|
ITEM 1.
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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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ClearSign Combustion Corporation and
Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
June 30,
|
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December 31,
|
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|
2018
|
|
|
2017
|
|
ASSETS
|
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Current Assets:
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
8,359,000
|
|
|
$
|
1,247,000
|
|
Contract assets
|
|
|
39,000
|
|
|
|
184,000
|
|
Prepaid expenses and other assets
|
|
|
693,000
|
|
|
|
366,000
|
|
Total current assets
|
|
|
9,091,000
|
|
|
|
1,797,000
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
398,000
|
|
|
|
498,000
|
|
Patents and other intangible assets, net
|
|
|
1,941,000
|
|
|
|
1,856,000
|
|
Other assets
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
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Total Assets
|
|
$
|
11,440,000
|
|
|
$
|
4,161,000
|
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS' EQUITY
|
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Current Liabilities:
|
|
|
|
|
|
|
|
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Accounts payable and accrued liabilities
|
|
$
|
809,000
|
|
|
$
|
768,000
|
|
Current portion of lease liabilities
|
|
|
163,000
|
|
|
|
159,000
|
|
Accrued compensation and taxes
|
|
|
439,000
|
|
|
|
607,000
|
|
Total current liabilities
|
|
|
1,411,000
|
|
|
|
1,534,000
|
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Long Term Liabilities:
|
|
|
|
|
|
|
|
|
Long term lease liabilities
|
|
|
113,000
|
|
|
|
195,000
|
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Total liabilities
|
|
|
1,524,000
|
|
|
|
1,729,000
|
|
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Commitments
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Stockholders' Equity:
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Preferred stock, $0.0001 par value, zero shares issued and outstanding
|
|
|
-
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-
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Common stock, $0.0001 par value, 21,417,909 and 15,608,853 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
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2,000
|
|
|
|
2,000
|
|
Additional paid-in capital
|
|
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64,592,000
|
|
|
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52,441,000
|
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Accumulated deficit
|
|
|
(54,678,000
|
)
|
|
|
(50,011,000
|
)
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Total stockholders' equity
|
|
|
9,916,000
|
|
|
|
2,432,000
|
|
|
|
|
|
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|
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Total Liabilities and Stockholders' Equity
|
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$
|
11,440,000
|
|
|
$
|
4,161,000
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
ClearSign Combustion Corporation and
Subsidiary
Condensed Consolidated Statements of
Operations
(Unaudited)
|
|
For the Three Months Ended
June 30,
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For the Six Months Ended
June 30,
|
|
|
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2018
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|
|
2017
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|
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2018
|
|
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2017
|
|
|
|
|
|
|
|
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|
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Sales
|
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$
|
-
|
|
|
$
|
-
|
|
|
$
|
530,000
|
|
|
$
|
360,000
|
|
Cost of goods sold
|
|
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20,000
|
|
|
|
-
|
|
|
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415,000
|
|
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251,000
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Gross profit (loss)
|
|
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(20,000
|
)
|
|
|
-
|
|
|
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115,000
|
|
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109,000
|
|
|
|
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Operating expenses:
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|
|
|
|
|
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Research and development
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1,019,000
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1,141,000
|
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2,153,000
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2,315,000
|
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General and administrative
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|
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1,351,000
|
|
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1,110,000
|
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|
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2,630,000
|
|
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2,438,000
|
|
|
|
|
|
|
|
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|
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|
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|
|
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Total operating expenses
|
|
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2,370,000
|
|
|
|
2,251,000
|
|
|
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4,783,000
|
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4,753,000
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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Loss from operations
|
|
|
(2,390,000
|
)
|
|
|
(2,251,000
|
)
|
|
|
(4,668,000
|
)
|
|
|
(4,644,000
|
)
|
|
|
|
|
|
|
|
|
|
|
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|
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Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest income
|
|
|
1,000
|
|
|
|
15,000
|
|
|
|
1,000
|
|
|
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29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net loss
|
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$
|
(2,389,000
|
)
|
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$
|
(2,236,000
|
)
|
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$
|
(4,667,000
|
)
|
|
$
|
(4,615,000
|
)
|
|
|
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|
|
|
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|
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Net loss per share - basic and fully diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
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Weighted average number of shares outstanding - basic and fully diluted
|
|
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21,362,596
|
|
|
|
15,601,380
|
|
|
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19,549,575
|
|
|
|
15,234,010
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
ClearSign
Combustion Corporation and Subsidiary
Condensed
Consolidated Statement of Stockholders’ Equity
(Unaudited)
For
the Six Months Ended June 30, 2018
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balances at December 31, 2017
|
|
|
15,608,853
|
|
|
$
|
2,000
|
|
|
$
|
52,441,000
|
|
|
$
|
(50,011,000
|
)
|
|
$
|
2,432,000
|
|
Shares issued in stock offering ($2.25 per share)
|
|
|
5,750,000
|
|
|
|
-
|
|
|
|
12,937,000
|
|
|
|
-
|
|
|
|
12,937,000
|
|
Issuance costs of rights offering
|
|
|
-
|
|
|
|
-
|
|
|
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(1,014,000
|
)
|
|
|
-
|
|
|
|
(1,014,000
|
)
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Shares issued for services ($3.50 per share)
|
|
|
5,000
|
|
|
|
-
|
|
|
|
17,000
|
|
|
|
-
|
|
|
|
17,000
|
|
Shares issued for board service ($1.85 per share)
|
|
|
54,056
|
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
100,000
|
|
Share based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
111,000
|
|
|
|
|
|
|
|
111,000
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,667,000
|
)
|
|
|
(4,667,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Balances at June 30, 2018
|
|
|
21,417,909
|
|
|
$
|
2,000
|
|
|
$
|
64,592,000
|
|
|
$
|
(54,678,000
|
)
|
|
$
|
9,916,000
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
ClearSign Combustion Corporation and
Subsidiary
Condensed Consolidated Statements of
Cash Flows
(Unaudited)
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,667,000
|
)
|
|
$
|
(4,615,000
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
117,000
|
|
|
|
174,000
|
|
Share based compensation
|
|
|
111,000
|
|
|
|
219,000
|
|
Depreciation and amortization
|
|
|
167,000
|
|
|
|
135,000
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Contract assets
|
|
|
145,000
|
|
|
|
(84,000
|
)
|
Prepaid expenses and other assets
|
|
|
(327,000
|
)
|
|
|
(28,000
|
)
|
Accounts payable and accrued liabilities
|
|
|
41,000
|
|
|
|
(105,000
|
)
|
Accrued compensation and taxes
|
|
|
(168,000
|
)
|
|
|
176,000
|
|
Contract liabilities
|
|
|
-
|
|
|
|
(102,000
|
)
|
Net cash used in operating activities
|
|
|
(4,581,000
|
)
|
|
|
(4,230,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of fixed assets
|
|
|
(19,000
|
)
|
|
|
(57,000
|
)
|
Disbursements for patents and other intangible assets
|
|
|
(211,000
|
)
|
|
|
(179,000
|
)
|
Net cash used in investing activities
|
|
|
(230,000
|
)
|
|
|
(236,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and units of common stock and warrants for cash, net of offering costs
|
|
|
11,923,000
|
|
|
|
8,667,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
11,923,000
|
|
|
|
8,667,000
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
7,112,000
|
|
|
|
4,201,000
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,247,000
|
|
|
|
1,259,000
|
|
Cash and cash equivalents, end of period
|
|
$
|
8,359,000
|
|
|
$
|
5,460,000
|
|
Supplemental disclosure of non-cash operating activities:
During the six months ended June 30, 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.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
ClearSign Combustion Corporation
Notes to Unaudited Condensed 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 June 30, 2018, the subsidiary was still in the process of formation and had not yet commenced any business activities.
As of August 1, 2018, the formation process had been completed.
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 $11.9 million in proceeds, net of offering costs, from the stock offering completed on February 27, 2018 as described
in Note 6 and $11.6 million in proceeds, net of offering costs, from a stock offering completed on July 20, 2018 as described in
Note 8. The Company has incurred losses since its inception totaling $54,678,000 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
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q.
Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed balance
sheet at December 31, 2017 has been derived from the Company’s audited financial statements.
In the opinion of management, these consolidated financial statements
reflect all normal recurring and other adjustments necessary for a fair presentation. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2017. Operating results for interim periods are not necessarily indicative of operating results for an entire
fiscal year or any other future periods.
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 sales and expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition, Cost of Sales and Change in Accounting
Principle
The Company recognizes revenue and related cost of goods sold
in accordance with FASB ASC 606
Revenue from Contracts with Customers
(ASC 606). Revenues and cost of goods sold are recognized
once the goods or services are delivered to the customer’s control and performance obligations are satisfied. Typically,
the Company’s contracts with customers have performance obligations regarding air emissions and operational performance that
are satisfied upon completion of service. Since this is the singular performance obligation and cannot be achieved until the air
emissions and operational performance have been successfully tested, revenue related to the contracts is recognized upon project
completion.
The Company’s contracts generally include progress payments
from the customer upon completion of defined milestones. As these payments are received they are offset against accumulated project
costs and recorded as either contract assets or contract liabilities. Upon completion of the performance obligations and acceptance
by the customer the projects can be recorded as revenue.
The Company’s contracts with customers contain no variable considerations
or incentives or discounts that would cause revenue to be allocated or adjusted over time. Therefore, no separate methods of evaluating
the contracts other than consideration of the price at achievement of the performance objectives was used in satisfying the review
requirements of ASC 606.
Contract acquisition costs and practical expedients
For contracts that have a duration of less than one year, the
Company follows the practical expedients provisions of ASC 606 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 and 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
Fixed assets are recorded at cost. Leases are recorded
in accordance with FASB ASC 842
Leases
. For those leases with a term greater than one year, the Company recognizes on the
balance sheet at the time of lease inception or modification a right-of-use asset and a lease liability, initially measured at
the present value of the lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line
basis. Operating leases with a term of 1 year or less are recognized on a straight line basis over the term. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated
over the life of the lease or their useful life, whichever is shorter. All other fixed assets are depreciated over two to four
years. Maintenance and repairs are expensed as incurred.
Patents and Trademarks
Patents and trademarks are recorded at cost. Amortization is
computed using the straight-line method over the estimated useful lives of the assets once they are awarded.
Impairment of Long-Lived Assets
The Company tests long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted
cash flows expected to result from the use and eventual disposition of the assets. In that event, a loss is recognized based on
the amount by which the carrying amount exceeds the fair value of the long-lived assets. Fair value is determined based on the
present value of estimated expected cash flows using a discount rate commensurate with the risks involved, quoted market prices,
or appraised values depending upon the nature of the assets. Loss on long-lived assets to be disposed of is determined in a similar
manner, except that fair values are reduced for the cost of disposal.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities
measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the
inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The three levels of inputs used to establish fair value
are the following:
|
·
|
Level 1 – Quoted prices in active markets for identical
assets or liabilities;
|
|
·
|
Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not
active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities; and
|
|
·
|
Level 3 – Unobservable inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company’s financial instruments primarily consist of cash
and cash equivalents, accounts payable and accrued expenses. As of the balance sheet dates, the estimated fair values of the financial
instruments were not materially different from their carrying values as presented on the balance sheets. This is primarily attributable
to the short term maturities of these instruments.
As described in Note 3, the Company has recorded lease liabilities
for the estimated present value of the lease payments under its 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 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 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 June 30, 2018 and 2017, potentially dilutive shares outstanding amounted to 3,500,619
and 3,475,994, respectively.
Recently Adopted Standards
In May, 2017 the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2017-09
Scope 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. 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.
Recently Issued Accounting Announcements
In June 2018, the FASB
issued ASU 2018-07 “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting”
(“ASU 2018-07”). The intention of ASU 2018-07 is to expand the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. These sharebased payments will now be measured at grant-date fair value of
the equity instrument issued. Upon adoption, only liabilityclassified awards that have not been settled and equity-classified awards
for which a measurement date has not been established should be remeasured through a cumulative-effect adjustment to retained earnings
as of the beginning of the fiscal year of adoption. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018
and is applied retrospectively. The Company currently does not expect this ASU to have any material impact on the financial statements
as all non-employee agreements are valued within the expected guidelines of the standard.
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.
Reclassifications
Certain items in prior period financial statements have been
reclassified to conform to current period financial statements.
Note 3 – Fixed Assets
Fixed
assets are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Machinery and equipment
|
|
$
|
815,000
|
|
|
$
|
801,000
|
|
Office furniture and equipment
|
|
|
172,000
|
|
|
|
167,000
|
|
Leasehold improvements
|
|
|
147,000
|
|
|
|
147,000
|
|
Right of use asset-operating leases
|
|
|
518,000
|
|
|
|
518,000
|
|
Accumulated depreciation and amortization
|
|
|
(1,254,000
|
)
|
|
|
(1,135,000
|
)
|
|
|
|
398,000
|
|
|
$
|
498,000
|
|
Construction in progress
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
398,000
|
|
|
$
|
498,000
|
|
The Company has a triple net operating lease for office and
laboratory space in Seattle, Washington through March 2020 with rent 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 through 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.
Lease costs for the three and six months ended June 30, 2018
and 2017 and other quantitative disclosures are as follows (unaudited):
|
|
For
the three months ended June 30,
|
|
|
For
the six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
53,000
|
|
|
$
|
60,000
|
|
|
$
|
106,000
|
|
|
$
|
115,000
|
|
Short-term lease cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total lease cost
|
|
$
|
53,000
|
|
|
$
|
60,000
|
|
|
$
|
106,000
|
|
|
$
|
115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
$
|
86,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
Minimum future payments under the Company’s leases at
June 30, 2018 and their application to the corresponding lease liabilities are as follows (unaudited):
|
|
Discounted lease
liability payments
|
|
|
Payments due
under lease
agreements
|
|
2018
|
|
$
|
80,000
|
|
|
$
|
86,000
|
|
2019
|
|
|
158,000
|
|
|
|
164,000
|
|
2020
|
|
|
38,000
|
|
|
|
37,000
|
|
Total
|
|
$
|
276,000
|
|
|
$
|
287,000
|
|
Note 4 – Patents and Other Intangible Assets
Patents and other intangible assets are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
1,253,000
|
|
|
$
|
1,167,000
|
|
Issued patents
|
|
|
1,050,000
|
|
|
|
930,000
|
|
|
|
|
2,303,000
|
|
|
|
2,097,000
|
|
Trademarks
|
|
|
|
|
|
|
|
|
Trademarks pending
|
|
|
46,000
|
|
|
|
41,000
|
|
Registered trademarks
|
|
|
23,000
|
|
|
|
23,000
|
|
|
|
|
69,000
|
|
|
|
64,000
|
|
Other
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
2,380,000
|
|
|
|
2,169,000
|
|
Accumulated amortization
|
|
|
(439,000
|
)
|
|
|
(313,000
|
)
|
|
|
$
|
1,941,000
|
|
|
$
|
1,856,000
|
|
Future amortization expense associated with issued patents and
registered trademarks as of June 30, 2018 is estimated as follows (unaudited):
2018
|
|
$
|
130,000
|
|
2019
|
|
|
238,000
|
|
2020
|
|
|
152,000
|
|
2021
|
|
|
63,000
|
|
2022
|
|
|
30,000
|
|
Thereafter
|
|
|
21,000
|
|
|
|
$
|
634,000
|
|
Note 5 – Sales, Contract Assets
and Contract Liabilities
The Company recognized no revenue during
the three months ended June 30, 2018. For the six months ended June 30, 2018 the Company recognized revenues totaling
$360,000 from completed flare projects, $128,000 of revenue from completion of a once through steam generator (OTSG) project
and revenue of $42,000 from a small project. At June 30, 2018, the Company had contract assets of $39,000 and
contract liabilities of $0.
Note 6 – 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 underwritten public
offering of 5,750,000 shares of common stock at a price of $2.25 per share. Gross proceeds from the offering totaled $12.9 million
and net cash proceeds approximated $11.9 million.
As detailed in Note 8 to these Consolidated Financial Statements,
in July of 2018 the Company completed a private offering of shares of common stock.
Equity Incentive Plan
The Company has an Equity Incentive Plan (the Plan) which 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, 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 June 30, 2018, the number of shares of common stock reserved for issuance under the Plan totaled 2,238,030.
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.
In the three months ended June 30, 2018, the Company granted
174,000 stock options under the Plan to employees. The stock options have exercise prices at the grant date fair value ranging
from $1.85 to $1.90 per share, contractual lives of 10 years, and vest over 4 years. The fair value of the stock options estimated
on the date of grant using the Black-Scholes option valuation model was $186,000. The recognized compensation expense associated
with these grants for the three months ended June 30, 2018 was $12,000. The following weighted-average assumptions were utilized
in the calculation of the fair value of the stock options:
Expected life
|
|
|
6.25
|
years
|
Weighted average volatility
|
|
|
71
|
%
|
Forfeiture rate
|
|
|
13
|
%
|
Weighted average risk-free interest rate
|
|
|
2.74
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
In May 2018, the Company authorized 108,108 shares of common
stock to be issued under the Plan to its four independent directors in accordance with board agreements and which will be earned
quarterly for service in 2018. The fair value of the stock at the time of grant was $1.85 per share for a total value of $200,000.
The Company recognized $100,000, represented by 54,056 shares, in general and administrative expense for the six months
ended June 30, 2018 and will recognize the remaining $100,000 in the remainder of 2018.
Outstanding stock option grants at June 30, 2018 and December
31, 2017 totaled 1,004,835 shares and 993,860 shares, respectively, with the right to purchase 664,982 shares and 754,989 shares
being vested and exercisable at June 30, 2018 and December 31, 2017, respectively. The recognized compensation expense associated
with these grants for the three and six months ended June 30, 2018 and 2017 totaled $61,000, $111,000, $76,000 and $219,000, respectively.
On July 1, 2018 the number of shares reserved under the Plan but unissued totaled 702,375. At June 30, 2018, there was $451,000
of total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Plan. That
cost is expected to be recognized over a weighted average period of 2.7 years.
Consultant Stock Plan
The Company has a Consultant Stock Plan (the Consultant Plan)
which provides for the granting of shares of common stock to consultants who provide services related to capital raising, investor
relations, and making a market in or promoting the Company’s securities. The Company’s officers, employees, and board
members are not entitled to receive 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 June 30, 2018 totaled 199,959 with 151,709 of those shares unissued. The Consultant Plan provides for quarterly increases
in the available number of authorized shares equal to the lesser of 1% of any new shares issued by the Company during the quarter
immediately prior to the adjustment date or such lesser amount as the Board of Directors shall determine. In August 2017,
the Company granted 10,000 shares of common stock under the Consultant Plan to a consultant for services from June 2017 to
May 2018 and subject to completion of service each quarter. The fair value of the stock at the time of grant was $3.50 per share
for a total value of $35,000 which the Company recognizes in general and administrative expense on a pro-rated quarterly basis.
The Consultant Plan expense for the three and six months ended June 30, 2018 and 2017 was $8,000 and $17,000 and $12,000 and $24,000,
respectively.
Warrants
The Company has the following warrants outstanding at June 30,
2018:
Total Outstanding Warrants
|
|
Exercise Price
|
|
|
Warrants
|
|
|
Wtd. Avg.
Exercise
Price
|
|
|
Remaining
Life
(in years)
|
|
$
|
1.80
|
|
|
|
80,000
|
|
|
$
|
1.80
|
|
|
|
2.64
|
|
$
|
4.00
|
|
|
|
2,395,471
|
|
|
$
|
4.00
|
|
|
|
0.57
|
|
$
|
10.00
|
|
|
|
20,313
|
|
|
$
|
10.00
|
|
|
|
0.68
|
|
|
|
|
|
|
2,495,784
|
|
|
$
|
3.98
|
|
|
|
|
|
The intrinsic value of the outstanding warrants was $16,000
at June 30, 2018.
Note 7 – Commitments
The Company and its Chief Executive Officer, Stephen E. Pirnat entered
into an employment agreement on February 3, 2015 that was amended on October 30, 2017 (the Agreement) which terminates on December
31, 2018, unless earlier terminated. Compensation under the Agreement includes an annual salary of $350,000, a grant of 300,000
stock options that vested in 2016 and 2017, an annual cash bonus 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 pursuant to the Agreement had employment
not been terminated or one year of the current annual compensation, whichever is greater. In the event of his termination through
a change in control, Mr. Pirnat would receive one year’s compensation, and all previously granted stock options would
vest in full.
The Company has a field test agreement with a customer to demonstrate
and test the Duplex technology in an 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 8 – Subsequent Event
On July 20, 2018 (the “Closing Date”) the Company
completed a private offering of 5,213,543 shares of common stock at $2.25 per share. Gross proceeds from the offering totaled $11.7
million and net cash proceeds approximated $11.6 million. In conjunction with this offering, the Company signed a Registration
Rights Agreement that requires the Company to file a registration statement with the Securities and Exchange Commission and to
use commercially reasonable efforts to have the registration statement declared effective by the Securities and Exchange Commission
within six months after the Closing Date.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER
INFORMATION CONTAINED IN THIS REPORT
This report contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give
our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly
to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,”
“believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,”
“intends,” “plans,” “would,” “should,” “could,” “may,”
“will” or other similar expressions in this report. In particular, these include statements relating to future actions;
prospective products, applications, customers, or technologies; future performance or results of anticipated products; anticipated
expenses; and future financial results. These forward-looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that
could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited
to:
|
·
|
our limited cash and our history of losses;
|
|
·
|
our ability to successfully develop and implement our technology and achieve profitability;
|
|
·
|
our limited operating history;
|
|
·
|
emerging competition and rapidly advancing technology in our industry that may outpace our technology;
|
|
·
|
customer demand for the products and services we develop;
|
|
·
|
the impact of competitive or alternative products, technologies and pricing;
|
|
·
|
our ability to manufacture any products we design;
|
|
·
|
general economic conditions and events and the impact they may have on us and our potential customers;
|
|
·
|
our ability to obtain adequate financing in the future;
|
|
·
|
our ability to continue as a going concern;
|
|
·
|
our success at managing the risks involved in the foregoing items; and
|
|
·
|
other factors discussed in this report.
|
Forward-looking statements may appear throughout
this report, including, without limitation, Item 2 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” The forward-looking statements are based upon management’s beliefs and assumptions and are
made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included
in this report. You should not place undue reliance on these forward-looking statements.
Unless otherwise stated or the context otherwise
requires, the terms “ClearSign,” “we,” “us,” “our” and the “Company”
refer to ClearSign Combustion Corporation and its consolidated subsidiary.
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements
and related notes included elsewhere in this Quarterly Report on Form 10-Q as well as our audited financial statements and related
notes included in our Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and
throughout this Form 10-Q contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not
limited to, the risks described in the section titled “Risk Factors” in our Annual Report on Form 10-K and in this
Form 10-Q.
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. 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. In order to generate meaningful
revenues, our technologies must be fully developed, gain market recognition and acceptance, and develop a critical level of successful
sales and product installations.
While we have recently begun commercializing
our Duplex technology, Duplex has had limited testing and verification by independent third parties however, 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.
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 at
www.clearsign.com
. The information contained on or that may be
obtained from our website is not a part of this report. To date, our operations have been located in the United States, but we
are actively pursuing opportunities in China and Europe.
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 targeted the introduction of Duplex to certain high-value 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 increased during 2018 due to some instability in certain
markets and commodities along with an improving but less certain 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 2018 prices ranging from $58 to $75 per barrel and July 2018 prices approximating $74 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 which
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 the 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.
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Non-attainment areas under the 1997 limit of 84 ppb
Source: EPA, August 2016
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Projected non-attainment areas under the 2015 limit of 70 ppb
Source:
URS, August 2015
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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.
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 the Duplex Plug & Play™, a recently developed 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 and received contracts for a total of six units, all of which have been completed as of the quarter ended June 30,
2018. This has been an important milestone because it demonstrates the broad application of our Duplex technology in the ground
flare market.
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 three OTSG projects in the enhanced oil recovery industry in Southern California. 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
exceed 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 (v) 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
and 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.
Historically, we have funded our operations
through the sale of our securities, including the following:
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In April and May 2012, we completed an initial public offering
of our common stock whereby we sold 3,450,000 shares of common stock at $4.00 per share, which included the exercise of the underwriter’s
overallotment option, resulting in gross proceeds of $13.8 million and, after deducting certain costs paid with common stock,
net proceeds of approximately $11.6 million.
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In March 2014, we completed a registered direct offering
of our common stock whereby we sold 812,500 shares of common stock at $8.00 per share resulting in gross proceeds of $6.5 million
and net proceeds of approximately $5.8 million.
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In February 2015, we completed an underwritten public offering
of our common stock whereby we sold 2,990,000 shares of common stock at $5.85 per share resulting in gross proceeds of $17.5 million
and net proceeds of approximately $16.3 million.
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In January 2017, we completed a rights offering and public
offering pursuant to which we sold 2,395,471 units for $4.00 per unit (the Rights Offering) with each unit consisting of one share
of common stock and one warrant to purchase one share of common stock for $4.00 per share resulting in gross proceeds of $9.6
million and net proceeds of approximately $8.7 million.
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In February 2018, we completed an underwritten public offering
of our common stock whereby we sold 5,750,000 shares of common stock at $2.25 per share resulting in gross proceeds of $12.9 million
and net proceeds of approximately $11.9 million.
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In July 2018, we completed a private offering of our common
stock whereby we sold 5,213,543 shares of common stock at $2.25 per share resulting in gross proceeds of $11.7 million and net
proceeds of approximately $11.6 million.
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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 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. The development of new products and any increase in sales of our existing products may result in an increase
to 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 expect to continue to incur consulting expenses related to technology development commensurate
with our current levels and we expect to continue to incur 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 marketing strategies.
Research, development, and commercial acceptance
of new technologies are, by their nature, unpredictable. Although we will 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 technology will be
accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore,
we have no committed source of financing and we cannot assure that we will be able to raise money as and when we need it to continue
our operations. If we cannot raise funds as and when we need them, we may be required to scale back our development plans by reducing
expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to
cease, our operations.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of
financial condition and results of operations is based upon our financial statements, which have been prepared in conformity
with accounting principles generally accepted in the United States of America. Certain accounting policies and estimates are
particularly important to the understanding of our financial position and results of operations and require the application
of significant judgment by our management or can be materially affected by changes from period to period in economic factors
or conditions that are outside of our control. As a result, they are subject to an inherent degree of uncertainty. In
applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates are based on our historical operations, our future business plans and
projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided
by our customers and information available from other outside sources, as appropriate. See Note 2 to our unaudited condensed
consolidated financial statements 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 date, the estimated fair
values of the financial instruments were not materially different from their carrying values as presented on the balance sheets.
This is primarily attributed to the short maturities of these instruments. The Company 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 Three and Six Months Ended June 30, 2018 and
2017
Sales and Gross Profit
. A gross profit
of $115,000, or 22%, was realized on product sales totaling $530,000 in the six months ended June 30, 2018. This profit resulted
from the installation of our Duplex technology in two enclosed ground flares for a major California oil producer and in an OTSG
owned by another major California oil producer. We earned no revenues during the quarter ended June 30, 2018, referred to herein
as Q2 2018. We incurred $20,000 in warranty costs during Q2 2018 which resulted in a gross loss. We earned $360,000 in revenues
and realized a gross profit of $109,000 from the installation of our Duplex technology in two enclosed ground flares for a major
California oil producer during the six month period ending June 30, 2017 and no revenues during the quarter ended June 30, 2017,
referred to herein as Q2 2017.
Operating Expenses
. Operating expenses,
consisting of research and development (R&D) and general and administrative (G&A) expenses, increased by approximately
$119,000 to $2,370,000 for Q2 2018, as compared to $2,251,000 for Q2 2017. The Company decreased its R&D expenses by $122,000,
or approximately 11%, to $1,019,000 for Q2 2018 as compared to $1,141,000 for Q2 2017. The decrease in R&D expenses was due
primarily to decreased field testing and development costs of our Duplex technology. G&A expenses increased by $241,000, or
approximately 22%, to $1,351,000 in Q2 2018 as compared to $1,110,000 in Q2 2017, resulting primarily from increased intellectual
property expenses, amortization and fees.
Operating expenses increased slightly, by approximately
$30,000, to $4,783,000 for the six months ended June 30, 2018 compared to $4,753,000 for the same period in 2017. The Company decreased
its R&D expenses by $162,000, or approximately 7%, to $2,153,000 for 2018 as compared to $2,315,000 for the same period in
2017. Like the decrease in R&D expenses for the quarter, the decrease in R&D expenses for the six months ended June 30,
2018 was due primarily to decreased field testing and development costs of our Duplex technology. G&A expenses increased by
$192,000, or approximately 8%, to $2,630,000 in 2018 as compared to $2,438,000 in 2017 resulting primarily from increased intellectual
property expenses.
Loss from Operations
. Our loss from operations
increased during Q2 2018 by $139,000, to $2,390,000 in Q2 2018 from $2,251,000 in Q2 2017 and increased for the six months ended
June 30, 2018 by $24,000, to $4,668,000 as compared with $4,644,000 for the six months ended June 30, 2017.
Net Loss
. Primarily as a result of the
increase in intellectual property costs, our net loss for Q2 2018 was $2,389,000 as compared to a net loss of $2,236,000 for Q2
2017, resulting in an increased net loss of $153,000 or approximately 7%, and our net loss for the six months ended June 30, 2018
was $4,667,000 as compared to a net loss of $4,615,000 for the same period in 2017, resulting in an increase in net loss of $52,000
or approximately 1%.
Liquidity and Capital Resources
At June 30, 2018, our cash and cash
equivalent balance totaled $8,359,000 compared to $1,247,000 at December 31, 2017. This increase resulted primarily from
$11.9 million in net proceeds we received from an underwritten public offering of 5,750,000 shares of our common stock at a
price of $2.25 per share that we completed in February 2018 offset by our operating costs for the six months ended June 30,
2018 associated with the ongoing research and development of our technology. On July 20, 2018 we completed a private offering
of 5,213,543 shares of common stock at a price of $2.25 per share which provided $11.6 million in net proceeds. Assuming that
our expenses do not increase significantly and that we make no material acquisitions, we anticipate that the available cash
and cash equivalent balance, including the proceeds from the July 2018 offering, will be sufficient to fund the
Company’s ongoing business activities into 2020.
At June 30, 2018, our current assets were in
excess of current liabilities resulting in working capital of $7,680,000 compared to $263,000 at December 31, 2017. The increase
in working capital resulted primarily from the net proceeds of the underwritten public offering offset by the funds used in operations
and invested in intangible and fixed assets.
Operating activities for the six months ended
June 30, 2018 resulted in cash outflows of $4,581,000 which were due primarily to the loss for the period of $4,667,000 and net
changes in working capital, exclusive of cash, which reduced cash flow by $309,000. These were offset primarily by other non-cash
expenses of $167,000 and services paid with common stock and stock options of $228,000. Operating activities for the six months
ended June 30, 2017 resulted in cash outflows of $4,230,000, which were due primarily to the loss for the period of $4,615,000
and net changes in working capital (exclusive of cash) which reduced cash flow by $143,000 and were partially offset by services
paid with common stock and stock options of $393,000 and other non-cash expenses of $135,000.
Investing activities for the six months ended
June 30, 2018 resulted in cash outflows of $211,000 for development of patents and $19,000 for acquisition of fixed assets, compared
to $179,000 in disbursements for patent development and other intangibles and $57,000 for the acquisition of fixed assets during
the same period of 2017.
During the six months ended June 30, 2018 there
were net cash inflows of $11,923,000 from the underwritten public offering of our common stock in February 2018. During the same
period in 2017, there were net cash inflows of $8,667,000 from the Rights Offering we completed in January 2017.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.