ClearSign Combustion Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2015; filed August 13, 2015. The filing identifies the issuer as ClearSign Combustion Corporation. The company develops Duplex and Electrodynamic Combustion Control (ECC) technologies for combustion systems.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | No revenue for either six-month period; a separate quarterly revenue figure is not stated. | |||
| Research and development expense | $714,000 | $556,000 | $1,287,000 | $1,163,000 |
| General and administrative expense | $1,096,000 | $1,072,000 | $2,115,000 | $2,113,000 |
| Total operating expenses | $1,810,000 | $1,628,000 | $3,402,000 | $3,276,000 |
| Net loss | $1,796,000 | $1,626,000 | $3,379,000 | $3,273,000 |
| Loss per share, basic and diluted | $0.14 | $0.17 | $0.28 | $0.35 |
At June 30, cash and cash equivalents were $14.606 million, versus $1.845 million at December 31, 2014; working capital was $13.601 million, versus $719,000. Total assets were $18.029 million and total liabilities $1.468 million. The balance sheet reports no debt. With no revenue, operating margins are not meaningful.
For the first half, operating cash use was $3.162 million, investing cash use $641,000, and financing cash inflow $16.564 million. The company reported $16.279 million in net cash proceeds from its February stock offering and $285,000 from option exercises. It had 12,811,218 common shares outstanding at June 30, compared with 9,681,476 at year-end 2014.
Changes versus comparable periods
- Q2 operating expenses rose $182,000 and net loss widened $170,000 year over year. For the first half, operating expenses rose $126,000 and net loss widened $106,000.
- Higher R&D spending mainly reflected increased Duplex field-testing costs. G&A included CEO-related stock-option and relocation costs, partly offset by lower consulting and travel costs.
- Cash and working capital increased substantially following the February 2015 equity offering. The first-half operating cash outflow was broadly similar to 2014.
Outlook, developments, and risks
- Management expects continued operating losses and negative cash flows for the foreseeable future; the filing gives no revenue, earnings, or profitability guidance. Management says ongoing development depends on funding from partners, co-development agreements, or additional financing.
- Duplex testing at an Aera Energy site reportedly met the applicable 5 ppm NOx limit at 52 million BTU/hr; the company reported about 1% thermal-efficiency improvement versus a conventional low-NOx burner without flue-gas recirculation. Aera-related future purchase terms are conditional on successful testing and customer election.
- A May 2015 order from an independent Southern California oil producer covers a Duplex retrofit of a 25 million BTU/hr unit, with installation expected in the second half of 2015. Tesoro agreed to a fixed-price first-phase evaluation, also expected in the second half. Two other refinery tests have potential purchase outcomes only if specified performance criteria are met.
- ECC work remained at the laboratory-testing stage with six parties; the filing cautions that further revenue or agreements are not assured.
- Key risks include commercialization and customer acceptance, competition and technology development, continued access to financing, and the possibility of having to reduce development activity or suspend operations if funding is insufficient. The company reported cumulative losses of $24.639 million and no committed financing source.
- Commitments include a former CEO termination liability of $576,000 payable through December 2016; the current CEO’s $350,000 annual salary and other contractual compensation; annual director compensation totaling $300,000; and office/laboratory lease payments of $234,000 through 2017, plus operating costs.
- No legal proceedings were reported. Management stated disclosure controls were effective as of June 30, 2015, with no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether Duplex field tests and the announced retrofit/evaluation projects were completed on schedule and met customer and regulatory performance criteria.
- Whether any conditional tests convert into product sales, recurring revenue, or funded development agreements.
- Cash use relative to the $14.606 million balance, and the company’s future financing needs and available financing options.
- The dilution and cost implications of equity compensation, outstanding options and warrants, and any further equity issuance.
- Progress in protecting and commercializing the patent portfolio, and whether reported performance and potential customer savings are independently validated.