ClearSign Technologies Corporation (CLIR) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the ClearSign Combustion First Quarter 2018 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 note, this event is being recorded. I would now like to turn the conference over to Lou Basenese, Vice President of Corporate Communications. Please go ahead.

Thank you, Austin, and welcome everyone to the ClearSign Combustion Corporation's first quarter 2018 results conference call. During 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 it's 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. With that, now I'd like to turn the call over to Brian Fike. Please go ahead, Brian.

Thank you, Lou, and thanks to everyone for joining us today. Before I turn the call over to Steve, I'll review our results for the first quarter of 2018 as they were reported on our recent Form 10-Q. For the quarter, we incurred a loss of $2.3 million, compared to a loss of $2.4 million for the first quarter of 2017. Our sales increased 47% to $530,000, compared with $360,000 in the first quarter of 2017, most of the revenue during the quarter related to an enclosed ground flare project and Once Through Steam Generator project that we had in the backlog we reported at the end of the fiscal year just completed. Gross margin was 25% of sales compared to 30% in the first quarter of 2017. Our expectation is that our gross margins will normalize for approximately 50% as we increased the number and consistency of duplex installations. As most of you know, we completed a stock offering on February 27 wherein we sold 5,750,000 shares at $2.25 per share, raising net proceeds of approximately $11.9 million. We ended the quarter with approximately $11.2 million in cash and remained debt-free. We continue to monitor our cash outflows and working on alternative funding methods that could include strategic partnerships and/or modifications to the existing warrant structure. With that, I would like to turn the remainder of the call over to Steve. Please go ahead, Steve.

Thank you, Brian, for that financial update. And I would like to thank and welcome participants on today's call. Today, we intend to review our progress during the first quarter of 2018, as well as share our insight into the future activities for 2018 and beyond. As you know, emissions controls is a massive, urgent and global need; and we believe ClearSign is uniquely positioned, thanks to our expanding portfolio of products to provide solutions, not only at a low cost but also with potential for attractive payback by improving efficiencies, reducing maintenance requirements and eliminating costly air population fines. Accordingly, we remain focused on three key initiatives to capitalize on our multi-billion dollar market opportunity for shareholders. The first is accelerating penetration into existing markets where we've already demonstrated best-in-class emissions controls performance with our patented and proven Duplex technology. The second is expanding into new international markets including most notably China, as well as Europe and the Middle East. And the third is faithfully investing in technology development to protect and enhance the Company's competitive advantage, as well as enable expansion into new markets. During the first quarter we continue to make progress on all three fronts which I would like to review at this time. We recently completed the final phase of $1.1 million flare projects. This project successfully retrofitted Duplex technology into enclosed ground flares for a major California oil producer and reduced emissions by 90% versus the existing controlled technology. Because of this significant improvements, we believe this multi-unit project created an entire new vertical for the industry which we believe ClearSign is ideally positioned to dominate overtime. Near-term, we anticipate our initial customer will have additional needs on a retrofit and a newbuild basis, thanks to the recent increases in production. At the same time, this customer also recently acquired significant assets in the enhanced oil recovery space in one of the most stringently regulated areas in the country. As a long time shareholder, you know, this market segment relies on Once Through Steam Generator or OTSGs to facilitate production. And the Duplex technology has a long-standing track record of delivering best-in-class NOx emissions reductions in OTSGs. As such, we are excited about the opportunities to help this customer with their emissions control needs, both for flares and OTSGs. We look forward to providing updates on both fronts in the coming months. Speaking of OTSG vertical, I'm happy to report that during the quarter we successfully completed a follow-on project for an OTSG system in a complex waste gas application. This retrofit unit achieved initial field testing results with an average NOx emission of 2.2 parts per million, significantly below the current regulatory standard of 5 parts per million. We believe this is another industry first, and therefore is a breakthrough that should not go unnoticed by potential customers and shareholders alike. I would remind everyone that the cost of deploying our Duplex technology to achieve these emissions levels is a fraction of the cost related to alternatives such as selective catalytic reduction. As previously disclosed, ClearSign negotiated a multi-year multi-unit contract with this customer for Duplex technology in OTSGs. While a specific commercial terms of this agreement have not been made public. We can share that we remain in active discussions with this customer to support their future requirements. Moving on to our refinery vertical; we are actively working with Delek Refinery in Tyler, Texas to schedule the installation of the remaining Duplex plug and play burners into their FCC heater. During our last call, we provided an update that we finalized the initial burner installation and based on the performance, the customer requested several modifications to determine if it was possible to increase each burners firing rate while maintaining the same footprint and NOx emissions profile. It's important for investors to understand that this is not possible with existing low NOx and ultra-low NOx burners on the market. However, our technical team has determined it is possible with Duplex technology. Accordingly, we made the necessary adjustments and are now awaiting the customers go ahead to finalize the installation. As is customary in all our verticals, variability unrelated to our technology can impact the timing of our installations. We continue to provide relevant updates as they become available. We're also working with Delek on opportunities to install our technology in their various delayed coker units where we believe the inherent advantages of Duplex technology will help debottleneck these assets and reduce flame impingement resulting in significant cost safety and emissions improvements. Also in our refinery segment, we continue to work closely with ExxonMobil in the development and deployment of our Duplex technology. As for the previously announced success of the joint testing at ClearSign's headquarter in Seattle, we have moved to regular ongoing technical meetings to discuss further deployment of our technology at one location within ExxonMobil's U.S. refinery and petrochemical operations. Once this location has been selected and an installation scheduled, determined, we will be able to notify shareholders as to our progress. In addition, and separate from the previously announced project with ExxonMobil, ExxonMobil has also asked us to evaluate the potential for applying our Duplex technology to heater treaters. For those unaware, this piece of equipment are found on almost every oil and gas pad site, they use to further separate oil, gas and water and they often required costly and ongoing maintenance to repair fire tubes due to flame impingement. Thanks to Duplex's design which inherently eliminates flame impingement, we believe heater treaters could represent a new significant end market for our technology, although preliminarily we look forward to providing more clarity on this potential opportunity in the future as pursue it with ExxonMobil, as well as other refiners. In summary, we are encouraged by the continued cooperation and high probability of follow-on orders in our existing markets. At the same time, we can also report that we are expecting a meaningful uptick in new business opportunities in our established verticals. We are in various stages of commercial discussions with over a dozen potential new customers including multiple super majors. While the recent rise in oil prices is obviously a factor, the need for clean air and in turn, affordable NOx emissions control offered by Duplex is ever presence. Accordingly, we believe the increase in pipeline activity is more directly related to our ability to productize our technology and our commitment to continue to expand our base of field installations within our core markets. Including in the first quarter, we look forward to announcing new orders in the coming months. Moving outside the existing markets, our second key factor area of focus is expanding internationally. We have prioritized our opportunities based on regions with clear needs for emissions reductions, a clear regulatory mandate, and most importantly, a budget for making improvements. In other words, we are focusing on international opportunities that represent the fastest path to revenue for the company. The most notable of such opportunities remains China. You will recall, ClearSign is currently working with a large state-owned enterprise on a large retrofit project for Chinese District Heating group which alone if successful could represent hundreds of retrofit burner opportunities and virtually thousands of retrofit opportunities throughout the balance of China's District Heating market. During the initial phase of this project, the Company expects experts determine substantial burner modifications where necessary to simplify the delivery of gas and air to provide an ideal operating environment for our Duplex to achieve ultralow NOx emissions. The level of modifications is consistent with previous initiatives and installations from customers in other verticals. It is important to note that we choose to retrofit the customer's burner because that is what the customer asked us to do. Since this client has literally hundreds of this type of European burner, the client believes ClearSign's ability to retrofit their existing burners and upgrade them to Duplex would result in a significant cost savings, as well as allow them to use existing components like burner management systems, fuel trains, etcetera. When marketing a new technology to a new customer with a huge potential sales in China, it is important to try very hard to accommodate the customer's wishes and this is exactly what we did here. While we were unable to complete the work during the heating season, this is not the result of any failure of the Duplex technology, rather it was the result of having to characterize multiple operating details of an existing burner in the field because the manufacturer would not give us the design details. If they did, it would have simplified and significantly accelerated this retrofit process. Their reluctance is understandable in a competitive market since this burner manufacturer would lose it's largest single customer when Duplex is installed successfully. Nevertheless, we are encouraged by the project progress we are making during the heating season. Our customer has been very supportive and we continue to work towards the solution before the beginning of next heating season to demonstrate the Duplex technology and satisfy the testing requirement as soon as practical. It is important to note that the Heating District project represents just one of the opportunities we are currently pursuing in China. The Company is in advanced discussions with additional customers in the refinery and petrochemical industry including customers like Sinopec and BASF. What's more, as announced previously, strategic investment from potential partners like CITIC and others will accelerate our efforts as our commercial success evolves in China. Beyond China, we have interests in other parts of Asia including South Korea and Japan, and continued interest in our technology throughout Europe and the Middle East. We remain optimistic about the long-term market opportunity and demand for our technology globally, and we expect to be able to provide key updates in this regard shortly. Moving on to our final focus area, technical development. We made encouraging progress during the quarter developing a pre-engineered fire tube boiler burner. As a reminder, this represents a $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 stage and previously shows promising performance compared to the best products that are currently available in the market to-date, more specifically, we reported NOx emissions of 10 ppm at 5% oxygen concentration without the use of expensive Flue Gas Recirculation. During the first quarter we were able to achieve NOx emissions of less than 8 ppm at 3% oxygen concentration at these levels and after successful scale up and expansion of our operating envelope including increased turn down. We could bring to market a product that delivers NOx emissions roughly 50% below the existing emissions requirement depending on the industry and the region. In other words, we would be a compelling offering that we're confident could sell-through into key markets including China. That said, the latest results and progress also give us more confidence than ever that we will be able to achieve our stretch goal of 5 ppm NOx at 3% oxygen which would represent a truly breakthrough emissions product for the industry. Based on the recent progress, we believe the next step required is for us to demonstrate and scale our work in the field. To that end we are actively evaluating installation sites with potential customers, concurrently exploring multiple commercial avenues including our original plan for this vertical to license the technology to major global boiler manufacturers. I'm happy to report that earlier this week we were awarded a Department of Energy grant to the small business innovative research and small business technology transfer program offices. Phase 1 of this grant provides a $150,000 in funds over the next 9 month period starting in July. The funds will be used to extend Duplex's already impressive performance and potentially act as a technical enabler for product implementation and execution into other vertical markets. If Phase 1 is successful, the Company will be eligible to potential receive upto $1.5 million in initial funds as part of the Phase 2 of this grant. This is a significant achievement for two reasons; first, it represents testing derivative of our original ECC technology that if successful, could enhance the already state-of-the-art performance characteristics and controls offered by Duplex. Second, it represents a non-dilutive means to supplement our R&D efforts which is an ongoing avenue being pursued by the Company. In fact, we were recently selected to advance to the next stage of consideration for two additional government grants worth a total of $600,000. We're in the process of submitting a final proposal and expect a final decision to be made on both by the end of the third quarter. Regardless if the grants are awarded, we remain committed to advancing our technology through regular research and development spending. As discussed on the last call, we recently made several technical advancements which should enable us to expand into new significant end markets including aerospace, gas turbines and marine. We look forward to providing more clarity on these potential opportunities in the future as development warrants. Our ongoing commitment to research and development has also led to three additional patents granted in the first quarter bringing our total patent portfolio to 45 grants and 81 applications as of March 30, 2018. Before closing, I want to provide an update on the regulatory front. ClearSign continues to enjoy a very symbiotic [ph] relationship with regulators whose interest lie in driving down emissions combined with the industry's interest in having cost effective solutions. More and more regulators are recognizing ClearSign's patented and disruptive technology creates the paradigm shift that clean air can be achieved at lower costs. This already resulted in the award from the South Coast data quality management district for demonstration site in Southern California. We continue to work hand-in-hand with regulators defined a suitable refinery partner and do not believe we're going to have a problem there. Moreover, as emission rules are being revisited in multiple jurisdictions in our core markets, we expect our ability to deliver NOx emissions consistent with -- and in many cases, superior to existing best available control technologies will lead to a BACT designation for our technology. While this is not a requirement for commercialization, any such regulatory designation promises to accelerate market adoption of our Duplex. In closing, I'd like to reiterate that ClearSign has demonstrated the ability for Duplex to deliver solutions that can provide clean air at low cost with an attractive payback. While the timing of follow-on orders and revenue grant is difficult to determine, we continue to demonstrate efficacy with our existing base of deployments and we are making significant progress towards broad-based commercialization. In addition, our pipeline of opportunities continues to expand with new and existing customers, as well as in new end markets. I remain very excited about the Company's potential, our technology and the prospects of converting our current pipeline into meaningful revenues. At this time, I'd like to turn the call over to the operator for questions.

[Operator Instructions] And our first question will come from Michael Bersek [ph] with National Securities. Please go ahead.

I'm relatively new to the story since the secondary offering; it seems like you've got a whole bunch of stuff happening and I'm a little concerned that it may -- maybe you're stretching yourself too thin, something I sort of -- I don't know, it seems like perhaps -- it's getting wider instead of moving forward a little faster, let's say. Am I getting it wrong?

I think your observation is correct and it's getting wider. The pace at which it moves forward is really more determined by the customer, their budget cycles, the availability to access assets and things that are somewhat outside of our control. So I think it's not a question of us in terms of accelerating the adoption, I don't know that it's necessarily things that we should refocus on as much as it is -- the gestation period it's going to take certain customers to install and operate the equipment. And the Delek example is the perfect example, we put these product in, they were very happy with how it worked, they came back to us and said, we'd like to buy a lot more; we said, okay, we can make it work. When would you like us to ship and then, when can you install them. And they said, well, it's going to take us a while to get a budget and get a schedule and get a crew. So those kinds of things don't consume our resources, so we're not burning any calories there but it's a little frustrating for all of us but it takes more time than we would prefer. I don't know if that answered the question?

I guess it does a little in the sense that I was sort of starting to concern that you're going to burn through this money pretty quickly, and then we -- without seeing the big cash flow increases coming in the market, obviously punishes stocks like that. But if you're saying a lot of that is not burning up a lot of your money then that's sort of fine. What is your burn rate for a quarter?

It's roughly $2.1 million to $2 million a quarter.

You don't have any sort of revenue guidance for the next quarter at all, any sense even?

Do we have a sense, yes, but we don't provide any guidance.

Finally, the China thing; I was a little surprised that they went really well, actually now I'm not. I withdraw that question. Thank you very much. I appreciate the answers.

[Operator Instructions] Your next question comes from Jim [ph] with CEA Inc. Please go ahead.

I'm curious of how the study that was performed by your outside consultant showing the installation, comparing the installation operating and capital cost for flares technology is superior overall the existing installations? And could you comment on what the results have been for you pursuing that with the existing operations that are using the automated [ph] technology that -- whereas yours would cost significantly less to operate and easy to install online without them shutting down?

I think you're referring to -- just for the rest of the people on the call, you're referring to the study in Whitepaper that was done by Nordan [ph] Engineering on the relative costs of SCRs versus ClearSign Duplex. And Nordan [ph] Engineering was actually also hired by the regulators to do a similar study for them; so what the study says is there is a dramatic -- underline the word dramatic savings in our technology versus SCRs which is really not disputed by anybody. The intuitive understanding of what it takes to install a selective catalytic reduction system as opposed to just replacing a burner is pretty simple to relate to. So the question becomes, you know, we don't feel that when a customer is faced with a choice between SCRs and our technology that 99% of the time the customer picks our technology.

What about replacing those because I know some operations that are actually been fined for poor operation violations. Furthermore, they are always up against their limits often and installing your technology would allow them to increase someplace else and these things will -- so why aren't they doing it?

You have hit an interesting and important point; there is an economic argument for replacing SCRs, we've made the point to the regulators that while the -- and just to kind of some clarity, the SCRs are permitted at a relatively low emissions level, very similar to what we can do but the SCR also has a reagent called anhydrous ammonia which provides about 8 ppm of anhydrous ammonia slipped into the air. So in terms of pure emissions, our technology is a better solution, independent of the cost. The fact that it costs a lot less is just an extra advantage. I don't know why I think -- you also make a good point that a recent survey has shown that the SCRs even though originally they were showing that they could produce 2 ppm of NOx, that in general, there -- because of the natural operations of SCRs, they don't come anywhere close to that overtime that there is an argument to be made for removing them and putting in our technology, there is also an argument to be made for reducing the cost of an SCR by putting in our technology and then you reduce the consumption of the catalyst required because you're removing less NOx from the air because we're taking it out, we're not creating in the first place. So you know, I have a bunch of different theories; I think eventually economics will catch up with us, meaning people will look at the huge savings and that will fall to our advantage. In the short-term, why people aren't doing exactly what you say or what we said is befuddling to me because it's so obvious, it's difficult to understand where we've seen greater progress with our technology is places -- and Southern California is a perfect example, here the regulators themselves, independently determined that our technology is so obviously advantageous that they are willing to fund a project to act as an ice-breaker for the refinery to try it so they can see how much money they can save.

I used to be in that business for a client [indiscernible] on combustion control systems, and we used reps. And you don't have to go to China to sell this stuff, you need to have a story, I mean it would be great if you could sell to China. It reminds me of that movie, Oil for the Lamps of China that -- Brian was in 1930 or something. Oil for the Lamps of China are nuclear in China but here you've got something right here that you could sell through a rep organization, not in -- and it appears that you put together that you can't -- you just have to read that report and read your other information; you've already cited all the good reasons why they should replace it, who has been contacting them and why aren't they. Do you have any sales efforts in that area? Can you use reps or another way to do it? Just target it. I'd like to know what you're doing about it? [Indiscernible].

We have reps in California.

Well, why it isn't getting them to solve?

Well, there is as many answers to that question is there are clients. Are you on an investor call or are you interviewing for a rep job because it sounds like you would be a good rep.

I've got a lot of experience in that and I'm a significant shareholder in your Company, and we can discuss that -- how I can help you in doing that offline.

And our next question comes from [indiscernible]. Please go ahead.

I'm trying to understand why in China your technical people did not look at the installation and realize there were going to be issues which might take much longer to be resolved once this started -- when you first announced it -- myself and a number of other investors thought that this installation would be in place and operating during the heating season which ended. It would seem as if the issue is related to the equipment in place, someone should be able to look at it and say, this needs modification and either maybe we should start on a different installed unit or we should have make it clear to everybody this is going to take some meaningful modifications.

I'll just give you the simple answer. I guess the customer himself has hundreds of these burners, so it wasn't like there was another simpler burner to fix; the burners that represent the vast majority of this inventory for which he was interested in retrofitting was this particular design, and that -- since we didn't have access to any of the design data and we weren't able -- the customer wasn't going to allow us to take a part and measure the kind -- and get the kind of information initially that we would need to resolve all the unknowns. It wasn't that we didn't realize it was going to be complicated but until we finally took the burner report and started taking measurements which we have done already now. At that time, we didn't know what we didn't know regarding the internal workings of this particular burner. Now, we have done a similar thing with another competitive burner from my former company and we're in the same position; we'd actually asked them for information on the burner, they rightfully so said forget it, why would we ever help you. In that particular case, we were able to quickly talk to customer who by the way was Era [ph] and letting us take the burner apart, get information that we needed to modify the burner. In the case of China, for a bunch of administrative and regulatory reasons that process took several months to do and it wasn't like we could just go in there, take the thing apart, measure anything we wanted, have our way with it and get it to run. And the reason that we were willing to take the risk is, it was something that the customer wanted us to try. We didn't have the opportunity.

But now that you're off-season, there is no timing issue to figure out what needs to be done and hopefully, put it in place before the coming heating season?

That's our view, yes.

And just one other question which sort of ties into my first question about why they are not deeper as in my mind. Have you actually signed any straight commercial installation contracts this year?

I'd say no.

And our next question comes from Jack Myer [ph], a private investor. Please go ahead.

You spoke about a burn rate of 2 to 2.1 per quarter. You have some runway with the cash you have but not an incredible amount. Based on how you think or see things at this point, where do you see that burn rate starting to come down so that there is a bit more runway?

I think there is two fundamental issues. One is, of course, getting orders to reduce the burn rate because you've got revenue, that's the preferred path.

That's the most critical certainly?

Yes, it's the most understandable, of course. As we said in the prepared remarks, we have other options that we look at in terms of funding from perhaps looking a little bit at the outstanding warrants to strategic investors from people in China to upfront royalty fees should somebody want to go license the technology. So we have other funding options aside from the most obvious which is increased sales and get revenue from the sales.

So if we focus on the revenue side, as opposed to other kinds of funding, when do you see revenue based on how you see the lay of the land? When do you see revenues beginning to kick-in at a level where the burn rate will drop because of that?

We haven't made any representation on the timing of that.

And this will conclude our question-and-answer session. I would like to turn the conference back to Steve Pirnat for any closing remarks. Mr. Pirnat, you may go ahead with your closing remarks.

Thank you. I'd like to thank everyone for their time and continued support. As I said earlier, we're confident in our path to achieving broader commercial adoption of our technology and have multiple prospects in the pipeline for meaningful revenues. To that end, we look forward to communicating additional successes in the coming weeks and months. Thank you, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.