ClearSign Combustion Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company develops combustion technologies, primarily Duplex, intended to improve emissions and operating performance. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q2 2017 / June 30, 2017 | Comparable period / prior date |
|---|---|---|
| Revenue | $0 for the quarter; $360,000 for the six months | $0 for Q2 and six months of 2016 |
| Gross profit and margin | None in Q2; six-month gross profit $109,000, approximately 30% margin | No revenue reported in 2016 periods |
| Operating expenses | $2.251 million for Q2; $4.753 million for six months | $2.442 million and $5.043 million, respectively, in 2016 |
| Net loss | $2.236 million for Q2; $4.615 million for six months | $2.431 million and $5.020 million, respectively, in 2016 |
| Net loss per share | $0.14 for Q2; $0.30 for six months | $0.19 and $0.39, respectively, in 2016 |
| Cash and cash equivalents | $5.460 million | $1.259 million at December 31, 2016 |
| Working capital | $5.043 million | $208,000 at December 31, 2016 |
| Cash flow | Six-month operating cash use $4.230 million; investing cash use $236,000; financing inflow $8.667 million | 2016 six-month operating and investing cash use were $4.901 million and $711,000; no financing inflow |
| Lease liabilities | $430,000 total: $155,000 current and $275,000 long term | $503,000 total at December 31, 2016 |
The January rights offering generated approximately $9.6 million gross and $8.7 million net proceeds. Total assets were $8.621 million and stockholders’ equity was $7.179 million at June 30. The filing reports no off-balance-sheet transactions and does not identify other borrowings.
Changes versus prior periods
- Six-month sales of $360,000 and gross profit of $109,000 were recorded in 2017, versus no sales in the comparable 2016 period. Revenue came from two completed flare retrofits; Q2 itself had no revenue.
- Six-month operating expenses fell $290,000, and net loss narrowed $405,000 year over year. Management attributed expense reductions primarily to lower Duplex field-testing and development costs and lower intellectual-property expenses.
- Cash and working capital increased substantially, mainly due to the January equity offering. Operating cash use remained significant.
- Common shares outstanding rose to 15,603,853 from 12,983,938 at year-end 2016. The offering also issued 2,395,471 warrants, exercisable at $4.00 through January 25, 2019.
Outlook, commentary and risks
- Management estimated available cash would fund ongoing activities through the end of Q1 2018 and anticipated needing additional capital thereafter. The company expects operating losses and negative cash flow for the foreseeable future; there is no assurance that financing will be available or that the company will achieve profitability.
- Three remaining flare retrofits under a roughly $900,000 customer contract, with approximately $540,000 of contract value, were expected to be completed during 2017, subject to the customer’s schedule. Other Duplex installation contracts had an aggregate value of approximately $280,000. These are expectations, not guaranteed revenue.
- Management planned field testing a new Duplex Plug & Play burner at a Texas refinery in fall 2017. Licensing and OEM arrangements were being pursued, but the company reported no licensing agreements and did not expect one before further field development and installations.
- Management said Duplex retrofit sales could eventually normalize at approximately 50% gross margins; this is an expectation, not a reported result. The company reported approximately 30% gross margin on six-month 2017 sales.
- Key risks include limited cash and recurring losses, dependence on further financing, uncertain customer acceptance and commercialization, competition and changing technology, oil-market conditions, and the ability to meet emissions-performance requirements. One customer accounted for 100% of accounts receivable at both June 30, 2017 and December 31, 2016.
- The company early adopted new revenue-recognition and lease-accounting standards retroactively; management reported no changes to previously reported financial statements from revenue-standard adoption. No material legal proceedings were reported. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Investor verification checklist
- Confirm cash runway assumptions, monthly cash burn, and the timing and terms of any additional financing.
- Track completion, customer acceptance, and cash collection for the remaining flare units and other installation contracts.
- Verify whether Plug & Play field testing and other commercialization milestones occur as planned, and whether any licensing agreements are executed.
- Assess customer concentration and the potential dilution from outstanding warrants, options, and future equity issuance.
- Monitor actual gross margins, recurring revenue, operating losses, and operating cash use against management’s expectations.