Business context and reporting period
ClearSign Combustion Corporation (the company identified in the request as ClearSign Technologies Corp.) filed this unaudited Form 10-Q for the three months ended March 31, 2017. It develops Duplex and Electrodynamic Combustion Control technologies intended to improve combustion emissions and operating performance. The company reported limited revenue to date and remained in a development and commercialization phase.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $360,000 | $0 |
| Gross profit (margin) | $109,000 (about 30%) | $0 |
| Operating expenses | $2.502 million | $2.601 million |
| Operating loss | $2.393 million | $2.601 million |
| Net loss | $2.379 million | $2.589 million |
| Basic and diluted loss per share | $0.16 | $0.20 |
| Cash used in operating activities | $2.267 million | $2.723 million |
| Cash used in investing activities | $133,000 | $381,000 |
| Cash provided by financing activities | $8.667 million | $0 |
At March 31, 2017, cash and cash equivalents were $7.526 million, versus $1.259 million at year-end 2016; working capital was $7.153 million, versus $208,000. Total assets were $10.571 million and total liabilities $1.319 million. Lease liabilities totaled $468,000 ($153,000 current and $315,000 long-term); the filing reports no other borrowings. Accumulated deficit was $42.710 million. The company had 15,601,353 common shares outstanding at March 31 and as of May 11, 2017.
Material changes versus the prior period
- Q1 revenue came from completing contractual obligations on two enclosed-flare retrofits for a major California oil producer. The quarter’s gross margin was about 30%; management said it expected margins to normalize over time near 50%, not that this level had been achieved.
- Operating expenses declined $99,000: R&D fell $151,000, primarily due to lower Duplex field-testing and development costs, while G&A rose $52,000, primarily due to personnel costs. Net loss narrowed by $210,000.
- Cash rose primarily because the company completed a January rights offering, raising $9.6 million gross and approximately $8.7 million net. The offering issued 2,395,471 shares and the same number of warrants, each exercisable at $4.00 per share through January 25, 2019.
- The company early-adopted revenue recognition guidance and lease accounting guidance in 2017. It reported no change to previously reported revenue under the revenue standard; lease adoption put right-of-use assets and lease liabilities on the balance sheet.
Outlook, management commentary, and risks
The remaining three units under the approximately $900,000 flare contract represented about $540,000 of contract value and were expected to be completed over the next three to six months, subject to the customer’s equipment schedule. The company also described a planned field test of its Duplex Plug & Play burner at a Texas refinery and a new OTSG installation agreement entered into in March. These are development plans, not financial guidance. The company had no licensing agreements and said it did not anticipate one before completing field development and additional installations.
Management expects operating losses and negative cash flow for the foreseeable future. It stated that continued operations and commercialization depend on adequate funding through sales, partnerships or co-development, or additional financing; there is no committed funding source and no assurance of profitability or long-term continuation as a going concern. Risks cited include technology development and customer acceptance, competition, manufacturing capability, financing availability, and volatile economic conditions in target markets. The company reported no known legal proceeding expected to have a material adverse effect, no off-balance-sheet transactions, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether the remaining flare installations were completed, accepted by the customer, and converted into recognized revenue; confirm customer timing and collection of receivables.
- Whether the Texas refinery field test and OTSG project progressed successfully, and whether Duplex performance and margins support repeatable commercial sales.
- Cash burn and financing needs against the $7.526 million quarter-end cash balance, including any subsequent financing or material changes in spending.
- Potential dilution from the 2,395,471 rights-offering warrants and other outstanding options and warrants; the filing reported 3,713,994 potentially dilutive shares at March 31, 2017.
- Warranty obligations, lease commitments, and the assumptions underlying management’s commercialization and funding outlook.