ClearSign Combustion Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The company was a development-stage business developing combustion-efficiency and emissions-control technology; it had not begun planned principal operations and had generated no operating revenue since its January 2008 inception.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development expense | $331,485 | $193,742 | $887,039 | $313,880 |
| General and administrative expense | $810,557 | $598,886 | $2,144,650 | $2,078,215 |
| Total operating expenses | $1,142,042 | $792,628 | $3,031,689 | $2,392,095 |
| Net loss | $1,132,220 | $791,159 | $3,016,650 | $2,389,581 |
| Basic and diluted loss per share | $0.13 | $0.16 | $0.42 | $0.57 |
Margins are not meaningful because the company reported no revenue. Q3 net loss increased approximately $341,000 year over year; nine-month net loss increased approximately $627,000. The nine-month operating-expense increase was driven chiefly by higher R&D spending, while 2012 G&A included public-company costs and higher compensation. The prior-year comparison included a nonrecurring $1 million stock-based consulting expense.
Cash flow, balance sheet and financing
- At September 30, cash and cash equivalents were $9.64 million, total current assets $9.81 million, working capital $9.10 million, total assets $10.54 million and stockholders’ equity $9.79 million. Working capital was $623,000 at December 31, 2011.
- Total liabilities were $749,000, including $714,000 of current liabilities. No promissory-note balance remained at quarter-end; the company reported no material long-term debt.
- Nine-month cash used in operating activities was $1.91 million; investing cash outflow was $528,000, primarily for fixed assets and patents/intangibles. Financing provided $11.15 million, mainly from the IPO.
- The April–May 2012 IPO sold 3.45 million shares at $4 per share, generating $13.8 million gross proceeds and approximately $11.2 million net cash proceeds after offering costs. Shares outstanding rose to 8,752,015 from 5,153,216 at year-end 2011.
Outlook, commentary and risks
- Management expected IPO proceeds to fund activities at least through April 2014. Its stated intended allocation was approximately $4 million for R&D and related capital spending, $2 million for intellectual-property protection, $1.75 million for market exploration, and the balance for working capital and general corporate purposes. Capital spending was estimated at $0.5–$1.0 million annually; hiring of up to approximately 20–30 employees was contemplated but dependent on development needs.
- The company reported a successful laboratory demonstration of its technology at 1,000,000 BTU per hour and was pursuing co-development work with established companies. It cautioned that development is unpredictable and there was no assurance of commercial acceptance, future revenue, profitability, or sufficient financing beyond the expected runway.
- Principal risks identified include continued losses, uncertain customer demand and commercialization, competition and technological change, manufacturing capability, and the possibility that additional financing may not be available. Management said operations could be curtailed or suspended if financing and alternative plans proved inadequate.
- A former legal adviser asserted that a related party could acquire 25,250 shares at $0.02 per share under a 2007 engagement letter. The company denied the claim, citing its view that the matter had been settled in November 2011. The filing does not quantify a potential financial exposure.
- The company’s 2011 audited statements had included a substantial-doubt going-concern paragraph; management said the subsequent IPO proceeds were expected to fund operations through at least April 2014. No formal revenue or earnings guidance was provided.
Key facts for investors to verify
- Cash availability and actual monthly burn, including whether the reported cash balance includes the $8.5 million 90-day certificate of deposit described in the filing.
- Progress from laboratory demonstration to field testing, co-development agreements, commercial products and revenue.
- Whether spending, hiring and capital-expenditure plans remain consistent with the forecast runway through April 2014.
- Status and potential dilution or cost from the disputed 25,250-share claim, and outstanding options and warrants.
- The filing describes IPO net proceeds as approximately $11.2 million in its proceeds discussion, while another passage refers to $11.64 million including stock issued to legal counsel; clarify the differing presentation when reconciling use of proceeds.