Business context and reporting period
ClearSign Technologies Corporation designs and develops combustion and fuel-safety technologies, including ClearSign Core. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. The company’s technologies remained in development and commercialization, with nominal operating revenue to date.
Financial performance and position
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 period |
|---|---|---|---|
| Revenue | $0 | $363,000 | $0 |
| Gross profit (loss) | ($505,000) | ($367,000) | $153,000 in each period |
| Operating expenses | $2.037 million | $4.196 million | $1.589 million / $3.552 million |
| Net loss | ($2.291 million) | ($4.312 million) | ($1.391 million) / ($3.354 million) |
| Basic and diluted loss per share | ($0.07) | ($0.14) | ($0.05) / ($0.13) |
| Operating cash used | Not stated separately | $3.674 million | $3.037 million |
At June 30, cash and cash equivalents were $10.642 million, up from $8.824 million at December 31, 2020. Working capital was $10.213 million. Current liabilities were $1.084 million; current assets were $11.297 million. Total liabilities were $1.538 million, including $652,000 of lease liabilities; the PPP loan had been forgiven. The filing reports no off-balance-sheet transactions. Gross margin was negative in Q2 and year to date, reflecting contract costs and estimated losses; the filing does not present a meaningful ongoing margin trend given limited revenue.
Material changes versus prior periods
- Q2 revenue was zero; first-half revenue of $363,000 came from delivery under a multi-burner product contract. There was no revenue in the comparable 2020 periods.
- Q2 cost of goods sold included $556,000 of estimated losses on two contracts. First-half cost of goods sold included $574,000 of estimated contract losses. The company expects those contracts to be loss-making at completion.
- Q2 net loss increased by $900,000 year over year; first-half net loss increased by $958,000. Management attributed the increases to higher operating expenses and, for the six-month period, higher cost of goods sold.
- G&A rose 34% in Q2 and 25% in the first half, reflecting director and employee equity compensation changes, temporary professional staffing and recruiting, rent and insurance, and a $100,000 severance accrual related to CFO Brian Fike.
- R&D rose 13% in Q2 and 6% in the first half, primarily due to commercialization work on fire-tube boiler burners, including a California demonstration installation.
- Operating cash use increased to $3.674 million from $3.037 million for the first half of 2020. Financing cash inflows included approximately $5.3 million net from the ATM equity program and $277,000 from option and warrant exercises.
Outlook, risks, contingencies and unusual items
- Management stated that available funds were sufficient to operate at current levels for at least 12 months from the report’s issuance. It anticipated needing additional capital thereafter. The company expects operating losses and negative cash flows for the foreseeable future and has no committed financing source.
- Potential funding sources include equity or debt financing, co-development or strategic-partner agreements, and sale or licensing of intellectual property. Management cautioned that financing may not be available on acceptable terms or at all and that continued operations depend on commercialization and funding success.
- COVID-19 disrupted China operations and prevented most U.S.-based employees from traveling there, delaying development, demonstration and certification programs. Supplier and partner delays also affected projects; the full impact remained uncertain.
- The $251,000 PPP loan was forgiven in the first half of 2021, and the company recorded a corresponding gain.
- Management identified a material weakness in internal control over financial reporting, citing post-close adjustments involving prepaid and accrued expenses, stock compensation, revenue contracts and construction-in-progress assets. Remediation efforts include additional checklists, reviews and staffing; management cautioned it could not assure full remediation.
- Other disclosed risks include limited operating history and revenue, technology and market acceptance, competition, manufacturing and intellectual-property risks, China-related risks, cybersecurity, and the ability to hire and retain personnel. The filing reported no material pending legal proceedings.
- The company sold 1,092,570 shares through its ATM during the first half for approximately $5.5 million gross and $5.3 million net. Outstanding common shares were 31,479,454 at June 30 and 31,482,454 as of August 19, 2021.
Important facts for investors to verify
- Whether the two contracts with estimated losses are completed, and whether actual losses differ from the $574,000 accrued through June 30.
- Whether ClearSign converts development and demonstration activity into repeat commercial installations and meaningful revenue.
- Cash burn, financing needs and available funding after management’s stated 12-month runway; also consider further dilution from equity issuance.
- Progress in remediating the material weakness and whether finance leadership and reporting controls are adequately staffed.
- Effects of COVID-related travel and project delays, particularly in China, and any continuing impacts on suppliers and partners.