ClearSign Technologies Corporation
Q2 2021 Earnings Call Transcript

Published: 8 Sep 2021

[Operator:]

Good day, and welcome to the ClearSign Technologies Second Quarter 2021 Conference Call. All participants will be in listen-only mode. . After today's presentation, there will be an opportunity to ask questions. . 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.

[Matthew Selinger:]

Good afternoon and thank you, operator. Welcome, everyone, to the ClearSign Technologies Corporation’s second quarter 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 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 the 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 does not intend to do so. On the call with me today is Jim Deller, ClearSign’s President and Chief Executive Officer. So, at this point, I would like to turn the call over to CEO, Jim Deller. Jim, please go ahead.

[Jim Deller:]

Thank you, Matthew, and thank you everyone for joining us today for ClearSign's second quarter 2021 investor update call. This last quarter has been a mix of great progress and encouragement as we moved multiple product lines through the technical stages of commercialization and customer engagement. Admittedly, I will say though the past weeks have not been without some frustration and separately, some sadness. Before I start and review the financial data reported in our second quarter 10-Q, I want to remember the passing of our CFO, Brian Fike. I'm sure that many of you saw the announcement that Brian Fike passed away at the end of July. Collectively, we are deeply saddened by Brian's passing and the entire ClearSign community continues to mourn his loss. And on behalf of our Board of Directors and employees, we extend our sincerest condolences to his family. Brian gave many years to this company and I want to recognize his contribution. Brian was a great colleague and friend to all our ClearSign, we will all miss him. For reassurance regarding succession, we have engaged some very competent professional temporary staff to maintain our finance function and further develop and strengthen our systems. However at the same time we are working with a nationwide recruitment firm to find a next permanent leader of our finance team. On the call today, I will provide our financial overview. I will then move on to our operational update. In that, regarding the major topics, I will start off with an overview of our process burner business, giving an update on our projects for the two international super major refiners and also the performance and developments with our operational installations. I'll then move the discussion to our boiler burner business where we have made significant development since our last call. In my remarks, I will address North America and China as well as the advances we have made in both our firetube and watertube products. After some general business related and closing remarks, we will open up the call for questions and answers. Reviewing our financial data, as reported in our recently filed 10-Q. Our net cash used in operations, the quarter ended June 30, 2021, was $2.16 million, compared to $1.65 million for the same period in 2020. I will go into detail on this temporary increase shortly. Our cash and cash equivalents were approximately $10.6 million at the end of the second quarter of 2021, compared to approximately $10.7 million at the end of the first quarter 2021. I want to give some details behind these numbers, because we do continue to be very conscious of our expenditures, plus it also has certain key projects and technologies to prove and to be meaningful this has to be done at industrial scale. As these testing activities are a necessary step in the commercialization and adoption of our technology in the industry, we are pushing ahead to complete them. These tests will not be a permanent activity, so this will pass, but we are seeing increased cash consumption, while these product proving activities are in progress. Primary among these is the expansion of our process burner capability and secondly, the proving of our new firetube and watertube boiler burner technology. I will go into more detail regarding these product lines later on this call. The key point is that the increased operating expenses are not a change in our management philosophy for the short-term, nonetheless, a necessary activity that will pass. As stated in our recent 10-Q filing, our operating expenses for the second quarter increased by 28% or just under $450,000 compared to the same period last year. In addition to the increased testing cost referred to earlier, during the second quarter we made payments and accruals for the recruitment of a new leader for our finance team and additional costs required for temporary staff to maintain our finance function until the position is filled. And finally, an accrual for a severance payment agreed with Mr. Fike as part of his separation agreement. To clarify timing, these payments were agreed to in April and therefore are included as an accrual in the second quarter. As of June 30, 2021, the company has sold an aggregate of 1,092,570 shares of common stock under its ATM program, at an average price of $5.03 per share. Gross proceeds totaled approximately $5.5 million and net cash proceeds approximated $5.3 million. Shares sold in the ATM program in the three months ended June 30, 2021, totaled 151,822 at an average price of $5.56. It should be noted that cash received from our ATM program in the second quarter included approximately $1.1 million from shares sold in the last two days of the first quarter, but settled in Q2. There were 31,479,454 shares of our common stock issued and outstanding as of June 30, 2021. We have confidence in our financial position and balance sheet. And with our quarter ending balances we have sufficient working capital available to carry us well into 2022 and that is without revenue from any other sources. I will now change focus and address our major product lines and we'll start with our process burner technology. As you will have seen from a press release issued September 3rd, on a call the day before, on which we were expecting to make arrangements for the final stakeholder performance demonstrations for ExxonMobil and possibly discussed the schedule for the delivery of the burners, we were given verbal notification to put our testing on hold, because the time window to include the burners in the early 2022 turnaround ended in August, and all the details required had not been finalized. This news of the project hold was both very disappointing and a surprise to all at ClearSign. Upon reflection, despite this change in plans, we have a lot to be encouraged about. We have given the development of our process burner technology great emphasis to the point that our burners are now capable of running on virtually any fuel blend required by refineries, including up to 80% hydrogen content. We have demonstrated that our burners can run when situated so close together that they are almost touching each other. A challenge in itself as refinery engineers know. They have turned down capabilities that match or exceed the usable operating range of most traditional burners and can modulate up and down without human input based on the demands of our refinery operating systems and all with a unique 5 ppm capable NOx control. For those in the industry, especially customers and engineering companies and to enable everyone to be aware of what this means I want to take a minute and go into the quantitative details of these capabilities because they are important. ClearSign Core process burners now run on fuel gases ranging from natural gas to blends with up to 80% hydrogen content and operate over a turn-down range of 5

[Operator:]

. Our first question today comes from Amit Dayal with H.C. Wainwright.

[Amit Dayal:]

Good afternoon, Jim. Sorry to hear about Brian. Been a pretty eventful quarter for you guys. Just starting with this Exxon news. Did Exxon go with somebody else? I don't know if you know the answer to that, but did Exxon go with somebody else, rather than you guys? And is that relationship pretty much done?

[Jim Deller:]

So Amit, first of all, the news that we received from Exxon was just a request on their part to put the testing on hold because the time required for the engineering to include our burners into that heater in the upcoming shutdown, basically the window had passed. So there was a miss on timing, we don't believe there are any other burner technologies being offered on the market today that can get close to what we offer. So I cannot speak for Exxon from -- of our own knowledge of the market and what we're seeing, there is no other burner technology out there. So what we've got is what we've been told by Exxon, although this was purely a timing miss and the window had passed. Obviously, we're very disappointed, and we are really looking forward to demonstrating those burners. Looking at the -- you asked about the relationship. I mean, Exxon, like all refineries, they're a very big potential customer. This is a speed bump in the road for us right here, we were looking to get at getting this demonstration in the field. We have made huge and accelerated the development of our process burner technologies to get it ready for the wide range of operating requirements that Exxon present us with. But the result is that we are in a much better position now. And we have a burner that will meet. And as I said in the remarks, especially any operation or any normal operational or process burner in the industry. They are -- like all refineries, we do foresee NOx reduction requirements, especially being imposed by the Air Regulation Authorities and first among those being California and the TCEQ in the Texas Gulf Coast area, Exxon is a very big client, and we really look forward to a lot of future business with them. This is just an unfortunate timing and one reference that we were looking to get in the field that, at least from what we told is not scheduled for the current turnaround next year.

[Amit Dayal:]

Okay. So should we assume that you are still in touch with Exxon and there is some level of dialogue still ongoing with Exxon?

[Jim Deller:]

Of course, yes. We are touch with the team. And long term, again, I mean, Exxon is a big refiner. They have a lot of assets in the Gulf Coast region. We believe that there's going to be emission requirements there. So we actually see them as a very big and very important customer. And we truly value the opportunity of business with them down the road.

[Amit Dayal:]

Okay. Understood. I move on to sort of the associated relationship with Zeeco, at least initially, the understanding was that the Zeeco partnership was somewhat dependent on Exxon coming through and that deployment coming through for you guys. I know you've commented that the partnership with Zeeco is still supportive, etc. But do you now need maybe sort of a new agreement with Zeeco that is independent, a little bit of the Exxon qualifier? Or is that not necessary?

[Jim Deller:]

No, the Exxon passed the news onto us late Thursday last week. We do have a very good and close relationship with Zeeco. And in fact, the first call I made was to be only just to explain the call we had and that Exxon was running out of time for their turnaround. We confirmed that, that relationship remains strong. There the testing that we're doing is being done at the Zeeco test facility. So our engineers and the Zeeco engineers are working hand-in-hand in that testing, they're buying our burners with us. So they are intimately familiar with the developments we've made to the technology and the capability of our technology, but also the interactions we have with customers and of inquiries and quotations that we're sending out, those quotations are typically needing, obviously the burners can be fabricated at Zeeco, and there will be testing that scheduled in the Zeeco test facilities. So obviously, it's kind of an internal relationship, but they have knowledge of the traction and the market interest in our burners as well. So the Exxon agreement was referenced as we set our initial collaboration out with Zeeco, but they are very much engaged with us. I believe we are both looking forward to growing this business. And just as an aside, I mentioned the watertube boiler burner as well. That boiler burner is being tested at the Zeeco facilities, they've expanded their other product lines that we are working with them on, at least for testing, they manufacture the burner in tote, but also because the very big market for that watertube boiler burner is in China, and they have a fabrication facility, in fact a very active office in Shanghai. They're actually fabricating a twin burner for us over there. So we have ongoing and expanding engagements with Zeeco.

[Amit Dayal:]

Okay. Understood. And then maybe just one last one for me. With respect to the China opportunity, is expecting any deployments or revenues from China in 2021 a bit aggressive? Or is that still possible?

[Jim Deller:]

It's still possible, Amit. As I said, the COVID travel restrictions have persisted much longer and much more strongly regarding covering China than we ever expected. We do want to make sure primarily that we protect our IP. And so where we do make our first sales, we want to make sure that we do those or select those customers carefully. And I do want to make sure that Manny Menendez, the President, the ClearSign President in Asia gets to visit those sites. And just to make sure that we are installing these burners for the first units into the right facilities. And because of that caution, no, it's possible we'll get some sales this year, but I really want to prioritize safeguarding our IP over just rushing to make a sale. No one is waiting for a sale, but we've really got to look at the long-term business. So I guess the short answer is, it's possible, but it's -- I'm certainly not wanted to give an impression that it should be expected.

[Operator:]

Our next question comes from Jeff Feinglass, a private investor.

[Unidentified Analyst:]

Hi Jim, I think you just touched on this, but I just want to follow-up with it. Given the news from Exxon and their delay, do you think that this has ported or any way reversing the traction you have with other super majors or refiners and process burners inside those refineries.

[Jim Deller:]

I mean, Jeff, the short answer is no, but let me give a little bit of background. I mean, obviously, we're very disappointed to hear from Exxon, and we're looking forward to, I think as I demonstrated. But as we need to take a step back and look at what this really means in the big picture of our strategy. And the reality is that we continue to execute the strategy that we started when I first joined ClearSign back in early 2019 and that was develop a technology that would make it easy to use and easy to incorporate in our customers, our refineries and their business and then to engage with collaborative partners who are well-established in the industry to provide a channel to market and help us conduct that business. And that has not changed. I don't want to belittle the disappointment. But the Exxon asking us to put the testing on hold affects the timing of one installation. The bigger outcome is through the engagement, as I mentioned with Amit, we have accelerated the development of our process burner technology, to the point that it meets virtually all the refinery needs and matches the operation of regular burners. And in addition, of course, we've maintained our NOx control and the value we can offer to enable our customers to avoid having to install SCRs. We -- our first super major installation is, when we're talking to references, it's installed and ready to be started up in Europe. I'm not aware of a single comment from customers or as a matter of fact, anyone in the industry regarding the ExxonMobil request to put our testing on hold, what we have seen is a notable uptick in customer engagement based on the operating capabilities that we've been able to develop for our process burner over the past few months.

[Operator:]

. Our next question will come from Robert Harvey, a private investor.

[Unidentified Analyst:]

Hi Jim, thank you for your earlier comments. I'm sorry that you had to deal with the two big issues you had in one quarter here. Can you say a little bit more about the demonstration that Exxon has to use the language put on hold, this was going to be -- this is not further testing at the Zeeco facility. This was to be a partial install or something at an Exxon facility? I mean, like what additional evidence did they need? And it just seems surprising that -- I mean, I believe that earlier, we're talking about an installation, possibly to one of their refineries in 2021 that was delayed to have further testing to demonstrate broader capability, but how can it be a surprise that suddenly at the end of August, and they didn't have the data they needed. I mean, it sounds like with Zeeco, you demonstrated all the capabilities that they needed. I mean, is this the hurricane that is like switched manpower at Exxon to Baton Rouge from Baytown? Or it's just -- it seems like suddenly, the deadline snuck-up. I mean these things are done very carefully with long lead times I just -- I'm having a problem understanding this was suddenly a surprise and put on hold means that they're coming back to do it, what in Jan of '23? Or like what can you say about what you think their thinking is?

[Jim Deller:]

Well, Robert, thanks for the question. I'm not going to present to -- it's not my place to try and speculate as to Exxon's thinking. What we know -- so we were looking forward to demonstrating these burners. The operating criteria that I went through, we believe, met all of the requirements. We were looking -- we expected on the call that we were going to be able to arrange for their plan of witness and hopefully, for the -- how to transport the burners down to site works, expect to talk about logistics. We are extremely surprised when they asked us to put the testing on hold. I don't believe the details were from our side. There is a -- I'm a little bit here. There's a lot of engineering that goes into a turnaround that, that obviously takes some time. And if they -- there is a time window that, that you have to commit. And we would just hold that, that time window had passed.

[Unidentified Analyst:]

Okay. Got it. In terms of emissions requirements, and you mentioned the California requirements for refineries and the Texas requirements. And I'm just -- there's an awful lot of talk and effort and so on going on in responding to climate change, it's in the air, in my understanding that nitrous oxide is 300x more damaging to the environment than carbon dioxide. If you had extra funds, is there lobbying that you would do? And -- or are there more regulations coming from others or whatever? What can pressure the marketplace to purchase your product sooner rather than later?

[Jim Deller:]

I can go on at length. I think, to be honest, we all care about the environment. We all want -- we all like things to move faster in that regard. As a burner manufacturer, we try and solve the need. We have customers that need our products to meet the emissions requirements. And we believe what we have here in ClearSign is a very special opportunity to enable them to do that in a very cost-effective manner. I think the -- there's always politics, but I really need to stay focused on our customers, to be honest. We're very aware of the regulations. We share information with the regulators because that helps us understand what they're looking at. We think it helps them improve their plans. So we actually engage with them. As we have on the World Oil project, that was an active participation with the South Coast Air Quality Management District in California. But from my side, running the business and especially appreciating that at the end of the day, the oil refineries are our customers -- our goal is to help them meet their needs and to be good environmental stewards in the most efficient and effective ways that they can.

[Operator:]

Our next question comes from Robert Kecseg with Las Colinas Capital Management.

[Robert Kecseg:]

Hi Jim. I'm going to ask you something about these process heaters. If we come into a customer with a 10 foot flame to replace their 2 inch flame, I would think you'd need to redesign the heater. But we're coming to them with a 2 holes flame from -- but I understand many, many feet on us is 10 feet or not. This is a considerably large flame. But won't that work in any of these existing heaters? I mean, as far as any kind of design changes goes? You see where I'm going with this, that there's no macular product. It should be easier to fit. Just to me, in my little brain.

[Jim Deller:]

Yes. Bob, no, you're right on the money. There's two big advantages that ClearSign does, especially ClearSign process burners offer into the market. And we tend to -- we do talk a lot. And very rightly so we talk a lot about NOx emissions. But the other attribute is our flames are significantly smaller. They're not 2 inches, but they are significantly shorter than the flames of traditional low and ultra-low NOx burners. And the flames of those traditional burners do cause problems because when the flames are long, they overheat the inside surface of the heater, and the result is that the operator has to turn the firing rate down to avoid damaging their equipment. So if you have a situation where, for example, the heaters, we're talking about are a crude charge heater, which restricts the flow-through in entire refinery, if the throughput of those heaters has to be turned down, it reduces the capacity of that refinery to make product. So the other advantage that we have in having much more -- or much more confined flames is that we can actually go back and fit our technology into those heaters to usually improve the NOx emissions. But more importantly, for those refiners is we can actually rate or enable them to increase the firing rates and the throughput of those heaters. So that has a very immediate -- obviously, the value for refineries is very easy to calculate in those circumstances. But above to your point, that is exactly a very real opportunity for us and one that we are -- we do have a significant traction on. So we're talking to customers, not just about NOx emissions, but we are talking about throughput increases in addition to that.

[Robert Kecseg:]

Okay. Okay. And kind of following with the same line of thinking, this shipment that just went to Europe or the other supermajor, they're going to be operating one of these burners. I assume, since you and I talked before about each one of these designs of these heaters, can be three burners, four burners, whatever and then the configuration. Are they going to put that one burner with other burners in that heater to -- that's going to be next to it? I don't understand how they would operate that. Does it seem like you're really be getting real information if it's combined with…?

[Jim Deller:]

I can't -- Bob, we have -- we're not allowed to disclose the details of our equipment. So let me talk in general terms. There are -- certainly, there are -- there's what we call cabin heaters, which are square boxes. And then vertical cylinder heaters as the name suggests that are basically white cans. Those vertical cylindrical heaters have burners that range typically in a circular pattern in the floor, whether it's 12 burners, 8 burners, 5 burners, three burners and the very small ones have a single burner in them. Okay? So based on that, this is -- we are to find a complete burner for this heater. So it's a very small heater in Europe that is first going to. But it will enable the customer to get a very good appreciation for what our burners can do. It will not be mixed with other burners.

[Robert Kecseg:]

All right. And then, kind of again, one on the same line of thinking. When you made these installations at these newest customers on the West Coast, I think you call it the transportation and storage customer. And that can -- base -- the configuration of the burners that you were putting in was replacing other burners with basically the same configuration. So there really wasn't a big engineering task for them to do. Is that correct?

[Jim Deller:]

That's correct. That goes back to our strategy right from the start, the objective being that we need to develop our technology to the point that it is heat to deploy. And in terms of functionality and putting into a heater, it just plugs right with the hole of the old existing burner, that cuts down the engineering cost and it makes the turnarounds very simple. So those burners just we dropped -- or the California Boiler team dropped the old burners out, plugged the new burners in, reconnected the fuel gas piping. They had some minor modifications on the control system for some different unrelated details and just fired them up. So it's a very easy like-for-like change out.

[Robert Kecseg:]

Right. And could you give us a sense -- on this call, it seemed like everybody was very excited about the name ExxonMobil and that kind of accomplishment. Could you just -- aside from that, could you just kind of give us some idea of pipeline for -- or inquiries or however you want to characterize, whatever you're comfortable with as far as for burners for that part of the business?

[Jim Deller:]

Yes. Bob, this is something that we watch and are very encouraged about. Just by that nature, we can't -- we don't control our customers. So I really can't go into mainland dates. I can say that we have customers that we're engaged with that range from global super majors through to smaller local refineries and some national scale refineries still with multiple heaters. The applications include NOx reduction and capacity expansion. So it's a growing pipeline, but I really -- unfortunately, I can't go into details just because it's so speculative, and I don't want to be misleading.

[Robert Kecseg:]

No, no, I understand that. I'm just trying to say that everything was laser-focused on this big name ExxonMobil and all of a sudden at those proofs. So I'm just saying that there has to be other business out there. And I would imagine, I think you've alluded to in past conversations, but just the fact that we were able to do this demonstration for that company, open the door to a lot more inquiry. Am I right in that?

[Jim Deller:]

Well, I think the -- yes, I think what's happened is we've used ExxonMobil's name to really describe the project. I think the -- more accurately, we reported the process burner development project and what the industry has been watching is the capabilities and the performance that we've been able to achieve because we're actively talking to our customers and the industry experts. So as we've been able to improve and achieve this performance by process furnace, that's the news that we are passing on, and that's what's leading to the interest and the engagement that we're getting. So whilst we have the Exxon name associated with it because it's what everyone recognized, the -- I think the reality in terms of the actual benefits and where we are and refer to it as the process burner development project.

[Robert Kecseg:]

And then over on the California Boiler, I suppose that the 500 horsepower get like a bigger portion of the market compared to the smaller 125. So now we have a larger market to address. Is that fair to say?

[Jim Deller:]

Yes. And Bob the key -- really the key to that 500 size and up is the San Joaquin Valley is the one region to formalize their NOx emission regulations revamp that was done quite recently, but they -- the 500 horse power, the NOx emission requirements dropped down to 2.5PPM at that 500 horsepower size and above. So that puts us in a very special position, obviously showing success in this demonstration, but we obviously believe that, that's to be expected. If we can do that, we are in a very unique position. And the only alternative that we're aware of is for customers to put an effective reduction unit on their boilers, which if you think of a food processing plant or somebody of that nature, going to the extra complexity, one the cost of installing such a piece of equipment and then maintaining ammonia and handling the deliveries, that is extremely burdensome. So we really believe that we have an extraordinary value at that 500 horsepower and above. So that's one of the reasons that we've really picked that size. In addition, California Boiler have a rental boiler of that size that we can work together to fit this burner into and then to deploy into the field to give customers first-hand experience using that burner.

[Robert Kecseg:]

One other thing maybe to connect the dots. From what I understand, Zeeco is connected in both the process burners and also potentially now with the watertube because they're both -- because they are in both of those businesses, but they're not in the firetube, is that right? Zeeco?

[Jim Deller:]

Yes. So yes, we're -- I mean, we're in ongoing discussions with Zeeco regarding the -- a firetube burner, but that's -- that opportunity for us to test there and have Zeeco fabricate that burner is really based on the strength of the process burner collaboration that we have developed. But it is also the -- the firetube boiler burners, we have a formal agreement in place, and I'm very pleased with the agreement in place with California Boiler.

[Operator:]

Our next question comes from Marshall Crowe, a Private Investor.

[Unidentified Analyst:]

Yes, so you had mentioned earlier, I believe it was the World Oil facility that a correction had been made because it started up cold. The burner started up cold, and so you had to go in and you will have to make repairs, I believe, or readjust it. Is that right? Are you familiar with what I am speaking of?

[Jim Deller:]

Yes, I am. It -- there was a…

[Unidentified Analyst:]

I'm just wondering how often that happens. Is that…

[Jim Deller:]

No, this is a one-off. And there's basically a couple of valves in the control system, just the way it was configured that didn't fire at the right time. And it led to some minor damage, but damage that we just want to take the opportunity to repair. So this is not a -- . This is just one of those one-off things that happens.

[Operator:]

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

[Jim Deller:]

Great. Thank you very much. This concludes the investor update call for the second quarter 2021. I look forward to speaking to you all in the future.

[Operator:]

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