ClearSign Technologies Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. ClearSign develops combustion and fuel-safety technologies, including ClearSign Core and ClearSign Eye. Its products remained in development, and the company reported no revenue in the quarter.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $0 | $0 in Q1 2019 |
| Operating expenses | $1.963 million | $2.376 million in Q1 2019 |
| Operating loss | $1.963 million | $2.377 million in Q1 2019 |
| Net loss | $1.963 million; $0.07 per share | $2.329 million; $0.09 per share in Q1 2019 |
| Cash used in operations | $1.390 million | $2.022 million in Q1 2019 |
| Cash and cash equivalents | $7.084 million | $8.552 million at December 31, 2019 |
| Working capital | $6.062 million | $7.684 million at December 31, 2019 |
| Total liabilities | $1.773 million, including $546,000 of lease liabilities | $1.716 million at December 31, 2019 |
Gross profit was $0 in Q1 2020; the company had a $1,000 gross loss in Q1 2019 from additional warranty costs. Gross margin is not meaningful with no sales. R&D expense declined 10% to $810,000, primarily due to lower field-testing and laboratory costs. G&A declined 22% to $1.153 million, primarily due to lower share-based compensation, consulting and legal costs. The net loss narrowed by $366,000 year over year, despite no interest income in Q1 2020 versus $48,000 in Q1 2019.
Investing activities used $78,000, primarily for patents and other intangible assets; there were no financing cash flows. The filing reports no conventional funded debt at March 31; lease obligations were the principal reported liabilities. After quarter-end, the company received a $250,832 Paycheck Protection Program loan on May 8, 2020, at 1% interest, due May 7, 2022. It intended to use the proceeds primarily for payroll and could seek forgiveness, but forgiveness was not assured.
Changes, outlook and material risks
- ClearSign reported cumulative losses of $69.953 million and expects operating losses and negative cash flow for the foreseeable future. Management stated that available funds were insufficient to support operations at current levels for at least 12 months from the report date, and concluded that substantial doubt existed about the company’s ability to continue as a going concern. Additional financing is needed; no committed source was identified.
- COVID-19 disrupted suppliers, contractor availability and projects. The company said its fire-tube boiler burner work could be delayed an additional one to three months, while water-tube boiler development in China had been delayed until the next heating season. These delays could postpone potential revenue. The pandemic also heightened uncertainty around access to capital and customer activity.
- The company’s technologies had generated only nominal operating revenue to date and required further development, customer acceptance and successful installations to produce meaningful sales. Management cited possible equity or debt financing, strategic or co-development agreements, and licensing or sale of intellectual property as funding alternatives.
- Nasdaq notified the company in January 2020 that its share price had remained below the $1.00 minimum bid-price requirement for 30 consecutive trading days, creating a risk of delisting if compliance was not regained within the applicable period.
- As of March 31, 2020, ClearSign had 14 full-time employees. It determined that it qualified as an essential business in Washington, with limited staff working at its Seattle facility and other personnel working remotely. The filing reported no material pending legal proceedings and no off-balance-sheet transactions.
Key facts for investors to verify
- Whether ClearSign secured additional capital and whether its cash runway and going-concern assessment changed after May 14, 2020.
- Whether it regained Nasdaq’s minimum bid-price compliance and maintained its listing.
- Progress and timing of the delayed China demonstrations and fire-tube boiler project, and whether any projects converted to recognized revenue.
- Use of the PPP loan proceeds and the amount, if any, ultimately forgiven; otherwise, the repayment and interest obligations.
- Whether commercialization, customer acceptance and product installations advanced enough to support future revenue and reduce operating cash burn.