ClearSign Technologies Corporation (CLIR) Q4 2017 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the ClearSign Combustion Corporation 2017 Results Conference Call. 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 also note today’s event is being recorded. At this time, I’d like to turn the conference call over to Mr. Lou Basenese, Vice President of Corporate Communications. Sir, please go ahead.

Greeting, and welcome to the ClearSign Combustion Corporation’s fourth quarter and full-year 2017 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 company’s 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. The risks and uncertainties associated with the forward-looking statements made in this conference call include, but are not limited to whether field testing and sales of ClearSign’s products will be successfully completed, whether ClearSign will be successful in expanding the market for its products and other risks that are described in ClearSign’s public periodic filings with the SEC, including the discussion in the Risk Factor section of the 2017 Annual Report on 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. On the call with me today are Steve Pirnat, ClearSign’s Chairman and Chief Executive Officer; and Brian Fike, ClearSign’s Chief Financial Officer. And with that, I’ll now turn the call over to Brian Fike.

Thank you, Lou, and thanks to, everyone, for joining us today. Before I turn the call over to Steve for his thoughts on the year, I’d like to review our financial results for 2017 as they have been reported today on our Form 10-K. For the year, we incurred a loss of $9.7 million, compared to a loss of $11.2 million for 2016. Our sales for the year were $540,000, compared to $621,000 in 2016, while our margins increased to 30% versus the 22% in 2016. We expect that margin to continue to improve as we start to do more consistent installations across our product segments. Our backlog at the end of the year consists of approximately $500,000 in projects in both the enclosed ground flare and Once Through Steam Generator product lines. These – this backlog should be recognized during the first quarter of 2018. As most of you know, we completed a stock offering on February 27 this last month, where we sold 5,750,000 shares at $2.25 each, raising a net of approximately $11.9 million to fund the company. Our cash resources were about $1.2 million at the end of the year with the proceeds of the right offering added to that and assuming no other revenue other than our known backlog, we have at least one year's worth of cash at this time. And with that, I will turn the remainder of the call over to Steve.

Thank you, Brian, for the financial update. I would like to thank and to welcome the participants on today’s call. On the call today, we intend to update our shareholders, as well as review and provide context for the events that impacted ClearSign in 2017. We will also share insights into future activities for 2018 and beyond. The company continues to make progress towards the expanded commercialization and productization of our Duplex technology. More importantly, we continue to build commercial momentum and increase customer advocacy to the expansion of field installations within our core markets. We successfully completed the installation of our third Once Through Steam Generator project for Aera Energy. This pay unit operated on a challenging waste gas application and achieved the permanent requirements for NOx emissions. Now waste gas by the way is really the waste the gas that comes off the wellhead as opposed to gas it usually goes through a pipeline. Aera was among our first commercial field installations and they have units that have been operating for over two years. As previously disclosed, ClearSign and Aera have negotiated a multiyear multi-unit contract for our Duplex technology on Once Through Steam Generators. The specific commercial terms of this agreement have not been disclosed. However, we can disclose that we are in active discussions with Aera to support their future requirements. ClearSign’s unique patented Duplex technology has been able to achieve NOx emissions performance consistent with Best Available Control Technology or BACT, as the regulators refer to it. Again, this performance was achieved without the requirements for costly Flue Gas Recirculation known as FGR or Selective Catalytic Reduction known as SCR, which are typically required to achieve similar emissions with competing products. Both FGR and SCR had cost to the system thus we provide a superior solution to meet the requirements for reduced air pollution and lower operating costs. As previously announced, we are working with a major Western Mediterranean refinery that has over a dozen process heaters, which could potentially benefit from Duplex technology. We received an initial order from them, but unfortunately, the customer has to make last-minute changes in its process conditions after the fact, which required us to cancel this particular order. We look forward to opportunities to continue to work with the same client on other applications. ClearSign continues to work closely with Exxon in a development and deployment of our Duplex technology. After the previously announced success of the joint testing at ClearSign’s headquarters in Seattle, we have moved to regular ongoing technical meetings to discuss further deployment of our technology at one location within ExxonMobil’s west refinery and petrochemical system. As a reminder, once qualification testing is completed at an Exxon facility, Exxon has indicated interest in standardizing on Duplex technology for existing heaters within the U.S. and overseas. We’re actively working with Delek Refinery in Tyler, Texas to expand use of our Duplex technology within their current FCC heater and look forward to long-term opportunities to install our technology on their various delayed coker units with the inherent advantages of Duplex technology may help the bottleneck these assets and reduce flame impingement problems. We were just down at the Tyler, Texas facility at Delek, and we’re able to help them change out a flame scanner and reinstall a ClearSign Duplex burner in the FCC heater. We’re encouraged by the continued opportunities and probability of follow-on orders from several of our California refinery customers. Our optimism for future orders in this vertical is largely result of our ability to productize our technology. You’ll recall, ClearSign’s initial commercial activities focused on retrofitting existing burner installations. However, last year, we successfully completed the development of our pre-engineered and standardized Plug and Play Duplex technology for refinery applications. This Plug and Play productization of our technology allows for simplify retrofit of existing installations and reduces the custom engineering cost and cycle time associated with retrofits. Not surprising, we have noticed a meaningful uptick in refinery customer interest following the introduction of our Duplex Plug and Play product, and are encouraged about the potential for future sales in this key end markets in 2018. As previously discussed, we also have been working towards productization of Duplex in other verticals to accelerate commercial adoption. We’re actively developing a pre-engineered fire tube boiler burner, which represents over $1 billion additional market opportunity for the company based on an independent third-party market analysis done by Frost & Sullivan. This product is currently in laboratory development stages, but is showing promising performance compared to the best products that are currently available in the market today. We’re optimistic that we will be able to leapfrog this performance with a truly breakthrough product in the foreseeable future, which will enable us to secure attractive licensing agreements. Multiple parties have already expressed interest in their results of our fire tube test in the basic Duplex technology. Additional research and development efforts are underway. Although preliminary, we have made several technical advancements, which can enable us to expand into significantly new end user markets, including the ability to develop instruments for combustion safety and improved operating efficiency of combustion systems. More work needs to be done to characterize the potential products pricing in end markets. That said, we’re encouraged by the progress we have made and we look forward to providing more clarity on these potential opportunities in the near future. Our ongoing commitment to research and development has also led to four additional patents granted in the fourth quarter, bringing our total patent portfolio to 42 granted patents and 69 applications as of December 2017. In the last year, ClearSign has focused on enhancing and strengthening the organizational capabilities by adding key members to our team. Perhaps some of you have recognized the voice of Lou Basenese, who read the Safe Harbor statement at the beginning of this call. I’m pleased to announce that Lou has joined ClearSign as Vice President of Corporate Communications and will be working with ClearSign to enhance communications and messaging to our investment community. Lou is an independent analyst that has followed Disruptive Technology Companies and he’s very familiar with the ClearSign story. Lou will be working closely with Matt Selinger at Three Part Advisors, I think they’ll make a great team. In July of 2017, Steve Sock joined ClearSign as Vice President of Business Development after 30-plus years at Amec Foster Wheeler. His extensive industry knowledge makes him ideally suited to lead our business development efforts. In November of 2017, Manny Menendez joined ClearSign as Vice President of ClearSign China. We have established ClearSign Asia Limited and ClearSign Combustion and Environmental Technologies Limited as a wholly-own foreign entity in China to facilitate and capitalize on the growing and inherent environmental business opportunities we see in China. Now Manny has an extensive background operating in China. Manny has over 30 years of experience as a businessman and entrepreneur has been successful in doing business in China and Asia Pacific region to again for more than 35 years. He is a Founder of MCM Group Holdings Limited and also 8M8 LLC. These organizations provide consulting and expertise in helping businesses develop their strategies in China and throughout Asia Pacific. We’re pleased to have Manny on board with the company. As most of you are aware, oh, pardon me – in addition to these personnel changes, we are pleased to announce the addition of Susanne Meline to the ClearSign Board of Directors. Susanne has an exceptional background in both law and financing and is very familiar with the micro-cap market and the ClearSign story. As most of you aware, China represents a huge market opportunity for ClearSign’s patented and cost-effective emissions reduction technology. We are completing as we speak a large retrofit project for a major Chinese District Heating Group, which alone is successful could represent literally hundreds of retrofit boiler burner opportunities and virtually thousands of boiler burner retrofit opportunities throughout the balance of the Chinese District Heating market. For those of you who are familiar with the District Heating business in China, you probably know that the district heating systems tend to shutdown around mid-March for the year. We’ve been given the opportunity to continue to work with one particular district heating customer and been allowed access to demonstrate our technology even beyond the current district heating season. This customer has been so compelled by the value of our technology that they also work with us through the Chinese New Year’s in order to help facilitate this installation that I refer to. We’re very optimistic about the outcome of this test and this District Heating Group, a state-owned enterprise has already expressed their intention to form a joint venture with ClearSign’s Wuxi [ph] to promote our technology throughout China. Further, we have teenagers from discussions with Sinopec, which is a state-owned refinery and petrochemical company, as well as Sinopec BAC or BASS and other blue chip Chinese companies for separate Duplex installations throughout China. As announced previously, strategic investment from potential partners like CETE [ph] and others will accelerate as commercial success evolves in China. Beyond China, we have interest in other part of Asia like Korea and Japan and continued interest in our technology throughout Europe. We remain optimistic about the long-term market opportunities and demand for our technology globally. ClearSign continues to enjoy a symbiotic relationship with regulators, whose interest in driving down emission combined with the industry’s interest in having cost-effective solutions work together. ClearSign’s patented and disruptive technology creates the paradigm shift that Clean Air can be cost-effective. ClearSign’s enclosed ground flares were successfully operated in Central California and produce emissions that were 90% below traditional flaring equipment. We received funding recently from the South Coast Air Quality Management District for a demonstration site in Southern California. While our initial partner, PVF Energy has withdrawn from this project, because their revised analysis of the asset proved to be too critical to use for a demonstration site. We believe we will find other good candidates to support us with this activity. We have up to one year from the final approval date to find a suitable partner. And we do not believe, we’ll have a problem finding one. Our technology throughout the industry is providing NOx emissions consistent with Best Available Control Technology standards at a fraction of the lifecycle cost inherent in current technologies like SCR’s. As we continue to collaborate with various regulators and operating companies, we are encouraged by the positive impact that our technology is having on the industry focus on emissions reduction and cost. We expect this unique capability of our technology to further develop into a broader range of BACT products. In closing, I’d like to reiterate I remain very excited about the opportunities for the company’s potential and technology and continues – and the continued support we are receiving from our customers and investors. At this time, I’d like to turn the call over to the operator for questions. Thank you.

Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question comes from Robert Hoffman from Princeton Opportunity Management. Please go ahead with your question.

Yes. Hi, Steve, and welcome Lou. Could you state – could you just elaborate a little bit on the Middle Eastern refinery cancellation? Just if you could give us a little more color there, that would be great? Thank you.

Yes. Well, it’s just discussed in the prepared comments that customer change conditions at the last-minute and the changes didn’t allow them to adapt our technology into the heater they selected. It was unfortunate, but they still have like 15-plus additional heaters that are suitable candidates for our technology. So in this particular case, it was more a decision that they had to make not us.

Gotcha. So it’s just – they just pick – they just didn’t. I guess, that explains it. And then can you give us a little more color on the process in China, maybe give us – tell us what has – obviously, it’s taken a fair amount of time and maybe you can flesh out some of the details there for us?

Yes. Well, the situation is that the – this District Heating Authority has literally hundreds of existing boilers with burners that were supplied by a variety of companies. And our basic approach was to retrofit the existing equipment and uses much of the existing componentry valves and controls as possible to minimize the impact to the operating company. And in some cases, we found just to take a specific example, we were trying to reuse one of their control valves and we found that the actual – the solenoid was defective, and so we had to replace it. And frankly is, what happened in Houston, Texas, you jump in, your picked up truck in about an hour. You have a new control valve. But in China, in this particular situation, it took us a week or so to sort that out. And then I might add, and again, I don’t want to get into too much detail, but just and just for color, the control valve has to talk to the burner management system. So we have to get a control valve that is suitable and then we have to go back in, because we are modifying the existing burner management system and get a programmer to make sure that the control system to talk to the control valve. And none of these things are really issues with respect to the viability and efficacy of the technology. They’re just the kind of logistical issues you deal with when you’re trying to retrofit an existing installation. Now going forward, once the technology has been successfully demonstrated, the customer will be more inclined into replacing a lot of the componentry, because they’re interested in keeping the existing equipment will be de minimis, since our technology will displace it completely. So I didn’t want to tear out too much of what they had until they knew we were going to be able to do what we said. And at this point, I think, we’re pretty close to being able to make them work. So that wasn’t a good answer just I’ll try it again, but that’s kind of…

No, no, that was very helpful. I mean, then obviously it’s a little different than going into Aera with their OTSG and turning it off and you just – you finish it up right, whereas they’re you’re trying to do a whole lot of things at the same time?

Well, there’s other issues, there’s regulatory and safety regulations that are different in China and there’s more bureaucracy associated with working with them than there is when you’re working with a U.S.-based company, as you can probably imagine.

And so can you share what the – what you think the timeline is going to be in China? I mean, is it – and what happens after after certain things occur?

I can only speculate on what I think will happen. And if you were to ask me bluntly six months ago what I thought, I thought we’d be done by now.

Okay.

So, events unfold at a pace that it’s more determined by the customer than by us. And I think it’s probably, I’m optimistic that this thing will once we’ve demonstrated the technology in this particular installation, the customer, as I mentioned in my prepared remarks, has already issued us a Memorandum of Understanding on the basis of us working together through our joint venture where they will actively help us promote the technology. So they’re very keen to make it go fast, Rob, I mean, which is really the question. Customer wants this thing to go fast, but we’ve got to demonstrated in a way that makes them feel comfortable that what we have is really applicable. And candidly, the installation that we’re talking about in China is in many cases very similar to the units we have operating in – at Aera in terms of size and scope and the basic thermal dynamics. So, of course, we’re optimistic on that basis. And I think that, it – maybe it’ll take six months for the thing to get going. But once it gets going, it will go very, very fast. And everything you find about China is, it takes them a long time to start. But once they get going, they move very, very fast.

I – so I guess, my follow-on is that, you don’t see subsequent installations taking a long time, it’s really just getting this first one getting all the things out, such that you can cookie-cutter the next one and the next one and the next one?

Yes, that’s absolutely right, because after we did the first one, which required a little bit of adaptive engineering, the others will be to use your term cookie-cutters. And then more specifically, we’ve already got agreement with one of the largest Chinese boiler operators manufacturers, who has a huge field service organization to do all the retrofit service work that’s outside our scope. So we will be doing – if we have to go back and do 50 or 100 of these things, it will be ClearSign people doing it. It will be a subcontract service company that’s already in good stead with the District Heating Authority and well-versed on the technology.

Wonderful. Great. Okay, I’ll go back into the queue. Thank you.

[Operator Instructions] Our next question comes from Robert Kecseg from Las Colinas Capital Management. Please go ahead with your question.

Hello. I got on just a little bit late. And – but I’m going to ask you about the Delek case, because it’s not in China, and we already installed that first Plug and Play. I just want to understand when you say the Plug and Play, my understanding is, it can be put in when the other burners are operating through the shutdown the burner that you want to replace, is that right?

It has that potential. Now I’ll make a couple of comments. One, the safety practices within the refinery have to allow that. It’s physically possible to do that and it actually can be done in my view safely, if you’ve got a typical heater that has six burners and it happens so often. One of the burners fails and the refineries are going to shutdown the whole heater, so they remove that burner. You can unbolt and remove the existing burner and plug in – thus Plug and Play the new burner, that’s a capability that exists with this design.

Okay. It’s capable, but that is and how this first one was put in the whole thing will shutdown?

Well, there was a lot more complexity to it, because the first one was – and again, I’ll give you a full answer to your question. But to give you some color, the first one was designed around 2.6 million BTU an hour heat release in which there were six of them. And when we put the first one in, the customer came back and said, we would really like to have more out heat output and then 2.5. Could you get it all way up to five? And concurrently, they took an existing burners – an existing burner that was actually sitting right next to our burner and they increased the heat release to that burner to five. And they did it in a way that wasn’t necessarily ideally suited to the application. So that burner was interfering with the actual – it was impinging on the flames of the asset and indirectly had some unfavorable effects on the Duplex, which caused a flame scanner to fail. And we went in and flame scanner is a device they should buy, it’s a very commercial device. We went down there last week actually and replaced the flame scanner and got our burner up and running in its original 2.5 million BTU an hour configuration. Now they’ve come back and said, we like your product. We’re now considering replacing all of these burners, the remaining five with new burners. But instead of them being the 2.6 million that we thought we were going to need, can you make them 5 million and we, in fact, can make them 5 million. And I think this is another kind of anecdotal story. But the interesting thing is that Duplex technology is capable in this case of almost doubling the amount of output in the same basic space, which is kind of unique and impressive.

So when you go to put in a 5 million BTU burner, we use in the Plug and Play, will you be able to demonstrate that by leaving the other ones running? Because it seems like there will be less pain for the customer. It seems like it will be easier for the customer to swallow if that’s how you could do it?

Yes, and that again, that was their intention when they were just going to install our 2.6 million and replace existing 2.6 million. But what made this thing kind of get delayed a little bit is, they’re interested in increasing the performance of some of the neighboring burners to 5 million. And that was something they did independently of us and that had some impact on their overall system that created issues for them.

So is there some – what I’m saying, is it not easier for them to install one if they don’t have to shut the other ones off. It’s got less disruptive to their operation, are they willing to do that, so that we can put another one in?

Yes, the answer is yes. And again, I think, you got it exactly right. The question right now is – is enough – is the one they’re going to plug in, is it going – we’re going to plug in one that’s 2.6 million BTUs to replace one that’s there or do we plug in a new one that’s 5 million. And what we think they want to do is plug in one that’s 5 million. And just to make this distinction, in a normal case, if you were to replace an existing traditional burner that’s 2.5 million with 5, it wouldn’t necessarily fit in the same space. So you couldn’t plug it in, because obviously, something that produces twice the output is going to be slightly larger. In our particular case, Plug and Play will actually fit in the same space.

Okay, good.

So that your basic question is yes. They like the idea. They can just unbolt the old one and plug in the new one. And they really like the idea that they can potentially plug in a new one that produces twice the output of the one they have.

Okay, good. I’ll look forward to hearing them do that. Thanks very much.

Okay, great.

[Operator Instructions] Ladies and gentlemen, at this time, we’ll end today’s question-and-answer session. I’d like to turn the conference call back over to management for any closing remarks.

Lou, do you have any closing remarks?

Yes, I just – as many people know, I’ve been an investor and analyst in ClearSign before the company went public following it and just enthusiastic and excited to be on board with the team with you Steve, and look forward to communicating with investors as I have on a regular basis moving forward as we reach important commercial milestone. So I just encourage everyone to stay in touch and we’ll look forward to talking here soon.

Yes, great. Thanks, Lou. And by the way, I’m on behalf of the management and the investors, we’re just thrilled to have you on board.

It’s pleasure to be here.

All right. With that, I guess, that includes – concludes the call. Thank you, everybody.

And ladies and gentlemen, that does conclude today’s conference call. We do thank you for joining. You may now disconnect your lines.