The accompanying notes are an integral
part of these condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated
Financial Statements
Note 1 – Organization and Description of Business
ClearSign Technologies Corporation (ClearSign or the Company)
designs and develops 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 ClearSign Core™ technology, which achieves very low emissions without the need of external flue gas recirculation,
selective catalytic reduction, or higher excess air operation, and ClearSign Eye™ sensing technology that provides robust
and advanced flame and flammability detection in flames or hydrocarbon containing gas mixtures. The Company is headquartered in
Seattle, Washington and was incorporated in the state of Washington in 2008 under the name ClearSign Combustion Corporation.
The Company changed its name to ClearSign Technologies Corporation on November 12, 2019. On July 28, 2017, the Company incorporated
a subsidiary, ClearSign Asia Limited, in Hong Kong to represent the Company’s business and technological interests throughout
Asia. Through ClearSign Asia Limited, the Company has established a Wholly Foreign Owned Enterprise (WFOE) in China – ClearSign
Combustion (Beijing) Environmental Technologies Co., LTD.
Unless otherwise stated or the context otherwise requires, the
terms ClearSign and the “Company” refers to ClearSign Technologies Corporation and its wholly-owned subsidiary, ClearSign
Asia Limited.
Liquidity
The Company’s technologies are currently in field development
and have generated nominal revenues from operations to date. In order to generate meaningful revenues, the technologies must be
fully developed, gain market recognition and acceptance, and develop a critical level of successful sales and product installations.
The Company has historically financed its operations primarily through issuances of equity securities, including $11.9 million
in
proceeds, net of offering costs, from a stock offering completed
on February 27, 2018 and $11.6 million in proceeds, net of offering costs, from a stock offering completed on July 20, 2018. The
Company has incurred losses since its inception totaling $66,374,000 and expects to experience operating losses and negative cash
flows 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 (the “SEC”)
for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
The condensed balance sheet at December 31, 2018 has been derived from the Company’s audited financial statements.
In the opinion of management, these consolidated financial statements
reflect all normal recurring and other adjustments necessary for a fair presentation. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2018. Operating results for interim periods are not necessarily indicative of operating results
for an entire fiscal year or any other future periods.
The accompanying unaudited condensed consolidated financial
statements include the accounts of ClearSign and its subsidiary. Intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition and Cost of Sales
The Company recognizes revenue and related cost of goods sold
in accordance with FASB ASC 606 Revenue from Contracts with Customers (ASC 606). Revenues and cost of goods sold are recognized
once the goods or services are delivered to the customer’s control and performance obligations are satisfied. Typically,
the Company’s contracts with customers have performance obligations regarding air emissions and operational performance that
are satisfied upon completion of service. Since this is the singular performance obligation and cannot be achieved until the air
emissions and operational performance have been successfully tested, revenue related to the contracts is recognized upon project
completion.
The Company’s contracts generally include progress payments
from the customer upon completion of defined milestones. As these payments are received they are offset against accumulated project
costs and recorded as either contract assets or contract liabilities. Upon completion of the performance obligations and acceptance
by the customer the projects can be recorded as revenue.
The Company's contracts with customers contain
no variable considerations or incentives or discounts that would cause revenue to be allocated or adjusted over time. Therefore,
no separate methods of evaluating the contracts other than consideration of the price at achievement of the performance objectives
was used in satisfying the review requirements of ASC 606.
Contract Acquisition Costs and Practical Expedients
For contracts that have a duration of less than one year, the
Company follows ASC 606 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 also maintains a cash balance in China which is insured up to $70,000 (500,000RMB). The Company has not experienced
losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Short-Term Investments
Short-term investments consist of U.S. treasury bills with original
maturities of twelve months or less and greater than three months. These short-term investments are classified as held to maturity
and are recorded on an amortized cost basis which approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount. An
allowance for doubtful accounts is established, as necessary, based on past experience and other factors which, in management’s
judgment, deserve current recognition in estimating bad debts. The determination of the collectability of amounts due from customer
accounts requires the Company to make judgments regarding future events and trends. Allowances for doubtful accounts are determined
based on assessing the Company’s portfolio on an individual customer and on an overall basis. This process consists of a
review of historical collection experience, current aging status of the customer accounts, and the financial condition of the Company’s
customers. Based on a review of these factors, the Company may establish or adjust the allowance for specific customers and the
accounts receivable portfolio as a whole.
Fixed Assets and Leases
Fixed assets are recorded at cost. Leases
are recorded in accordance with FASB ASC 842 Leases. For those leases with a term greater than one year, the Company recognizes
on the balance sheet at the time of lease inception or modification a right-of-use asset and a lease liability, initially measured
at the present value of the lease payments. Lease costs are recognized in the income statement over the lease term on a straight-line
basis. Operating leases with a term of 1 year or less are recognized on a straight line basis over the term. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated
over the life of the lease or their useful life, whichever is shorter. All other fixed assets are depreciated over two to four
years. Maintenance and repairs are expensed as incurred.
Patents and Trademarks
Patents and trademarks are recorded at cost. Amortization is
computed using the straight-line method over the estimated useful lives of the assets once they are awarded.
Impairment of Long-Lived Assets
The Company tests long-lived assets, consisting of fixed assets, patents and other intangible assets,
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. In that event,
a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Fair value
is determined based on the present value of estimated expected cash flows using a discount rate commensurate with the risks involved,
quoted market prices, or appraised values depending upon the nature of the assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the cost of disposal.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities
measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the
inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The three levels of inputs used to establish fair value
are the following:
|
·
|
Level 1 – Quoted prices in active markets for identical assets or liabilities;
|
|
·
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities; and
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair
value of the assets or liabilities.
|
The Company's financial instruments primarily consist of cash
and cash equivalents, short-term investments, accounts payable and accrued liabilities. As of the balance sheet dates, the estimated
fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheets.
This is primarily attributable to the short-term maturities of these instruments.
The Company did not identify any other non-recurring assets
and liabilities that are required to be presented in the balance sheets at fair value.
Research and Development
The cost of research and development is expensed as incurred.
Research and development costs consist of salaries, benefits, share based compensation, consulting fees, rent, utilities, depreciation,
and consumables.
During the nine months ended September 30, 2019, the Company
received $108,000 to partially fund specific research and development activity relating to its ECC technology. Since these funds
were provided without expectation of reciprocation, except notification of research results, the funds received were offset against
the related research and development costs incurred.
Income Taxes
The Company accounts for income taxes using an asset and liability
approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax
benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire
before the Company is able to realize their benefits, or that future deductibility is uncertain. Tax benefits from an uncertain
tax position are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing
authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements
from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate resolution.
Stock-Based Compensation
The costs of all employee stock options, as well as other equity-based
compensation arrangements, are reflected in the consolidated financial statements based on the estimated fair value of the awards
on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange
for the award. Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received
or the fair value of equity instruments issued, whichever is more reliably measured.
Foreign Operations
The accompanying consolidated financial
statements as of September 30, 2019 and December 31, 2018 include assets amounting to approximately $149,000 and $199,000, respectively,
relating to operations of the Company in China. It is always possible unanticipated events in foreign countries could disrupt the
Company’s operations.
Foreign Currency
The functional currency of ClearSign Asia Limited is the U.S.
dollar. The Company remeasures the transactions denominated in Chinese Yuan at the average exchange rate in effect during the period.
At the end of each reporting period, the Company remeasures ClearSign Asia Limited’s monetary assets and liabilities to the
U.S. dollar using exchange rates in effect at the end of the reporting period. The Company remeasures its non-monetary assets and
liabilities at historical exchange rates. The Company records gains and losses related to remeasurement in other income (expense),
net in the consolidated statements of operations. Foreign currency exchange gain (losses) has not been significant in any period
presented and the Company has not undertaken any hedging transactions related to foreign currency exposure.
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 September 30, 2019 and 2018, potentially dilutive shares outstanding amounted to
2,195,670 and 3,534,579, respectively.
Recently Adopted Standards
In June
2018 FASB issued ASU No. 2018-07 Compensation-Stock Compensation. The amendments in this update expand the scope of Topic
718 to include share based payment transactions for acquiring goods and services from nonemployees. An entity should apply the
requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution
of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that
period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods
or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also
clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards
granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue
from Contracts with Customers. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, including
interim periods within those years. The Company currently does not believe this amendment applies to any of its transactions at
this time.
Management does not believe that any other recently issued,
but not yet effective, authoritative guidance, if currently adopted, would have a material impact on the Company’s consolidated
financial statement presentation or disclosures.
Note 3 – Fixed Assets
Fixed assets are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
863,000
|
|
|
$
|
853,000
|
|
Office furniture and equipment
|
|
|
178,000
|
|
|
|
186,000
|
|
Leasehold improvements
|
|
|
150,000
|
|
|
|
150,000
|
|
Right of use asset-operating leases
|
|
|
1,138,000
|
|
|
|
637,000
|
|
Accumulated depreciation and amortization
|
|
|
(1,595,000
|
)
|
|
|
(1,369,000
|
)
|
|
|
$
|
734,000
|
|
|
$
|
457,000
|
|
The Company has a triple net operating
lease for office and laboratory space in Seattle, Washington through March 2020 with rent of approximately $12,000 per month
plus triple net operating costs. The Company also has a triple net operating lease for office space in Tulsa, Oklahoma
with a term that was to end in August 2019 and monthly rent of approximately $2,000 per month plus triple net operating
costs. Both leases include lessee renewal options for three years at the then prevailing market rate. Effective as of July
and August 2019, the Company exercised the option to renew both the Seattle lease and the Tulsa lease for three years. The
new term of the Seattle lease will begin in April 2020 and rent will be abated for April and May 2020, although the Company
will be responsible for its proportionate share of expenses and taxes. The Company will pay a monthly rent of approximately
$13,500 beginning on June 1, 2020 through March 2021. The monthly rent will increase on the first day of April of each
succeeding year by approximately 3% until the end of the term in May 2023. The rent for the Tulsa lease is approximately
$2,200 a month beginning September 2019 through August 2022 with an annual 2.5% increase. The Company has an operating lease
for office space in Beijing, China through November 2020 with a monthly rent of approximately $6,000.
Lease costs for the nine months ended September 30, 2019 and
2018 and other quantitative disclosures are as follows (unaudited):
|
|
For the three months ended Setpember 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
58,000
|
|
|
$
|
52,000
|
|
|
$
|
175,000
|
|
|
$
|
158,000
|
|
Total lease cost
|
|
$
|
58,000
|
|
|
$
|
52,000
|
|
|
$
|
175,000
|
|
|
$
|
158,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
$
|
178,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
$
|
505,000
|
|
|
|
|
|
|
|
|
|
For operating lease:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
3.34
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
7.17
|
%
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2019, the Company
recorded a right-of-use assets and operating lease liabilities amounting to $505,000 upon extensions of the leases for its office
space in Seattle, Washington through May 2023 and its offices space in Tulsa, Oklahoma through August 2022.
Minimum future payments under the Company’s leases at
September 30, 2019 and their application to the corresponding lease liabilities are as follows (unaudited):
|
|
Discounted lease
liability payments
|
|
|
Payments due under lease agreements
|
|
2019 (remaining 3 months)
|
|
|
48,000
|
|
|
|
59,000
|
|
2020
|
|
|
177,000
|
|
|
|
215,000
|
|
2021
|
|
|
169,000
|
|
|
|
193,000
|
|
2022
|
|
|
178,000
|
|
|
|
190,000
|
|
2023
|
|
|
71,000
|
|
|
|
73,000
|
|
Total
|
|
$
|
643,000
|
|
|
$
|
730,000
|
|
Note 4 – Patents and Other Intangible Assets
Patents and other intangible assets are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Patents pending
|
|
$
|
847,000
|
|
|
$
|
1,202,000
|
|
Issued patents
|
|
|
558,000
|
|
|
|
761,000
|
|
|
|
|
1,405,000
|
|
|
|
1,963,000
|
|
Trademarks
|
|
|
|
|
|
|
|
|
Trademarks pending
|
|
|
64,000
|
|
|
|
55,000
|
|
Registered trademarks
|
|
|
23,000
|
|
|
|
23,000
|
|
|
|
|
87,000
|
|
|
|
78,000
|
|
Other
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
1,500,000
|
|
|
|
2,049,000
|
|
Accumulated amortization
|
|
|
(256,000
|
)
|
|
|
(290,000
|
)
|
|
|
$
|
1,244,000
|
|
|
$
|
1,759,000
|
|
The Company monitors and assesses the net realizable value of
the Company’s patent portfolio at each reporting period. As a result of management’s assessment of the Company’s
patent portfolio in terms of cost-effectiveness and alignment with the focus on those patents that have significant future commercial
value to the Company, an impairment charge of $337,000 and $733,000, respectively, was recorded during the three and nine months
ended September 30, 2019.
Future amortization expense associated with issued patents and
registered trademarks as of September 30, 2019 is estimated as follows (unaudited):
2019 (remaining 3 months)
|
|
$
|
31,000
|
|
2020
|
|
|
123,000
|
|
2021
|
|
|
90,000
|
|
2022
|
|
|
54,000
|
|
2023
|
|
|
21,000
|
|
Thereafter
|
|
|
6,000
|
|
|
|
$
|
325,000
|
|
Note 5 – Sales, Contract Assets
and Contract Liabilities
The
Company recognized no revenue during the nine months ended September 30, 2019. For the nine months ended September 30, 2018, the
Company recognized revenues totaling $530,000 from completed flare projects. At September 30, 2019, the Company had contract assets
of $53,000 and contract liabilities of $0. The cost of goods sold of $1,000, recognized during the nine months ended September
30, 2019, related to additional warranty costs incurred for previously completed contracts.
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.
Equity Incentive Plan
The Company has adopted and the Company’s
shareholders have approved the ClearSign Combustion Corporation 2011 Equity Incentive Plan (the Plan) which permits the Company
to grant to eligible participants, including officers, employees, directors, consultants and advisors, options to purchase shares
of common stock, stock awards and stock bonuses. The Compensation Committee of the Board of Directors is authorized to administer
the Plan and establish the grant terms, including the grant price, vesting period and exercise date. At the Company’s Annual
Meeting held on May 8, 2019, the shareholders approved an amendment to the Plan that (i) increased the number of shares of common
stock in the reserve by 1,231,593 to a total of 4,004,214 shares of common stock, representing approximately 15% of the number
of shares of the Company’s stock outstanding and (ii) increased the number of shares that may be issued pursuant to the
evergreen provision, if any, to the lesser of 15% of any new shares issued by the Company during the quarter immediately prior
to the adjustment date or such lesser amount as the Board of Directors shall determine. Therefore, as of September 30, 2019,
the number of shares of common stock reserved for issuance under the Plan totaled 4,004,589.
In the nine months ended September 30, 2019, the Company made
awards of stock options for the purchase of an aggregate 1,298,718 shares of common stock to its employees and directors from the
Plan. Of these awards, options covering 159,100 shares of common stock were awarded in lieu of cash bonuses for 2018 and the expense
was recorded during the year ended December 31, 2018. An option for the purchase of 258,618 shares of common stock was issued from
the Plan to the Company’s Chief Executive Officer as part of options for the purchase of an aggregate 600,000 shares of common
stock granted to him in conjunction with his recruitment and employment, as described below (see Inducement Stock Options). Options
covering an additional 381,000 shares of common stock have been issued as payment to the Company’s directors and are described
below. The remaining stock option awards covering 500,000 shares of common stock have exercise prices at the grant date fair value
ranging from $0.87 to $2.25 per share, contractual lives of 10 years, and vest over 2 years. The fair value of the stock options
estimated on the date of grant using the Black-Scholes option valuation model was $259,000. The following weighted-average assumptions
were utilized in the calculation of the fair value of the stock options:
Expected life
|
|
5.75
|
years
|
Weighted average volatility
|
|
71%
|
|
Forfeiture rate
|
|
20%
|
|
Weighted average risk-free interest rate
|
|
2.51%
|
|
Expected dividend rate
|
|
0%
|
|
Outstanding stock option awards at September 30, 2019 and December
31, 2018 totaled 2,115,670 shares and 880,277 shares, respectively, with the right to purchase 1,150,375 shares and 587,962 shares
being vested and exercisable at September 30, 2019 and December 31, 2018, respectively. The recognized compensation expense associated
with stock option awards for the three and nine months ended September 30, 2019 and 2018 totaled $58,000 and $274,000 and $59,000
and $170,000, respectively. On September 30, 2019 the number of shares reserved under the Plan but unissued totaled 1,297,040.
At September 30, 2019, there was $316,000 of total unrecognized compensation cost related to non-vested share based compensation
arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.7 years. The intrinsic
value of outstanding stock options was $131,000 at September 30, 2019.
During 2019, the Company’s directors are compensated solely
in stock option awards. In addition to being paid for their services as directors, individual directors are paid for committee
membership, for services as a committee chair and for services as a lead director. 381,000 options for the purchase of shares of
common stock were granted to members of the Board of Directors for service during 2019. The options have an exercise price of $1
and vest in equal increments at the end of each quarter. The recognized expense associated with Board stock option awards for the
three and nine months ended September 30, 2019 and 2018 totaled $34,000 and $103,000, and $0 and $0, respectively. At September
30, 2019 there was $34,000 of unrecognized cost related to non-vested Board fees granted under the Plan. The following assumptions
were utilized in the calculation of the fair value of the stock options:
Expected life
|
|
5.75
|
years
|
Weighted average volatility
|
|
71%
|
|
Forfeiture rate
|
|
20%
|
|
Weighted average risk-free interest rate
|
|
2.25%
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|
Expected dividend rate
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0%
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Consultant Stock Plan
The Company has a Consultant Stock Plan (the Consultant Plan)
which provides for the granting of shares of common stock to consultants who provide services related to capital raising, investor
relations, and making a market in or promoting the Company’s securities. The Company’s officers, employees, and board
members are not entitled to receive awards from the Consultant Plan. The Compensation Committee of the Board of Directors is authorized
to administer the Consultant Plan and establish the grant terms. The number of shares reserved for issuance under the Consultant
Plan on September 30, 2019 totaled 253,367 with 192,617 of those shares unissued. The Consultant Plan provides for quarterly increases
in the available number of authorized shares equal to the lesser of 1% of any new shares issued by the Company during the quarter
immediately prior to the adjustment date or such lesser amount as the Board of Directors shall determine. The Company granted
10,000 shares of common stock to a consultant under the Consultant Plan for services performed and to be performed during the period
from August 13, 2018 to August 31, 2019. The fair value of the stock at the time of grant was $1.44 per share for a total value
of $14,000. The Consultant Plan expense for the three and nine months ended September 30, 2019 and 2018 was $4,000 and $11,000
and $9,000 and $26,000, respectively.
Inducement Stock Options
Pursuant to the rules of The Nasdaq Stock Market, and in compliance
with those rules, the Company may issue equity awards, including stock options, as an inducement to an individual to accept employment
with the Company. Inducement awards need not be approved by the Company’s shareholders. During the nine months ending September
30, 2019 the Company granted options to purchase 600,000 shares of common stock as an inducement to its President and Chief Executive
Officer to accept the Company’s offer of employment. (See Note 7.) The stock options have exercise prices at the award date
fair value ranging from $1.16 to $2.25 per share, contractual lives of 10 years, and vest over 2 years. An option to purchase 258,618
shares was issued from the Company’s 2011 Equity Incentive Plan. Non-qualified stock options covering the remaining 341,382
shares were issued from the Company’s reserve of authorized but unissued shares of common stock. The fair value of the stock
options estimated on the date of grant using the Black-Scholes option valuation model was $329,000. The recognized compensation
expense associated with these awards for the three and nine months ended September 30, 2019 was $24,000 and $183,000, respectively.
The remaining unrecognized compensation expense associated with these awards is $146,000. The following weighted-average assumptions
were utilized in the calculation of the fair value of the stock options:
Expected life
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|
5.75
|
years
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Weighted average volatility
|
|
71%
|
|
Forfeiture rate
|
|
20%
|
|
Weighted average risk-free interest rate
|
|
2.55%
|
|
Expected dividend rate
|
|
0%
|
|
Warrants
At September 30, 2019, warrants for the purchase of 80,000 shares
of common stock at an exercise price of $1.80 per share were outstanding and had a remaining life of 1.39 years.
The intrinsic value of the outstanding warrants was $0 at September
30, 2019.
Note 7 – Commitments and Contingencies
On January 28, 2019 (the
“Effective Date”), the Company and Colin James Deller entered into an employment agreement (the
“Agreement”) pursuant to which the Company employed Dr. Deller as its President until April 1, 2019, at which
time Dr. Deller became the Company’s Chief Executive Officer. Pursuant to the Agreement, the Company pays Dr. Deller an
annual salary of $350,000. As an inducement to accept employment with the Company, Dr. Deller was also granted an incentive
option to purchase 400,000 shares of the Company’s common stock at an exercise price of $1.16 per share and an
incentive option to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.25 per share. Each
option has a term of 10 years and will vest as follows: the right to purchase one-third of the shares of common stock subject
to the option vested on the Effective Date; the right to purchase one-third of the shares will vest on the first anniversary
of the grant date; and the right to purchase one-third of the shares will vest on the second anniversary of the grant date.
The Company also agreed to pay certain expenses, not to exceed the sum of $100,000, related to Dr. Deller’s move from
Tulsa, Oklahoma to Seattle, Washington, including reasonable expenses related to the sale of his home in Tulsa. As a
temporary adjustment for the difference in the cost of living between Tulsa and Seattle (the
“Relocation Adjustment”), for a period of four years (the “Payment Period”) from the Effective Date,
the Company has also agreed to pay up to $6,000 a month to Dr. Deller for expenses related to temporary housing and travel to
and from Tulsa to Seattle. If Dr. Deller purchases a home in the Seattle area, the Relocation Adjustment will continue to be
paid through the expiration of the Payment Period, although the Relocation Adjustment may be adjusted or terminated upon
mutual agreement of Dr. Deller and the Company. The Agreement may be terminated by the Company for cause, as defined in the
Agreement, due to Dr. Deller’s death or disability, upon 30 days’ notice to Dr. Deller or as a result of a change
in control, as defined in the Agreement. With the exception of a termination for cause, if Dr. Deller’s employment is
terminated by the Company, aside from accrued but unpaid salary, bonus (if any) and business expenses, Dr. Deller will
receive the balance of the unpaid Relocation Adjustment and nine months of his annual salary.
Through September 30, 2019, the Company has paid Dr. Deller
$25,000 in Relocation Adjustment payments to reimburse temporary housing costs.
Litigation
From time to time the Company may become involved in various
lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties
and an adverse result in any such matter may harm the Company’s business. As of the date of this report, the Company is not
a party to any material pending legal proceedings.
Indemnification Agreements
The Company maintains indemnification agreements with its directors
and officers that may require the Company to indemnify these individuals against liabilities that arise by reason of their status
or service as directors or officers, except as prohibited by law.
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:
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our ability to successfully develop and implement our technology and achieve profitability;
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our limited operating history;
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emerging competition and rapidly advancing technology in our industry that may outpace our technology;
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changes in government regulations that could substantially reduce, or even eliminate, the need for our technology;
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customer demand for the products and services we develop;
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the impact of competitive or alternative products, technologies and pricing;
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·
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our ability to manufacture any products we design;
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·
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general economic conditions and events and the impact they may have on us and our potential customers;
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our ability to obtain adequate financing in the future;
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·
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our ability to continue as a going concern;
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our success at managing the risks involved in the foregoing items; and
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·
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other factors discussed in this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K.
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Forward-looking statements may appear throughout
this report, including, without limitation, Item 2 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” The forward-looking statements are based upon management’s beliefs and assumptions and are
made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included
in this report. You should not place undue reliance on these forward-looking statements.
Unless otherwise stated or the context otherwise
requires, the terms “ClearSign,” “we,” “us,” “our” and the “Company”
refer to ClearSign Technologies Corporation and its subsidiary.