ClearSign Combustion Corporation — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016; quarterly figures below are for the fourth quarter where noted. The filing’s registrant name is ClearSign Combustion Corporation.
Business context
The company develops combustion and emissions-control technologies. Its Duplex platform uses a porous ceramic tile to reduce emissions and flame length; its Electrodynamic Combustion Control (ECC) technology uses a computer-controlled electric field. Duplex was moving from field development toward commercialization in oilfield steam generators and flares, and refinery process heaters. ECC remained at the laboratory-research stage. The company reported nominal revenue since its 2008 inception and has historically financed operations mainly by selling securities.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $621,000 | $61,000 |
| Cost of goods sold | $485,000 | $50,000 |
| Gross profit and margin | $136,000; 22% | $11,000; approximately 18% |
| Research and development expense | $4.831 million | $2.932 million |
| General and administrative expense | $6.510 million | $5.021 million |
| Operating loss | $11.205 million | $7.942 million |
| Net loss / loss per share | $11.173 million / $0.86 | $7.898 million / $0.63 |
| Cash used in operating activities | $8.672 million | $6.261 million |
| Cash and cash equivalents at year-end | $1.259 million | $10.985 million |
| Working capital at year-end | $355,000 | $9.564 million |
FY2016 fourth-quarter revenue was $361,000, with a gross loss of $77,000 and net loss of $2.306 million. No debt balance or interest expense is reported in the supplied financial statements; reported liabilities were primarily accounts payable, accrued compensation, deferred rent, and contract billings. At year-end, current assets were $1.897 million and current liabilities were $1.542 million.
Material changes and unusual items
- Revenue increased sharply from a small 2015 base, reflecting completion and acceptance of four conditional customer contracts. The company recorded its first meaningful product sales in 2016.
- Operating expenses rose 43% to $11.341 million, including higher field-testing and personnel costs. A $1.971 million impairment and abandonment charge on capitalized pending patents contributed to G&A expense and was added back in the cash-flow reconciliation.
- Contract accounting affected reported project economics: certain pre-completion costs had been expensed as R&D, while later costs were recorded as cost of goods sold when contracts were completed. Management said initial projects were more costly than expected and anticipated future Duplex retrofit gross margins of approximately 50%.
- Cash fell by $9.726 million during 2016. Operating activities used $8.672 million and investing activities used $1.054 million; there were no financing cash flows in 2016.
- In January 2017, after year-end, the company raised approximately $8.7 million net through a rights offering of common shares and warrants. Management believed the proceeds would fund operations for at least the next 12 months. The offering increased potential dilution.
Outlook, commentary, and risks
Management planned further Duplex field validation, including testing the Duplex Plug & Play burner at a Texas refinery, and continued development of customer and OEM relationships. The company had a $900,000 agreement for five additional flare retrofits, with completion dependent on customer equipment availability; revenue was to be recognized as units were installed and accepted. The company had no licensing agreements at the filing date. ECC development remained dependent on further research and potential collaborative funding.
Management cited the potential for emissions requirements and operating-efficiency savings to support demand, while acknowledging that actual adoption, performance, and profitability were uncertain. The filing states that the technologies had not been independently tested or verified. Key risks include continued losses and negative cash flow, dependence on additional financing, unproven commercial acceptance and margins, technical and installation challenges, competition from established suppliers, regulatory changes, permitting and safety risks, and intellectual-property protection. The company reported an accumulated deficit of $40.331 million and expected operating losses and negative cash flow for the foreseeable future.
The independent auditor gave an unqualified opinion on the financial statements, but did not audit or express an opinion on internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016.
Most important facts for investors to verify
- Whether the five contracted flare retrofits are completed and accepted, and when the associated deferred billings are recognized as revenue.
- Whether field performance, emissions results, and claimed efficiency benefits are independently validated and lead to repeat commercial orders.
- Whether gross margins improve from the reported 22% as project costs and completed-contract accounting effects normalize.
- Whether the January 2017 offering proceeds provide the stated runway, given cash burn and continuing operating losses.
- The potential dilution from the offering warrants, outstanding options and warrants, and future equity financing needs.