Clearsign Technologies Corp quarterly report, Q2 FY2018

Business context and reporting period

ClearSign Combustion Corporation (the registrant named in this filing) designs and develops combustion technologies, including Duplex, intended to improve emissions and operating performance. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparative periods are Q2 and first-half 2017. The company remains in commercialization and field-development stages, with nominal revenue relative to operating costs.

Financial performance and position

MetricQ2 2018 / June 30, 2018Comparable period / prior year-end
Revenue$0 for Q2; $530,000 for six months$0 for Q2 2017; $360,000 for six months 2017
Gross profit (loss)Q2: $(20,000); six months: $115,000, approximately 22% marginQ2 2017: $0; six months 2017: $109,000
Operating expensesQ2: $2.370 million; six months: $4.783 millionQ2 2017: $2.251 million; six months 2017: $4.753 million
Net lossQ2: $2.389 million; six months: $4.667 millionQ2 2017: $2.236 million; six months 2017: $4.615 million
Basic and diluted loss per shareQ2: $0.11; six months: $0.24Q2 2017: $0.14; six months 2017: $0.30
Cash and cash equivalents$8.359 million$1.247 million at December 31, 2017
Working capital$7.680 million$263,000 at December 31, 2017
Cash flow from operations$(4.581) million for six months$(4.230) million for six months 2017

First-half revenue increased 47% year over year, while gross profit rose modestly. Operating expenses were nearly flat for the half: lower research and development spending was largely offset by higher general and administrative costs, principally intellectual-property expenses. First-half net loss increased 1%; Q2 net loss increased about 7%. Loss per share was lower than the prior-year periods, while weighted-average shares increased.

First-half investing cash outflow was $230,000, including $211,000 for patents and other intangible assets. Financing provided $11.923 million net, primarily from the February 2018 equity offering. Total liabilities were $1.524 million, including $276,000 of lease liabilities; the filing reports no other material borrowing or debt balance. The company reported 21,417,909 common shares outstanding at June 30, 2018.

Changes, outlook, and risks

  • Q2 revenue was nil, despite $530,000 of first-half revenue from completed flare, once-through steam generator (OTSG), and other projects. The filing recognizes revenue when project performance obligations are completed and accepted.
  • In July 2018, after the reporting date, the company sold 5,213,543 shares at $2.25 per share, receiving approximately $11.6 million net. Including this offering, management expected available cash to fund ongoing activities into 2020, assuming expenses do not increase significantly and no material acquisitions occur. These proceeds are not included in June 30 cash or equity.
  • Management expects operating losses and negative operating cash flow for the foreseeable future. Meaningful revenue depends on further technology development, market acceptance, and successful sales and installations. The company may need additional financing, partnerships, or licensing; it had no licensing agreements at the time of the filing and no committed source of future financing.
  • Commercial progress included completion of six contracted enclosed ground-flare units and three OTSG installations. Process-heater testing and additional installations were underway. Duplex Plug & Play remained under field testing; potential OEM licensing or manufacturing arrangements depend on successful validation.
  • Key risks include technology performance and acceptance, competition and rapidly changing technology, customer demand, commercialization and manufacturing execution, and access to capital. Management cautioned that it could need to reduce development, staffing, marketing, or other activities if funding is unavailable. The filing reports no material change to the risk factors in the 2017 Form 10-K.
  • The company reported no material legal proceedings or off-balance-sheet transactions. Management assessed disclosure controls as effective at June 30, 2018 and reported no material change in internal control over financial reporting during the quarter.

Investor verification priorities

  1. Confirm the timing and terms of the July 20, 2018 share offering, registration-rights obligations, and post-offering share count; the filing reports 26,631,452 shares outstanding as of August 13, 2018.
  2. Track cash use against management’s conditional runway estimate into 2020, particularly operating cash outflows and any need for additional financing.
  3. Verify whether Duplex field tests and installations meet emissions and operational criteria, convert into repeat orders, and support customer acceptance or licensing.
  4. Reconcile project-level revenue, completion/acceptance milestones, and gross margins, given no Q2 revenue and dependence on project completion for recognition.
  5. Assess dilution from outstanding options and warrants: the filing reports 2,495,784 warrants outstanding at June 30, 2018, including 2,395,471 exercisable at $4.00 with a weighted remaining life of 0.57 years.