ClearSign Technologies Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company designs and develops combustion and emissions-control technologies, including ClearSign Core and ClearSign Eye. Its technologies remain in development and have generated only nominal revenue to date. The company changed its name from ClearSign Combustion Corporation on November 12, 2019.
Financial results and liquidity
- Revenue: None in Q3 or the first nine months of 2019. The comparable 2018 nine-month period included $530,000 of revenue from completed projects. Gross profit was nil in Q3 2019 and a $1,000 loss for the 2019 nine-month period.
- Net loss: $2.108 million in Q3 2019 versus $2.292 million in Q3 2018; $6.863 million for the first nine months of 2019 versus $6.959 million in 2018. Loss per share was $0.08 for Q3 and $0.26 year to date.
- Operating expenses: $2.138 million in Q3, down from $2.306 million; $6.962 million year to date, down from $7.089 million. Year-to-date R&D declined to $2.563 million from $3.133 million, while G&A increased to $4.399 million from $3.956 million.
- Cash flow: Operating cash use was $5.457 million for the first nine months, compared with $6.323 million in 2018. Investing activities provided $4.585 million, mainly from $4.924 million of Treasury bill maturities. There were no financing cash inflows, versus $23.511 million of net equity proceeds in the 2018 period.
- Liquidity: At September 30, cash and equivalents were $8.077 million and short-term investments were $1.999 million. Working capital was $9.196 million, down from $14.774 million at December 31, 2018. Management said available cash should fund ongoing activities for at least 12 months from the filing date, assuming expenses do not rise significantly and there are no material acquisitions.
- Balance sheet and obligations: Total assets were $12.653 million; total liabilities were $1.936 million, including $643,000 of lease liabilities. The filing reports no conventional borrowing debt. Stockholders’ equity was $10.717 million.
Material changes and unusual items
- Net loss improved modestly year over year, primarily reflecting lower R&D expense and higher interest income; year-to-date operating loss was nearly unchanged.
- The company recorded $733,000 of patent portfolio impairment for the first nine months, including $337,000 in Q3, following a review of cost-effectiveness and commercial value. This reduced the carrying value of patents and other intangible assets.
- The company extended its Seattle and Tulsa office leases, adding $505,000 of right-of-use assets and lease liabilities. The reported weighted-average remaining lease term was 3.34 years.
- Outstanding common shares were 26,704,761 at September 30. The company also reported 2,115,670 outstanding options and 80,000 warrants, which may be relevant to potential dilution.
Outlook, commentary and risks
Management described the business as dependent on further technology development, market acceptance, successful installations and access to funding. It expects operating losses and negative cash flows for the foreseeable future and has no committed financing source. Potential funding routes include strategic or co-development agreements and equity or debt financing; the company warned that inability to raise funds could require spending reductions or curtailment of operations. Management reported commercial installations across several applications and believes the technology may improve emissions, efficiency and operating performance, but these claims and the path to meaningful revenue remain subject to customer adoption and execution.
Risks highlighted include the company’s history of losses, competition and technological change, changing emissions regulation, customer demand, manufacturing capability, economic conditions, financing availability and the ability to continue as a going concern. The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of September 30, 2019.
Important facts for investors to verify
- Whether the company can convert development work and commercial interest into repeat installations and meaningful revenue.
- Whether cash and short-term investments support operations beyond management’s stated 12-month estimate, given continued operating cash use and the absence of committed financing.
- The commercial implications of the $733,000 patent impairment and the company’s continuing patent portfolio review.
- Potential dilution from outstanding options, warrants and equity-plan reserves.
- Whether actual spending, customer acceptance and partnership progress remain consistent with management’s assumptions and outlook.