ClearSign Technologies Corporation (CLIR) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the ClearSign Combustion Corporation Fourth Quarter and Full Year 2015 Conference Call. At this time, all participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Matthew Selinger at Three Part Advisors. Please go ahead sir.

Thank you, operator. Greetings and welcome to the ClearSign Combustion Corporation Fourth Quarter and Full Year 2015 Results Conference Call. During the course of this conference call, the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes remarks about the corporations' projections, expectations, plans, beliefs and prospects. These statements are based on judgments and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties associated with the forward-looking statements made in this conference call include, but are not limited to the following; any unexpected significant increase in ClearSign’s monthly cash requirements, ClearSign’s ability to access financing, if it needs to do so, the possible negative effects of declining oil prices, weather field testing of ClearSign’s products will be successful, whether ClearSign will be successful and sustaining the market for its products including by licensing technology and other risks that are described in ClearSign's public periodic filings with the SEC, including the discussion in the Risk Factors sections of our 2015 Annual Report on the Form 10-K. Investors or potential investors should read these risks. ClearSign assumes no responsibility to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. So on the call with me today are Steve Pirnat, Chairman and Chief Executive Officer of ClearSign Combustion Corporation and Jim Harmon, Chief Financial Officer. So with that, I will now turn the call now over to Jim. Jim?

Thank you everyone for joining us this afternoon. Before I turn the call over to Steve, I’d like to review our results for the quarter and year as they they've been reported on our 10-Q and this afternoon's press release. For the fourth quarter of 2015, we recorded a loss of $2,558,000, compared with a loss of $2,303,000 in the fourth quarter of 2014, an increase of $265,000. For the year the company had a loss of $7,898,000 compared to a loss of $7,296,000 in 2014, an increase of $602,000. In the fourth quarter, we recorded revenue of $61,000 in gross margin of $11,000 related to the engineering of a Duplex installation at an oil refinery. The increase loss was primarily due to our increased field testing and development efforts related to Duplex Technology. As to our cash resources, we had a $11 million of cash at year end and our cash balance decreased by $1.7 million in the fourth quarter. As such, you can see that we have about six quarters of cash on hand based on our current rate of usage and without considering any income from sales. We currently have seven field test projects regarding our Duplex Technology. Two related to OTSGs in the enhanced oil recovery industry, one related to Wellhead Enclosed Flares and four related to process heaters in the oil refining industry. Three of these projects are in a design phase and four are in the field work stage. Our field work has been successful to date in registering NOx emission levels within the customer and relevant regulatory body and specifications. However, there remains certain additional field work required before we can complete the installations and commissioning processes, which Steve will speak to you shortly. Six of the seven field test projects agreements include payments once the project is completed and the installed unit is operating to the customer satisfaction. Some of these agreements include stage revenue recognition similar to the oil refinery where we’ve recognized revenue in the fourth quarter of 2015 related to the project engineering. As each of these projects or stages of projects are completed and the cash collected in accordance with the related agreements. We expect to recognize small amounts of revenue. As we move forward with commercial sales of Duplex, we would anticipate more traditional sales terms, but would still recognize the revenue once we are assured of customer acceptance. As such, it should be clear to our investors why we believe that successful completion of field development projects is critical to the commercialization of our Duplex product. Our business plan contemplates licensing our technology after we prove commercial viability and generate interest from original equipment manufacturers or OEMs. Licensing would significantly change the makeup of our revenue mix, revenue recognition and margins. While we are currently pursuing various licensing arrangements, we have no agreements at this time and did not anticipate any such agreements without completion of further development work, including the field development projects previously referenced. We believe that our ability to license our technology will be greatly enhanced by end user pole resulting from field success, completion of commercial sales and regulatory endorsements. With that, I'll now turn the call over to Steve. Steve?

Thank you, Jim and thank you everyone for joining the call today. 2015 was a transformative year for ClearSign as we continue to move from a development stage company to making commercial inroads into multiple vertical markets. I would like to say that I’m proud of our progress and would like to thank the ClearSign team and our customers for making this happen. We issued a shareholder learn in January which highlighted the year’s accomplishments where we validated our Duplex Technology in a full scale field trial. Received our first commercial order for Duplex, bolstered senior R&D talent to accelerate research, validated the performance of our once-through steam generator unit, installed and operated our first unit in refinery, entered into five field trial agreements for Duplex in addition to the initial field development agreement from 2014, and finally completed a common stock offering of $17.5 million. I wanted to highlight these events to reflect on the level of progress we have achieved over the past year, and show how this will pave the way for future commercial developments. On the last couple of calls we discussed the market, our sales environment, sales cycle and then ordering from intake. As a company, we are focused on the most important catalyst in our business, which is our current pipeline of field tested installation. Simply put success of these installations will bring validation revenues and ultimately attract more customers and potential licensees of our technology. Many perspective customers and licensees are watching and they want to see our installations working successfully in the field. With that said, I would like to go over our current announced projects. Our intension is to be as transparent as possible in discussing our product development and customers. However, as we’ve mentioned before, there are times when we need to balance investor transparency with discretion due to sensitivities that surround our customers and their businesses as well as our own interest in protecting our technology and business interest. Some of our customers and future customers do not want their business and operations discussed in detail for competitive regulatory and financial reasons. In some cases, we are able to discuss more about our technology results when the client is not named, therefore we will at times discuss customers and products more generically. This is also true regarding our pipeline. We would not want to give up negotiating or competitive advantage by naming potential customers or disclosing undo details regarding our technologies prematurely. As Jim mentioned, we currently have seven field test projects with our Duplex Technology. Three of these projects are in the design phase and four are the field work stage. These projects each have differing designs and applications, also typically these projects that we take on are among the customer’s most difficult and challenging applications. Our four projects in the field are experiencing varying successes and challenges. Our goal is to achieve steady state operational success in a manner that satisfies the customer’s requirements. These particular applications have led us to utilize certain new materials and designs to address their unique applications and circumstances. As a result, we have been developing a much better understanding of our product performance and a much more robust arsenal of designs to address the market. Today we have one of these installations that has been operating fully to the customer satisfaction for the past six weeks. The three other field installations are in varying stages of development but not yet have been completed. Of our three design phase projects, one relates to the most recent announcement regarding a contract for an enclosed Wellhead Flare in Southern California. These are flares from wells where they burn off unwanted gas from the oil field. The Wellhead Enclosed Flare project is notable for a few reasons. First, the business came to us about an oil producers need to seek a solution to their NOx emissions problems. This is another example of how the word is spreading about Duplex Technology throughout the market. Secondly, the customers addressing a problem and is eager for a solution that no other supplier can competitively provide, as such the magnitude of the order can grow upon the successful installation the customer has an immediate need for five systems to be retrofitted and we are looking forward to applying our technology to create a solution. And lastly, the flare market is the new vertical market for ClearSign, albeit an adjacent market segment to our current ones. There are over a million wellheads in the U.S. alone and we feel that our technology will be applicable to a large percentage of these installations. We do not believe that a 100% of the market is addressable for Duplex, but we do think this could be a significant opportunity particularly since the Obama administration has recently expressed interest in reducing flare emissions. In terms of our untapped target vertical commercial blower market, I can say that we continue to talk with manufacturers and discussions and testing is ongoing. Our model would be to license our technology to this vertical market through blower OEMs themselves. Regarding the development of our Electrodynamic Combustion Control or ECC Technology, we continue to move forward in the lab. However, the results are still too preliminary for us to draw any conclusions. So for the foreseeable future, our lab testing is ongoing for this technology. We do not believe the applications – we do believe the applications are well suited for fuels like coal, which could be meaningful in a massive addressable market that is in die or need of an environmental emission solution. Now, let’s shift to an overview of our corporate activities. Our focus is on the successful completion of our field installations continuing to build a book of business and move from product development to product sales and licensing of our technology. We believe we are adequately capitalized to support our current development and commercialization ramp up for these technologies. After we complete the development process and can project revenues, we’ll be in a better able to address our future capital needs, if any and to consider our strategic alternatives. In closing, we have made successful intervals in our target vertical markets. We have installations in various spaces which needed to complete and the results validated. Our pipeline continues to grow as word of our technology spread throughout the market. Successful field development results with customer satisfaction are the key to driving our sales and marketing efforts going forward. Before I move to questions, I would like to thank our investors for their time, investment and support of our game changing technologies and the team at ClearSign. At this point, I’m pleased to answer some questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Lou Basenese of Disruptive Tech Research. Please go ahead.

Hey Steve, hey Jim, how you’re doing?

Yeah, hi Lou.

Hey guys, just curious if we could get some clarity on some timelines. I know in the past we’ve talked about the work with Tesoro. I’m just curious what the next phase of that is, I would assume it after doing the engineering work it’s an installation, just curious when that might occur?

Well, each shop has its own timeline, but with respect to Tesoro specifically they have asked the next phase of their implementation include a trip to one of our refinery installations where they can actually see an up fired refinery burner in operation. And we have two in the field that are coming to life in the next 30, 60 days. So we would intend to bring them both of them to California so they’re relatively close. So we would intend to bring them to these job site and let them see the ClearSign Technology operate in a refinery application and then based on that they would plot their own steps forward.

Okay, so they’re waiting for those installations. I guess moving on to those, can you just give us idea, you mentioned in the press release that you’ve had one installation in the field running for six weeks, these others ones have been – are in process. What does it look like in terms of how long we can expect them to be running before customer accepts them? Is there specific emissions levels that need to hit, what are the parameters that would dictate acceptance?

There absolutely are specific emissions levels that need to be hit, but more importantly each customer has their own “comfort level” with regard to how long something has to run before they feel good about it. And as you might aware, and in lot of refinery applications, in particular over the course of a month there are cycles in the fuel that’s actually supplied to the burner. So for example, the amount of hydrogen that supplied to the burner as a fuel source could swing fairly widely and hydrogen becomes a problematic fuel for a variety of reasons and we of course have done some testing and felt pretty good about it but the clients themselves like to see that firsthand. So, I certainly – if I were a refinery operator, I’d want to see the thing run for a couple of months before I warm up to the idea but no pun indented but you also have people that just takes six months or something longer is what’s required. In the case of respect of Tesoro I think they’re just – because their own internal schedule had slowed down, I think they just see going to the field and witnessing an application. Operating is just a prudent step along the way in the prior discussions with them, they were perfectly willing to go ahead on their own without seeing an installation. In fact, I thought at one point Lou, they were actually going to be first in terms of having something up and running.

Okay. And just some clarity if you can, would Tesoro need to wait until these other two installations in California are complete and accepted or would they be willing to go see it during the period while they’re operational?

No, they’re actually willing to go see it right now and bluntly we offered them a date to go see it and that was a few weeks ago and their guides were tied up. I think they might have actually been having a refinery turnaround and they weren’t able to make the trip.

Okay. And then it sounds like the business that came to you for Wellhead Enclosed Flares is pretty significant, I did some preliminary searches and with suggestions over a million of them in the U.S. Could you – I think you commented to it a little bit in the prepared remarks but can you provide a more concrete number around what the size of the opportunity might be for you, and then what the…

Well, it’s closer to a 1,300,000 well in the U.S. The reason that it’s difficult to really nail down the size of the addressable market is the requirements for each Wellhead Flare varies widely by geography based on who the regulatory body is, whether it’s on federal land, whether it’s state control. The project that we’re specifically working on is in Southern California, so as you know they had very, very stringent regulatory requirements. In the case of some of these oil wells in North Dakota, there is really very limited emission requirements. And what the Obama administration had suggested in a fairly recent pronouncement was that they wanted the oil producers to actually collect through gathering pipelines all the gas rather than flare it off, which is as you can imagine with the million wells a pretty impractical solution to the problem. So I think what will happen is, I think the government and regulators and the operators will get together at some point and say, let’s look at the regions, let’s look at the kind of the environment we’re in and let’s come up with the regulations that are more appropriate for the individual of geographic areas. But to make this thing simple, I mean if you’ve got a million potential applications and only 500,000 of them or half become opportunities for ClearSign, that number kind of runs your calculator out of zeros pretty quickly.

Yeah. And then just can you remind us what’s the installation timeline for these five units with this customer, does the customer have a requested timeline that they’d like to have them all done by?

Yes, they’ve given us a preliminary schedule and we’re actually in the field now retrofitting the first one.

Okay. So it’s a sooner…

So I mean – so Lou to be blunt, they like it yesterday.

Okay, great. Well I appreciate taking the questions. I’ll jump back in the queue if I have anymore.

Yeah, thanks.

[Operator Instructions] Our next question comes from Richard [indiscernible]. Please go ahead.

Yeah, thank you for taking my call. Steve and Jim, I was following your company before you guys went public when you were still in the pet and totaling venture stages. And I got to say, I’ve seen a lot of companies come along to the stage you’re at, but I congratulate you on your execution. That’s where the founders usually fall down and we hit the rocks and you’ve guys have done a phenomenal job with the major engineering projects getting through the stages. So congratulate you and look forward to that record carrying forward. And I just have two questions. First of all, is there any real effect from – or positive or negative from the really low oil and gas prices? And then I have one follow-on.

Well, first of all thank you for the observation and lot of people here are working pretty hard and we appreciate you’ve been noticing. I’d say the most profound impact on the oil prices has been in our enhanced oil recovery once-through steam generator segment where the capital budgets have really been decimated and that the amount of funding that’s going to be applied to the build out of our technology has been delayed while the operators try to figure out how they’re going to invest their precious few capital ballers. What we had going for us in the principle business driver behind ClearSign as you know isn’t really the price of oil or with the regulatory environment. So even though the price of oil has decreased and the driver in both the California market and we’re also seeing in Western Canada is still environment regulations. So we think there has been a delay in spending the money but we don’t think there is going to be an elimination of these retrofits. And so we’re somewhat frustrated by the fact that we thought a lot of the stuff was going to happen much sooner than it is, but we’re also encouraged by the fact that people we talk to still say that they need to spend the money. The government regulators are not letting them off the hook with respect to emissions requirements independently of what the price of oil is, they have to meet the requirements.

And how about natural gas, do you have applications in there where the usage of expanding because of the massive drop in the price?

Well it’s a mixed bag. In some respects the drop in the natural gas price runs counter to our capabilities of producing energy savings because in the case again, once-through steam generators when gas was $6 for a 1,000 cubic meters the savings on our product could be a year or so with now being dramatically less than that it makes the payback period a lot longer. But yes, the products we provide fundamentally burn natural gas in a refinery and I would say on a positive note, the fact that oil prices have dropped, has been a favorable event for refiners. It’s reduced one of their biggest cost which is feedstock and in the refineries themselves, most of the refineries operate on a natural blended refinery gas and that’s exactly what fueling our burners.

Okay. And my last question has to do with your comments about potential licensing of your technology. Can you just give us a timeframe in which you think is the middle point for us to get excited about that coming through?

It varies by vertical, meaning we’re talking to the boiler OEMs on a different timeline and the discussions we’re having with some of the refinery burner companies. But I would say that the tipping point would probably be towards the end of this year and the reason I say that is by then we’ll have many of these installations up and running successfully so we’ll be able to demonstrate to the end users that the technology really works and therefore will be able to demonstrate to the potential license source that the technology really works. And it can work in the real world with the kinds of operator problems that typically occur and the kind of mixing of fuels that typically occur and all the real world’s problems that occur that make some things that work really well in the lab, not so practical when they get to the field. And as a summary I’d say, so far we’ve made some design modifications and we’ve had some challenges but we haven’t seen anything certainly in the year that I’ve been here that convinces us that we can’t achieve our objective and get this technology into the market.

Do any of those design modifications come with extra pattern coverage?

Possibly, we’re looking at some of them. One in particular certainly will, some of the changes are quite basic, there are just changes in material to go to higher temperature materials and things that are just kind of almost and off the shelf change. But again I can talk about this subject for an hour but I’m also noticed that the list of callers, some of those people are competitors of mine, so I want to be a little judicious about how much I say.

That’s why I ask if you’re discovering any intellectual property that you can only discover by actually being there, so I’ll get back in the queue. Thanks I’m really excited about how you guys are moving forward.

Appreciate, thank you, we’re excited too.

Okay.

And our next question comes from Jason Cavalier, a Private Investor. Please go ahead.

Hey guys, good afternoon.

Good afternoon.

You – one of you referenced these regulatory endorsements as something that might become strategic or is strategic to ClearSign. Can you talk a little bit about what a regulatory endorsement is and is that something that ClearSign actually have to apply for or how does that work and are there any available right now?

Well I think just to – and not to try to tick on the words. The regulators don’t really endorse technology but they do make end users where of emerging technologies that might help the end user meet a regulatory emissions requirement that they’re struggling with. And we’ve been very fortunate particularly in California and with the Texas regulators where we have been invited to conferences and then engaged with the regulators and with end user refiners and operators to be able to present our technology and discuss its capabilities. The regulators of course have divested interest in seeing the machines decrease and in the case of our technology, the fact that it’s very cost effective and in fact can have a payback based on energy savings is very attractive to the regulators and they are certainly not [indiscernible] about making end users aware of it. And we take every opportunity that we’re given in concert with the regulators to go see the end users and talk to them about it. I think we’ve really gotten that message out and we’re getting calls coming inbound now from these end users, based on this dialog that we just mentioned. And now we’re at a point where that we want to have more and more specific installations by applications operating for some reasonable period of time, but we can not only talk about it from a theoretical standpoint but we can say if you see this refinery you can talk to this person and he has got this burner or operating for eight months and has been working great. And that’s kind of where we are now.

Okay, thank you very much. I’ll go back in the queue.

[Operator Instructions]

Since there were no further questions, I’d like to thank everyone once again for attending today.

It looks like you got one from – one more Lou.

I’m sorry, I got one more from Lou. Go ahead Lou. Lou?

Hey guys, just a quick question in relation to licensing and other opportunities. I think in the last call you mentioned the Canadian once-through steam generator operators came back to you because of the change in regulatory climate up there. Any updates there in terms of where the negotiations at, what – just a general color around those talks?

Well, that’s progressing quite well Lou in great generality. But if I told you who we’re going to talk to and when we’re going to see them, I’d be afraid we get on the airplane with three of my competitors.

Yeah, no understood, I just wanted to make sure that it was still moving forward on – you’ve seem to be pretty optimistic on the last call, so.

Yeah we are really very optimistic and quite bluntly, there was a pause as we talked about at the last call, not only because of the oil prices but because of the elections that took place in Western Canada and frankly the new administration is very, very positive with respect to the environment and that’s been really a good opportunity for us. So we’re pretty excited about Western Canada as an opportunity to scale up the successes we’ve had at places [indiscernible] and to take advantage of the number of once-through steam generators that exist in Western Canada. So it’s…

Okay.

We’re pretty keen on that.

Okay, great. Thanks guys, look forward to good news gentlemen.

And ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to Steve Pirnat for any closing remarks.

Well since there were no further questions, I’d like to thank everyone once again for attending today and for your ongoing support and enthusiasm. We look forward to speaking with you again.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.