ClearSign Combustion Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. ClearSign develops combustion technologies, principally Duplex, intended to reduce emissions and improve operating performance; its ECC technology remains in development. The filing reports limited commercial revenue to date.
Financial results and position
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Revenue | $0 | $360,000 | $260,000 in both Q3 and nine months |
| Gross profit (loss) | $(15,000) | $94,000 | $213,000 in both periods |
| Operating expenses | $2.460 million | $7.213 million | $4.066 million Q3; $9.109 million nine months |
| Operating loss | $(2.475) million | $(7.119) million | $(3.853) million Q3; $(8.896) million nine months |
| Net loss | $(2.472) million | $(7.087) million | $(3.846) million Q3; $(8.866) million nine months |
| Loss per share | $(0.16) | $(0.46) | $(0.30) Q3; $(0.69) nine months |
Q3 gross margin was negative; the company recorded a $15,000 warranty-reserve increase. Nine-month gross margin was approximately 26%. Management said the 2017 sales came from two enclosed-flare installations completed in Q1. Cash and equivalents were $3.511 million at September 30, versus $1.259 million at December 31, 2016. Working capital was $2.691 million. Nine-month operating cash use was $6.076 million; investing cash use was $339,000, while financing provided $8.667 million. The company had $392,000 of lease liabilities on the balance sheet and disclosed no off-balance-sheet transactions; no borrowing balance is reported.
Changes and notable items
- Net loss narrowed by $1.374 million in Q3 and $1.779 million for the nine months year over year. Operating expenses declined, mainly due to lower intellectual-property writeoff costs; R&D spending rose in Q3 with increased Duplex field testing.
- Patent-pending impairment losses were $1.739 million in the first nine months of 2017, versus $1.971 million in 2016; none was recorded in Q3 of either year.
- The January rights offering raised $9.6 million gross and approximately $8.7 million net, issuing 2,395,471 shares and the same number of warrants. Shares outstanding were 15,606,353 at September 30.
- ClearSign early adopted the new revenue-recognition standard and applied it retroactively; management said prior-period reported results required no adjustment. Revenue is generally recognized when project performance obligations are completed and accepted.
Outlook, risks and contingencies
Management expected existing cash to fund operations into Q1 2018 and anticipated needing additional capital to continue thereafter. It expected ongoing losses and negative cash flow and warned that financing was not assured, raising substantial uncertainty about the company’s ability to continue as a going concern. Potential funding sources include equity or debt, co-development or strategic partnerships, and licensing or sale of intellectual property.
Management expected the remaining three units under a $900,000 flare contract—approximately $540,000 in contract value—to be completed in Q4 2017 and early 2018, subject to the customer’s schedule. The company also reported other Duplex customer contracts and field-test activity. It described development of the Duplex Plug & Play burner and ECC laboratory work, but provided no quantified revenue or profitability guidance and had no licensing agreements in place. Key risks include commercialization and customer acceptance, competition and technology development, financing needs, and dependence on successful product performance. Management reported disclosure controls were effective and no material legal proceedings known to it.
Important facts for investors to verify
- Cash runway assumptions, funding plans, and progress securing capital beyond Q1 2018.
- Customer timing, acceptance, and revenue recognition for the remaining flare installations and other contracts.
- Evidence of sustained commercial demand, product performance, regulatory acceptance, and progress toward licensing or OEM arrangements.
- Warranty exposure, further patent impairments, and the potential dilution from outstanding warrants and equity plans.