ClearSign Combustion Corporation — Q2 2016 Form 10-Q
Business context and period: The company designs and develops combustion technologies, primarily Duplex and Electrodynamic Combustion Control (ECC). This unaudited report covers the quarter and six months ended June 30, 2016. The filing reports no significant revenue since inception; meaningful commercialization depends on completing field tests and achieving customer acceptance.
Financial performance and position
- Revenue and margins: No revenue is reported in the statements of operations for Q2 or the first six months of 2016 or 2015. Gross profit and operating margins are therefore not presented.
- Q2 results: Operating expenses were $2.442 million, up $632,000 from Q2 2015. Operating loss was $2.442 million; net loss was $2.431 million, or $0.19 per share, compared with a $1.796 million net loss, or $0.14 per share, a year earlier.
- Six-month results: Operating expenses were $5.043 million, up $1.641 million year over year. Net loss was $5.020 million, or $0.39 per share, compared with $3.379 million, or $0.28 per share, in the first half of 2015.
- Expense drivers: Q2 R&D increased $502,000 to $1.216 million, mainly from higher Duplex field-testing costs and personnel. Six-month R&D increased $1.254 million to $2.541 million. G&A was $1.226 million for Q2 and $2.502 million for the six months; increases included consulting costs and patent impairment, partly offset by lower personnel costs.
- Cash flow: Six-month operating cash use was $4.901 million, versus $3.162 million in 2015; investing cash use was $711,000, versus $641,000. There were no financing cash flows in the first half of 2016, compared with $16.564 million of financing inflows in 2015.
- Liquidity and debt: Cash and equivalents were $5.373 million at June 30, down from $10.985 million at December 31, 2015. Working capital was $4.580 million, versus $9.564 million at year-end. Current liabilities totaled $1.328 million; the balance sheet reports no debt.
- Equity and other items: Total assets were $9.311 million and stockholders’ equity was $7.983 million. Accumulated deficit reached $34.178 million. The company issued 60,883 shares through cashless warrant exercises and recorded $425,000 of stock-based compensation and stock issued for services during the first half.
Material changes and developments
- Losses and operating cash use increased year over year as the company expanded field development and research spending.
- Patent and other intangible assets, net, rose to $3.276 million from $2.881 million at year-end. The company recorded patent-abandonment impairment losses of $167,000 in Q2 and $232,000 in the first half.
- The company reported eight Duplex field-test projects: four in design and four in fieldwork. It said fieldwork had recorded NOx emissions within customer and regulatory specifications, while further work remained to complete installations and commissioning.
- As a subsequent event, the company disclosed an August 2016 order to retrofit flares for a major California oil producer. The multi-flare order, including a test installation nearing completion, exceeds $1 million and is expected to take six to twelve months, subject to the customer’s schedule.
Outlook, risks and contingencies
The filing provides no quantified revenue, earnings, or cash-flow guidance. Management expects operating losses and negative cash flow for the foreseeable future. Commercialization depends on successful development, customer acceptance, market adoption, and financing. Management says funding may be sought through sales, licensing or co-development agreements, equity or debt financing, or other alternatives; no licensing agreements or committed financing sources were in place. The company warns that if it cannot obtain funding, it may have to reduce development spending or curtail or suspend operations.
Key risks include limited cash and a history of losses, uncertain technology development and customer demand, competition and alternative technologies, manufacturing capability, volatile energy-sector conditions, and the ability to raise capital and continue as a going concern. The filing reports no legal proceedings believed to have a material adverse effect and no off-balance-sheet transactions. It also reports no material changes in internal control over financial reporting and states that disclosure controls were effective as of June 30, 2016.
Important facts for investors to verify
- Whether the announced flare order is completed, generates revenue under the company’s customer-acceptance accounting policy, and leads to further commercial sales.
- Cash burn, available financing, and the company’s ability to fund operations through completion of field tests and commercialization.
- Progress, costs, customer acceptance, and payment terms for the eight Duplex field-test projects; the filing says six agreements provide for payment after completion.
- Whether patent-abandonment charges or further intellectual-property spending materially affect the value of reported intangible assets and future expenses.
- Potential dilution from outstanding options and warrants, and the company’s use of its effective $30 million shelf registration statement.