ClearSign Combustion Corporation — Q1 2014 Form 10-Q
Business and period: The filing identifies the registrant as ClearSign Combustion Corporation, a development-stage company developing combustion-efficiency and emissions-control technologies, including ECC and Duplex. This unaudited report covers the three months ended March 31, 2014, compared with Q1 2013. The company reported no significant operating revenues to date; it had received $93,000 in cumulative co-development revenue since inception.
Financial highlights
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Revenue | No co-development revenue | No revenue in Q1 2013 |
| Operating expenses | $1.647 million | $1.361 million in Q1 2013 |
| Operating loss | $1.647 million | $1.361 million in Q1 2013 |
| Net loss | $1.646 million; $0.18 per share | $1.357 million; $0.15 per share in Q1 2013 |
| Cash and cash equivalents | $6.503 million | $2.688 million at December 31, 2013 |
| Working capital | $5.939 million | $1.923 million at December 31, 2013 |
| Total assets / liabilities | $8.720 million / $646,000 | $4.702 million / $914,000 at December 31, 2013 |
| Cash flows | Operating use $1.636 million; investing use $345,000; financing inflow $5.796 million | Q1 2013 operating use $1.069 million; investing use $303,000; no financing inflow |
With no Q1 revenue, gross margin was not meaningful. The balance sheet reports no outstanding borrowing at March 31, 2014; the filing does not provide a separate debt metric. Cash and working capital increased primarily due to the March equity offering.
Changes and notable items
- Operating expenses rose $286,000 year over year: R&D increased $149,000 to $607,000, mainly from $88,000 higher personnel compensation and $61,000 higher consumables and testing costs. G&A increased $137,000 to $1.040 million, primarily due to $119,000 higher marketing costs.
- Net loss increased $289,000 from Q1 2013. The company recorded an $8,000 impairment from abandoned capitalized patents.
- In March, the company issued 812,500 shares at $8.00 per share, generating $6.5 million gross and approximately $5.8 million net proceeds. It also issued the placement agent a warrant for 20,313 shares at $10.00 per share. Shares outstanding increased to 9,631,913 from 8,810,674 at December 31, 2013.
- Patent and other intangible-asset spending was $328,000 in Q1 2014, compared with $162,000 in Q1 2013.
Outlook, risks, and contingencies
- Management expected the March offering proceeds to fund activities at least through January 2015. Planned use included approximately $2 million for R&D and capital expenditures, $1 million for intellectual-property protection, $1 million for business development and marketing, and the balance for working capital and general purposes. Annual capital expenditures were estimated at approximately $500,000.
- The company expected continued operating losses and negative cash flow for the foreseeable future. It had no committed financing source and said it might seek further equity or debt financing, co-development arrangements, or asset sales or licenses. If funding or commercialization efforts fail, it may reduce development plans or curtail or suspend operations.
- Commercialization, customer demand, technology development, competition, manufacturing capability, and access to financing were identified as significant risks. The company was pursuing a broad development program with two solid-fuel combustion companies, but stated that additional revenue or final agreements were not assured.
- Minimum future office and laboratory lease payments totaled $402,000 through February 2017, excluding triple-net operating costs. A former legal adviser’s related party claimed an entitlement to acquire 25,250 shares at $0.02 per share; the company disputed the claim and reported no further communication since March 2012. Legal proceedings were otherwise listed as not applicable.
Important facts for investors to verify
- Whether cash burn, planned spending, and additional financing needs remain consistent with management’s stated funding runway through January 2015.
- Progress and commercial terms of co-development projects, including potential follow-on work with Covanta and Grandeg and the newer solid-fuel program.
- Evidence that ECC or Duplex can be commercialized, attract customers, and generate revenue sufficient to support operations.
- Effects of equity issuance, options, and warrants on dilution; and the status of the disputed 25,250-share claim and other contractual commitments.