Business context and reporting period
ClearSign Combustion Corporation (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2015. It develops combustion technologies intended to improve emissions, energy efficiency and operating performance. Its principal technologies are Duplex and Electrodynamic Combustion Control (ECC). The company reported no revenue in either Q1 2015 or Q1 2014.
Financial results and liquidity
| Metric | Q1 2015 / Mar. 31, 2015 | Comparable / prior-period figure |
|---|---|---|
| Revenue | $0 | $0 in Q1 2014 |
| Research and development expense | $573,000 | $607,000 in Q1 2014 |
| General and administrative expense | $1.019 million | $1.040 million in Q1 2014 |
| Total operating expenses / operating loss | $1.592 million | $1.647 million in Q1 2014 |
| Net loss | $1.583 million; $0.14 per share | $1.646 million; $0.18 per share in Q1 2014 |
| Cash used in operating activities | $1.738 million | $1.636 million in Q1 2014 |
| Cash and cash equivalents | $16.190 million | $1.845 million at Dec. 31, 2014 |
| Working capital | $15.413 million | $719,000 at Dec. 31, 2014 |
| Total liabilities | $1.193 million | $1.640 million at Dec. 31, 2014 |
There is no reported revenue, so revenue-based margins are not meaningful. The balance sheet lists no borrowings; liabilities consist primarily of payables, accrued compensation and taxes, and deferred rent. Investing activities used $352,000, mainly for patents and other intangible assets. Financing activities provided $16.435 million.
Material changes versus the prior comparable period
- Operating expenses fell $55,000 year over year, with lower consulting costs cited in both R&D and G&A. Net loss narrowed by $63,000.
- Cash rose substantially following a February 2015 public offering of 2.99 million shares at $5.85 per share. The offering generated approximately $16.3 million in net proceeds and incurred about $1.2 million in costs.
- Common shares outstanding increased from 9,681,476 at Dec. 31, 2014 to 12,790,664 at Mar. 31, 2015. The filing reports 12,804,936 shares outstanding as of May 14, 2015.
Outlook, management commentary and risks
- Management expects operating losses and negative cash flow for the foreseeable future. The filing provides no financial revenue or earnings guidance and states that there is no committed source of future financing.
- Management says the company needs funding through co-development or strategic agreements, equity or debt financing, or other alternatives. If adequate funding is unavailable, it may reduce development and other spending or curtail or suspend operations. A shelf registration statement was available for up to $6.008 million of additional securities after the February offering.
- For Duplex, the company reported testing an Aera Energy once-through steam generator at 52 million BTU/hour, meeting a stated 5 ppm NOx limit and observing approximately 1% better thermal efficiency than a conventional low-NOx burner without flue gas recirculation. The company estimates potential 3–4% energy savings versus systems using flue gas recirculation, or up to $90,000–$100,000 in annual savings, depending on energy prices and other factors. Further testing remains necessary, and future purchases by Aera are conditional.
- The company reported an order from an independent Southern California oil producer to retrofit a 25 million BTU/hour steam generator, with installation expected in the second half of 2015. Two refinery field-test agreements would result in purchases only if specified retrofit requirements are met; the prospective customers have no other financial obligations. ECC work remained at the laboratory-testing stage.
- Key risks include product development and customer acceptance, competition and changing technology, commercialization and manufacturing capability, continued access to financing, and the possibility that the company will not achieve profitability or continue as a going concern.
- Commitments include the former CEO’s termination agreement, with $673,000 remaining payable through December 2016 at quarter-end, and a new CEO employment agreement. The office and laboratory lease runs through February 2017, with minimum future payments of $268,000 as of March 31, 2015.
Important facts for investors to verify
- Whether the Aera demonstration meets all remaining performance criteria and leads to an elected purchase, and whether the independent producer’s retrofit is completed on schedule.
- Whether field-test agreements convert to purchases, and whether the company begins generating recurring revenue from commercial deployments.
- Cash burn and funding needs relative to the $16.19 million quarter-end cash balance, including any use of the remaining shelf registration capacity.
- Potential dilution from future equity financing, outstanding options and warrants, and the share-count increase reported after quarter-end.
- The assumptions supporting estimated energy savings and their applicability to customers’ actual operating conditions and energy prices.