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ClearSign Technologies Corporation (CLIR)

Q4 2021 Earnings Call· Wed, Apr 6, 2022

$5.36

+2.49%

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Transcript

Operator

Operator

Good day, and welcome to the ClearSign Technologies Fourth Quarter and Full Year 2021 Conference Call. All participants will be in a listen-only mode. . Please note this event is being recorded. I would now like to turn the conference over to Matthew Selinger of Firm IR Group. Please go ahead sir.

Matthew Selinger

Management

Good afternoon, and thank you, operator. Welcome, everyone, to the ClearSign Technologies Corporation fourth quarter and full year 2021 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 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 Factors section of the 2020 annual report on Form 10-K. Except as required by law, ClearSign assumes no responsibility to update these forward-looking statements to reflect future events or actual outcomes and is not intended to do so. So on the call with me today are Jim Deller, ClearSign's President and Chief Executive Officer; and Brent Hinds, ClearSign's Vice President of Finance and Controller. So at this point, I would like to turn the call over to Brent Hinds. Please go ahead, Brent.

Brent Hinds

Management

Thank you, Matthew. And thank you everyone for joining us here today. Before I begin, I'd like to note that our 2021 annual report on Form 10-K was filed with the SEC last week, which includes our financial results for the year ended December 31, 2021. As noted on the last call, my initial focus in joining ClearSign was to continue to enhance and strengthen the financial reporting systems and to lay the groundwork for future growth. I'm happy to report that we have successfully remediated the material weakness recorded in Q2 2021. We achieved this goal by focusing on the fundamentals, reconciliations and checklist. We've also built system wide infrastructure to facilitate efficient and effective operations month-to-month. Moving forward our muscle memory will only improve our efficiency and scalability. I must say thank you to the accounting team and the whole ClearSign family for pulling together to overcome this challenge. And with that, I would like to give an overview of the financials for the fourth quarter and full year 2021. The company recognized $607,000 of revenue during the 12 months ended December 31, 2021. The company reported zero revenues for the same period in 2020. Our operating expenses for the year ended December 31, 2021 increased approximately $1 million compared to the same period in 2020. The majority of this $1 million increase can be attributed to two key items. One item was our ExxonMobil project where we incurred approximately $712,000 in year-over-year expenses to further develop and refine our ClearSign coal burner. The second item relates to a non-cash patent impairment charge of approximately $385,000. Our impairment charges were the result of periodic reviews of our patent portfolio. Over the past year, these reviews are focused on aligning product lines with key patents, and right sizing our…

Jim Deller

Management

Thank you, Brent, for the financial overview. Hello, everyone and thank you for joining our fourth quarter and full year 2021 conference call today. I appreciate your interest in ClearSign. Today, I will start the call with an overview of the process burner business and discuss our boiler burners starting with the domestic business then move on to our business in China, which encompasses both our firetube and watertube boiler burner products. As always, we will open up the call for questions at the end of my prepared remarks. So now turning to process burners. I will start with our most recent use. Just last week, we announced an initial engineering order for a major independent refiner for one of the California refineries, which we anticipate will result in the sale and delivery of 20 burners. As with other orders, this is the first step in the process as is common in the refining industry. As stated in the press release, this order is for the engineering, drafting and CFD as Computational Fluid Dynamics modeling by ClearSign coal burners to be installed and operated in two separate destination heaters, and eight in the other. The following phases of this project are expected to include a physical first article for size burner demonstration, then the supply of the 20 burners, which based on current plans are expected to be shipped and installed in the California refinery in early 2023. This project is significant for a few reasons. The first being that this is the largest planned commercial project for the company to-date, both in terms of expected revenue and the number of burners included in the supply. Secondly, the customer refinery is located in the South Coast Air Quality Management District of California. Essentially the Los Angeles region, which for us…

Operator

Operator

We will now begin the question-and-answer session. Our first question will come from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal

Analyst

Thank you guys for taking my questions. Jim, just to begin with in terms of, just a high level outlook for 2022 from a revenue perspective, would you give us a sense of, all these orders that you have in hand, what portion of that will be deployed this year and how that translates into, revenue range, what kind of revenue range should we expect from the orders you have in hand so far.

Jim Deller

Management

Amit, thanks for your question. We would not be going to give guidance per se but I can certainly talk about the orders we have and what's in them. And we are ready to allow everyone to back of the envelope , we previously thought about the other process burners and the price range that they sell in. So ballpark, you can assume the burners are selling on average about $100,000 per phase. And the firetube boiler burners range in size and the prices do change with the size but on average, they're about that same number. So from the orders we put out, you can look at the number of burners, you're going to get a reasonable ballpark for the value of the orders to ClearSign. Typically, for the orders, we are putting the timeframe for the deliverables in those orders. If we don't just to give everyone some ability to project going forwards. A typical process burner order is roughly going to be nine to 12 months from the time we take the orders the time the product is delivered. For a firetube boiler burner order that's going to be in the region of typically three to four months. No, just looking back at what we have in hand right now, we announced the Midwest refinery order in November of last year. Accepting the cautionary note that I mentioned that order was for 16 burners. The order for California that we've just recently announced the bigger order there they included 20 burners. So if we can do the math based on that. The forward-looking pipeline and obviously I don't have a crystal ball. But I'm very encouraged by the inquiries we get. We are seeing increased referrals, we think based on the good results we are getting from the global super major, and the burner base we have in their refinery in Europe. They have refineries in California, we've been receiving a lot of work from them, the engineering companies involved in those inquiries. And we announced last week, those engineering companies are also now passing us inquiries, which we are obviously working on. And then on in the -- kind of same vein as soon as they get these first boiler burner orders in but expect to get the same value from the references. So we do see our orders increasing as we get more references in the market. You asked about revenue, I'm actually going to pass over to Brent because I know there are specific timing rules required to accounting and I'd rather let the expert talk about that.

Brent Hinds

Management

Yes. From a revenue perspective, keep in mind, Jim is talking about orders in the back of the envelope calculation that you do there. Keep that in mind that the revenue will be generated or put on the books once we meet the performance obligations as outlined by 606 regulations. So that would be when we meet those obligations such as delivery and inspection.

Amit Dayal

Analyst

Understood. Okay, thank you for those guys. With respect to this Midwest customer, that is undergoing this M&A situation. Of the 16, have you delivered three to five or fewer than those so far?

Jim Deller

Management

Yes. So the way these orders work, and I will speak generally about a process burner order and it's actually the same for the California order we've recently received. The first phase is engineering, computer modeling may not also include the performance demonstration of the first article burner in the test furnaces for us that will be conducted at Zeeco. Specifically, in these cases, the Midwest refinery, the initial part of that engineering scope does include the witness test. And that is, we're currently working on the schedule for that with our customer, we expect to be completing that within the next week or so. The California engineering order includes the engineering design and computer modeling with the testing to be a later phase. So right now, the burners -- in the Zeeco test furnace are working really well. We are at the point of scheduling that final form of witness test. And that will complete our deliverables for this first phase of the order that we have in hand today.

Amit Dayal

Analyst

Okay, understood. So for now, we should just assume that nothing has changed with respect to sort of you guys delivering or deploying these units until we get another update from you on that.

Jim Deller

Management

Yes, that's great, Amit. I don't have anything further to –

Amit Dayal

Analyst

And then kind of given the timeline to discuss, Jim, are you highlighted, nine to 12 months for process burners, three to four months for the firetube burners. For this 500 horsepower firetube burners with respect to the California market, where you are seeing a lot of interest? I know, the 12 to 18 months away from having to deploy this, but shouldn't they be starting to place orders for this in the next one or two quarters if they are to meet these compliance requirements.

Jim Deller

Management

Amit, that is correct. I think very prudent of especially of the large customers who have a fleet of boilers and want to make certain about the technology that they are buying is going to meet all their needs of the future. Strategic we are working with them additionally, as the first adopters, because obviously, they have great value in putting our equipment into one burner, say one boiler initially, as to kick the tires, as it were to make sure that they're confident that they can then recommend the solution for the rest of their fleet. So, yes, you are correct. We do expect orders to be coming in the very near future. We have also been very strategic, especially to work with first adopters that have a large number of boilers to follow.

Amit Dayal

Analyst

Okay, understood. I will take my other questions offline, Jim. Thank you so much.

Jim Deller

Management

Thank you, Amit.

Operator

Operator

Our next question will come from Peter Jacobs with Stifel. Please go ahead.

Peter Jacobs

Analyst

Hey, good afternoon, Jim and everyone. First, Jim, congratulations on the progress you've made at the company the past year and a half or so. Secondly, this is a bigger picture question. And as I think about emission control, and reduction technologies into the future, particularly carbon capture. How does that fit in with NOx reduction? Meaning that would carbon capture technologies reduce the need for NOx emission reductions because it would capture the NOx? Or do they complement each other? Could you just kind of talk about that as we're thinking about 10 to 20 years down the road?

Jim Deller

Management

Certainly. Peter, first of all, thank you for the compliment. So carbon dioxide and NOx are obviously two different molecules, but they are also related in the industry. Because the reason that carbon capture is something that people are talking about, it basically enables the production of hydrogen as a fuel and then the ability to burn hydrogen in it. Right you burn hydrogen doesn't contain carbons, we burn hydrogen that only produces water. So you essentially end up with a CO2 increase or a non-CO2 increase in fuel. When you burn hydrogen the combustion is more intense and the flame temperature is higher and the net result is it, it creates more NOx. So what is being done to modify the fuel will actually create more NOx unless you put a very good NOx producing technology or NOx reducing type of burner into the furnace to control the NOx. We have proven the ClearSign Technologies so far running on in excess of 80% hydrogen that was part of meeting all the obligations of the Exxon project, which we did successfully. I believe going from 80% to 100% is a fairly modest change to the technology, we believe we have the capability to do that. And that will give us the ability to produce a burner that actually has a very good NOx controlling capability, even when using 100% hydrogen fuel. So as you see this as a good opportunity for ClearSign, what we don't know is the timing, as you suggest that the carbon capture projects are quite long ranging and in their early stages, but we see this as a very big opportunity and ClearSign can really play a part in the future.

Peter Jacobs

Analyst

Okay, thank you so much. That helps put some context around that. That's all I have.

Jim Deller

Management

Thank you.

Operator

Operator

Our next question will come from Jeff Feinglas, a Private Investor. Please go ahead.

Jeff Feinglas

Analyst

Hey, Jim. I want to go back for a second. You had mentioned a project and I didn't recall where you'd mentioned it. But I just want to make sure I got this straight. I heard that it performed at half the rate of the expectation, their payback period would be, you say within 12 months.

Jim Deller

Management

Yes. Hi, Jeff. I think what you're referring to is the Midwest refining project that we have. I can go over. We have -- there are two very strong value propositions for the ClearSign process burner technology. One is, what we often talked about is our ability to very efficiently meet the new NOx emission requirements. The other is through our ability to control the flame envelope and produce small flames. We can put burners into heaters where there's a lot of heat for very small volume in general terms and allow those heaters to operate at a high heat release, or high heat inputs as you increase throughput. And they can with traditional low NOx burners, which tend to have very large, bushy flames. In the case of this specific Midwest refinery project, the economic driver is that we can increase the or we believe both us and our client believe that we can increase the throughput of these heaters allowing the refinery to increase the barrels per day that they process. Based on my estimation, even if we achieve half of the process throughput improvements that we both expect, the payback for the customer will be in the order of one month. Whereas normal CapEx projects are the good ones, you're probably looking out one to two years as a good project. So the value proposition in the cases where this technology is required are exceptional.

Jeff Feinglas

Analyst

Yes. Maybe that's an understatement. Exceptional. I mean, forgive my ignorance, but that seems significant to me payback period, from a CapEx perspective and I misreading it. I mean, it is a combustion industry expects things to be paid back in a 30-day period.

Jim Deller

Management

It is quite special we agree. We have underlined a lot, it is a very exceptional circumstance.

Jeff Feinglas

Analyst

Okay. Well, I have no further questions. Just want to make sure I heard that right. And stretch it here to make sure, I heard one month.

Jim Deller

Management

Yes. It’s good news. Thank you, Jeff.

Operator

Operator

Our next question will come from Robert Kecseg from Las Colinas Capital Management. Please go ahead.

Robert Kecseg

Analyst

Hi, Jim. I wanted to ask you about the refining industry in general. In today's marketplace, is there very much expansion of refineries of existing facilities? And what about the billing of new refineries?

Jim Deller

Management

Hi, Bob. So I don't have a crystal ball on that. What we're seeing and most of what we see on that respect is actually in the form of feasibility studies and the like. We're not seeing a lot of expansion, we're seeing a lot of environmental projects, which is the most exciting for us but mainly driven by new emission regulations. These are the ones on the near-term horizon. There's lots of talk of carbon capture projects, but those are a much more distant. But the emissions regulations within the industry, the discussions of how they're going to be met, what the upcoming regulations are. And then the engagement of the engineering companies in these emissions regulating projects and helping their customers work out the most economic or the best solutions is really the dominant conversations in the industry that we're aware of.

Robert Kecseg

Analyst

Okay. And then on the difference between the emissions type of benefit, and the throughput benefit that you talked about. I'm wondering how prevalent we could expect more opportunities for the throughput type of economic benefit for the customer? Is this a really unusual heater? Or is it 10% of the market or 20% of the market, some sort of ballpark on how --

Jim Deller

Management

It's a really good point. Also, I don't have specific numbers. But it is a fairly common situation as the NOx emissions have been reduced over the years and the traditional burners have been developed and deployed, the resulting flames have gotten bigger and bigger, leading to more and more furnaces basically being undersized for the volume of these new flames. Of course, replacing heaters is expensive. So what happens is, either the heat input of the heaters gets reduced, so that the heaters are not over fired. Or the heaters get fired by , and they can coke up and lead to more maintenance than is normal. So we believe it's a good market. And the great thing for us is that market is global. It's not restricted to areas like California and soon to be Texas where we expect the emissions regulations to be driving a market for us. We think this is applicable to a very large portion of the globe, where there are at least some form of NOx controls required of the burners. In terms of the orders, I really believe, our success will bread success. Companies, I believe, we'll get some companies willing to try as we have with this Midwest refinery. Once we have technology in the field that demonstrates we are successful, that will then spread and become known and people with restricted heaters we expect them to come to us in search of solutions. So I'm really excited about this technology, I think it's a very good deployment of this very special type of burner we have here at ClearSign. And it's one that we've really only just started to promote and see the benefits of what it can do in the industry.

Robert Kecseg

Analyst

And then also, you now have all the different products, I would assume, with this watertube growing or proceeding ahead, that we now have products in the different categories that you want it to be in, is that a fair statement?

Jim Deller

Management

Yes. Right from -- for years ago when we laid out a strategy of developing this unique technology into products that was easy to install and easy for our customers to deploy and as close to a, what I will call a normal traditional burner as possible. Bringing the watertube boiler burner to market, obviously these successful launch of the firetube and process burner, especially with the applications we have running in California and Europe we so we really believe that we have the full suite of our core products developed and are really enjoying getting into the commercial phase of the business.

Robert Kecseg

Analyst

That's all I’ve got. Thanks, Jim.

Jim Deller

Management

Thank you, Bob.

Operator

Operator

Our next question will come from Robert Harvey, a Private Investor. Please go ahead.

Robert Harvey

Analyst

Hi, Jim. Thank you for your and the team's hard work in a difficult year and we know from a variety of perspectives. I want to go back to this point to Jeff Feinglas raised about the one-month payback. And as an amateur, the question that comes to mind is looking at this product, these products that you have and installations in Los Angeles, and so on. It seems to me that the demand is significantly driven by what the environmental restrictions are. Even though these refineries should be putting your products in for a variety of reasons, because you're new, they don't pull the trigger until they have to. But it seems to me when they have to, their demand is inelastic, or its price inelastic. If no one else has a product that can get 2.5 PPM. Then, in the productivity side, I realized that might be separate application a one-month payback tells me that the product is being priced too low. I mean, how about a six-month payback, and you raised the price six-fold? My concern is I'm just looking at, a $6 million to $7 million annual burn rate. And I'm looking at $3.5 million in revenues over the next year and a half. And the dilution to shareholders of selling more stock at these prices. There's a critical question here, I think about, are these customers really, would they not buy a burner because it costs $200,000 versus a scrubber instead of $100,000? I'm sure you've thought about this, but I just -- am I overlooking some major -- simplifying some major realities, oversimplifying some important realities are missing?

Jim Deller

Management

Well, I think you're making some good points. We certainly appreciate what I believe is the value of the technology we provide. And believe me as we believe the market will accommodate pricing, we are absolutely in this business to make money, I have absolutely no hesitation in saying that. I think we have to recognize that, today in the industry, we are considered a new technology. And the first thing we have to do is to get a reference list built up. And to get the early adopters to put our technology in and actually demonstrate to the market that it can do what we say it can do and can do that reliably. So that in the eyes of our customers, it becomes less new, and potentially less of a concern for them when selecting it and becomes much more common and normal. So that we can recognize the full value, especially compared to the next best alternatives that the technology can deliver. So at this point, I think I feel comfortable with the pricing where it is at today. I think as the value of the technology and the performance of the burners is established in the market and understood if it gives us the opportunity to increase the pricing, absolutely, I'm all for that and recognize that possibility. Just as today. I don't want to be too greedy. I really want to get this -- I just want to get the volume out there. And I think we've priced it fairly to make a very healthy profit for ClearSign, whilst being in the range that we can get the first adopter customers to place orders with us.

Robert Harvey

Analyst

Thank you.

Jim Deller

Management

Thank you, Bob.

Operator

Operator

Due to time constraints, this concludes our question-and-answer session. I would like to turn the conference back over to Jim Deller for any closing remarks.

Jim Deller

Management

Thank you, Operator. And thank you everyone for your interest and taking the time to participate today. We look forward to updating you regarding our developments and speaking to you on our next call.

Operator

Operator

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