ClearSign Technologies Corporation (CLIR) Q4 2019 Earnings Report, Transcript and Summary

Good day and welcome to the ClearSign Technologies' Fourth Quarter and Full Year 2019 Conference call. All participants will be in 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 Matthew Selinger, Investor Relations. Please go ahead.

Thank you operator, and welcome everyone to the ClearSign Technologies Corporation fourth quarter and full year 2019 results conference call. During this conference call, the company will make forward-looking statements. 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 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 the ClearSign will be successful in expanding the market for its products, and other risks that are described in ClearSign's periodic public filings with the SEC. Including the discussion in the Risk Factor sections of the 2018 Annual Report on Form 10-K and the 2019, which will be filed in the coming weeks. Except as required by law, 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 Jim Deller, ClearSign's President and Chief Executive Officer; and Brian Fike, ClearSign’s Chief Financial Officer; Rob Hoffman, ClearSign's Chairman of the Board will also be available during the Q&A portion of this call. So with that said, I would like to turn the call over to Brian Fike. Brian, please go ahead.

Thank you Matthew, and thank you to everyone joining us today. Our full financial results will be released later this month, but before I turn the call over to Jim, I want to take the opportunity to briefly look back over the previous year since our change in company management and focus. The cash burn for the quarter ended December 31, 2019 was $1.5 million, compared to $2.2 million in the same period of 2018. This is a reduction of 32% and is representative of the changes made in the company since the first quarter of last year. Looking back and comparing the last three quarters of 2018 to 2019, the reduction in cash burn is 25%. And looking at the six months, the cash burn reduction is a full 30%. The Q4 figures are consistent with the increasing efficiency achieved over the past year. The major savings have been from systematic focus on selected and prioritized development projects and the very selective and judicious use of outsourced consulting. This has been combined with more rigorous project planning and budgeting and expenditure approval processes. Our cash and investment resources were about $8.5 million at the end of the fourth quarter of 2019, compared to $10 million at the end of the third quarter. Shares outstanding at the end of 2019 were 26,707,261. It is important to note that we have sufficient working capital available as of today. It carries through 2020 and into 2021. This is assuming no revenues and assuming no material change in expenditures. I just want to reemphasize that. It assumes no revenues from the ClearSign Core burner sales and no revenue from our soon to be deployed ClearSign Eye products, which we do expect to begin seeing results from during this time window. And with that, I would like to turn the call over to our Chief Executive Officer, Jim Deller. Please go ahead, Jim.

Thank you Brian, and good afternoon everyone, and welcome to our fourth quarter and full year results call for 2019. I would like to start the call by giving some commentary on the release that the company issued on January 31st regarding updates on ongoing projects. Specifically, our oil demonstrations in China and initial test firing of the ClearSign multi-burner unit at the World Oil in California. Regarding China, the season has been frustrating, because we have not been able to reap the fruits of our labor. The developments made to our water tube technology have enabled the boiler to run up to 96% rate with NOx in compliance and under the 10 parts per million the objective set for this application. We last shut the boiler down to confirm the internal structure was suitable for ongoing operation and to give our Coreä break over the Chinese New Year when the ability to work how to stop anyway. Over the Chinese New Year, the effects of the coronavirus took hold along in the holiday and late preventing travel by both Chinese nationals and our USA staff to the work site. This inability to travel continues today with the Chinese heating season now essentially over, it is not possible to complete this project and conduct the formal performance test even after being so close. Our Chinese partners remain committed to achieving mutual success. On a positive note, we are able to improve the arrangements of 5G boiler burner demonstration and can now complete this without being limited by the Chinese heating season. At this moment, similar to the water tube project, the fire tube demonstration is also on hold due to the effects of the coronavirus. However, the test site we have secured is with a boiler manufacturer and potential partner that is not subject to the seasonal operation of the Chinese heating facilities. In addition, the test boiler we will be retrofitting is not an in-service unit. Therefore, the process of installing our burner making adjustments if appropriate and retesting et cetera will be significantly accelerated. As soon as travel in China is reestablished and safe, we expect to continue this work to improve the performance of this burner and to obtain the necessary performance certification. As we have said in the past, the markets for both our fire tube and water tube burners in China is massive. While we want and plan to have access in both verticals, the fire tube market is approximately four time that of a water tube with an addressable market of approximately 250,000 units in a region slated for emissions reduction. Of our two shots on goal, we are happy to have our fire tube burner move forward first. We believe that post certification it could be a short time to commercial sales. Turning to the multi-burner demonstration of World oil. I would like to start by describing the upfront challenges associated with this demonstration. The spacing and arrangement of burners in this particular heater was very tight providing only an extremely small confined for the burner placement and subsequent formation of the flames. Frankly, this is one of the most challenging environments for any burner setup that I have seen in my career. That being said, it is a perfect place to demonstrate the advantages that our ClearSign core burners have the potential to provide. As outlined in the press release at the end of January, we completed the design, delivery and installation of the burners for World oil on schedule. And to address the expectation of our Plug & Play design, the burners were installed without issue taking just over two days to install the five burners. The burners ran robustly from below the minimum design firm rates to above their maximum rate. Reducing NOx levels below our guarantee between three and four parts per million throughout that range. I want to emphasize those numbers between 3 PPM and 4 PPM, while I guaranteed NOx emissions were 5 parts per million. In fact, the burners were tested cycling for minimum to maximum rates in an accelerated fashion and the burners performed admirably. Up to this installation, we have never had the opportunity to optimize the burner configuration for multiple burner applications. This was always an uncertainty for this project and ultimately as we sought to operate all the burners together some heater instability developed which limited the heat input to the heater. We even had a number of design modification we were prepared to implement. And by the way making design modifications in field installations is not uncommon. However, in this case, the heater in question was a critical charge heater and modifications for burners were delayed getting the entire refinery back up to full-rate as the turnaround schedule was very short. As a result, the mutually agreed upon and prudent decision was made to remove the burners and optimize the burners outside of the operating heater. So overall, the easy installation of our Plug & Play design went as planned. The burner started and ran on automatic control as planned and exceeded their design operating range. Critically, the NOx emissions were comfortably below the five parts million guarantee. And equally valuable we now know what we need to optimize and have worked already underway on those design upgrades. I will comment again that this particular heater is one of the most highly fired I have ever seen and so it was an extreme application of our new technology. The point here is that we have made some very significant developments in our process burner technology. Full commercialization in single burner best core heaters has been achieved, but the path before commercialization of our technology in a multi-burner situation continues to evolve. Of note here is that we are in the field working on real demonstrations. What we learned we will improve on and carry forward to future demonstrations. This has been the history of ClearSign's technology development. Unlike our asset heavy large incumbents, ClearSign have to take that technologies from the lab and then work on them live in the field. In my previous life and this is also true with the established OEMs, we enjoy the luxury of a large but capital-intensive infrastructure like full-scale, test furnaces where the majority of the kits can be worked out before going to the field. But what is a technical disadvantage in the short term will be very financial advantage in the long-term for ClearSign. Bringing us to a natural segue, we are continuing to develop our channel partner relationship. While I do not have a formal partnership to announce at this time, I'm extremely pleased to announce that we have secured the commitment from an industry-leading OEM burner manufacturer to host the burner testing that will be conducted as part of fulfilling the anticipated burner supply order from ExxonMobil. This not only allows us to prove and demonstrate the burners in a full-scale multi-burner bona fide industrial test facility to full industrial requirements, but we believe that it signifies a confirmed interest on the part of the burner manufacturer to establish the ClearSign burner technology in the marketplace. It also provides what we believe is the final provision required to proceed with this higher profile of burner demonstration project. We have made a commitment to confidentiality with the burner supply company, so please understand that I cannot go into further details here. But we are very grateful for their continued pioneering support. I have mentioned previously that this is a very conservative industry, leading to comprehensive betting on the part of prospective partners and customers alike. And we are pleased to be making solid forward progress. In terms of our formal supply agreement for the refining and petrochemical market, the ExxonMobil demonstration project is the next step that must be completed before we move forward. We expect the testing for this order to be completed around mid 2020. We also believe that this project's burner testing will, in terms of the progress for the launch of our ClearSign business, have a very positive effect as a multi-burner demonstration in a world-class industrial test furnace has always been a key milestone and this commitment cost this very valuable hurdle on the time line. On last call we debuted and discuss the rebranding of the company to ClearSign Technologies. Because the development of our sensing technology was a significant factor in the decision to rebrand ClearSign as a technology company, I'd like to review the progress in these product lines. In conversations with numerous potential customers, we have focused the development of our claim sensor technology for ClearSign Eye on the development of a device that will validate whether the flame of a burner pilot is on or off. While this sounds like a simple application, it's one of extreme importance and the currently available technology for flame rods in the industry are a source of great frustration due to poor reliability, frequently for replacement and operational delay to our customers. The prospect of providing an alternative device that avoids the common failures of flame rods was met with unanimous strong support by every customer group consulted. This is not one customer think it is interesting. This is every customer called saying that it will be outstanding. One key failure of the existing technology is at the probe that enables the flame rod to detect the flame has to be actually immersed in the flame. And this leads to frequent failures. However, one key advantage of the ClearSign Eye technology is that the center services are positioned significantly outside of the flame and therefore are not subject to heat-induced deterioration. In many burners systems, the pilot flame rods are considered a safety device. Basically, they are required to prove that the pilot flame is on before control system is allowed to let fuel gas flow to the main burner. For those not aware of how the system works, the pilot flame ignites the main fuel gas, in this the pilot flame in a residential water heater. Only that the pilot flame in the industrial case is 12 or 20 inches long. And the main flame is likely 10 to 20 feet long and three to five feet wide. Obviously, there's a lot of gas driving such a large flame. And if a pilot flame is not on, spewing gas into heater is an extremely dangerous situation. And, of course, if the flame rod is not indicating the presence of a flame, since it has been compromised sitting in the flame, even if not handled by the programming of the combustion controls, the operator has no choice but to shut the system down and downtime for maintenance or replacement of flame rods pierce profits. Given the importance of the pilot flame sensor to operation of the overall heater, it is clear that improving its reliability that is minimizing the maintenance requirements as well as the number of times the flame sensors do not work when needed, will be of great value to potential customers throughout the refining and petrochemical industries. This potential market for our pilot flame sensor device is truly global and includes any type of burner originally manufactured by any supplier, including low-emission and non-low-emission burners, new burners and retrofits into existing burners. We anticipate that the first demonstration installations of this technology will be installed in customer equipment in the next few months. At the same time, the industrial certification process is underway, following which the final product will be formally launched. We also plan for ClearSign Eye to be included in the ExxonMobil burners on a demonstration basis. The ClearSign Eye sensor will be sold by ClearSign either to burner manufacturers, private manufacturers or directly to refining and petrochemical customers to retrofit into their existing burners. We also anticipate developing channel partners as this business progresses. For those interested in the specific science behind our ClearSign Eye technology, we have some more details on our website. And additionally, we have started to market the sensor and those following ClearSign on LinkedIn will have seen the initial promotional parts of our launch plan. The second general application of our sensing technology is into the transportation market. As we indicated in our announcement on Tuesday, we have a contract in place with a major global aerospace company to validate the application of our sensor technology as a key component of a new system that we mutually anticipate can lead to increased efficiency and reduced maintenance on commercial and military aircraft. The development and subsequent testing and certification of new technology for aircraft is an evolved and time-consuming process. However, the value and size of the final addressable market makes us a very appealing opportunity for ClearSign. Developing this product with a customer from the start is a great advantage and significantly reduces our risk while at the same time, increases our chances of success. We anticipate that this technology will provide valuable diversification and business growth opportunities with ClearSign on the heels of the global deployment of our burner-related products. Additionally, we do not see this as requiring a large investment from ClearSign. Our input will be mainly in the form of limited manpower with our primary contribution in the form of our intellectual property rights for this market vertical. ClearSign has been discussing this possible application of our technology and developing the relationship for a few years, so it's gratifying to finally have a formal business development plan initiated and this investment in ClearSign's long-term growth underway. While ClearSign today without doubt getting our technology out improvement in the mainstream industrial arena which includes securing formal supply partnerships is job number one. But in parallel, we are developing additional commission and sales channels and partnerships to grow our business as rapidly as possible when those are established. One example is creating a partnership with a company of environmental lawyers and consultants to enable the value of NOx credits created in Texas to be accepted as payment for the supply of burners. These emission reduction credits are traded on the market exchange. In essence, this plan will enable customers to avoid the capital outlay for the purchase of our technology by monetizing the value of the oximes reduction is achieved by the installation of our ClearSign Core products. But our customers such emissions reductions may also reduce the future burden of compliance with timing emissions regulations. We are also very pleased to formalize our agreement with California Boiler which was completed on March 5th in the Santa Ana, California office. This agreement engages California Boiler in promoting selling and installing all ClearSign combustion-related products in California, especially but also throughout the United States. We have worked with California now for almost a year on an informal basis and have proven to be a very professional, progressive, and growth-oriented company. And our experience their installation and customer support work on-site is of very high quality. So, we are very happy to be working with them for unusual business growth. As a final note, I'd like to follow-up on our last investor call back in November 2019. At that time, we have just renamed ClearSign Combustion Corporation to ClearSign Technologies Corporation. To better reflect the ClearSign business model of providing technology rather than being a manufacturer in both the sensing and burner-related sectors. And also shortly after the call, we launched a new ClearSign website. The anticipated development of our flame center and especially the aforementioned aerospace project that we are now able to reveal and other possibilities along the same lines are key considerations in that renaming and rebranding decision. I also hope you have found the website useful. If you have not seen the new site, I encourage you to do so; www.clearsign.com. While our speed to market isn't as rapid design and I'm sure any of us would like to see, I am encouraged by the progress we have made. The plans and commitments we have secured in this past quarter for our process burner, oiler burner, and sensing technologies and the expansion of the products that ClearSign provides, particularly regarding our sensing technologies. We believe that we have made significant progress in our projects with marquee customers and have secured the development and demonstration path for these to become successful ventures. Looking back over the past year, I joined the company in late February 2019. A lot has happened to ClearSign. We have made some great and very significant developments in our key technologies, especially the development of the process burner, developing that technology to operate like a standard burner adding a pilot to light the burner immediately on demand and thus eliminate the need for a startup burner or warm up period and when ready transitioning the flame to the surroundings. The consistent development of this technology has continued to extend the operating window to match the needs of those who we believe will be our mainstream customers, resulting in engagement and commitment we are seeing today. The developments made to the process burner technology have also been transferable to the boiler burners where the same benefits have been demonstrated and we look forward to getting back into China to complete our initial projects there. At the start of my tenure, we made a concerted effort to focus on development on what we identified as high priority projects that we could get to market quickly. Nowhere has this been more evident than with our sensing technology. This discipline has led to identifying the high-value opportunity and then focusing on the rapid development of the pilot sensor technology that we anticipate will be launched commercially later this year. We have also defined and relaunched the ClearSign business model, which included the development and branding of our burner technology as ClearSign Core. ClearSign Core will be included as a high-technology heart for a traditional burner OEM offering, thereby enabling ClearSign to leverage the value of our technology with our asset-light company structure. And our partners resources and infrastructure to offer a truly differentiated high-value product what is traditionally a highly commoditized and price competitive burner market. As mentioned earlier, the fruition of this transition in both the burner and sensor technology products of we led to the renaming of the company to ClearSign technologies. We have also made some internal and cultural changes to ClearSign. The work, ethic and discipline has improved and the rate of cash burn has significantly decreased by 30% or $2.3 million per year while productivity in the development of commercialized products has increased. This has been achieved even with the addition of our marketing and customer communication staff and the development of our Tulsa office, which we added in anticipation of our pending process burner collaborative partnership and preparation for the true commercial launch and growth of that product line. Looking forward, we have the commitment from a major burner OEM to host our performance on ExxonMobil. And we anticipate that we will receive an equipment order to validate a burner technology in the OEM's large Baytown refinery. We also have a host site in China to demonstrate our 5G boiler burner technology outside the restrictions on the Chinese heating season. We anticipate the completion of these projects will establish ClearSign technology as a validated solutions to achieve the anticipated future low mob emissions already requested by customers in our primary target markets of the United States and China. We have also made solid progress diversifying our sensor product range by leveraging our technologies to provide products of great value in large addressable markets in the combustion space in the form of our flame sensors and an eye to continued future expansion and growth of the ClearSign business in the large transport market throughout product development projects with our recently announced global aerospace partner. To give you insight into our media activities, what you will see if you want through our doors today. We have three very clear burning projects being led by engineers with very definite understanding of the task ahead of them and our tight time lines. Our process burner is being optimized to meet the operating requirements of ExxonMobil being scheduled for multi burner test setup and demonstration in Tulsa. Jeff Lewallen, our Refining and Petrochemical Business Leader and lead engineer is driving this effort. Although, based in he Tulsa, he is close to living in Seattle recently. We are making good progress. The testing is continuous but we will not let up until that is done. Our 5G boiler burner technology is being pushed to demonstrate commercial operation in China. Beyond the original goal of providing performance as soon as the coronavirus allows us to continue there. While our demonstration is delayed by the coronavirus, our progress is not. Don Kendrick, our Chief Technical Officer has this project and is solely focused on getting this done. If you visited late into the evening you are very likely to see Don and his team pushing this project forward. The third project is our burner sensor. This is at the stage of creating fabrication drawings. Walking in, you will see one of our sulfur copper [ph] streams is converted to what we have called a ward room, set up for our engineering, commercialization and design teams to finalize this task, so we can take the designs for fabricators for panel production optimization. We also up this way so that any questions related to design or manufacturing options a need for a quick validation test to prove the proper function of the design details can be done almost immediately without a loss of momentum. We have already set the clock ticking for the completion of this project with our launch promotion. Everyone is committed to making this a reality. Finally, and in closing, I'd like to thank our loyal investors for your continued support. I look forward to rewarding your patience as we transition the ClearSign business to commercial operations. I also want to acknowledge and thank our employees, we've seen many changes this past year and are responding well to the change in focus and intensity as we push to get our project – products to market. With that I'll ask the operator to open up the call for our Q&A. Operator, can we please take questions now?

We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Jeff Feinglass [ph], a private investor.

Thank you. Hey, Jim, congrats on the accomplishment for last year and unfortunate that this hysteria has kept you guys out of fishing in China but hope that resumes quickly. Away from China, just a couple of questions. The first, I know you're not going to – you can't mention who the potential burner manufacturer partner is but you mentioned that we're going to use their test facility. I mean is that – is that meaningful that they're going to allow us to use their test facility? Is that a sign of the kind of their positive outlook on our burner technology?

Back when I was in my previous appointment, ClearSign actually approached me and asked if we will be prepared to lend our test facility to ClearSign. And very distinctly my answer is absolutely no. Because the biggest fear I had was that somehow ClearSign technology will be accepted and proven in the marketplace and get a foothold. So we've been working to develop our collaborative partnership with a major burner OEM in total now really since I've joined the company. Whilst I really can't speak for them joining the dots for them to offer a ClearSign the ability to use their world-class test facility to demonstrate our burners to accompany by ExxonMobil that they very well know is really going to put ClearSign on the roadmap to full commercialization and to be a real player in the market. Actually without speaking, I don't think it takes a lot of extrapolation we really believe that this is a very solid sign that that company truly wants ClearSign to be part of the industry. And of course doing that one would infer that they would fully anticipate that they will be able to benefit from that relationship as well. So to me, Jeff, obviously yes this is extremely important and extremely significant both for the launch of ClearSign but also the fact that it is a requirement for ClearSign to provide burners to the likes of ExxonMobil, so it allows that project to go ahead we're ultimately going to be demonstrating our burners in their facility, so that ExxonMobil gets the chance to validate our burners in their facility for their future use. They've spent a lot of time with us in the past as well. So this is really a cascading benefit to Clearsign, the establishment of us with the burner OEM it gives a solid channel to market. And then for ExxonMobil will be able to demonstrate our products in their refinery. I wish they would not be investing in if they didn't have a very clear picture of what they intended to use our products for in the future. So all of that related it is an extremely significant offering on the part of the burner manufacturer, although I truly believe they are made with our eyes fully open as to the implications of what they're offering for us and what that can do for both us and them in the industry in the future.

Great. Thank you for that. Also kind of related to that, I mean, so we're going to use a test facility and this is going to potentially lead to an order by Exxon for test burners. Can you walk me through the timeline on what that looks like to get the test facility order implementation and their Baytown facility, et cetera?

Certainly. And this if you look at the whole time and to really understand the full context of what this means for ClearSign and our investors, you've got to go back a couple of years. Exxon has been spending a lot of time betting the ClearSign burner technology they've made visits to us out here in Seattle, prior to I joined the company they've also been out while I've been here. They've seen the burners operating throughout its range and put it through its paces and simulating the fuel gases and the operating requirements that they would see in their production units. We've got a lot of the key engineers and a lot of man-hours and time invested in assessing ClearSign technology as a solution for Exxon. They placed an engineering order with us last year, which we have completed and the main focus of that order was to assess the application on the burners into their specific heater at Baytown and to look at the control system, and for Exxon to truly understand what it would take to implement the ClearSign technology. The next stage for them is to place an order. We are talking to them weekly. So, we're getting a lot of momentum. But for ExxonMobil, we fully expect to receive that order very soon. The -- as soon as we get that, we will be doing the final design and actually building the test burners, which then have to be demonstrated in this multi-burner test furnace in total. We will do that as soon as we can get that test scheduled and the burners built. My best expectation at this point is that that will be around the middle of this year. And that is truly going to be a milestone for ClearSign. The ability to demonstrate our burners for a company like ExxonMobil in the premises of a global partner and then basically having everyone sign off on that success is really everything coming together for us. But going forwards, we will build the burners for installation on the Exxon refinery likely around the end of the year average, of course, the burners will be started up. But that really is just the start. This is a product performance for Exxon. As I said by that time they've invested a lot of money in assessing this technology and a lot of time. If they didn't have the intention of using this much wider and I really can't speak for Exxon here, but I'm really drawing conclusions, they would not invest that type of time or money on a single heater in Baytown if they truly didn't have the intention of deploying the technology much more widely going forward and if they didn't see a really significant use and value of our technology for them. So, I really -- whilst this project has a fairly short time line, I think it's really the start of something much bigger that's going to go on a long way into the future.

Got it. Thank you for that. Thanks all my questions.

Thank you.

[Operator Instructions] Our next question will come from David Brown, a Private Investor.

Hi Jim. Thank you for the encouraging words in the call. I just wanted to ask a question since ClearSign is headquartered in what some have called the ground zero for the United States of the coronavirus. And I've seen another company that's just reported earnings and had a huge hit on its stock today that's in the Seattle area. Are there effects of this for ClearSign right now? Or are you seeing anything that concerns you for doing business besides what's obviously happening in China?

Obviously, China is the most immediate and most distinct effect just the delay of projects there are obviously very clear. In the office, we are very focused on getting the projects done and that really requires our employees to be here. We all lean, everyone has tasks assigned. And we do instill all precautions we've been recommended, but work has to go on. I think everyone is totally committed to getting this work done. Just being responsible, we are taking all the precautions we can to make sure we can do this safely.

Great. That's really what I wanted to know. And I congratulate you on the continued momentum that you're building and also saving money over what expenses were in years past. That's showing great discipline. So congratulations on that.

Thank you, David.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Deller for any closing remarks.

Well, and thank everyone for joining this call. If there are no further questions, thank you for participating and we look forward to updating you on our progress as events occur. And truly very much appreciate your continued support.

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