ClearSign Combustion Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The unaudited filing describes ClearSign as a development-stage company developing combustion-efficiency and emissions-control technology. It had not generated operating revenue, and planned principal operations had not commenced.
Financial performance and position
| Metric | Q2 2012 | Six months 2012 | Comparable 2011 |
|---|---|---|---|
| Revenue | None reported since inception | ||
| Operating expenses | $1.025 million | $1.890 million | $707,280 Q2; $1.599 million six months |
| Net loss | $1.020 million | $1.884 million | $706,235 Q2; $1.598 million six months |
| Basic and diluted loss per share | $(0.13) | $(0.29) | $(0.16) Q2; $(0.52) six months |
| Cash used in operating activities | Six-month outflow: $1.125 million | Six-month outflow: $412,045 |
At June 30, cash and cash equivalents were $10.758 million, working capital was $10.507 million, total assets were $11.449 million, and total liabilities were $549,373. The company had no promissory note outstanding at quarter-end; it repaid its notes in May. No profit margins are meaningful given the absence of revenue.
Changes versus prior period and financing
- Q2 operating expenses rose about $318,000 year over year, including a $194,000 increase in R&D to $291,031, attributed to more personnel and research activity. G&A rose about $124,000 to $734,368; higher staffing and $194,000 of public-company costs were partly offset by a prior-year consulting expense.
- Six-month operating expenses increased about $291,000. R&D rose $435,000 to $555,554; G&A fell about $145,000 to $1.334 million, largely because 2011 included a nonrecurring $1 million stock-paid consulting expense, partly offset by higher compensation and public-company costs.
- The April–May IPO sold 3.45 million shares at $4 each, raising $13.8 million gross. Offering costs were approximately $2.727 million; the cash flow statement reports approximately $11.2 million in net cash proceeds. The filing elsewhere describes approximately $11.64 million of net proceeds including stock issued to legal counsel, so the precise net-proceeds basis should be checked.
- Financing activities provided $11.152 million in the first half, while investing activities used $199,288, primarily for equipment and patents/trademarks. Common shares outstanding were 8,752,015 at June 30.
Outlook, risks and unusual items
- Management expected IPO proceeds to fund activities at least through April 2014. Planned uses included approximately $5 million for R&D and related capital expenditures, $1 million for intellectual-property protection, $1.25 million for market opportunities, and the balance for working capital and general purposes. Planned annual capital expenditures were $0.5–$1.0 million; hiring could increase by approximately 20–30 employees, depending on development needs.
- Management cautioned that development is unpredictable, commercialization and customer acceptance are uncertain, and proceeds may prove insufficient. The company had no committed financing source and could need additional financing, reduce spending, or curtail or suspend operations if funding or development plans fall short.
- The 2011 auditor’s report had raised substantial doubt about the company’s ability to continue as a going concern; management said the IPO subsequently alleviated its funding concern through at least April 2014. The company remained loss-making and had accumulated a $6.375 million development-stage deficit.
- A former legal adviser asserted that a related partnership could acquire 25,250 shares at $0.02 per share under a 2007 engagement letter. The company denied the claim, citing a November 2011 settlement among its defenses. The filing reports no legal proceedings during the six-month period.
- IPO costs included $1.2 million in underwriter fees to MDB Capital Group and warrants to buy 345,000 shares at $5.00; MDB beneficially owned 5.9% of the company at June 30. The company also had approximately $525,000 in minimum future lease payments through the lease term and CEO severance provisions.
Important facts for investors to verify
- Whether cash burn, hiring, R&D and capital spending support management’s projected funding runway through April 2014.
- The reconciliation between the filing’s approximately $11.2 million net IPO cash proceeds and its approximately $11.64 million proceeds figure that includes stock issued to counsel.
- Progress toward technical validation, commercialization, customer demand and revenue, none of which had yet been established.
- Resolution and potential financial or dilution impact of the disputed 25,250-share claim, as well as outstanding options and warrants.
- Potential future financing needs and dilution if development costs exceed available cash or commercialization is delayed.