ClearSign Combustion Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. The filing describes ClearSign as a development-stage combustion-technology company with de minimis operating revenue.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Revenue | No clear revenue value is reported; the company says it has earned no significant revenue since inception. | — |
| Research and development expense | $1.325 million | $573,000 in Q1 2015 |
| General and administrative expense | $1.276 million | $1.019 million in Q1 2015 |
| Total operating expenses / operating loss | $2.601 million | $1.592 million in Q1 2015 |
| Net loss | $2.589 million; $0.20 per share | $1.583 million; $0.14 per share in Q1 2015 |
| Operating cash used | $2.723 million | $1.835 million in Q1 2015 |
| Cash and cash equivalents | $7.881 million | $10.985 million at December 31, 2015 |
| Working capital | $6.916 million | $9.564 million at December 31, 2015 |
| Total assets / stockholders’ equity | $11.343 million / $10.204 million | $14.202 million / $12.578 million at December 31, 2015 |
The filing provides no meaningful gross margin information, given the absence of significant revenue. It reports no debt on the balance sheet. Current liabilities were $1.139 million, primarily accounts payable and accrued liabilities, compensation and taxes, and deferred rent. Cash declined by $3.104 million during the quarter. Investing cash outflows were $381,000; there were no financing cash flows.
Material changes and notable items
- Operating expenses rose approximately $1.009 million year over year. R&D increased $752,000, primarily from field and laboratory testing, higher personnel costs, and field-testing and consulting costs. G&A increased $257,000, including higher consulting and public-company costs.
- Net loss increased by $1.006 million versus Q1 2015. The company attributed the increase primarily to higher operating expenses.
- A $65,000 impairment loss was recorded for abandoned capitalized patents; none was recorded in Q1 2015. Patent and other intangible asset spending was $370,000.
- The company recognized $215,000 of stock and share-based compensation-related items in its operating cash-flow reconciliation. Common shares outstanding were 12,882,471 at quarter-end; the filing reports 12,943,354 shares outstanding as of May 12, 2016.
- A remaining $275,000 liability under a former CEO’s termination agreement was due through December 2016. The office and laboratory lease runs through February 2017, with $130,000 of minimum future payments disclosed at March 31, 2016.
Business outlook, risks, and contingencies
ClearSign is developing Duplex technology for combustion systems and Electrodynamic Combustion Control (ECC). It reported eight Duplex field-test projects: four in design and four in fieldwork. The company said fieldwork had recorded NOx emissions within customer and regulatory specifications, but additional work remained before installation and commissioning could be completed. Six project agreements provide for payments after completion and customer acceptance; management anticipated only small amounts of revenue from completed trials.
In April 2016, the company announced an agreement with a major Canadian oil sands producer to design and engineer Duplex for its OTSG fleet, with completion expected within six months based on customer communications. ClearSign said it was pursuing licensing and co-development arrangements but had no licensing agreements and did not expect one before completion of the discussed field-development projects. No specific financial guidance was provided.
Management expects operating losses and negative cash flow for the foreseeable future. It stated that continued development and commercialization depend on obtaining adequate funding through partnerships, agreements, or equity or debt financing. The company had a shelf registration statement effective January 7, 2016, permitting offers of up to $30 million of securities; this is financing capacity, not cash raised. Management cautioned that insufficient funding could require reduced spending, scaled-back development, or curtailed or suspended operations. Risks include technology and customer acceptance, competition, commercialization, financing availability, and the ability to continue as a going concern. The filing reports no material legal proceedings known to the company and no off-balance-sheet transactions.
Important facts for investors to verify
- Progress, completion, customer acceptance, and payment terms for the eight field-test projects and the Canadian oil sands agreement.
- Actual cash burn and liquidity needs relative to the $7.881 million quarter-end cash balance, and whether additional financing or partnerships are secured.
- Whether commercial sales, licensing, or co-development agreements are achieved, and the timing and revenue-recognition implications.
- Patent portfolio developments, future impairment risk, and the status and timing of the remaining former-CEO termination payments.
- Potential dilution from securities issued under the shelf registration, stock plans, options, and outstanding warrants.