ClearSign Combustion Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. ClearSign designs and develops combustion technologies, principally Duplex, intended to reduce emissions and improve efficiency. Its technologies remained in field development, with only nominal revenue historically.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $530,000 |
| Gross profit (loss) | $0 | ($20,000) | ($1,000) | $115,000 |
| Operating expenses | $2.447 million | $2.370 million | $4.823 million | $4.783 million |
| Operating loss | ($2.447 million) | ($2.390 million) | ($4.824 million) | ($4.668 million) |
| Net loss | ($2.426 million) | ($2.389 million) | ($4.755 million) | ($4.667 million) |
| Loss per share, basic and diluted | ($0.09) | ($0.11) | ($0.18) | ($0.24) |
No meaningful revenue-based margin is available for 2019 because revenue was zero. Q2 R&D expense declined 15% to $864,000, while general and administrative expense rose 17% to $1.583 million. For the first half, R&D fell 18% to $1.766 million and G&A increased 16% to $3.057 million. The filing attributes the G&A increase primarily to a $396,000 patent impairment charge.
Cash flow and balance sheet: First-half operating cash use was $3.967 million, versus $4.581 million in 2018. Investing activities provided $4.675 million, mainly from $4.935 million in Treasury bill maturities; the company spent $243,000 on patents and intangible assets and $17,000 on fixed assets. There were no financing cash flows in the period. Cash and cash equivalents were $9.657 million at June 30, up from $8.949 million at year-end; short-term investments were $1.988 million, down from $6.923 million. Working capital was $10.859 million, compared with $14.774 million at December 31, 2018.
Total liabilities were $1.536 million, including $269,000 in current and long-term lease liabilities. The filing reports no conventional borrowings. Total assets were $14.240 million and stockholders’ equity was $12.704 million. Accumulated deficit was $64.266 million.
Changes, outlook, and risks
- First-half revenue fell from $530,000 to zero; the 2018 revenue came from completed flare projects. The filing reports no Q2 revenue in either year.
- First-half net loss increased by $88,000, or about 2%, despite higher interest income ($69,000 versus $1,000), reflecting no 2019 gross profit and higher G&A. Weighted-average shares increased to 26.7 million from 19.5 million for the six-month comparison.
- The $396,000 patent impairment followed a review of portfolio cost-effectiveness and commercial relevance. Management said the impairment reflected a focus on patents with significant future commercial value.
- Management expected available cash and cash equivalents to fund ongoing activities for at least 12 months from the filing date, assuming expenses did not increase significantly and no material acquisitions occurred. The company expected continued operating losses and negative cash flows and had no committed financing source. Future funding could require partnerships, co-development, equity or debt financing, licensing or asset sales.
- Commercialization depends on further technology development, market acceptance, successful installations and adequate financing. Risks include competition, changing regulation, customer demand, manufacturing capability, and the possibility of needing to reduce or cease operations if financing is unavailable. The company reported no material pending legal proceedings.
- The company received a Nasdaq letter on July 9, 2019 confirming it had regained compliance with all listing requirements. Management assessed disclosure controls as effective at June 30, 2019 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash runway and actual operating cash use against management’s conditional 12-month funding estimate.
- Progress toward revenue-generating installations, customer acceptance, and commercial or strategic partner agreements.
- Patent portfolio changes and the effect of the impairment on the remaining intellectual-property base.
- Equity compensation and potential dilution: outstanding options totaled 2.17 million shares at June 30, 2019; common shares outstanding were 26.70 million.
- Whether Nasdaq listing compliance remains in good standing and whether additional financing will be required.