ClearSign Combustion Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing was signed March 27, 2018. This is an annual report, with fourth-quarter results also disclosed. The company designs and develops combustion and emissions-control technologies, principally Duplex, and remains an early-stage business with limited commercial sales.
Business context and commercialization
Duplex uses a porous ceramic tile with a burner and is intended to reduce emissions and improve combustion performance. The company reported installations or field development in refinery process heaters, enclosed ground flares, and once-through steam generators. It generated 2017 sales from three completed flare units. ClearSign Asia Limited was formed in Hong Kong; a Chinese partner’s letter of intent contemplated potential investment and market support, but no definitive agreement was assured. The company had no licensing agreements at year-end.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $540,000 | $621,000 |
| Gross profit | $160,000 | $136,000 |
| Gross margin | 29.6% | 21.9% |
| Operating expenses | $9.872 million | $11.341 million |
| Operating loss | $9.712 million | $11.205 million |
| Net loss | $9.680 million | $11.173 million |
| Operating cash flow | $(8.258) million | $(8.672) million |
Fourth-quarter 2017 revenue was $180,000, gross profit was $66,000, and net loss was $2.593 million; fourth-quarter 2016 figures were $361,000, a gross loss of $77,000, and a net loss of $2.306 million. The filing attributes the annual reduction in losses mainly to lower operating expenses, including lower patent impairment charges in 2017. Research and development expense was $4.712 million, compared with $4.831 million.
At December 31, 2017, cash and equivalents were $1.247 million, working capital was $263,000, total assets were $4.161 million, and total liabilities were $1.729 million. Liabilities included $354,000 of lease liabilities; the filing reports no off-balance-sheet transactions and no material conventional borrowing. Financing activities provided $8.667 million net in 2017 through a stock-and-warrant offering. The company reported an accumulated deficit of $50.011 million.
Changes, outlook, risks, and unusual items
- Annual revenue declined approximately 13% from 2016, while gross profit increased by $24,000. Operating expenses fell approximately 13%, and net loss narrowed approximately 13%.
- Management expects gross margins to normalize around 50% if sales volume increases. This is an expectation, not assured guidance; the filing gives no revenue or earnings forecast.
- Management stated that the February 27, 2018 stock offering—5.75 million shares at $2.25 per share—provided approximately $11.9 million in net proceeds and was expected to fund operations for at least 12 months from the filing date. Additional capital is anticipated to be needed to continue operations beyond 12 months.
- The company expects continuing operating losses and negative cash flow and says it has no committed source of future financing. Commercial adoption, product development and testing, financing availability, competition, regulatory changes, and intellectual-property protection are key risks. The filing states that continued operations depend on raising additional funds.
- Three of five contracted flare units were delivered in 2017; the remaining two were completed and installed in the first quarter of 2018, with revenue recognized after installation, customer acceptance, and satisfaction of performance obligations. A cooperative demonstration project with a California regulator and refiner was still being scoped.
- The 2017 tax-law change reduced deferred tax assets by $6.2 million, offset by a corresponding valuation allowance adjustment; no income-tax provision was recorded. The auditor issued an unmodified opinion on the financial statements and did not audit internal control effectiveness.
Important facts for investors to verify
- Whether the post-year-end offering proceeds provide sufficient runway, and what additional financing may be required.
- Evidence of repeat commercial sales, customer acceptance, and the economics of installations, including whether the anticipated gross margin is achievable.
- Completion, acceptance, and revenue recognition for the remaining flare units and the status of other customer contracts and contract assets.
- Progress toward definitive China partnership or investment arrangements and any licensing or OEM agreements.
- Whether field results support regulatory approvals and broader adoption, and how product performance, warranty costs, or permitting requirements may affect commercialization.
- Potential dilution: at year-end the company disclosed 2,495,784 warrants and 993,860 options outstanding; the subsequent February 2018 offering issued 5.75 million additional shares.