Business context and reporting period
ClearSign Combustion Corporation’s unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016. The company develops combustion technologies, principally Duplex and Electrodynamic Combustion Control (ECC). It reported its first meaningful product sale in the quarter, while remaining an early-stage business with limited revenue.
Financial performance and position
| Metric | Q3 2016 | Nine months 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $260,000 | $260,000 | $0 |
| Gross profit | $213,000 | $213,000 | $0 |
| Operating expenses | $4.066 million | $9.109 million | $1.969 million; $5.371 million |
| Net loss | $3.846 million | $8.866 million | $1.961 million; $5.340 million |
| Basic and diluted loss per share | $0.30 | $0.69 | $0.15; $0.43 |
| Cash used in operations | $6.417 million for nine months | $4.800 million for nine months |
Reported Q3 gross profit included $144,000 of earlier project costs expensed as research and development; including those costs, gross profit would have been $69,000, or 26% of sales. Management expects Duplex product margins to normalize over time near 50%.
At September 30, cash and cash equivalents were $3.558 million, versus $10.985 million at December 31, 2015; working capital was $2.434 million, versus $9.564 million. Total assets were $6.106 million and stockholders’ equity was $4.348 million. The balance sheet reports no debt. Investing activities used $1.010 million over nine months; there were no financing cash flows in the period. The filing does not provide a clear cash-runway estimate.
Material changes versus prior period
- Revenue rose from zero to $260,000, from a completed Duplex wellhead flare installation for a major California oil producer.
- Nine-month net loss increased to $8.866 million from $5.340 million. Operating expenses increased by $3.738 million, reflecting higher R&D and G&A, including patent impairment charges.
- The company recorded $1.971 million of nine-month impairment and abandonment charges on pending patents, including $1.739 million in Q3. It reduced pending patent matters from 146 to 80 and retained 21 issued patents.
- Cash declined by $7.427 million during the first nine months, while the comparable 2015 period included $16.563 million of financing cash inflows.
Outlook, commentary and risks
Following acceptance of the first flare unit, ClearSign contracted to supply five additional units to the same customer for approximately $900,000, expected to be completed over three to nine months, subject to the customer’s schedule. The company reported that two refinery installations and one enhanced-oil-recovery unit were completed and accepted after quarter-end; related revenue was expected in later periods. It also reported $361,000 in post-quarter sales completions.
Management cited successful field demonstrations and emissions results exceeding current local Best Available Control Technology levels in four California installations. It plans to continue field testing, develop applications and pursue licensing, but had no licensing agreements and did not expect any before completing further field development and installations. These statements are forward-looking, not guaranteed results.
The company expects operating losses and negative cash flow for the foreseeable future and says adequate funding is necessary. It has no committed financing source and warns that inability to raise funds could force spending reductions or curtailed operations. It had an effective shelf registration permitting up to $30 million of securities offerings. Key risks include commercialization and customer adoption, competition, technology and manufacturing execution, financing needs, and continued viability. The filing reports no legal proceeding believed likely to have a material adverse effect. Management stated disclosure controls were effective as of quarter-end.
Most important facts for investors to verify
- Whether the approximately $900,000 multi-unit contract and post-quarter installations were completed, accepted, and converted to recognized revenue and cash receipts.
- Cash burn, available financing, and expected funding needs relative to the $3.558 million quarter-end cash balance.
- Whether reported gross margins improve toward management’s approximate 50% expectation as additional units are delivered.
- Commercial progress across the refinery and enhanced-oil-recovery projects, and whether field results translate into repeat sales or licensing agreements.
- The effects of patent abandonment and impairment on the protection and commercial value of the remaining intellectual-property portfolio.