ClearSign Combustion Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing identifies the registrant as ClearSign Combustion Corporation.
Business context
The company develops combustion technologies intended to improve energy efficiency and reduce emissions, including Electrodynamic Combustion Control (ECC) and Duplex. It had generated no significant revenue since inception and relies primarily on equity financing.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $0 | $50,000 | $0 | $50,000 |
| Operating expenses | $1.722 million | $1.381 million | $4.998 million | $4.151 million |
| Operating loss | $1.722 million | $1.365 million | $4.998 million | $4.135 million |
| Net loss | $1.721 million | $1.362 million | $4.994 million | $4.125 million |
| Loss per share | $0.18 | $0.15 | $0.53 | $0.47 |
- For the nine months, R&D expense was $1.836 million and general and administrative expense was $3.162 million. The company attributed increases primarily to higher staffing and testing costs, business development and marketing, and patent impairment.
- Gross profit was $16,000 on Q3 2013 revenue; there was no revenue or gross profit in 2014. A 2014 gross margin is therefore not meaningful.
- Cash and cash equivalents were $3.277 million at September 30, 2014, compared with $2.688 million at December 31, 2013. Working capital was $2.477 million, versus $1.923 million.
- Nine-month operating cash outflow was $4.293 million; investing outflow was $957,000; financing inflow was $5.839 million. Financing included approximately $5.780 million net proceeds from a March stock offering.
- Total liabilities were $985,000, comprising current liabilities of $949,000 and deferred rent of $36,000. The balance sheet reports no borrowings or other debt.
- Total assets were $6.031 million and stockholders’ equity was $5.046 million. Accumulated deficit was $18.958 million.
Material changes and notable items
- Compared with the prior-year periods, nine-month operating expenses rose $847,000 and net loss increased $869,000. Q3 net loss increased $359,000 year over year.
- In March 2014, the company sold 812,500 shares at $8.00 per share, raising $6.5 million gross and approximately $5.8 million net. Shares outstanding were 9,667,731 at September 30; the filing reports 9,676,069 as of November 13, 2014.
- The company recorded patent-abandonment impairment of $59,000 in Q3 and $67,000 for the nine months.
- In July, ClearSign entered a field-test agreement with Aera Energy to retrofit and test Duplex technology in a once-through steam generator. Potential future purchases are conditional on successful testing and Aera’s election; the filing provides no guaranteed revenue from the arrangement.
Outlook, risks and contingencies
- Management expected cash to fund activities at least through early 2015. The company expected ongoing operating losses and negative cash flow and had no committed source of future financing.
- Management cited potential follow-on equity or debt financing, co-development agreements, and sale or licensing of intellectual property as possible funding alternatives. If funding is inadequate, the company may reduce spending or curtail or suspend operations.
- Management described development and commercialization as uncertain: there is no assurance of customer acceptance, additional co-development revenue, successful commercialization, profitability, or continued operation as a going concern.
- Expected capital expenditures were approximately $0.5 million annually, subject to operating and co-development needs. No specific earnings or revenue guidance was provided.
- The filing reports no legal proceedings and no off-balance-sheet transactions. Management stated that disclosure controls were effective and that no material changes to internal controls occurred during the quarter.
Investor verification checklist
- Verify the progress, test criteria, results, and any resulting purchase decision under the Aera Energy field-test agreement.
- Track cash burn against the early-2015 funding estimate and assess the timing and terms of any additional financing.
- Confirm whether co-development or other commercial agreements generate material revenue; reported revenue was zero for the 2014 quarter and nine-month period.
- Review changes in R&D, business development, patent-protection spending, and patent impairment.
- Assess potential dilution from outstanding options, warrants, and future equity issuance.