, are included in contract assets on our balance sheet as of December 31, 2017. These sales were recognized in the first quarter of 2018 as each of the remaining two units were installed and accepted by the customer and the performance obligations were completed.
Based upon discussions with local regulators and examination of regulatory reports, we believe that flare emissions are a potential target for increased regulation, in part because the success of our installations to date has shown regulators that establishing emissions standards for ground flares is possible. In anticipation of this, we are pursuing potential customers with target ground flare applications that would benefit from our proven installations.
OTSGs in Enhanced Oil Recovery Industry
We have successfully installed our Duplex technology in two OTSG projects in the enhanced oil recovery industry in Southern California. In March 2017, we entered into an agreement to complete a third installation for this customer fueled by oil field waste gas instead of natural gas. This installation was completed in the first quarter of 2018. We believe that our successful installations in the OTSG market to date are gaining regulator acceptance by the Southern California regulatory authorities and, as a result, market acceptance.
Duplex’s Emission Results and Licensing
We have now achieved emission results which exceeded current local Best Available Control Technology (BACT) levels in multiple installations in California related to three of our five target industries. We intend to continue to demonstrate Duplex capabilities through (i) working with local air quality officials to demonstrate the effectiveness of the technology, (ii) operating in-place units, (iii) engineering and testing with new customers and applications, (iv) pursuing additional lab research and development of new applications (e.g. packaged boilers) and next generation improvements to Duplex design and standardization, including the pursuit of more complete systems similar to the Duplex Plug & Play for application in other vertical markets, and (iv) assisting our customers in making emission results available for designation as BACT by local regulatory bodies.
Our business plan contemplates licensing our technology after we prove commercial viability and generate interest from OEMs. We believe licensing would significantly change the makeup of our sales mix, sales cycles, and margins. Licensing our technology within one or an array of selected vertical markets (e.g. burners for refinery process heaters or packaged boilers) could dramatically accelerate the global sales and market adoption rate of our technology. In order to create channel flexibility and meet end user demand however, we intend to continue to pursue end user customers through direct sales, sub-contractors, or channel partners. While we are currently pursuing various licensing arrangements, we have no agreements at this time and do not anticipate entering into any such agreements prior to completing the field development projects discussed above and completing a meaningful number of installations and sales. We believe that the continuing development of Duplex, the completion of sales and an increase in end-users will enhance our ability to license our technology.
Development of ECC
We are continuing to pursue development of our patented ECC technology through laboratory research where we have demonstrated certain favorable attributes of this proprietary technology operating at lab scales. We are also developing certain derivative product expressions, some unrelated to industrial combustion products, that are being tested and validated both by the Company and by independent third parties.
Technical Components of our Duplex and ECC Technologies
Our Duplex burner technology consists of a traditional industrial burner and a porous ceramic tile. When the uncombusted mix of gaseous fuel and air is directed at the tile, hot gas combusts within the tile itself. Because the fuel and air have more time to mix, the NOx- forming hot spots that are typically produced in an open flame are greatly eliminated and a dramatically shorter flame is produced. NOx, a regulated pollutant comprised largely of nitrogen oxide and nitrogen dioxide, is greatly reduced to levels of 5ppm or below depending on the specific application without any external fans or associated power, thereby minimizing harmful emissions while improving system efficiency. A shorter flame allows for operation of the furnace at a higher capacity. We believe Duplex’s radiant heat transfer enhances thermal efficiency as it eliminates the possibility of flame impingement and reduces the likelihood of coking in a combustion chamber.
Our ECC technology consists, in its simplest form, of four major components: (a) a computer, (b) standard software delivering proprietary algorithms to (c) a power amplifier (resident outside the combustion chamber) and (d) electrodes inside or proximate to the combustion chamber. ECC introduces a high voltage electric field into the combustion process to control the resulting flames electrically through the naturally forming ions. The electrodes are optimized in material and shape to best suit the specific geometry of a given installation. We have also demonstrated a technique to apply ECC to a combustion system without requiring an electrode to have physical contact with the flame.
The basic components of both systems are either available “off the shelf” or require manufacturing techniques that are well within the current capabilities of existing technologies. Thus, our products are readily available and scalable for high volume demand.
The Combustion Markets
Overview
We compete in the combustion and emissions control markets. According to the U.S. Department of Energy, in 2011, two-thirds of the energy used in U.S manufacturing is converted via boilers, furnaces, and process heaters, our core market focus. Based on the June 2016 Frost & Sullivan Market Assessment Report, we estimate that our addressable target market over the next ten years in the United States is up to $3.6 billion, comprised of up to $1.7 billion from the industrial/commercial/institutional boiler segment, up to $0.8 billion from the refinery segment, up to $0.8 billion from the large industrial segment, up to $0.2 billion from the flare segment, and up to $100 million from the enhanced oil recovery (EOR) segment.
These are highly competitive industries that are currently dominated by companies that have both substantially greater financial resources than we do and established products. Based on the testing and the field installations completed to date, however, we believe that our Duplex technology offers a unique and powerful ability to improve emissions and operational performance, energy efficiency and overall cost-effectiveness. We are targeting the following segments of the combustion market:
In each segment, we are marketing solutions with our Duplex technology that we believe could simultaneously improve both pollution control and operational efficiency characteristics through (a) cost-effective retrofitting of our Duplex technology onto existing standard system designs, and (b) new system designs.
Market Entry
We believe that our Duplex technology can be applied to a wide range of systems in which there is a flame. While this implies many potential market opportunities, it also requires that we exercise a disciplined approach in comparatively evaluating those opportunities in order to select and prioritize those applications that are cost effective and afford the best mix of time and cost required for development relative to revenue potential. We also aim to select applications in which our technologies either offer immediate, clear, meaningful, and measurable advantages relative to competing technologies or address unmet market needs.
We have pursued retrofitting existing systems with our Duplex technology to improve their performance as we believe that provides us the quickest path to market. This is because (1) the installed base of existing combustion systems is far greater than the annual number of newly built systems, (2) integrating our technology into a retrofit is less complex than integrating our technology into a new combustion system designed by an OEM, (3) the design cycle of a retrofit application is far shorter, and (4) we believe that with the previously challenging economic and energy industry market conditions, less costly retrofits are more attractive to many segments of the energy market than new capital equipment and infrastructure builds to comply with environmental regulations and derive cost efficiencies.
Since we have completed initial retrofit projects in three vertical market installations, we believe that pursuit of new, stand-alone products, such as the Duplex Plug & Play, will enable us to substantially increase our sales to a meaningful level through licensing or other business arrangements with OEMs. Upon broader adoption of the Duplex Plug & Play, we will pursue OEMs or other means to license the product in order to take advantage of the manufacturing and distribution capabilities of more established market participants. We are planning to develop a stand-alone product for application in the packaged boiler market and intend to investigate the value of developing additional stand-alone products.
The success we have experienced in the wellhead enclosed flare, oil refining and enhanced oil recovery sectors has allowed us to capitalize on these recent product development results by refocusing our personnel and resources toward enhancing and productizing our Duplex technology in order to generate revenue. The success in these initial areas has also allowed us to work on developing the potential for installing our Duplex technology in both firetube and watertube boilers. A demonstration project on boilers is currently underway with a Chinese partner and research on this application continues in our laboratory.
Sales and Marketing Plan
Partnership Strategy and Field Development. We believe that our technologies have the potential to transform industries that rely on combustion and that our technologies are broadly applicable in large, scalable, global markets.
We intend to form strategic partnerships and/or license agreements with key incumbents who are currently participating in our targeted market segments. We expect to maintain our existing capabilities to serve our end-user customers via our current channel partners and subcontractors.
Our targeted market segment territories include North America, Europe, and China and encompass:
We currently are pursuing field development programs of our Duplex burner products. These programs are aimed at our target industrial combustion markets.
Pricing Strategy. Our target markets are characterized by well-established competitors in mature businesses. As a result, competitive pricing rather than pricing based on broad product value is the standard for these markets. Since we believe that our technology will provide greater economic value in comparison to our competitors, we plan to price our technology based upon the value that we believe it will provide in reduced air pollution control costs, including fines, and reduced maintenance and operating costs.
Channel Structure and Path to Market. Our path to market could involve any combination of (1) licensing our technologies for either one-time or periodic licensing fees for a period of time within specific fields of use and/or territories, (2) selling our intellectual property rights within specific fields of use and/or territories, or (3) manufacturing the components required to enable our technologies and/or supplying a complete burner package through strategic subcontracting agreements. Since our solutions consist largely of off-the-shelf components, we do not anticipate that we will require a large manufacturing capacity. To the extent we will require production of specific hardware (electrodes, for example), we plan to rely on outside contract manufacturers, which we believe are widely available and for which a competitive market exists.
Competition and Barriers to Entry
The industry in which we operate is global in scope and is populated by large, established suppliers of burners and post-combustion air pollution control systems, all of which possess substantially greater resources than we do. Worldwide, suppliers of burners and air pollution control equipment include but are not limited to companies such as UOP, Callidus and Maxon (all three are subsidiaries of Honeywell), John Zink Hamworthy Combustion (a subsidiary of Koch Industries and including Coen), Babcock and Wilcox, Westinghouse, Eclipse, General Electric, Haldor Topsøe, Hitachi, Linde, and Fives North American, among others.
These systems include low NOX burners, electrostatic precipitators, bag houses, selective catalytic reduction systems and various types of scrubbers. The companies that provide these systems are well established and their combustion and emissions control technologies are based on mature, well-understood technologies that are proven in the market. We believe the further development of their technologies, however, will be limited largely to marginal performance improvements. As a consequence of this relatively slow pace of adopting innovation, we believe current technology offerings from the large competitors have become largely commoditized, and differentiation between suppliers is very often based on price. This provides both an opportunity and a barrier to more nimble, disruptive companies.
From a customer's perspective, legacy air pollution control technology is viewed as a cost of doing business, and as a means to operate within regulatory requirements and avoid fines. Unlike most other kinds of capital equipment that provide an economic return through enhanced productivity or efficiency, we believe customers of traditional emissions control equipment do not otherwise expect any positive return on these investments.
As indicated above we are seeking to enter the combustion and emissions control market and to establish ourselves in a highly competitive industry against companies that have both substantially greater financial resources than we do and established products. Because they have been available in the market for many years, our competitors’ product offerings may have several advantages. Among these are:
We believe, however, that our Duplex technology would be an attractive alternative to the products and solutions offered by companies with which we seek to compete. In particular, we believe that our Duplex technology could offer a unique cost-effective means to reduce many pollutants at the source while improving operational efficiency. We believe our Duplex technology could be capable of reducing the requirement for costly legacy equipment, offering customers the prospect of a positive return on their investment in the form of enhanced efficiency and productivity while reducing emissions to the levels of existing air pollution control technologies. In particular, we believe our Duplex technology could offer the following advantages when compared with the next best alternatives.
Emissions Reduction from Combustion Sources. Current technology reduces emissions by using mechanical mixing aids such as swirlers, staging combustion in two or more zones, or treating emissions such as NOX after the fact using selective catalytic reduction. In contrast, we believe our Duplex technology can:
Improving flame shape. The main goal of virtually all process combustion is to transfer heat to raise steam or enable a chemical reaction, and to do so as efficiently as possible. Conventional technology uses buoyancy (the natural tendency for a flame and heat to rise opposite to the force of gravity) and momentum (fuel mixed with air and forced through a nozzle, as in a torch) as the only tools to shape flames. Unfortunately, momentum effects die out over distance from their source and buoyancy always operates counter to the gravitational field. Moreover, momentum and buoyancy effects often drive wayward flames into process tubes where they cause overheating and potential failure. In contrast, we believe that our technology eliminates flame impingement by shortening the combustion flame.
Enhancing heat-transfer and process efficiency. The main objective of industrial combustion in furnaces and boilers is to transfer heat to a process fluid. Conventional combustion techniques do their best to optimize flame shape to achieve this end, but we believe conventional combustion techniques have no additional means for enhancing heat transfer. In contrast, we believe that our technology could enhance heat transfer to the process tube with radiation from the solid Duplex tile, which is a more effective radiator than a conventional flame.
Compared to the products and solutions of companies with which we seek to compete, we believe our technology could provide our potential customers with a lower total cost of ownership, offering the prospect of a positive economic return on investment to systems operators due to a reduction in their capital and operating expenses, and an increase in energy efficiency.
Because our technology is not yet widely used, we do not currently represent a significant competitive presence in our industry.
Research and Development Program
Our research and development program includes pilot-scale research and participating customer site demonstrations. The experience and industry contacts of our management, board of directors, and consultants with potential customers in the petroleum, petrochemical, and industrial steam applications industries inform our research program. These are supported by field development agreements, research agreements, and memoranda of understanding with potential development partners, customers and research institutions. Our research and development activities make use of employees and consultants that are experts in the areas of industrial combustion, statistical experimental design, gas turbines, fluid mechanics, physics of particles and ions, and electric fields. We spent $4,712,000 and $4,831,000 on research and development for the years ended December 31, 2017 and 2016, respectively.
We have tested our Duplex and ECC technologies in our laboratory at capacities representative of industrial equipment. We have installed our Duplex technology on a retrofit basis in numerous field test sites, including our Duplex Plug & Play product. Our research and development activities include the following: (1) scale up to commercially relevant sizes, (2) site demonstration at full scale, (3) complete first installation, (4) complete further installations to refine the product, its installation, and its reliability, and (5) enhance our intellectual property portfolio.
Intellectual Property Protection
We are pursuing an aggressive intellectual property strategy including:
Government Regulation
Government approval is not required in order for us to sell the principal products or services that we are developing. Government regulation, particularly environmental regulation, however, is likely to play an important role in shaping our product mix and offerings. Our Duplex technology includes enhancement of the combustion process and reduction of certain emissions at a lower cost than current air pollution control devices. Field implementation of our technologies requires permits from various local, state and federal agencies that regulate mechanical and electrical infrastructure and fire and air pollution control.
We believe that we offer major advances in emissions and efficiency reductions. We also believe emissions regulations could enhance market demand for technology if such regulations require a reduction in criteria pollutants such as NOX, SOX, and CO, or others such as CO2, or mercury. In such cases, possible legislation on greenhouse gases, boiler MACT rules, or general reductions in required criteria pollutant levels could serve our business objectives. Although the timing of such regulations is uncertain, the general trend over the last decades continues to be government-mandated reduction for all criteria pollutants and the addition of new emissions to those regulated. Ultimately, it may be possible for our technology to achieve EPA BACT (Best Available Control Technology) designation. Although field development testing of our Duplex technology is ongoing, in September 2017 the South Coast Air Quality Management District governing the greater Los Angeles area approved a cooperative funding effort to work with a local refiner to implement a Duplex demonstration project in their regulatory area. The project scope, overall budget and detailed requirements are currently being finalized. We believe the availability of our technology, by itself, could accelerate the government’s willingness to adopt more stringent environmental regulations. Further, efficiency improvements include enhanced mixing, lower excess air requirements, and improved heat transfer to the process. We believe such efficiency improvements could generate market demand regardless of the existing regulatory framework because they could result in savings to businesses that adopt our technology.
Although the current U.S. administration has indicated that it plans to pursue the reduction of environmental regulations in order to promote economic activity and to eliminate or reduce perceived needless environmental regulations, the statements and actions to date have primarily referenced elimination of regulations associated with greenhouse gas emissions, an area with secondary benefit to our technologies, and the approval of oil pipelines, a step that may benefit our business and that of our customers in the energy sector. At this time, we are not aware of any current or proposed federal, state or local environmental compliance regulations that would have a material detrimental effect on our business objectives. We do not anticipate any major expenditures to be required in order for our technology to comply with any environmental protection statutes.
Employees
As of March 27, 2018, we had 17 full-time employees and 1 part-time employee. Our employees are not covered by collective bargaining agreements, and we believe our relationship with our employees is good.
We are subject to various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock, you should carefully consider the risks described below, together with the other information included in this report.
The risks described below are not the only risks we face. If any of the events described in the following risk factors actually occurs, or if additional risks and uncertainties later materialize that are not presently known to us or that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
Risks Related to Our Business
We are a company with a limited operating history and our future profitability is uncertain. We anticipate future losses and negative cash flow and we may never be profitable.
We are a company with a limited operating history and limited revenues to date. We have incurred losses since our inception and expect to experience operating losses and negative cash flow for the foreseeable future. As of December 31, 2017, we had a total accumulated deficit of approximately $50.0 million. We anticipate our losses will continue to increase from current levels because we expect to incur additional costs and expenses related to prototype development, consulting costs, laboratory development costs, marketing and other promotional activities, the addition of engineering and manufacturing personnel, and our continued efforts to form relationships with strategic partners. We may never generate significant revenue and we may never be profitable.
If we do not receive additional financing when and as needed in the future, we may not be able to continue our research and development efforts or commercialization efforts and our business may fail.
Our business is capital-intensive, and requires capital investments in order for it to develop. Our cash on hand will likely not be sufficient to meet all of our future needs and we will likely require substantial additional funds in excess of our current financial resources for research, development and commercialization of our technology, to obtain and maintain patents and other intellectual property rights in our technology, and for working capital and other purposes, the timing and amount of which are difficult to ascertain. Until our technology generates revenues sufficient to support our operations, we plan to obtain the necessary working capital for operations through the sale of our securities, but we may not be able to obtain financing in amounts sufficient to fund our business plans. Furthermore, if our target customers are slow to adopt our technology, we may require additional investment capital in order to continue our operations. If we cannot obtain additional funding when and as needed, our business might fail.
Market acceptance of our technology and business is difficult to predict. If our technology does not achieve market acceptance, our business could fail.
We are continuing to develop our technology, which is being tested in the field by various customers and markets. If we are unable to effectively develop and timely promote our technology, gain recognition in our market segments, and develop a critical level of successful sales and product installations, we may not be able to successfully achieve sales revenue and our results of operations and financial condition would then suffer. Our ability to achieve future revenue will depend significantly upon achieving a critical mass of market awareness and sales to potential customers of our products. While we plan to achieve this awareness over time, there can be no assurance that awareness of our company and technology will develop in a manner or pace that is necessary for us to achieve profitability in the near term.
Further we cannot predict the rate of adoption or acceptance of our technology by potential customers. While we may be able to effectively demonstrate the feasibility of our technology, this does not guarantee the industrial combustion and power generation market will accept it, nor can we control the rate at which such acceptance may be achieved. In certain of our market segments, there is a well-established channel with a limited number of companies engaged in reselling to our target customers. Failure to achieve productive relations with a sufficient number of these prospective partners may impede adoption of our technology. Additionally, some potential customers in our target industries are historically risk-averse and have been slow to adopt new technologies. If our technology is not accepted in the industrial combustion and power generation market, we may not earn enough by selling or licensing our technology to support our operations, recover our research and development costs or become profitable and our business could fail.
Our efforts may never demonstrate the feasibility of our product.
Our research and development efforts remain subject to all of the risks associated with the development of new products based on emerging and innovative technologies, including without limitation unanticipated technical or other problems, our ability to scale our technology to large industrial applications, conditions in the field during installation and the possible insufficiency of funds for completing development of these products. Technical problems, including those specific to customer site implementation, may result in delays and cause us to incur additional expenses that would increase our losses. If we cannot complete, or if we experience significant delays in completing, research and development of our technology for use in potential commercial applications, particularly after incurring significant expenditures, our business may fail.
Changes to environmental regulations could make our technology less desirable.
The negative environmental impacts of industrial activity have given rise to significant environmental regulation in industrialized countries. These regulations are important incentives in the adoption of technologies like ours. To the extent that environmental regulations in the United States and in other industrialized countries are modified in the future, or even relaxed, our technology may not produce the results required, or may even be unnecessary, to comply with the modified regulations. For example, although the current U.S. administration has indicated that it plans to pursue the reduction of environmental regulations in order to promote economic activity and to eliminate or reduce perceived needless environmental regulations, the administration’s statements to date have primarily referenced elimination of regulations associated with greenhouse gas emissions, an area unrelated to our technologies, and the approval of oil pipelines, a step that may benefit our business. However, if the Environmental Protection Agency relaxes the clean air regulations our technologies are designed to address, our business and results of operations could be materially adversely affected.
We may fail to adequately protect our proprietary technology, which would allow our competitors to take advantage of our research and development efforts.
Our long-term success largely depends on our ability to market our technology. We rely on a combination of patents, trade secrets and other intellectual property laws, confidentiality and security procedures and contractual provisions to establish and protect our proprietary rights in our technology, products and processes. If we fail to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary technologies. Our pending or future patent applications may not result in issued patents. In addition, any patents issued to us in the future may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or from third parties infringing such patents or misappropriating our trade secrets or provide us with any competitive advantage. In addition, effective patent and other intellectual property protection may be unenforceable or limited in foreign countries. If a third party initiates litigation regarding the validity of our patents, and is successful, a court could revoke our patents or limit the scope of coverage for those patents.
We also rely upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We protect this information with reasonable security measures, including the use of confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with strategic customers and partners. It is possible that these agreements may not be sufficient or that these individuals or companies may breach these agreements and that any remedies for a breach will be insufficient to allow us to recover our costs and damages. Furthermore, our trade secrets, know-how and other technology may otherwise become known or be independently discovered by our competitors.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
A third party may sue us for infringing its intellectual property rights. Likewise, we may need to resort to litigation to enforce our patent rights or to determine the scope and validity of third-party intellectual property rights. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our efforts from our business activities. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. If we do not prevail in this type of litigation, we may be required to pay monetary damages and/or expenses; stop commercial activities relating to our products; obtain one or more licenses in order to secure the rights to continue manufacturing or marketing our products; or attempt to compete in the market with substantially similar products. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations.
We cannot guarantee that any research and development partnership we enter into will be successful.
We intend to form research and development arrangements to develop our technology within targeted segments. Collaborative arrangements involve risks that participating parties may disagree on business decisions and strategies. These disagreements could result in delays, additional costs, risks of litigation, and failure of the development of our technology within the combustion market segment. Success of any collaborative arrangements we enter into will depend in part on whether those with whom we collaborate fulfill their contractual obligations satisfactorily. If a party with whom we collaborate fails to perform its contractual obligations satisfactorily, we may be unable to make the additional investments or provide the added services that would be required to compensate for that failure. If we are unable to adequately address any such performance issues, our reputation may be materially adversely affected and we may be exposed to legal liability. Our inability to successfully maintain collaborative relationships, once we enter into them, or to enter into new collaborative arrangements, could have a material adverse effect on our results of operations.
If we are unable to keep up with rapid technological changes, our products may become obsolete.
The market for alternative environmental products is characterized by significant and rapid technological change and innovation. Although we intend to employ our technological capabilities to create innovative products and solutions that are practical and competitive in today’s marketplace, future research and discoveries by others may make our products and solutions less attractive or even obsolete compared to other alternatives that may emerge.
Our technology and its industrial applications have not yet been safety tested.
There is inherent danger in dealing with the combustion process. There is additional danger in modifying this process in ways that are new and, as yet, untested on a commercial scale. Although we have not yet encountered any areas of risk in the development or testing of our products beyond those already inherent in the combustion process or those particular to an industrial site, we may be exposed to liabilities should an industrial accident occur during development, testing, or operation in our laboratory or during field implementation of our technology.
We will depend on approval from various local, state and federal agencies to implement and operate our technology. There is no assurance that these agencies will approve our technology.
Our technology includes enhancement of the combustion process, inclusion of a computer-controlled electric field to selectively promote, suppress, retard or accelerate chemical reactions as desired, and to reduce certain emissions at a lower cost than current air pollution control devices. Field implementation of our technology will therefore require permits from various local, state and federal agencies that regulate mechanical and electrical infrastructure and fire and air pollution control. Our technology may be subject to heightened scrutiny since it will be new to these governing bodies. As such, there may be delays or rejections in applications of portions of or all of our technology in the individual jurisdictions involved.
Because our technology has not yet been fully developed or implemented, we are uncertain of our profit margins and whether such profit margins, if achieved, will be able to sustain our business.
We have not fully developed our products, cost of goods or pricing. As a result, we cannot reliably predict our profit margins. Our operating costs could increase significantly compared to those we currently anticipate due to unanticipated results from the development process, application of our technology to unique or difficult processes, regulatory requirements and particular field implementations. Further, we envision our pricing to be highly dependent on the benefits that our customers believe they will achieve using our products. Accordingly, we cannot predict whether or when we will achieve profitability, and if achieved, the amount of such profit margins.
Many of our potential competitors have greater resources, and it may be difficult to compete against them.
The combustion industry is characterized by intense competition. Many of our potential competitors have better name recognition and substantially greater financial, technical, manufacturing, marketing, personnel and/or research capabilities than we do. Although at this time we do not believe that any of our potential competitors has technology similar to ours, if and when we complete the commercialization of products based on our technology, potential competitors may respond by developing and producing similar products. Many firms in the combustion industry have made and continue to make substantial investments in improving their technologies and manufacturing processes. In addition, they may be able to price their products below the marginal cost of production in an attempt to establish, retain or increase market share. Because of these circumstances, it may be difficult for us to compete successfully in the combustion market.
The loss of the services of our key management and personnel or the failure to attract additional key personnel could adversely affect our ability to operate our business.
A loss of one or more of our current officers or key employees could severely and negatively impact our operations. Of particular note, the loss of services of Stephen E. Pirnat, Chief Executive Officer and President, or Dr. Donald W. Kendrick, Chief Technology Officer could significantly harm our business. We have no present intention of obtaining key-man life insurance on any of our executive officers or management. Additionally, competition for highly skilled technical, managerial and other personnel is intense. As our business develops, we might not be able to attract, hire, train, retain and motivate the highly skilled executives and employees we need to be successful. If we fail to attract and retain the necessary technical and managerial personnel, our business will suffer and might fail.
Risks Related to Owning Our Securities
The public market for our securities is volatile. This may affect not only the ability of our investors to sell their securities, but the price at which they can sell their securities.
We completed the initial public offering of our common stock in April 2012. Since that time, our common stock (CLIR: NASDAQ) has traded as low as $1.75 per share and as high as $11.75 per share based upon daily closing prices, and day-to-day trading has been volatile at times. Further, in conjunction with a shareholder rights offering we completed on January 25, 2017, we sold warrants (CLIRW: NASDAQ), the day-to-day trading of which has also been volatile to date. This volatility may continue or increase in the future. The market price for the securities may be significantly affected by factors such as progress in the development of our technology, agreements with research facilities or co-development partners, commercialization of our technology, variations in quarterly and yearly operating results, general trends in the alternative energy industry, and changes in state or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our securities.
We have the right to issue shares of preferred stock. If we were to issue preferred stock, it is likely to have rights, preferences and privileges that may adversely affect our common stock or other securities.
We are authorized to issue 2,000,000 shares of “blank check” preferred stock, with such rights, preferences and privileges as may be determined from time-to-time by our board of directors. Our board of directors is empowered, without shareholder approval, to issue preferred stock in one or more series, and to fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion rights, voting rights, and other rights, preferences and privileges for the preferred stock. No shares of preferred stock are presently issued and outstanding and we have no immediate plans to issue shares of preferred stock. The issuance of shares of preferred stock, depending on the rights, preferences and privileges attributable to the preferred stock, could adversely reduce the voting rights and powers of the common stock and the portion of our assets allocated for distribution to common stock holders in a liquidation event, and could also result in dilution in the book value per share of our common stock. The preferred stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying or preventing a change in control of the company, to the detriment of our shareholders. We cannot assure you that we will not, under certain circumstances, issue shares of our preferred stock.
We may be required to raise additional financing by issuing new securities, which may have terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock and our business.
We will require additional financing to fund research, development and commercialization of our technology, to obtain and maintain patents and other intellectual property rights in our technology, and for working capital and other purposes. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our then-current shareholders will be reduced. Further, we may have to offer new investors in our equity securities rights that are superior to the holders of common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us which could have a materially adverse effect on our business and results of operations.
We have not paid dividends in the past and have no immediate plans to pay dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to continue to develop our products, to market our products, to cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure you that we would, at any time, generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend.
We have a significant number of options and warrants outstanding and we may issue additional options in the future to employees, officers, directors, independent contractors and agents. Sales of the underlying shares of common stock could adversely affect the market price of our common stock.
As of December 31, 2017, we had outstanding options and warrants for the purchase of 993,860 and 2,495,784 shares of common stock, respectively. Under the ClearSign Combustion Corporation 2011 Equity Incentive Plan and the ClearSign Combustion Corporation 2013 Consultant Stock Plan (collectively, the “Plans”), we have the ability to grant awards of shares or options to employees, officers, directors, independent contractors and agents. Furthermore, as of December 31, 2017, we have reserved an additional 290,815 shares of common stock for such awards and the Plans provide that this number may increase quarterly by a collective amount of up to 11% of the number of shares issued by us each quarter. Certain holders may sell these shares in the public markets from time to time, without limitations on the timing, amount or method of sale. If our stock price rises, the holders may exercise their warrants and options and sell a large number of shares. This could cause the market price of our common stock to decline.
We have incurred and will incur significant costs as a result of being a public company that reports to the Securities and Exchange Commission and our management is required to devote substantial time to meet compliance obligations.
As a public company reporting to the Securities and Exchange Commission, we incur significant legal, accounting, investor relations, printing, board compensation, and other expenses that we did not incur as a private company. These costs totaled $1,239,000 in 2017. We are subject to the reporting requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act of 2002 (with the exception of the requirement of auditor attestation of internal control over financial reporting from which we are currently excluded as a smaller reporting company), as well as rules subsequently implemented by the Commission that impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. In addition, there are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Wall Street Reform and Protection Act that as we grow could increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. Our management and other personnel continually devote a substantial amount of time to these compliance initiatives. In addition, these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.
Our charter documents and Washington law may inhibit a takeover that shareholders consider favorable.
Provisions of our Articles of Incorporation and bylaws and applicable provisions of Washington law may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which shareholders might otherwise receive a premium for their shares, or transactions that our shareholders might otherwise deem to be in their best interests. The provisions in our Articles of Incorporation and bylaws:
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In addition, Chapter 23B.19 of the Washington Revised Code generally limits our ability to engage in any business combination with a person who beneficially owns 10% or more of our outstanding voting stock unless certain conditions are satisfied. This restriction lasts for a period of five years following the share acquisition. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock or other securities.
ITEM 1B: UNRESOLVED STAFF COMMENTS.
None.
Our principal office is located at 12870 Interurban Avenue South, Seattle, Washington with a satellite office located in Tulsa, Oklahoma. At our principal office in Seattle, we currently lease approximately 9,425 square feet of office and laboratory space, which is suitable and adequate for our current operations, under a triple net lease which expires in March 2020. Monthly minimum rent is $12,268. The Company also has a triple net operating lease for office space in Tulsa, Oklahoma with a term that began in September 2016 and will expire in August 2019. The monthly minimum rent for our Tulsa location is $2,147.
From time to time we 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 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 4: MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the NASDAQ Capital Market under the symbol “CLIR”. The range of high and low closing sales prices of our common stock are presented below.
| 2017 | 2016 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| First quarter | $ | 4.55 | $ | 3.05 | $ | 4.90 | $ | 2.98 | ||||||||
| Second quarter | $ | 4.25 | $ | 3.30 | $ | 5.28 | $ | 3.75 | ||||||||
| Third quarter | $ | 4.00 | $ | 2.90 | $ | 6.09 | $ | 4.14 | ||||||||
| Fourth quarter | $ | 4.45 | $ | 2.08 | $ | 6.08 | $ | 3.40 | ||||||||
On January 25, 2017, the Company completed a rights offering and public offering of units comprised of common stock and warrants at a purchase price of $4.00 per unit pursuant to which we issued 2,395,471 shares of common stock together with warrants for the purchase of 2,395,471 shares of common stock. The warrants allow each holder to purchase one share of common stock at an exercise price of $4.00 per share, are non-callable, expire on January 25, 2019, and are publicly traded on the NASDAQ Capital Market under the symbol “CLIRW”.
On February 27, 2018, the Company completed a public offering of common stock at $2.25 per share whereby 5,750,000 shares were issued. Gross proceeds from the offering totaled $12.9 million and net cash proceeds approximated $11.9 million.
According to our transfer agent, as of March 27, 2018 we had approximately 139 shareholders of record and 7 warrant holders of record. These numbers do not include an indeterminate number of holders whose shares or warrants are held by brokers in street name. Our stock transfer agent is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598.
Dividends
We have not paid any cash dividends on our common stock since our inception and do not anticipate paying any cash dividends in the foreseeable future. We plan to retain our earnings, if any, to provide funds for the expansion of our business.
Recent Issuances of Unregistered Securities
On December 31, 2017, we issued 2,500 shares of common stock, having a per share value of $3.50, the closing price of our common stock on August 3, 2017, the date of grant, from our 2013 Consultant Stock Plan to our investor relations firm, Three Part Advisors, LLC, for services provided in the three months ended December 31, 2017. The issuance of such shares was deemed to be exempt from registration under the Securities Act of 1933, as amended, in reliance upon Section 4(a)(2) of the Securities Act (or Regulation D promulgated thereunder).
Equity Compensation Plan Information
See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information about our equity compensation plans.
ITEM 6: SELECTED FINANCIAL DATA.
As a smaller reporting company, we are not required to provide this information.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this Form 10-K contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not limited to, the risks described in the section titled “Risk Factors”.
OVERVIEW
We design and develop technologies for the purpose of improving key performance characteristics of combustion systems, including emission and operational performance, energy efficiency and overall cost-effectiveness. Our Duplex technology is currently in field development and we continue to conduct laboratory research with our ECC technology. We have generated nominal revenues from operations to date to meet operating expenses.
We have incurred losses since inception totaling $50,011,000 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, including $11.9 million in proceeds, net of offering costs, from the stock offering completed on February 27, 2018 as described in Note 13 to our financial statements. Including the most recent stock offering, since inception we have raised approximately $60.3 million in gross proceeds through the sale of our equity securities.
In order to generate meaningful revenues, our technologies must be fully developed and gain market recognition and acceptance and we must 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 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 research, 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 17 full-time employees and 1 part-time employee. We anticipate increasing the number of employees required to support our activities in the areas of research and development, sales and marketing, and general and administrative functions. We also expect to incur consulting expenses related to technology development, when using third party expertise and resources is more cost effective than maintaining full time resources, commensurate with our current levels and we expect to incur increasing expenses to protect our intellectual property.
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 consolidated 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 audited consolidated financial statements for a more complete description of our significant accounting policies.
Revenue Recognition and Cost of Goods Sold. Effective January 1, 2017, the Company retroactively adopted ASU No. 2014-09 which has as its core principle that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. The Company reviews each contract to identify contract rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations. Revenues and costs of sales are recognized once the goods or services are delivered to the customer’s control and performance obligations are satisfied. Typically, the Company’s customer contracts include performance obligations related to emission levels or other metrics that are measured at project completion. 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 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 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 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 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 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 attributed to the short maturities of these instruments. The Company has lease assets as defined in Note 2 and disclosed in Note 3 to the financial statements. 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 Years Ended December 31, 2017 and 2016
Revenue, Cost of Goods Sold, and Gross Profit. The Company reported annual revenue of $540,000 in 2017 earned from the completion of three enclosed ground flares and recognized gross profit for the year of $160,000. The Company reported revenue of $621,000 and a gross profit of $136,000 in 2016. We anticipate gross margins will normalize in the range of 50%, assuming an increase in volume of sales.
Operating Expenses. Operating expenses decreased by $1,469,000 to $9,872,000 in 2017 compared to $11,341,000 in operating expenses in 2016, a decrease of approximately 13%. The Company decreased its research and development (R&D) expenses by $119,000 to $4,712,000 for 2017 compared to $4,831,000 for 2016. R&D expenses decreased due primarily to a $199,000 decrease both in field testing costs related to the evaluation of our Duplex technology and laboratory related costs, all of which totaled $1,748,000 in 2017 as compared to $1,947,000 in 2016. The field testing decrease was offset in part by a small increase in general R&D costs. General & Administrative (G&A) expenses decreased by $1,350,000 to $5,160,000 for 2017 compared to $6,510,000 for 2016. This decrease resulted primarily from decreased impairment losses of $1,971,000 on capitalized patents pending, offset by increases to consulting costs of $272,000, one-time costs of $265,000 in 2017 from our withdrawn registration statement on Form S-1 and an increase of $111,000 to depreciation and amortization costs.
Loss from Operations. Due to the decrease in operating expenses, our loss from operations decreased during 2017 by $1,493,000 to $9,712,000, compared to $11,205,000 in 2016, a decrease of approximately 13%.
Net Loss. Primarily as a result of the decrease in operating expenses, our net loss for 2017 was $9,680,000 as compared to a net loss of $11,173,000 for 2016, resulting in a $1,493,000 decrease in the net loss or approximately 13%.
Liquidity and Capital Resources
At December 31, 2017, our cash and cash equivalent balance totaled $1,247,000 compared to $1,259,000 at December 31, 2016.Although we are pursuing sales and co-development agreements, there is no assurance that we will be successful in entering into any such agreements or, if we do enter into such agreements, that they will provide adequate funds to support our operations and to commercialize our technology. To the extent sales and co-development agreement funding is insufficient for these purposes, we may undertake offerings of our securities, debt financing, selling or licensing our developed intellectual or other property, or other alternatives. As detailed in Note 13 to our audited consolidated financial statements, on February 27, 2018 the Company completed a stock offering of 5,750,000 shares at a price of $2.25 per share. We received net proceeds of approximately $11.9 million from the offering which we believe will be adequate to support our operations for at least the next 12 months from the date of filing our Form 10-K for the year ended December 31, 2017. From inception, the Company’s operations have been funded primarily through the sale of its common stock. In order to continue business operations beyond twelve months, the Company currently anticipates that it will need to raise additional capital. However, there can be no assurances that the Company will be able to secure any such additional financing on acceptable terms and conditions. The Company filed a Form S-3 shelf registration statement with the Securities and Exchange Commission on December 29, 2015 that was declared effective on January 7, 2016. The registration statement allows the Company to offer common stock, preferred stock, warrants or units from time to time as market conditions permit.
At December 31, 2017, our current assets were in excess of current liabilities resulting in working capital of $263,000 compared to $208,000 at December 31, 2016. The increase in working capital resulted primarily from $184,000 in increases for contract assets related to jobs in progress in 2017 and a decrease of $62,000 in accrued compensation, offset by a $169,000 decrease in prepaid expenses and other assets.
Operating activities for 2017 resulted in cash outflows of $8,258,000 which were due primarily to the loss for the period of $9,680,000, offset by share based compensation from the Company’s employee and consultant equity plans of $369,000, services and compensation paid with common stock of $342,000, and depreciation and amortization expense of $288,000. Operating activities for 2016 resulted in cash outflows of $8,672,000 which were due primarily to the loss for the period of $11,173,000, offset by share-based compensation from the Company’s employee and consultant equity plans of $645,000, abandonment of capitalized pending patents of $1,971,000, services and compensation paid with common stock of $194,000, and depreciation and amortization expense of $208,000.
Investing activities for 2017 and 2016 resulted in cash outflows of $421,000 and $1,054,000, respectively. Development of capitalized patents and other intangible assets for 2017 and 2016 resulted in cash outflows of $327,000 and $917,000, respectively. Acquisition of fixed assets for 2017 and 2016, primarily research and development equipment, resulted in cash outflows of $94,000 and $137,000, respectively.
Financing activities for 2017 resulted in $8,667,000 of cash inflows from the rights offering and sale of units we completed on January 25, 2017, which provided gross proceeds of $9.6 million and net cash proceeds of $8.7 million. There were no financing activities in 2016.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ClearSign Combustion Corporation and Subsidiary
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ClearSign Combustion Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ClearSign Combustion Corporation and subsidiary (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity and cash flows, for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Liquidity
As more fully discussed in Note 1 to the consolidated financial statements, the Company is subject to the risks and uncertainties associated with a new business and has incurred significant losses from operations since inception. The Company’s continued operations are dependent upon its ability to raise additional funds through equity or debt financing. There can be no assurances that the Company will be successful in achieving its long-term plans, as described in Note 1.
/s/ Gumbiner Savett Inc.
We have served as the Company's auditor since 2011
Santa Monica, California
March 27, 2018
ClearSign Combustion Corporation and Subsidiary
Consolidated Balance Sheets
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,247,000 | $ | 1,259,000 | ||||
| Accounts receivable | - | 103,000 | ||||||
| Contract assets | 184,000 | - | ||||||
| Prepaid expenses and other assets | 366,000 | 535,000 | ||||||
| Total current assets | 1,797,000 | 1,897,000 | ||||||
| Fixed assets, net | 498,000 | 644,000 | ||||||
| Patents and other intangible assets, net | 1,856,000 | 1,735,000 | ||||||
| Other assets | 10,000 | 10,000 | ||||||
| Total Assets | $ | 4,161,000 | $ | 4,286,000 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 768,000 | $ | 755,000 | ||||
| Current portion of lease liabilities | 159,000 | 150,000 | ||||||
| Accrued compensation and taxes | 607,000 | 669,000 | ||||||
| Contract liabilities | - | 115,000 | ||||||
| Total current liabilities | 1,534,000 | 1,689,000 | ||||||
| Long Term Liabilities: | ||||||||
| Long term lease liabilities | 195,000 | 353,000 | ||||||
| Total liabilities | 1,729,000 | 2,042,000 | ||||||
| Commitments | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock, $0.0001 par value, zero shares issued and outstanding | - | - | ||||||
| Common stock, $0.0001 par value, 15,608,853 and 12,983,938 shares issued and outstanding at December 31, 2017 and 2016, respectively | 2,000 | 1,000 | ||||||
| Additional paid-in capital | 52,441,000 | 42,574,000 | ||||||
| Accumulated deficit | (50,011,000 | ) | (40,331,000 | ) | ||||
| Total stockholders' equity | 2,432,000 | 2,244,000 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 4,161,000 | $ | 4,286,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
ClearSign Combustion Corporation and Subsidiary
Consolidated Statements of Operations
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Sales | $ | 540,000 | $ | 621,000 | ||||
| Cost of goods sold | 380,000 | 485,000 | ||||||
| Gross profit | 160,000 | 136,000 | ||||||
| Operating expenses: | ||||||||
| Research and development | 4,712,000 | 4,831,000 | ||||||
| General and administrative | 5,160,000 | 6,510,000 | ||||||
| Total operating expenses | 9,872,000 | 11,341,000 | ||||||
| Loss from operations | (9,712,000 | ) | (11,205,000 | ) | ||||
| Other income: | ||||||||
| Interest income | 32,000 | 32,000 | ||||||
| Net loss | $ | (9,680,000 | ) | $ | (11,173,000 | ) | ||
| Net loss per share - basic and fully diluted | $ | (0.63 | ) | $ | (0.86 | ) | ||
| Weighted average number of shares outstanding - basic and fully diluted | 15,421,095 | 12,928,715 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
ClearSign Combustion Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity
| Total | ||||||||||||||||||||
| Common Stock | Additional | Accumulated | Stockholders' | |||||||||||||||||
| Shares | Amount | Paid-In Capital | Deficit | Equity | ||||||||||||||||
| Balances at January 1, 2016 | 12,868,943 | $ | 1,000 | $ | 41,735,000 | $ | (29,158,000 | ) | $ | 12,578,000 | ||||||||||
| Shares issued for services ($3.40 per share) | 44,112 | - | 150,000 | - | 150,000 | |||||||||||||||
| Shares issued for services ($3.96 per share) | 5,000 | - | 20,000 | - | 20,000 | |||||||||||||||
| Shares issued for services ($4.85 per share) | 5,000 | - | 24,000 | - | 24,000 | |||||||||||||||
| Shares issued upon exercise of warrants ($2.20 per share) | 60,883 | - | - | - | - | |||||||||||||||
| Share based compensation | - | - | 645,000 | - | 645,000 | |||||||||||||||
| Net loss | - | - | - | (11,173,000 | ) | (11,173,000 | ) | |||||||||||||
| Balances at December 31, 2016 | 12,983,938 | 1,000 | 42,574,000 | (40,331,000 | ) | 2,244,000 | ||||||||||||||
| Shares issued in rights offering ($3.03 per share) | 2,395,471 | 1,000 | 7,257,000 | - | 7,258,000 | |||||||||||||||
| Warrants issued in rights offering ($0.97 per warrant) | - | - | 2,324,000 | - | 2,324,000 | |||||||||||||||
| Issuance costs of rights offering | - | - | (915,000 | ) | - | (915,000 | ) | |||||||||||||
| Shares issued in payment of accrued compensation ($3.60 per share) | 136,110 | - | 490,000 | - | 490,000 | |||||||||||||||
| Shares issued for services ($4.85 per share) | 5,000 | - | 24,000 | - | 24,000 | |||||||||||||||
| Shares issued for services ($3.50 per share) | 5,000 | - | 18,000 | - | 18,000 | |||||||||||||||
| Shares issued for 2017 board services ($3.60 per share) | 83,334 | - | 300,000 | - | 300,000 | |||||||||||||||
| Share based compensation | - | - | 369,000 | - | 369,000 | |||||||||||||||
| Net loss | - | - | - | (9,680,000 | ) | (9,680,000 | ) | |||||||||||||
| Balances at December 31, 2017 | 15,608,853 | $ | 2,000 | $ | 52,441,000 | $ | (50,011,000 | ) | $ | 2,432,000 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ClearSign Combustion Corporation and Subsidiary
Consolidated Statements of Cash Flows
| For the Years Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (9,680,000 | ) | $ | (11,173,000 | ) | ||
| Adjustments to reconcile net loss to net cash used | ||||||||
| in operating activities: | ||||||||
| Common stock issued for services | 342,000 | 194,000 | ||||||
| Share based payments | 369,000 | 645,000 | ||||||
| Depreciation and amortization | 297,000 | 208,000 | ||||||
| Abandonment and impairment of capitalized patents pending | - | 1,971,000 | ||||||
| Deferred Rent | - | (17,000 | ) | |||||
| Change in operating assets and liabilities: | ||||||||
| Contract assets | (184,000 | ) | - | |||||
| Accounts receivable | 103,000 | (103,000 | ) | |||||
| Prepaid expenses and other assets | 169,000 | (332,000 | ) | |||||
| Accounts payable and accrued liabilities | 13,000 | 260,000 | ||||||
| Accrued compensation and taxes | 428,000 | (440,000 | ) | |||||
| Contract liabilities | (115,000 | ) | 115,000 | |||||
| Net cash used in operating activities | (8,258,000 | ) | (8,672,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of fixed assets | (94,000 | ) | (137,000 | ) | ||||
| Disbursements for patents and other intangible assets | (327,000 | ) | (917,000 | ) | ||||
| Net cash used in investing activities | (421,000 | ) | (1,054,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of units of common stock and warrants for cash, | ||||||||
| net of offering costs | 8,667,000 | - | ||||||
| Net cash provided by financing activities | 8,667,000 | - | ||||||
| Net decrease in cash and cash equivalents | (12,000 | ) | (9,726,000 | ) | ||||
| Cash and cash equivalents, beginning of year | 1,259,000 | 10,985,000 | ||||||
| Cash and cash equivalents, end of year | $ | 1,247,000 | $ | 1,259,000 | ||||
Supplemental disclosure of non-cash operating and financing activities:
During the year ended December 31, 2017, the Company issued 136,110 shares of common stock to its officers in satisfaction of $490,000 of accrued compensation at December 31, 2016.
During the year ended December 31, 2016, the Company issued 60,883 shares of common stock through net settlement cashless exercise of warrants to purchase 118,959 shares at $2.20 per share when the closing prices on the date of exercises were a weighted average of $4.51 per share.
The accompanying notes are an integral part of these consolidated financial statements.
ClearSign Combustion Corporation and Subsidiary
Notes to Consolidated Financial Statements
Note 1 – Organization and Description of Business
ClearSign Combustion Corporation (ClearSign or the Company) designs and develops technologies for the purpose of improving key performance characteristics of combustion systems, including emission and operational performance, energy efficiency and overall cost-effectiveness. The Company’s primary technologies include its Duplex technology, which achieves very low emissions without the need of external flue gas recirculation, selective catalytic reduction, or higher excess air operation, and its Electrodynamic Combustion Control or ECC technology, which introduces a computer-controlled electric field into the combustion region that may better control gas-phase chemical reactions and improve system performance and cost-effectiveness. 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. As of December 31, 2017, the subsidiary was still in the process of formation and had not yet commenced any business activities.
Liquidity
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 the $11.9 million in proceeds net of offering costs from the stock offering completed on February 27, 2018 as described in Note 13. The Company has incurred losses since its inception totaling $50,011,000 and expects to experience operating losses and negative cash flow for the foreseeable future. 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 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 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
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ClearSign and its subsidiary.
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, Cost of Sales and Change in Accounting Principle
In September 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 (ASU No. 2014-09) regarding revenue recognition. The new standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. It is effective January 1, 2018 and early adoption is permitted. Management has elected early adoption of this standard to minimize the eventual cost of implementation.
The Company previously accounted for revenues from design and installation of its products on the completed contract method. Revenues from contracts and related costs of goods sold were recognized once the contract was completed or substantially completed. Contract costs included all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, and depreciation costs. Provisions for estimated losses on uncompleted contracts were made in the period in which such losses were determined.
The Company retroactively adopted ASU No. 2014-09 effective January 1, 2017. The Company reviewed each contract to identify contract rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations. Revenues and costs of sales are recognized once the goods or services are delivered to the customer’s control and performance obligations are satisfied. Typically, the Company’s customer contracts include performance obligations related to emission levels or other metrics that are measured at project completion. Management analyzed prior year revenue recognition made under the completed contract method and determined that no changes in the previously reported financial statements were required. Management elected to not apply the practical expedients in the adoption of ASU No. 2014-09.
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 has recognized revenue of $540,000 and $621,000 in 2017 and 2016 respectively.
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 ASU No. 2014-09.
Contract acquisition costs and practical expedients
For contracts that have a duration of less than one year, the Company follows ASC 606, 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 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 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 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 Change in Accounting Principle for Leases
Fixed assets are recorded at cost. As disclosed in Note 3, in 2017 the Company retroactively adopted Accounting Standards Update No. 2016-02 (ASU No. 2016-02) regarding 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 (short term leases) 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 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:
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.
In adopting ASU 2016-02 as described in Note 3, the Company recorded lease liabilities for the estimated present value of the lease payments under the lease agreements. The Company determined the interest rate based on an estimated incremental borrowing rate. The lease liabilities are classified within Level 3.
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.
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 December 31, 2017 and 2016, potentially dilutive shares outstanding amounted to 3,489,644 and 1,328,128, respectively.
In connection with the January 2017 rights offering (see Note 8), the company evaluated the financial impact of FASB ASC 260, “Earnings per Share,” which states, among other things, that if a rights issue is offered to all existing stockholders at an exercise price tht is less than the fair value of the stock, then the weighted average shares outstanding and basic and diluted earnings per share shall be adjusted retroactively to reflect the bonus element of the rights offering for all periods presented. The Company determined that the application of this specific provision of ASC 260 was immaterial to previously issued financial statements and therefore, did not retroactively adjust previously reported weighted average shares outstanding and basic and diluted earnings per share.
Recently Issued Accounting Pronouncements
In May, 2017 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09Scope of Modification Accounting, clarifies Topic 718, Compensation – Stock Compensation, which requires a company to apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:(1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. The Company currently does not have any modifications to existing stock compensation agreements and will be able to calculate the impact of the ASU once modifications arise.
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.
Emerging Growth Company
The Company was an emerging growth company as defined under the Jumpstart Our Business Startups Act of 2012 (JOBS Act). An emerging growth company may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company’s status as an emerging growth company expired December 31, 2017.
Note 3 – Fixed Assets
Fixed assets are summarized as follows:
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Machinery and equipment | $ | 801,000 | $ | 662,000 | ||||
| Office furniture and equipment | 167,000 | 141,000 | ||||||
| Leasehold improvements | 147,000 | 134,000 | ||||||
| Right of use asset-operating leases | 518,000 | 518,000 | ||||||
| Accumulated depreciation and amortization | (1,135,000 | ) | (894,000 | ) | ||||
| 498,000 | 561,000 | |||||||
| Construction in progress | - | 83,000 | ||||||
| $ | 498,000 | $ | 644,000 | |||||
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02 regarding leases for the purpose of providing more comprehensive and standardized presentation of an entity’s cost of property essential to its operations and its related funding. The new standard requires lessee recognition on the balance sheet of a right-of-use asset and a lease liability, initially measured at the present value of the lease payments. It further requires recognition in the income statement of a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis. Finally, it requires classification of all cash payments within operating activities in the statements of cash flows. It is effective for fiscal years commencing after December 15, 2018 and early adoption is permitted. Management has elected early adoption of this standard to minimize the eventual cost of implementation.
The Company has a triple net operating lease for office and laboratory space in Seattle, Washington through March 2020. This lease was modified in November 2016 to extend its term from February 2017 to March 2020. Rent escalated annually by 3% through February 2017 and remains at a constant rate thereafter of $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 began in September 2016 and will expire in August 2019 with monthly rent of $2,000 per month plus triple net operating costs. Both leases include lessee renewal options for three years at the then prevailing market rate.
With the retroactive adoption of ASU No. 2016-02, the new lease standard was applied to the Tulsa lease in September 2016, the commencement of the lease term, and to the Seattle lease in November 2016, the time of the lease modification. A leasehold interest and corresponding lease liability was recognized related to the Tulsa lease and the Seattle lease retroactively in 2016 in the amounts of $71,000 and $447,000, respectively. These reflect the lease commitments over the lease term discounted at the Company’s estimated incremental borrowing rate of 5% per annum. The lessee renewal options were not included in the lease term as they were not considered to be reasonably probable of exercise nor measurable. In 2016, accumulated amortization of these assets amounted to $18,000 and principal payments of the lease liabilities amounted to $18,000. There was no meaningful effect on the 2016 results of operations or the December 31, 2016 accumulated deficit. Management elected to apply the practical expedients in the adoption of ASU No. 2016-02 and to not apply the standard to short term leases.
Lease costs for the years ended December 31, 2017 and 2016 and other quantitative disclosures are as follows:
| For the twelve months ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Lease cost: | ||||||||
| Operating lease cost | $ | 214,000 | $ | 186,000 | ||||
| Short-term lease cost | 47,000 | 21,000 | ||||||
| Total lease cost | $ | 261,000 | $ | 207,000 | ||||
| Other information: | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | 172,000 | ||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | ||||||||
| For operating lease: | ||||||||
| Weighted average remaining lease term (in years) | 2.18 | |||||||
| Weighted average discount rate | 5.00 | % | ||||||
Minimum future payments under the Company’s leases at December 31, 2017 and their application to the corresponding lease liabilities are as follows:
| Discounted lease liability payments | Payments due under lease agreements | |||||||
| 2018 | $ | 159,000 | $ | 173,000 | ||||
| 2019 | 158,000 | 164,000 | ||||||
| 2020 | 37,000 | 37,000 | ||||||
| Total | $ | 354,000 | $ | 374,000 | ||||
Note 4 – Patents and Other Intangible Assets
Patents and other intangible assets are summarized as follows:
| December 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Patents | ||||||||
| Patents pending | $ | 1,167,000 | $ | 1,040,000 | ||||
| Issued patents | 930,000 | 747,000 | ||||||
| 2,097,000 | 1,787,000 | |||||||
| Trademarks | ||||||||
| Trademarks pending | 41,000 | 23,000 | ||||||
| Registered trademarks | 23,000 | 23,000 | ||||||
| 64,000 | 46,000 | |||||||
| Other | 8,000 | 8,000 | ||||||
| 2,169,000 | 1,841,000 | |||||||
| Accumulated amortization | (313,000 | ) | (106,000 | ) | ||||
| $ | 1,856,000 | $ | 1,735,000 | |||||
Future amortization expense associated with awarded patents and registered trademarks as of December 31, 2017 is estimated as follows:
| 2018 | $ | 229,000 | ||
| 2019 | 208,000 | |||
| 2020 | 122,000 | |||
| 2021 | 46,000 | |||
| 2022 | 16,000 | |||
| Thereafter | 19,000 | |||
| $ | 640,000 |
Note 5 – Sales, Billings, and Costs on Uncompleted Contracts
In 2016, the Company entered intoa multi-flare contract with a third party contractor to supply its Duplex technology to a major California oil producer to retrofit its enclosed wellhead ground flares. This contract is valued at approximately $900,000 and includes certain performance obligations related to emission levels. As such, each flare retrofit is considered a separate transaction where revenues are recognized upon delivery of the unit and satisfaction of the performance obligation. In the three months ended March 31, 2017, revenue totaling $360,000 was recognized with the completion of the contractual obligations. One additional unit with a contract value totaling $180,000 was completed during the fourth quarter of 2017. The Company also has contracts with three oil producing companies for the installation of its Duplex technology with a total value of approximately $336,000. To date, all of the Company’s sales have been Duplex products sold in the United States. At December 31, 2017, the Company had contract assets of $184,000 and contract liabilities of $0.
Note 6 – Product Warranties
A summary of the Company’s warranty liability activity, which is included in accrued liabilities in the accompanying balance sheets as of December 31, 2017 and 2016 is as follows:
| 2017 | 2016 | |||||||
| Warranty liability, beginning of year | $ | 213,000 | $ | - | ||||
| Accruals | 69,000 | 283,000 | ||||||
| Payments | (114,000 | ) | (70,000 | ) | ||||
| Adjustments and other | 13,000 | |||||||
| Warranty liability, end of year | $ | 181,000 | $ | 213,000 | ||||
Note 7 – Income Taxes
Through December 31, 2017, the Company incurred net operating losses for federal tax purposes of approximately $47,000,000. The net operating loss carry forwards may be used to reduce taxable income through the years 2028 to 2037. The availability of the Company's net operating loss carry forwards is subject to limitation if there is a change in the ownership of the Company's stock of 50% or more.
A reconciliation of the expected tax computed at the statutory federal income tax rate to the provision for income taxes is as follows:
| 2017 | 2016 | |||||||
| Expected tax benefit at 34% | $ | (3,291,000 | ) | $ | (3,799,000 | ) | ||
| Tax Reform | 6,210,000 | |||||||
| Change in valuation allowance | (3,070,000 | ) | 3,590,000 | |||||
| Other | 151,000 | 209,000 | ||||||
| Provision for income taxes | $ | - | $ | - | ||||
The net deferred tax asset at December 31, 2017 and 2016 was $10,020,000 and $13,090,000, respectively. In assessing the potential realization of these deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. At December 31, 2017 and 2016, management was unable to determine if it is more likely than not that the Company’s deferred tax assets will be realized and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates. Significant components of the deferred tax assets (liabilities), are approximately as follows:
| 2017 | 2016 | |||||||
| Net operating loss carry forwards | $ | 9,860,000 | $ | 13,100,000 | ||||
| Accrued liabilities | 210,000 | 250,000 | ||||||
| Stock compensation | (90,000 | ) | (260,000 | ) | ||||
| Depreciation | 60,000 | 20,000 | ||||||
| Prepaid expenses | (20,000 | ) | (30,000 | ) | ||||
| Other | - | 10,000 | ||||||
| Deferred tax assets, net | 10,020,000 | 13,090,000 | ||||||
| Valuation allowance | (10,020,000 | ) | (13,090,000 | ) | ||||
| Net deferred tax asset | $ | - | $ | - | ||||
Although the Company is not under examination, the tax years for 2014 and forward are subject to examination by United States tax authorities.
The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. As of December 31, 2017 and 2016, there were no accrued interest or penalties related to uncertain tax positions.
On December 22. 2017. The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act contains significant changes to corporate taxation, including (i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing for certain business assets, (iii) the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense and (vi) expanded limitations on executive compensation.
The key impact of the Tax Act on the Company’s financial statements for the year ended December 31, 2017, was the re-measurement of deferred tax balances to the new corporate tax rate. In order to calculate the effects of the new corporate tax rate on the Company’s deferred tax balances, ASC 740 “Income Taxes” (“ASC 740’) required the re-measurement of the Company’s deferred tax balances as of the enactment date of the Tax Act, based on the rates at which the balances are expected to reverse in the future. The re-measurement of the Company’s deferred tax balances resulted in a net reduction in deferred tax assets of $6.2 million offset with a corresponding adjustment to the valuation allowance.
Note 8 – Stockholders’ 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.
In February 2018, the Company completed an offering of common stock as described in Note 13 whereby 5,750,000 shares of common stock at a price of $2.25 per share were issued and sold for net cash proceeds of approximately $11.9 million.
In January 2017, the Company completed a rights offering and public offering of units comprised of common stock and warrants at a purchase price of $4.00 per unit pursuant to which the Company issued 2,395,471 shares of common stock together with warrants for the purchase of 2,395,471 shares of common stock. The warrants allow each holder to purchase one share of common stock at an exercise price of $4.00 per share, are non-callable, expire on January 25, 2019, and are publicly traded on the NASDAQ Capital Market under the symbol “CLIRW”. Gross proceeds from the offering totaled $9.6 million and net cash proceeds approximated $8.7 million. Expenses of the offering approximated $915,000, including dealer-manager and placement agent fees of $575,000 paid to MDB Capital Group LLC (MDB) and MDB’s legal fees of $60,000. The net cash proceeds were allocated to the relative fair values of the common stock and warrants on the date of issuance resulting in an allocation of $3.03 per share to the common stock and $0.97 per share to the warrants. In calculating the fair value of the warrants using the Black-Scholes model, the following assumptions were utilized:
Equity Incentive Plan
The ClearSign Combustion Corporation 2011 Equity Incentive Plan (the Plan) provides for the granting of options to purchase shares of common stock, stock awards to purchase shares at no less than 85% of the value of the shares, and stock bonuses to officers, employees, board members, certain consultants, and advisors. 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 December 31, 2017, the number of shares reserved for issuance under the Plan totaled 1,662,530 shares. The Plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 10% 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. Activity under the Plan is as follows:
| 2017 | 2016 | |||||||
| Reserved but unissued shares under the Plan, beginning of year | 266,884 | 455,372 | ||||||
| Increases in the number of authorized shares under the Plan | 255,261 | 15,039 | ||||||
| Grants of stock options | (127,000 | ) | (171,900 | ) | ||||
| Stock option forfeitures | 15,955 | 12,485 | ||||||
| Exercise of stock options | - | - | ||||||
| Stock grants | (219,444 | ) | (44,112 | ) | ||||
| Reserved but unissued shares under the Plan, end of year | 191,656 | 266,884 | ||||||
Stock Options
In 2017, the Company granted from the Plan to certain employees stock options for the purchase of 127,000 shares of stock. The stock options have exercise prices based on the grant date fair values ranging from $3.10 to $3.80 per share with a weighted average of $3.69 per share, a contractual life of 10 years, and vesting over one to four years. As permitted by SAB 107, due to the Company’s insufficient history of option activity, management utilized the simplified approach to estimate the expected term of the options, which represents the period of time that options granted are expected to be outstanding. Expected volatility was determined through the Company’s historical stock price volatility. The Company estimated the forfeiture rate at the time of grant and will revise it, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes compensation costs only for those equity awards expected to vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:
The fair value of stock options granted, estimated on the date of grant using the Black-Scholes option valuation model, was $233,000. The recognized compensation expense associated with these grants in 2017 was $59,000.
A summary of the Company’s stock option activity and related information is as follows:
| 2017 | 2016 | |||||||||||||||||||||||
| Options to Purchase Common Stock | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Options to Purchase Common Stock | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | |||||||||||||||||||
| Outstanding at January 1 | 882,815 | $ | 4.98 | 7.51 | 723,400 | $ | 5.18 | 8.10 | ||||||||||||||||
| Granted | 127,000 | $ | 3.69 | 9.48 | 171,900 | $ | 4.22 | 9.26 | ||||||||||||||||
| Exercised | - | - | - | - | - | - | ||||||||||||||||||
| Forfeited/Expired/Exchanged | (15,955 | ) | $ | 5.15 | - | (12,485 | ) | $ | 6.17 | - | ||||||||||||||
| Outstanding at December 31 | 993,860 | $ | 4.81 | 6.94 | 882,815 | $ | 4.98 | 7.51 | ||||||||||||||||
| Exercisable at December 31 | 754,989 | $ | 4.98 | 6.32 | 547,532 | $ | 4.91 | 6.85 | ||||||||||||||||
A summary of the status of the Company’s non-vested stock options at December 31 and changes during the year is as follows:
| 2017 | 2016 | |||||||||||||||
| Number of Options | Weighted Average Grant Date Fair Value | Number of Options | Weighted Average Grant Date Fair Value | |||||||||||||
| Non-vested stock options at January 1 | 335,283 | $ | 5.09 | 466,009 | $ | 5.79 | ||||||||||
| Granted | 127,000 | $ | 3.69 | 171,900 | $ | 4.22 | ||||||||||
| Vested | (207,457 | ) | $ | 5.16 | (290,141 | ) | $ | 5.67 | ||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited/Expired/Exchanged | (15,955 | ) | $ | 5.15 | (12,485 | ) | $ | 6.17 | ||||||||
| Non-vested stock options at December 31 | 238,871 | $ | 4.27 | 335,283 | $ | 5.09 | ||||||||||
The estimated aggregate pretax intrinsic value of the Company’s outstanding vested stock options at December 31, 2017 is $207,000. The intrinsic value is the difference between the Company’s common stock price and the option exercise prices multiplied by the number of in-the-money options. This amount changes based on the fair value of the Company’s common stock.
At December 31, 2017, there was $436,000 of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted under the Plan. That cost is expected to be recognized in future years as follows:
| 2018 | $ | 211,000 | ||
| 2019 | 144,000 | |||
| 2020 | 69,000 | |||
| 2021 | 12,000 | |||
| $ | 436,000 |
The recognized compensation cost associated with the Plan is as follows:
| 2017 | 2016 | |||||||
| Research and development | $ | 119,000 | $ | 112,000 | ||||
| General and administrative | 250,000 | 513,000 | ||||||
| Effect on net loss | $ | 369,000 | $ | 625,000 | ||||
| Effect on net loss per share | $ | 0.02 | $ | 0.05 | ||||
Stock Grants
In February 2017, the Company granted 136,110 shares of common stock under the Plan to its six officers as payment for bonuses that were accrued at December 31, 2016. The per share fair value of the stock at the time of grant was $3.60 for a total value of $490,000 which the Company had recognized as bonuses in 2016. The common stock was subject to repurchase rights by the Company at $0.0001 per share through February 10, 2018.
In February 2017, the Company issued 83,334 shares of common stock under the Plan to its three independent directors for 2017 compensation in accordance with agreements entered into with each director. The common stock was subject to repurchase rights by the Company at $0.0001 per share through February 10, 2018 upon the termination of the individual’s services as a director or other circumstances as set forth in the award agreements. The fair value of the stock at the time of grant was $3.60 per share for a total value of $300,000, which the Company recognized in general and administrative expense in 2017.
In 2016, the Company granted 44,112 shares of common stock under the Plan to its three independent directors in accordance with agreements for board service. The fair value of the stock at the time of grant was $3.40 per share for a total value of $150,000, which the Company recognized in general and administrative expense in 2016.
Consultant Stock Plan
The 2013 Consultant Stock Plan (the Consultant Plan) 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 grants 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 December 31, 2017 totaled 99,159 shares. 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 in each of 2017 and 2016 under the Consultant Stock Plan to a consultant for services for each of the twelve months ended May 31, 2018 and 2017 and subject to completion of service each quarter. The fair value of the stock at the time of grant was $3.50 and $4.85 per share for a total value of $35,000 and $49,000, which the Company recognizes in general and administrative expense on a pro-rated quarterly basis. The Consultant Plan expense for 2017 and 2016 was $42,000 and $44,000, respectively.
Activity under the Consultant Plan is as follows:
| 2017 | 2016 | |||||||
| Reserved but unissued shares under the Consultant Plan at January 1 | 83,633 | 92,130 | ||||||
| Increases in the number of authorized shares under the Consultant Plan | 25,526 | 1,503 | ||||||
| Stock grants | (10,000 | ) | (10,000 | ) | ||||
| Reserved but unissued shares under the Consultant Plan at Period End | 99,159 | 83,633 | ||||||
Warrants
In conjunction with the January 2017 rights offering, the Company issued warrants for the purchase of 2,395,471 shares of common stock at $4.00 per share. The warrants expire on January 25, 2019.
A summary of the Company’s warrant activity and related information is as follows:
| 2017 | 2016 | |||||||||||||||
| Warrants | Average Exercise Price | Warrants | Average Exercise Price | |||||||||||||
| Outstanding at January 1 | 445,313 | $ | 4.65 | 564,272 | $ | 4.14 | ||||||||||
| Granted | 2,395,471 | $ | 4.00 | - | - | |||||||||||
| Exercised | - | - | (118,959 | ) | $ | 2.20 | ||||||||||
| Forfeited/Expired | (345,000 | ) | $ | 5.00 | - | - | ||||||||||
| Outstanding at Period End | 2,495,784 | $ | 3.98 | 445,313 | $ | 4.65 | ||||||||||
The following table summarizes the number of warrants, the weighted average exercise price, and weighted average life (in years) by price for both total outstanding warrants and total exercisable warrants at December 31, 2017:
| Total Outstanding Warrants | ||||||||||||
| Exercise Price | Warrants | Wtd. Avg. Exercise Price | Remaining Life (in years) | |||||||||
| $1.80 | 80,000 | $ | 1.80 | 3.13 | ||||||||
| $4.00 | 2,395,471 | $ | 4.00 | 1.07 | ||||||||
| $10.00 | 20,313 | $ | 10.00 | 1.18 | ||||||||
| 2,495,784 | $ | 3.98 | ||||||||||
The intrinsic value of the outstanding warrants was $144,000 at December 31, 2017.
Note 9 – Retirement Plan
The Company has a defined contribution retirement plan covering all of its employees whereby the Company matches employee contributions up to 3% of each employee’s 2017 and 2016 earnings. The Company’s matching contribution expense totaled $86,000 and $85,000 in 2017 and 2016, respectively.
Note 10 – Related Party Transactions
In connection with the January 2017 rights offering, the Company paid the dealer-manager and placement agent, MDB Capital Group, LLC, fees of $575,000 and legal fees and other costs of $60,000. MDB and its chief executive officer were significant owners of the Company’s common stock at the time of this offering.
Note 11 – Commitments and Contingencies
On February 3, 2015, the Company and its Chief Executive Officer, Stephen E. Pirnat entered into an employment agreement (the Agreement) which was to terminate on December 31, 2017, unless earlier terminated. Compensation under the Agreement includes an annual salary of $350,000, a grant of 300,000 stock options vesting in 2016 and 2017, an annual cash bonuses that may equal up to 60% of his annual salary and equity bonuses based on performance standards established by the Compensation Committee of the Board of Directors, medical and dental benefits for Mr. Pirnat and his family, other employee benefits offered to employees generally and relocation expenses up to approximately $100,000. The Agreement may be terminated by the Company without cause under certain circumstances, as defined in the Agreement, whereby a severance payment would be due in the amount of compensation that would have been due had employment not been terminated or one year of the current annual compensation, whichever is greater. In the event of a change in control, Mr. Pirnat would receive one year’s compensation, and all previously granted stock options would vest in full. On October 30, 2017, the term of the Agreement was extended through December 31, 2018.
The Company has a field test agreement with a customer to demonstrate and test the Duplex technology in a once through steam generator (OTSG) used to facilitate a thermally enhanced oil recovery process. Under the terms of the agreement, the Company has retrofitted an OTSG unit in order to achieve certain performance criteria. The agreement also includes time-sensitive pricing, delivery and installation terms, if elected, that will apply to future purchases of this Duplex application by this customer.
Note 12 – Quarterly Results (unaudited)
Quarterly results for the years ended December 31, 2017 and 2016 are as follows:
| First | Second | Third | Fourth | |||||||||||||
| For the year ended December 31, 2017 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
| Revenue | $ | 360,000 | $ | - | $ | - | $ | 180,000 | ||||||||
| Gross Profit (Loss) | $ | 109,000 | $ | - | $ | (15,000 | ) | $ | 66,000 | |||||||
| Operating Expense | $ | 2,502,000 | $ | 2,251,000 | $ | 2,460,000 | $ | 2,659,000 | ||||||||
| Net Loss | $ | (2,379,000 | ) | $ | (2,236,000 | ) | $ | (2,472,000 | ) | $ | (2,593,000 | ) | ||||
| Net Loss per share - basic and fully diluted | $ | (0.16 | ) | $ | (0.17 | ) | $ | (0.16 | ) | $ | (0.17 | ) | ||||
| For the year ended December 31, 2016 | ||||||||||||||||
| Revenue | $ | - | $ | - | $ | 260,000 | $ | 361,000 | ||||||||
| Gross Profit (Loss) | $ | - | $ | - | $ | 213,000 | $ | (77,000 | ) | |||||||
| Operating Expense | $ | 2,601,000 | $ | 2,442,000 | $ | 4,066,000 | $ | 2,232,000 | ||||||||
| Net Loss | $ | (2,589,000 | ) | $ | (2,431,000 | ) | $ | (3,846,000 | ) | $ | (2,306,000 | ) | ||||
| Net Loss per share - basic and fully diluted | $ | (0.20 | ) | $ | (0.19 | ) | $ | (0.30 | ) | $ | (0.17 | ) | ||||
Note 13 – Subsequent Event
On February 27, 2018, the Company completed a public offering of common stock at $2.25 per share whereby 5,750,000 shares were issued. Gross proceeds from the offering totaled $12.9 million and net cash proceeds approximated $11.9 million. Expenses of the offering approximated $1,000,000, including underwriter compensation of $839,000 paid to National Securities Corporation and the payment of $75,000 for legal fees incurred by National Securities Corporation.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: 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 (the “Act”) 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.
Report on Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Report on Internal Control over Financial Reporting
Our chief executive officer and our chief financial officer are responsible for establishing and maintaining internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our chief executive officer and our chief financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control—Integrated Framework.
Based on our assessment, our chief executive officer and our chief financial officer determined that, as of December 31, 2017, our internal control over financial reporting is effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Act) during the fourth quarter of the last fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Item 10: Directors, Executive Officers and corporate governance
Directors and Executive Officers
Our business, property and affairs are managed by, or under the direction of, our Board, in accordance with the Washington Business Corporation Act and our bylaws. Members of the Board are kept informed of our business through discussions with the Chief Executive Officer and other key members of management, by reviewing materials provided to them by management, and by participating in meetings of the Board and its Committees.
The information concerningfollowing table sets forth the names and ages of the directors and executive officers. Our officers are appointed by, and serve at the pleasure of, the Board.
| Name | Age | Position | ||
| Colin James Deller | 53 | Chief Executive Officer and Director | ||
| Brian G. Fike | 52 | Chief Financial Officer, Treasurer and Secretary | ||
| Robert T. Hoffman Sr. | 62 | Director, Chairperson of the Board | ||
| Susanne L. Meline | 53 | Director, Lead Independent Director | ||
| Bruce A. Pate | 63 | Director | ||
| Judith Schrecker | 68 | Director |
Directors and officers are nominated and appointed based upon their experience, knowledge of the Company’s markets and business segments, community involvement and commitment to serving the interests of stockholders:
Colin James Deller
Dr. Deller joined us as our President in February 2019, transitioned to the office of Chief Executive Officer on April 1, 2019 and was appointed as a director on February 13, 2020. Dr. Deller began his career at Hamworthy Combustion while also completing his Ph.D. In 1996, Dr. Deller joined Callidus, where he was employed in Project Engineering and Sales, and over the course of ten years advanced to serve as Chief Combustion Engineer and Manager of Burner Order Execution before being promoted to oversee Callidus’ entire burner business. From 2010 until he left Callidus, following the acquisition of Callidus by Honeywell, Dr. Deller served as General Manager with full profit and loss accountability for the Honeywell UOP Callidus burner business worldwide. During that time, he led his team in developing new international markets, including developing a leading market position in China. From May 2018 until he joined the Company, Dr. Deller served as the interim Global Operations Director for the entire Honeywell International UOP Callidus business, which includes flares and thermal oxidizers in addition to burners.
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Dr. Deller has a Bachelor of Engineering in mechanical engineering from Portsmouth Polytechnic, U.K., a doctorate in flame chemistry from the University of Portsmouth, U.K., and an MBA from The University of London.
Brian G. Fike
Mr. Fike was appointed as our Controller in January 2016, as our interim Chief Financial Officer, Secretary and Treasurer in May 2017 and as our Chief Financial Officer on November 12, 2019. Prior to joining the Company, from March 2001 to January 2016, Mr. Fike was employed by Darigold, Inc., a $2.3 billion dairy manufacturing co-op of 500 member farmers, where he successively held the positions of Plant Controller, Accounting and Finance Manager, Strategy Manager and Regional Controller. Prior to his career at Darigold, Mr. Fike held similar positions in the specialty foods and industrial automation industries. Mr. Fike also served eight years in the U.S. Naval Reserve.
Mr. Fike holds a BBA in Accountancy from Boise State University and an MBA from the University of Washington.
Robert T. Hoffman Sr.
Mr. Hoffman became a director of our Company in July 2018 in conjunction with the execution of a Voting Agreement between the Company and clirSPV LLC and was appointed as Chairman in November 2018. Mr. Hoffman has more than 30 years of relevant capital markets experience and expertise. In 2011, Mr. Hoffman founded and continues to manage Princeton Opportunity Management LLC. Previously, he served as founder and managing partner of Candlewood Capital, a long/short fund which managed more than $1 billion in primarily institutional assets. Mr. Hoffman also was a Managing Director and Portfolio Manager for the Growth & Income (G&I) mutual fund and institutional assets of what was originally Scudder Stevens and Clark, where he was responsible for all buy and sell decisions. During his tenure, G&I assets under management expanded from approximately $1.75 billion to more than $25 billion. Mr. Hoffman was also nominated by two separate governors to serve three terms as a Member and Chairman of the State of New Jersey Investment Council (SIC) from 1990 to 2002. The SIC has ultimate oversight responsibility for state and local pension funds totaling more than $80 billion. Mr. Hoffman's career also includes service as the Assistant State Treasurer for Pensions and Investments for the State of New Jersey, Special Assistant to the Governor of New Jersey and Mergers, and Acquisitions Analyst at ABN/LaSalle Bank. He holds an M.B.A. with Distinction from the Kellogg School of Management at Northwestern University and an Economics degree from Dartmouth College.
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Susanne L. Meline
Ms. Meline has been a director of our Company since February 2018. In 2003, Ms. Meline co-founded Francis Capital Management (“FCM”), a value-based investment advisor, where she continues to specialize in analyzing small cap stocks. Prior to co-founding FCM, Ms. Meline worked as an investment banker with Houlihan Lokey, a global investment bank serving corporations, institutions, and governments worldwide. She also practiced law in the corporate group of Jones Day, an international law firm that provides legal advisory services across multiple disciplines and jurisdictions. Ms. Meline is a Certified Director through the UCLA Anderson School of Management, a Board Leadership Fellow for the National Association of Corporate Directors (the “NACD”) and holds a CERT Certificate in CyberSecurity Oversight from the NACD and Carnegie Mellon University Software Engineering Institute. Ms. Meline received a B.A. in political science from UCLA, and a J.D. from the UC Hastings College of the Law. She has also served on the board of directors of Finomial Corporation.
Bruce A. Pate
Mr. Pate joined our Company as a director in January 2019. Mr. Pate is the general partner of Pate Capital Partners LP, which he founded in 2004 to invest in publicly traded companies with a special emphasis in energy and resource-related sectors. Prior to founding Pate Capital Partners LP, Mr. Pate spent over 20 years at Morgan Stanley & Co. as a principal of the firm, where he managed fixed income and equity portfolios for entrepreneurs, foundations, and corporations.
Judith S. Schrecker
Ms. Schrecker joined our Company as a director in February 2021. Ms. Schrecker brings more than 40 years of financial and operating leadership and board participation with broad international experience. Most recently Ms. Schrecker was VP of Finance of Flat Rolled Products at ATI Metals Inc., a Global manufacturer of technically advanced specialty materials and complex components, overseeing revenues of over $1 Billion. Prior to that Ms. Schrecker was Chief Financial Officer of Alcoa's Global Rolled Products business and a member of the executive council of the company. Under her leadership, the Global Rolled Products business achieved historically high profitability. Ms. Schrecker previously served on the boards of Finacity Corporation and Dress for Success Worldwide. She attended the University of Pittsburg Graduate School of Public and International Affairs along with a B.A. in History, Economics, and Latin American Studies from Temple University. Additionally, Ms. Schrecker is a 2020 Exceptional Women Awardees Foundation (EWA) recipient.
Board Meetings and Committees of our Board
The Board has three standing committees, the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, referred to in this Form 10-K as the “Governance Committee” (collectively, the “Board Committees”). All members of the Board Committees are non-employee directors who are deemed independent. During the year ended December 31, 2020, the Board held nine meetings, the Audit Committee held five meetings, the Compensation Committee held four meetings, and the Governance Committee held five meetings. Each of our directors attended at least 75% of the meetings held by the Board and the Board Committees of which he or she is a member. We do not have a policy with regard to Board attendance at the annual meetings. All of the members of our Board attended the 2020 Annual Meeting.
Business Experience and Qualifications
The investment experience that each of Ms. Meline and Messrs. Hoffman, and Pate brings to our Board includes their experience in analyzing the operations of businesses, and particularly smaller capitalized companies, to determine the likelihood of success. Ms. Schrecker has significant financial, business, operational and industrial experience. In addition, Ms. Meline has significant experience with respect to best practices in corporate governance. We believe that their experience, together with the expertise brought to our operations by Dr. Deller, will help us achieve our goals of proving commercial viability of our products, generating interest from end users and original equipment manufacturers and licensing our technology. For these reasons we concluded that each of these individuals should serve as a director.
Family Relationships. Involvement in certain legal proceedings.
None of our executive officers is related to any of our directors or any other officer. None of our executive officers has been involved in a legal proceeding that requires disclosure pursuant to Item 401(f) of Regulation S-K promulgated under the Exchange Act. None of our officers was selected as such as a result of an arrangement or understanding between him and any other person. None of our director nominees is related to any other director nominee or any officer. None of our director nominees has been involved in a legal proceeding that requires disclosure pursuant to Item 401(f) of Regulation S-K promulgated under the Exchange Act. Mr. Hoffman was selected as a director pursuant to the terms of a Voting Agreement we entered into with clirSPV LLC in July 2018. Mr. Pate was selected as a director pursuant to the terms of the Cooperation Agreement we entered into with Anthony DiGiandomenico and his affiliates in January 2019.
Audit Committee
The Audit Committee is comprised of Susanne Meline (Chairperson), Bruce Pate, and Judith Schrecker. Our Board of Directors has determined that Judith Schrecker serves as an Audit Committee financial expert. The role of the Audit Committee includes, but is not limited to, the following:
| · | overseeing management’s preparation of our financial statements and management’s conduct of the accounting and financial reporting processes; |
| · | appointing, compensating, retaining and overseeing the work of the independent registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company; |
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| · | overseeing management’s maintenance of internal controls and procedures for financial reporting at least annually; |
| · | overseeing our compliance with applicable legal and regulatory requirements, including without limitation, those requirements relating to financial controls and reporting; |
| · | overseeing the independent registered public accounting firm’s qualifications and independence; |
| · | preparing the report required by the rules of the Securities and Exchange Commission to be included in our proxy statement; and |
| · | discharging such duties and responsibilities as may be required of the Audit Committee by the provisions of applicable laws, rules or regulations. |
The Audit Committee is authorized (without seeking Board approval) to retain or terminate special legal, accounting or other advisors and may request any officer or employee of the Company or the Company’s outside counsel or independent registered public accounting firm to meet with any members of, or advisors to, the Audit Committee.
A copy of the charter of the Audit Committee is available on our website at www.clearsign.com (under “Investors-Corporate Governance-Governance Documents”).
Compensation Committee
The Compensation Committee is comprised of Bruce Pate (Chairperson), Susanne Meline, and Judith Schrecker. The role of the Compensation Committee is to:
| · | review, approve and recommend to the Board our compensation and benefits policies generally and the annual compensation (base salary, bonus and other benefits) for all of our executives, including our Chief Executive Officer; |
| · | administer the ClearSign Technologies Corporation 2011 Equity Incentive Plan, the 2013 Consultant Stock Plan and the ClearSign Technologies Corporation 2021 Equity Incentive Plan, if approved pursuant to Proposal 4; and |
| · | annually review and make recommendations to the Board with respect to the compensation of non-executive directors, including any incentive plan compensation. |
A copy of the charter of the Compensation Committee is available on our website at www.clearsign.com (under “Investors-Corporate Governance-Governance Documents”).
The Compensation Committee may engage outside advisers, including outside auditors, attorneys and consultants, as it deems necessary to discharge its responsibilities. The Compensation Committee has sole authority to retain and terminate any compensation expert or consultant used to provide advice on compensation levels or assist in the evaluation of director, Chief Executive Officer or senior executive compensation, including sole authority to approve the fees of any expert or consultant and other retention terms. In addition, the Compensation Committee considers, but is not bound by, the recommendations of our Chief Executive Officer with respect to the compensation packages of our other executive officers.
Nominating and Corporate Governance Committee
The Governance Committee is comprised of Bruce Pate (Chairperson) and Susanne Meline. The role of the Governance Committee is to:
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| · | evaluate from time to time the appropriate size (number of members) of the Board and recommend any increase or decrease; |
| · | determine the desired skills and attributes of members of the Board, taking into account the needs of the business and listing standards; |
| · | establish criteria for prospective members, conduct candidate searches, interview prospective candidates, and oversee programs to introduce the candidate to us, our management, and operations; |
| · | review planning for succession to the positions of Chairperson of the Board and Chief Executive Officer and other senior management positions; |
| · | annually recommend to the Board persons to be nominated for election as directors; |
| · | recommend to the Board the members of all standing committees; |
| · | adopt or develop for Board consideration corporate governance principles and policies; and |
| · | periodically review and report to the Board on the effectiveness of corporate governance procedures and the Board as a governing body, including conducting an annual self-assessment of the Board and its standing committees. |
A copy of the charter of the Governance Committee is available on our website at www.clearsign.com (under “Investors-Corporate Governance-Governance Documents”). The members of the Governance Committee review the qualifications of the director-nominees.
Director Qualifications and Diversity
The Board seeks independent directors who represent a diversity of backgrounds and experiences that will enhance the quality of the Board’s deliberations and decisions. Candidates should preferably have board experience with one or more companies or should have achieved a high level of distinction in their chosen fields. The Board is particularly interested in maintaining a mix that includes individuals who are active or retired executive officers and senior executives, particularly those with experience in combustion, technology, air pollution control and air emission regulation, intellectual property, start-up companies, research and development, strategic planning, business development, compensation, finance, accounting and banking.
In evaluating nominations to the Board of Directors, the Governance Committee also looks for certain personal attributes, such as integrity, ability and willingness to apply sound and independent business judgment, comprehensive understanding of a director’s role in corporate governance, availability for meetings and consultation on Company matters, and the willingness to assume and carry out fiduciary responsibilities.
Compensation Committee Interlocks and Insider Participation
None of our prior or current executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or the Compensation Committee.
Risk Oversight by the Board of Directors
It is management’s responsibility to assess and manage the various risks we face. It is the Board’s responsibility to oversee management in this effort, in order to ensure that risks and uncertainties that may relate to our ongoing operations and to our plans for the future are considered and managed appropriately. In exercising its oversight, the Board has allocated some areas of focus to its Committees and has retained areas of focus for itself, as more fully described below.
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Full Board – Risks and exposures focused on by the full Board include strategic, financial and execution risks including cyber and safety risks, and other current matters that may present material risk to our operations, plans, prospects or reputation. Throughout the year, the Chief Executive Officer discusses these risks with the Board during strategy reviews that focus on a particular function or aspect of our business.
Audit Committee – Risks and exposures focused on by the Audit Committee are those associated with financial matters, particularly financial reporting, tax, accounting, disclosure, internal control over financial reporting, financial policies, investment guidelines, risk management as a whole and credit and liquidity matters.
Governance Committee – Risks and exposures focused on by the Governance Committee are those relating to corporate governance and management and director succession planning.
Compensation Committee – Risks and exposures focused on by the Compensation Committee are those associated with leadership assessment and compensation programs and arrangements, including incentive plans, to ensure that compensation incentives are aligned with our risk management objectives.
Board Leadership Structure
The Chairperson of the Board presides at all meetings of the Board. The Chairperson is appointed on an annual basis by at least a majority vote of the directors. At a special meeting of the Board held on November 6, 2018, the Board determined to separate the offices of the Chief Executive Officer and the Chairperson. The Board believes that this leadership structure increases the Board’s independence from management by allocating authority for operational leadership to the Chief Executive Officer while allocating to the Board the responsibility for monitoring and overseeing management. The Board again appointed Ms. Meline to the role of lead independent director at a meeting held on February 13, 2020. As the lead independent director, Ms. Meline is the liaison between Mr. Hoffman, as the Chairperson, and the other independent directors. We believe that having a lead independent director will facilitate communication among the members of the Board.
Compliance with Section 16(a)
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company, the Company believes that, with the exception of the individuals named below, all of its directors, officers and beneficial owners of more than 10% of our equity securities timely filed these reports during 2020.
| · | Donald Kendrick, our Chief Technology Officer, and Stephen Sock, our Senior Vice President of Business Development, each filed a Form 4 reporting the grant of options to purchase common stock of the Company (each award constituting one transaction) one day after the filing due date. |
Code of Ethics
We adopted a Code of Business Conduct and Ethics (“Code of Ethics”) applicable to our principal executive officer and principal financial and accounting officer and any persons performing similar functions. In addition, the Code of Ethics applies to our employees, officers, directors, agents and representatives. The Code of Ethics requires, among other things, that our employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner, and otherwise act with integrity and in our best interest. The Code of Ethics is available on our website at www.clearsign.com (under “Investors-Corporate Governance-Governance Documents”). We intend to satisfy the disclosure requirement regarding an amendment to, or a waiver from, a provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting the information on our internet website, www.clearsign.com.
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Employee, Officer, and Director Hedging
Our policy against insider trading prohibits all employees and directors from engaging in any short sales of our securities, hold our securities in a margin account, or pledge our securities as collateral for a loan.
Policy with Regard to Director Nominations
There were no material changes with regard to directors’ nomination procedures of the Company. Shareholder proposals with regard to director nominations are reviewed by the Corporate Secretary for compliance with the requirements for such proposals, which are set forth below in this Item 10. All other information requiredour Policy Regarding Shareholder Candidates for Nomination (the “Policy”). Shareholder proposals that meet these requirements will be summarized by this itemthe Corporate Secretary. Summaries and copies of the shareholder proposals are circulated to the Chairman of the Governance Committee.
The Governance Committee will consider director candidates recommended by shareholders. If a director candidate is incorporatedrecommended by referencea shareholder (a “Nominating Shareholder”), the Governance Committee expects to evaluate such candidate in the same manner it evaluates director candidates it identifies. The Policy requires a Nominating Shareholder to have continuously held at least 5% of the Company’s common stock for at least three years by the date the name of the candidate is submitted, and to continue to hold the common stock through the date of the annual meeting. The Policy permits a Nominating Shareholder to submit one candidate for consideration at any annual meeting of shareholders. Pursuant to the Policy, a Nominating Shareholder must submit a candidate for consideration as a director in writing to the Company’s Proxy Statement forSecretary; the 2018 Annual Meetingsubmission must be received by a date not later than the 120th calendar day before the anniversary of Shareholdersthe date that the prior year’s annual meeting proxy statement was released to shareholders (or if the annual meeting date has changed by more than 30 days, a reasonable time before we begin to print and mail the proxy statement) and must include the following information:
1. The name, address and number of shares of common stock owned by the Nominating Shareholder.
2. A representation that the Nominating Shareholder meets the requirements described above and will continue to meet them through the date of the annual meeting. If the Nominating Shareholder is not a registered holder of the Company’s common stock, the Nominating Shareholder must provide evidence of eligibility as provided in Exchange Act Rule 14a-8(b)(2).
3. A description of all arrangements or understandings (whether written or oral) between or among the Nominating Shareholder and the candidate or any other person or entity (naming such person or entity) regarding the candidate’s nomination.
4. All information regarding the candidate that the Company would be required to disclose in a proxy statement filed withpursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) within 120 dayswith respect to a meeting at which the candidate would stand for election.
5. Confirmation that the candidate is independent under the independence requirements established by the Company, Rule 10A-3(b) promulgated under the Exchange Act and Nasdaq Listing Rule 5605(a)(2), or if the candidate is not independent under all such criteria, a description of the fiscal year ended December 31, 2017.reasons why the candidate is not independent.
Code6. The consent of Business Conductthe candidate to serve as a member of the Company’s board of directors, if nominated and Ethicselected.
7. A representation signed by the candidate that if elected he or she will:
(i) represent all shareholders of the Company in accordance with applicable laws and the Company’s article of incorporation, bylaws and other policies;
(ii) comply with all rules, policies or requirements generally applicable to non-executive directors; and
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(iii) upon request, complete and sign a customary director and officer questionnaire.
Our Policy Regarding Shareholder Candidates for Nomination is available on our website at www.clearsign.com (under “Investors-Corporate Governance-Governance Documents”).
Item 11: Executive Compensation
Compensation Discussion
Overview
The Compensation Committee of the Board administers our executive compensation and benefit programs. The Compensation Committee is comprised exclusively of independent directors and oversees all compensation and benefit programs and actions that affect our executive officers.
Compensation Process and Role of Management
The Compensation Committee is responsible for determining and approving all compensation for our executive officers. Pursuant to its charter, the Compensation Committee recommends to the full Board the salary, annual incentive compensation or bonus, long-term incentive compensation in the form of stock options or stock grants, and all other employment, severance and change-in-control agreements applicable to executive officers. As discussed below, our Chief Executive Officer assists the Compensation Committee in its deliberations with respect to the compensation payable to our other executive officers. At the end of or immediately following each fiscal year, our Chief Executive Officer evaluates executive officer performance for the prior fiscal year, other than his own performance, and discusses the results of such evaluations with the Compensation Committee. The Chief Executive Officer assesses each executive officer’s performance during the year based upon subjective factors concerning such officer’s individual business goals and objectives, and the contributions made by the executive officer to our overall results. The Chief Executive Officer then makes specific recommendations to the Compensation Committee for adjustments to base salary and the grant of a target bonus and/or equity award, if appropriate, as part of the compensation package for each executive officer, other than himself, for the next fiscal year. The Compensation Committee reviews the performance of the Chief Executive Officer and determines all compensation for the Chief Executive Officer. The Chief Executive Officer is not present at the time the Compensation Committee reviews his performance and discusses his compensation.
Evaluation of Compensation Practices
In 2017, the Compensation Committee engaged Willis Towers Watson to evaluate both our executive compensation program and our director compensation program. The objective was to determine the equity and competitiveness of our practices with those of peer companies and relevant standards promulgated by shareholder rights organizations and other relevant stakeholders. Although the study analyzed executive compensation comprehensively, there was particular focus on equity incentives for executives. The Compensation Committee integrated the results of the May 2017 study into its evaluation of executive compensation and director compensation for the years 2018, 2019, and 2020. Willis Towers Watson provided no other services to us following the evaluation. The Compensation Committee is currently reviewing compensation trends, especially at other companies.
Director Compensation
The Boardfollowing table sets forth information concerning compensation for services rendered by our non-executive directors for 2020. The amounts represented in the “Option Awards” column reflect the grant date fair value of Directors has adopted a codethe options computed in accordance with FASB ASC Topic 718 and do not necessarily equate to the income that will ultimately be realized by the director for such awards.
Director Summary Compensation Table
| Name | Fees Earned or Paid in Cash | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Nonqualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||||||
| Lon E. Bell | $ | $ | $ | 16,875 | (1) | $ | - | $ | - | $ | - | $ | 16,875 | |||||||||
| James Simmons | 8,448 | (2) | - | - | - | 8,448 | ||||||||||||||||
| Bruce Pate | 97,670 | (3) | - | - | - | 97,670 | ||||||||||||||||
| Susanne Meline | 112,506 | (4) | 112,506 | |||||||||||||||||||
| Robert T. Hoffman | 98,906 | (5) | 98,906 | |||||||||||||||||||
| $ | - | $ | - | $ | 334,405 | $ | - | $ | - | $ | - | $ | 334,405 | |||||||||
| (1) | Since his appointment as a director, Dr. Bell has received grants of 99,693 shares of common stock and options for the purchase of 119,000 shares as compensation for his services. Dr. Bell did not stand for re-election in 2020. |
| (2) | During his tenure as a director, Mr. Simmons received options for the purchase of 80,000 shares of common stock as compensation for his services. Mr. Simmons resigned as a director on February 13, 2020. |
| (3) | Since his appointment as a director, Mr. Pate has received options for the purchase of 189,000 shares of common stock as compensation for his services. |
| (4) | Since her appointment as a director, Ms. Meline has received grants of 27,027 shares of common stock and options for the purchase of 227,500 shares of common stock for her services. |
| (5) | Since his appointment as a director, Mr. Hoffman has received grants of 13,514 shares of common stock and options for the purchase of 206,500 shares of common stock for his services. |
In 2020, each non-executive director’s annual compensation was paid in options to purchase common stock. This component of business conduct and ethics (the Code)the Company’s director compensation program is designed in part, to deter wrongdoing and to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosurebuild an ownership stake in reports and documents that the Company files with or submitswhile conveying an incentive to directors relative to the Securitiesreturns recognized by our shareholders.
All directors are reimbursed for ordinary and Exchange Commission andreasonable expenses incurred in exercising their responsibilities in accordance with the Company’s expense reimbursement procedure applicable to all employees of the Company.
Independent directors are not eligible to participate in the Company’s other public communications, complianceemployee benefit plans, including the retirement plan.
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Summary Compensation Table for 2020 and 2019
The table below summarizes the total compensation paid to or earned by our Chief Executive Officer and our Chief Financial Officer in 2020 and 2019, in accordance with applicable governmental laws, rules and regulations,Item 402(m)(2) of Regulation S-K. These officers are referred to herein as the prompt internal reporting of Code violations to an appropriate person“named executive officers” or persons, as identified“NEOs.” The amounts represented in the Code“Option Awards” column reflects the stock compensation expense recorded by the Company pursuant to ASC Topic 718 and accountability for adherencedoes not necessarily equate to the Code. The Code applies to all directors,income that will ultimately be realized by the named executive officers for such awards.
Summary Compensation Table
| Name and Principal Position | Year | Salary | Bonus | Option Awards (1) | All Other Compensation (2) | Total | ||||||||||||||||||
| Colin J. Deller | 2020 | $ | 350,000 | $ | 202,454 | (3) | $ | 97,408 | (5) | $ | 68,351 | $ | 718,213 | |||||||||||
| Chief Executive Officer | 2019 | 306,250 | 90,000 | (4) | 206,992 | (6) | 59,444 | 662,686 | ||||||||||||||||
| Brian G. Fike | 2020 | 200,000 | 50,000 | (3) | 29,558 | 32,352 | 311,910 | |||||||||||||||||
| Chief Financial Officer | 2019 | 174,250 | 19,217 | (4) | 50,098 | 29,941 | 273,506 | |||||||||||||||||
| (1) | The amounts included in this column are the aggregate dollar amounts of compensation expense recognized by us for financial statement reporting purposes in accordance with Accounting Standards Codification 718, Compensation-Stock Compensation, and includes amounts from option awards granted in 2020, 2019, 2018, and 2017. For information on the valuation assumptions used in calculating these dollar amounts, see Notes 2 and 8 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020. These amounts reflect our accounting expense for these awards and do not correspond to the actual value that may be recognized by the individuals upon option exercise. |
| (2) | Relates to healthcare benefits, relocation expenses and employer matching in a defined contribution retirement plan available to all employees. |
| (3) | Bonuses for 2020 were accrued in 2020 and paid in either Stock or Stock options during the first quarter of 2021. |
| (4) | Bonuses for 2019 were accrued in 2019 and paid in exercisable stock options issued during the first quarter of 2020. |
| (5) | Includes Option awards of $45,147 and inducement awards of $52,261. |
| (6) | Includes Option awards of $95,936 from our 2011 Equity Incentive Plan and stock options of $111,056 issued to Dr. Deller as an inducement to accept our offer of employment. |
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Outstanding Equity Awards
The following table sets forth information concerning outstanding equity awards held by our NEO’s at December 31, 2020.
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) | Equity Incentive Plan Awards: Market of Payout Value of Unearned Shares, Units or Other Rights that have not Vested ($) | ||||||
| Colin J. Deller | ||||||||||||
| 178,161 | (1) | - | (1) | $0.94 | 12-31-29 | - | - | |||||
| 133,333 | (2) | 66,667 | (2) | $2.25 | 12/31/28 | - | - | |||||
| 266,667 | (3) | 133,333 | (3) | $1.16 | 12/31/28 | - | - | |||||
| Brian G Fike | ||||||||||||
| 40,000 | (1) | (1) | $0.89 | 12/31/29 | - | - | ||||||
| 33,333 | (4) | 16,667 | (4) | $2.25 | 12/31/28 | - | - | |||||
| 33,333 | (4) | 16,667 | (4) | $1.21 | 12/31/28 | - | - | |||||
| 50,000 | (1) | - | (1) | $1.21 | 12/31/28 | - | - | |||||
| 15,625 | (5) | 9,375 | (5) | $1.90 | 03/31/28 | - | - | |||||
| 8,750 | (6) | 1,250 | (6) | $3.80 | 03/31/27 | - | - | |||||
| 5,000 | (7) | - | (7) | $4.21 | 03/31/26 | - | - |
| (1) | Unearned options vest 100% on the date of award. At December 31, 2020, these options have vested 100%. |
| (2) | Unearned options vest 33% on the date of award and on January 24th of each calendar year thereafter until fully vested on January 24th, 2021. In the event of a change in control of the Company, the unvested options become fully vested. At December 31, 2020, these options have vested 67%. These options are non-qualified and issued as an inducement award. |
| (3) | Unearned options vest 33% on the date of award and on January 24th of each calendar year thereafter until fully vested on January 24th, 2021. In the event of a change in control of the Company, the unvested options become fully vested. At December 31, 2020, these options have vested 67%. Of the 400,000 options 141,382 are non-qualified and issued as an inducement award. |
| (4) | Unearned options vest 33% on the date of award and on January 1 of each calendar year thereafter until fully vested on January 1, 2021. In the event of a change in control of the Company, the unvested options become fully vested. At December 31, 2020 these options have vested 67%. |
| (5) | Unearned options vest 6.25% on July 1, 2018 and on the first day of each calendar quarter thereafter until fully vested on April 1, 2022. In the event of a change in control of the Company, the unvested options become fully vested. At December 31, 2020, these options have vested 62.5%. |
| (6) | Unearned options vest 6.25% on July 1, 2017 and on the first day of each calendar quarter thereafter until fully vested on April 1, 2021. In the event of a change in control of the Company, the unvested options become fully vested. At December 31, 2020, these options have vested 87.5%. |
| (7) | Unearned options vested at the rate of 40% on April 1, 2017 and continue to vest at the rate of 5% on the first day of each calendar quarter thereafter until they are fully vested on April 1, 2020, At December 31, 2020 100% of these options were vested. |
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Employment Contracts and employeesTermination of Employment and Change-in-Control Arrangements
Employment Agreement with Colin James Deller
On January 28, 2019 (the “Effective Date”), the Company and Colin James Deller entered into an employment 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 has 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 Codeagreement may be found onterminated by the Company’s website at www.clearsign.com.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 6 months of his annual salary.
The Company intends to disclose any amendments to or waiversChange of its code of ethics as it applies to directors or executive officers by disclosing them on Form 8-K.Control Arrangements
Item 11: Executive Compensation
The information required by this item is incorporated by referenceAll of the option awards and stock awards granted to the Company’s Proxy Statementexecutive officers include change-in-control arrangements whereby any unvested stock options would vest or any repurchase rights for the 2018 Annual Meetingstock grants or, if exercised prior to vesting, stock options, would terminate as a result of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2017.a change in control.
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Item 12: Security Ownership of Certain Beneficial Owners and Management AND RELATED SHAREHOLDER MATTERS
The information concerning the Company’s equity compensation plan is set forth below in this Item 12. All other information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2018 Annual Meeting of Shareholders.
Equity Compensation Plan Information
The table below provides information as of December 31, 20172020 regarding the compensation plans (2011 Equity Incentive Plan and 2013 Consultant Stock Plan) under which the Company’s equity securities of ClearSign are authorized for issuance.
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) (c) | |||||||||
| Equity compensation plans approved by security holders | 3,489,644 | $ | 4.22 | 191,656 | ||||||||
| Equity compensation plans not approved by security holders | - | - | - | |||||||||
| 3,489,644 | $ | 4.22 | 191,656 | |||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) (c) | |||||||||
| Equity compensation plans | ||||||||||||
| approved by security holders | 2,777,119 | $ | 2.17 | 1,429,006 | ||||||||
| Equity compensation plans not | ||||||||||||
| not approved by security holders | - | - | - | |||||||||
| 2,777,119 | $ | 2.17 | 1,429,006 | |||||||||
The above table excludes vested stock grants of 477,014591,879 and 43,25074,500 shares under the 2011 Equity Incentive Plan and the 2013 Consultant Stock Plan, respectively.
In January 2011, theour shareholders approved the ClearSign CombustionTechnologies Corporation 2011 Equity Incentive Plan whichthat provides for the granting of options to purchase shares of common stock, stock awards to purchase shares at no less than 85% of the value of the shares, and stock bonuses to officers, employees, board members, certain consultants, and advisors. 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. The Plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 10%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.
In May 2013, the shareholders approved the 2013 Consultant Stock Plan whichthat 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 grants 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 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.
Security Ownership of Certain Beneficial Owners and Management
The following table shows information known to us about beneficial ownership of our common stock by:
| · | each of our directors; |
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| · | each individual identified as an NEO in the section of this report titled “Executive Compensation”; |
| · | all of our directors and executive officers as a group; and |
| · | each person known by us to beneficially own 5% or more of our common stock. |
Beneficial ownership and percentage ownership are determined in accordance with the rules of the SEC. Under these rules, beneficial ownership generally includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares that an individual or entity has the right to acquire ownership of on or before May 27, 2021, which is 60 days from March 28, 2021, through the exercise of any option, warrant, conversion privilege or similar right. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of our common stock that could be issued upon the exercise of outstanding options and warrants that are exercisable on or before May 27, 2021 are considered to be outstanding.
To our knowledge, except as indicated in the footnotes to the following table and subject to state community property laws where applicable, all beneficial owners named in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The percentage is based 30,900,634 shares of common stock, par value $.0001, issued and outstanding as of on March 28, 2021.
| Name and Address of Beneficial Owner (1) | Amount of Beneficial Ownership (2) | Percent of Class | ||
| Directors and Officers: | ||||
| Colin J. Deller | 858,161 | (3) | 2.7% | |
| Brian G. Fike | 233,821 | (4) | 0.8% | |
| Brian G. Fike | 233,821 | (6) | 0.7% | |
| Robert T. Hoffman | 6,198,140 | (5) | 19.9% | |
| Susanne Meline | 309,022 | (6) | 1.0% | |
| Bruce A. Pate | 394,000 | (7) | 1.3% | |
| Judith Schrecker | ||||
| All Directors and Executive Officers as a Group (6 persons) | 7,993,144 | 24.5% | ||
| 5% Owners | ||||
| CLIR SPV LLC | 5,867,968 | 19.0% |
| (1) | The address of each officer and director is 12870 Interurban Avenue South, Seattle, Washington 98168. |
| (2) | Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and is generally assigned to the person holding voting power and/or investment power with respect to securities. With the exception of the securities beneficially owned by our officers and directors and their affiliates, the ownership of the shares of common stock listed above were determined using public records. |
| (3) | Includes options to purchase 858,161 shares of common stock which may be exercised on or before May 27, 2021 . Excludes options to purchase 510,000 shares of common stock none of which will vest on or before May 27, 2021. |
| (4) | Includes common stock holdings of 10,071 and options to purchase 223,750 shares of common stock which may be exercised on or before May 27, 2021. Excludes options to purchase 36,250 shares of common stock, none of which will vest on or before May 27, 2021. |
| (5) | Includes common stock holdings of 123,672 shares and options to purchase 206,500 shares of common stock which may be exercised on or before May 27, 2021. Mr. Hoffman is the managing member of GPCLIRSPV LLC which is the managing member of CLIRSPV LLC, the owner of 5,867,968 shares of common stock. Mr. Hoffman disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in CLIRSPV LLC. |
| (6) | Includes common stock holdings of 81,522 and options to purchase 227,500 shares of common stock which may be exercised on or before May 27, 2021. |
| (7) | The shares of common stock are owned 100,000 shares by the Pate Family Trust and 105,000 shares by Pate Capital Partners LP, a private investment partnership. Includes options to purchase 189,000 shares of common stock which may be exercised on or before May 27, 2021. |
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Item 13: Certain Relationships and Related Transactions, AND DIRECTOR INDEPENDENCE
Transactions with related persons
Participation in Common Stock Offering
In August 2020, the Company completed a registered public offering of the shares of its common stock pursuant to an effective registration statement on Form S-3 (File No. 333-232402) (the “Offering”). The information requiredfollowing directors participated in the Offering on the same terms as the other investors and purchased shares of our common stock at a price of $2.00 per share.
| Bruce A. Pate | 35,000 | |||
| Susanne Meline | 5,000 | |||
| All Directors and Executive Officers as a Group (2 persons) | 40,000 |
Investment by this itemclirSPV LLP
Robert T. Hoffman Sr., one of our directors, is incorporatedthe managing member of GPCLIRSPV LLC, which is the managing member of clirSPV LLC. Mr. Hoffman has voting and investment control over the shares of common stock owned by reference toclirSPV LLC.
In connection with a private placement of the Company’s Proxy Statementcommon stock pursuant to a Stock Purchase Agreement dated July 12, 2018, the Company granted to clirSPV LLC a right to purchase certain new equity securities that the Company sells for the 2018 Annual Meetingpurpose of Shareholdersraising capital on terms and conditions no different from those offered to be filedother purchasers (the “Participation Right”) so that it could maintain a 19.99% percentage ownership (the Percentage Ownership“) of the Company’s outstanding common stock. The Participation Right will expire on December 31, 2023. Further, in conjunction with this investment made by clirSPV LLC, we entered into a Voting Agreement with clirSPV LLC pursuant to which Mr. Hoffman was named as a director.
Because certain elements of the Participation Right, such as the notice provisions, were not compatible with the SEC within 120 daysOffering, in a written waiver dated August 18, 2020, and fully executed on August 19, 2020, clirSPV LLC waived its right to exercise the Participation Right in connection with the Offering. In lieu of participating in the Offering, the Company and clirSPV LLC agreed that, following the initial closing of the fiscal year ended December 31, 2017.Offering, clirSPV LLC may purchase from the Company, at the price sold to investors in the Offering, unregistered shares of its common stock in a number that will allow it to maintain its Percentage Ownership. In September 2020, clirSPV LLC exercised this right and purchased 654,425 shares of our common stock at a price of $2.00 per share.
Independence of Directors
In determining the independence of our directors, we apply the definition of “independent director” provided under the listing rules of The Nasdaq Stock Market LLC (“Nasdaq”). Pursuant to these rules, the Board concluded its annual review of director independence in April 2021. After considering all relevant facts and circumstances, the Board affirmatively determined that all of the directors then serving on the Board are independent within the meaning of Nasdaq Listing Rule 5605(a)(2) and Rule 10A-3(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the exception of Robert T. Hoffman Sr. and Colin James Deller.
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ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information requiredPre-approved Services by this item is incorporated by reference to the Company’s Proxy StatementAuditor
The Audit Committee has adopted a policy for pre-approval of audit and permitted non-audit services by the Company’s external auditor. The Audit Committee approved the audit fees, audit-related fees, tax fees and all other fees described below and believes such fees are compatible with the independence of Gumbiner Savett Inc.
| 2020 | 2019 | |||||||
| Audit Fees | $ | 62,000 | $ | 60,500 | ||||
| Audit Related Fees | - | - | ||||||
| Tax Fees | $ | 8,500 | $ | 14,912 | ||||
| All Other Fees | $ | 30,085 | $ | 6,528 | ||||
Audit Fees. “Audit Fees” are the aggregate fees of Gumbiner Savett Inc. attributable to professional services rendered in 2020 and 2019 for the 2018 Annual Meetingaudit of Shareholdersour annual consolidated financial statements and for review of consolidated financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided by Gumbiner Savett Inc. in connection with statutory and regulatory filings or engagements for those fiscal years.
Tax Fees. “Tax Fees” are the aggregate fees of Gumbiner Savett Inc. billed for professional services rendered to be filedus for tax compliance, tax advice, and tax planning.
All Other Fees. “All Other Fees” are the aggregate fees of Gumbiner Savett Inc. attributable to customary agreed upon professional services in connection with the SEC within 120 daysfiling of our Form S-3 in June 2019, filing of our prospectus supplement and the public offering completed in August 2020, filing of our prospectus supplement in connection with our At-The-Market agreement executed in December 2020, and review of our annual proxy statements.
Pre-approval Policies and Procedures
The Audit Committee is required to review and approve in advance the retention of the fiscal year ended December 31, 2017.independent registered public accounting firm for the performance of all audit and lawfully permitted non-audit services and the fees for such services. The required pre-approval policies and procedures were complied with during 2020 and 2019.
Item 15. Exhibits, Financial Statement Schedules
15(a) (1)Consolidated Financial Statements
The financial statements filed as part of this report are listed and indexed in the Index to Consolidated Financial Statements included at Item 8. Financial statement schedules have been omitted because they are not applicable, or the required information has been included elsewhere in this report.
15(a) (2)Financial Statement Schedules
Not applicable.
15 (a) (3)(b) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Table below. The Company has identified in the Exhibit Table each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(a) (3) of Form 10-K.
*Filed herewith.
*Filed herewith.
**Furnished herewith.
+Agreement with management or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CLEARSIGN | ||
| Date: | By: | /s/ |
| Chief Executive Officer | ||
| Date: | By: | /s/ Brian G. Fike |
| Brian G. Fike | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.