ClearSign Technologies Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 30, 2020. This is an annual report; it also provides unaudited quarterly results, including Q4.
Business context
ClearSign develops combustion and sensing technologies intended to reduce emissions and improve operating efficiency. Its principal product, ClearSign Core, uses a porous ceramic structure in burners; the company also develops flame-sensing products. Commercialization remains at an early stage, and historically the company has generated only nominal revenue. It plans to reach customers in part through OEM and other strategic partnerships, including a 2019 flare collaboration with ASHCOR.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $0 | $530,000 |
| Gross profit (loss) | $(1,000) | $103,000 |
| Operating expenses | $8.582 million | $9.674 million |
| Operating loss | $(8.583) million | $(9.571) million |
| Net loss | $(8.482) million | $(9.500) million |
| Net loss per share, basic and diluted | $(0.32) | $(0.42) |
| Net cash used in operating activities | $(6.902) million | $(8.384) million |
Cash and cash equivalents were $8.552 million at year-end, versus $8.949 million a year earlier; short-term investments declined from $6.923 million to zero as Treasury bills matured. Working capital was $7.684 million, down from $14.774 million. Total assets were $10.942 million and total liabilities $1.716 million. The filing reports no conventional borrowings; lease liabilities totaled $595,000, including current and long-term portions. No financing cash flows occurred in 2019. The company reported an accumulated deficit of $67.990 million.
There was no meaningful 2019 gross margin because there were no sales and the reported cost of goods sold was a $1,000 warranty cost on prior contracts. Management anticipated gross margins could normalize around 50% if sales volume increases; this is an expectation, not a reported result.
Changes and notable items
- Revenue fell from $530,000 in 2018, which came from completed flare, OTSG and other projects, to zero in 2019.
- Operating expenses declined 11%, mainly as research and development spending decreased by $996,000. General and administrative expense decreased by $96,000; a $733,000 write-off of capitalized patent costs offset reductions in other costs.
- Net loss narrowed by approximately 11%, while operating cash outflow also declined. These improvements did not reflect revenue growth.
- The company recorded a $733,000 impairment/write-off of capitalized patent costs after reassessing its patent portfolio. Research and development grants of $108,000 were offset against related costs.
- Shares outstanding were 26,707,261 at December 31, 2019. The company issued no shares for cash during 2019 and granted substantial options; potential dilution is relevant.
Outlook, risks and contingencies
Management said existing funds were expected to support operations for at least 12 months from issuance of the financial statements, but anticipated needing additional capital to operate beyond that period. The company has a history of losses and negative operating cash flow, no committed financing source, and depends on future financing, partnerships or commercialization. Management cautioned that financing may not be available on acceptable terms. The independent auditor gave an unqualified opinion on the financial statements but noted that continued operations depend on raising funds and attaining profitable operations.
COVID-19 had delayed Chinese boiler demonstrations and restricted work at the Seattle facility. Management estimated the fire-tube boiler product could be delayed one to three months and water-tube development until the next heating season; it could not estimate the pandemic’s full effect. Management also warned that lower oil prices could cause energy-sector customers to delay or cancel projects.
Nasdaq notified the company in January 2020 that its share price was below the $1 minimum bid requirement and gave it until July 13, 2020 to regain compliance, subject to possible extension. Other principal risks include uncertain customer adoption and product scaling, competition from better-resourced companies, regulatory changes and permitting, reliance on partners, protection of intellectual property, China-related risks, and potential equity dilution. No material pending legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an internal-control audit opinion.
Important facts for investors to verify
- Whether ClearSign secured additional capital after the filing and how the financing affected cash runway and shareholder dilution.
- Whether Nasdaq listing compliance was regained by the stated deadline or an extension was obtained.
- Whether the delayed Chinese boiler demonstrations and other field tests were completed, accepted by customers, and converted into revenue.
- Whether OEM or licensing partnerships generated commercial orders and recurring revenue, and whether the anticipated gross margin is achievable at scale.
- Whether cash burn, contract obligations, and lease liabilities remain consistent with management’s stated runway; the filing does not provide a detailed forward cash forecast.