ClearSign Combustion Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. The company develops combustion technologies, principally Duplex, intended to improve emissions and operating performance. Revenue remains limited while products are developed and commercialized.
Financial results and liquidity
| Metric | Q1 2018 / March 31, 2018 | Q1 2017 / December 31, 2017 |
|---|---|---|
| Revenue | $530,000 | $360,000 |
| Gross profit (margin) | $135,000 (25%) | $109,000 (30%) |
| Operating expenses | $2.413 million | $2.502 million |
| Operating loss | $2.278 million | $2.393 million |
| Net loss | $2.278 million | $2.379 million |
| Net loss per share | $0.13 | $0.16 |
| Cash used in operating activities | $1.860 million | $2.267 million |
| Cash and cash equivalents | $11.202 million | $1.247 million |
| Working capital | $9.936 million | $263,000 |
| Total liabilities | $2.290 million, including $315,000 of lease liabilities | $1.729 million |
| Accumulated deficit | $52.289 million | $50.011 million |
Cash increased primarily from the February 2018 stock offering, which raised approximately $11.9 million net. Investing activities used $108,000, principally for patents and other intangible assets. The filing reports no off-balance-sheet transactions.
Material changes versus the prior comparable period
- Revenue rose $170,000, while gross profit increased $26,000; reported gross margin declined from 30% to 25%.
- Operating expenses decreased $89,000, with lower research and development and general and administrative expenses. Net loss narrowed by $101,000.
- Operating cash outflow fell by $407,000 year over year.
- The February offering issued 5.75 million shares at $2.25 per share. Shares outstanding rose to 21,361,353 at March 31, from 15,608,853 at December 31, 2017.
Outlook, commentary, and risks
- Management expects operating losses and negative cash flow for the foreseeable future and states that additional capital will be needed to continue operations beyond twelve months from the filing date. No assurance is given that financing will be available on acceptable terms.
- Management expects Duplex product sales to normalize over time to gross margins of approximately 50%; this is an expectation, not a reported result or formal revenue guidance.
- Q1 revenue included $360,000 from completion of enclosed-flare retrofits, $128,000 from an OTSG project, and $42,000 from a smaller project. The six-unit flare contract was completed in the quarter. The company has no licensing agreements and does not expect to enter one before further field development and installations.
- Revenue is concentrated: one California oil producer accounted for 68% of Q1 revenue and another for 24%. Two customers represented 63% and 37% of accounts receivable, respectively.
- Key risks include commercialization and customer acceptance, limited independent testing, competition and technological change, regulatory developments, customer and oil-market conditions, and the ability to raise further capital. The company has incurred $52.289 million in cumulative losses.
- The company reported no legal proceedings believed to have a material adverse effect. Disclosure controls were assessed as effective, with no material changes in internal control reported.
Important facts for investors to verify
- Whether the reported cash balance and subsequent financing plans support operations beyond the stated twelve-month horizon.
- Progress on converting field demonstrations and completed installations into repeat commercial sales, and whether margins can approach management’s approximately 50% expectation.
- Customer concentration, collection of the $344,000 accounts receivable balance, and the impact of any customer or project delays.
- Potential dilution: 2,495,784 warrants were outstanding at March 31, 2018, in addition to other equity incentives; the filing reports 3,465,168 potentially dilutive shares excluded from diluted loss per share as anti-dilutive.
- Whether independent field validation, regulatory acceptance, and future licensing or co-development arrangements develop as management anticipates.