ClearSign Technologies Corporation

Good day and welcome to the ClearSign Technologies second quarter 2021 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. 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 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 to 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 a 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.

Thank you, Matthew. And thank you, everyone, for joining us today for the ClearSign second quarter 2021 investor update call. This last quarter has been a mix of great progress and encouragement as we move 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 10Q, 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 at 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. But at the same time, we are working with a nationwide recruitment firm to find our next permanent leader of our finance team. On the call today, I will provide a financial overview. I will then move on to our operational update. Regarding the major topics, I will start off with an overview of our process burner business, giving an update on our projects with the two international supermajor refiners, and also the performance and development with our operational installations. I will then move the discussion to our boiler burner business, where we have made significant developments 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 fire tube and water tube 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 TEN-Q. Our net cash used in operations for the quarter ended June 30th, 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 of 2021. I want to give some details behind these numbers because we do continue to be very conscious of our expenditures whilst we also have certain key projects and technologies to prove and to be meaningful that 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 fire tube and water tube 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, but a short-term, nonetheless a necessary activity that will pass. As stated in our recent 10 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 costs referred to earlier, During the second quarter, we made payments and accruals for the recruitment of a new leader for our finance team, an additional cost required for temporary staff to maintain our finance function until the position is filled, and finally, an accrual for a severance of 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 30th, 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 total approximately $5.5 million, and net cash proceeds approximated $5.3 million. Shares sold in the ATM program in the three months ended June 30th, 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 that settled in Q2. There were 31,479,454 shares of our common stock issued and outstanding as of June 30th, 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 the press release issued September 3rd, on a call the day before on which we were expecting to make arrangements for the final stakeholder performance demonstration for ExxonMobil and possibly discuss 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 a 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 the refinery operating systems, and all with their 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 can operate over a turn-down range of 5 to 1 or non-industry terminology from 100% of design firing rate down to 20% of design firing rate. The burners can light off smoothly on any fuel in that range, including from a cold start when the furnace is full of fresh air. Depending on the heater operating conditions, we will make NOx guarantees typically between 5 ppm and 9 ppm, including under the conditions just described. Regarding proven operational site NOx performance, The formal third-party emissions report from our multi-burner infrastructure project has not yet been released, but we did take our own measurements at the same time, which were consistent with those of the outside measurement company. For that project, we guaranteed 7 ppm NOx, and our measurements indicated just over 6 ppm at full rate, with a heavy hydrocarbon low-pressure waste stream flowing in addition to the normal fuel gas. We believe that were these burners to run on normal fuel gas alone, the NOx performance would be even better. As our testing is run in the test facility of our partner Zico, they are very familiar with the development and capabilities of our technology. We believe that our relationship with Zico remains strong and that we are both looking forward to developing this business. We have attracted great interest in our technology both due to its NOx control and ability to function at high intensity and in close confines, and are in discussions with major multi-site and global refiners seeking our burners for both attributes. We have other significant process burner projects ongoing and in place. The burner for the super major global refining customer in Europe has been shipped today. is on site and ready to fire up, which is scheduled to occur early in the fourth quarter of this year. This project will be the first installation of the Supermajor Global Refiner for the company and also the first in Europe. While solving a need for our customer in Europe, it is our understanding that this is also a trial opportunity for this client to assess our technology for inclusion in their NOx reduction plans, particularly for their refineries in California. We do look forward to completing this installation and startup, and will make an announcement when this has been achieved. Our installation for the Fortune 500 infrastructure company continues to run seamlessly. The data that we recorded and the results of the independent testing, to the extent that we are aware of them, have shown the heater operating below the groundbreaking emissions guarantee, some details of which I gave earlier in my technical digressions. The formal report is still within the review period required by the South Coast Air Quality Management District, and we do not know if any formal announcement will be made by them at the end of this period. If we learn anything official, we will pass that on. It is quite normal for respective customers to seek referrals from existing customers, and we do know that the engineering company involved in this project has provided good references for us when requested by prospective new customers. The burners installed at World Oil continue to operate at full rate and consistently. We are in regular contact with oil. As we mentioned previously, three of the burners need to be optimized as they were hindered by a controls issue during the original startup earlier this year, and we are planning to return to modify those burners to their original condition when the refinery shuts down, and this is anticipated to be early in the first quarter next year. In general, we are seeing more and more interest in our technology. This is a mix of clients with different needs and who are looking to address an active project, as well as those assessing technical and commercial options as part of future planning, budgeting processes, or feasibility studies. As we have said before, I believe there is a great awareness of ClearSign's capabilities in the eyes of the industry. While we also need to recognize that we need success to breed success, and that we anticipate being able to provide knowledge of successful installations, case studies, and similar references will be one of our most powerful sales attributes, especially considering the conservative nature of our industry. It is also worth noting that all the aforementioned projects have been supplied through our collaboration with Zico, who continue to be a very supportive and proficient partner. In fact, this relationship has provided benefits in other verticals, one of which I will touch on coming up later in my commentary. Turning to boiler burners, at the time of our last call, we were awaiting a new USA-fabricated 125 horsepower burner to ship to the California boiler site in Visalia, California, in the center of the San Joaquin Valley. That has been completed, the burner arrived, and California Boiler installed the burner, fabricated the fuel gas supply system, and burner controls. We worked together to fine-tune the burner and finally conducted our first FireTube customer demonstration event with California Boiler. The demonstration went very well, attracting over 20 visitors from a wide range of industries, including the local regulatory authority. The gas analyzer screen showing performance of the burner at well below 2.5 ppm NOx and some other photographs from the event were posted on LinkedIn, where we share many company updates. The operation of this burner has since been independently verified by a third-party source testing firm as meeting the local regulatory requirements. Ultimately, this demonstration also led to multiple requests for proposals. The boiler into which our burner is installed is a rental unit owned by California Boiler, and since the demonstration, the boiler has been relocated and is being set up for service at a milk processing plant, providing a great reference for us and our collaboration with California Boiler, and giving a customer a first-hand experience of a ClearSign core burner. This also provides the ability to obtain ongoing operational data, which we will be able to share in support of future sales and marketing efforts. To expand our product range, we now have fabricated and delivered a much larger 500 horsepower 5-tube boiler burner to California Boilers Basalia site. This burner is currently being installed in a second, much bigger rental boiler. We are anticipating holding a customer demonstration event with substantially larger audience to show this burner in operation in October of this year. This 500 horsepower size is critical to our plans as the regulations for new and existing boilers of this size and above in the California San Joaquin Valley require NOx emissions below 2.5 ppm. And we believe that there are no other burner technologies with the capability to operate near this level. Even outside of the San Joaquin Valley region, the capability to provide a burner that can control NOx emissions comfortably below permit requirements and avoid the cost of installing and maintaining selective catalytic reduction units, aka SCRs, in addition to the operational demands of handling the ammonia or urea required to operate them, has great value and interest from potential customers. As environmental emission regulations are enforced and deadlines for compliance get closer, we expect the demand for this technology to grow. It also helps that our partner, California Boiler, has a well-established operation and a long client list in this region. Aside from the favorable market traction for these burners in California, rolling out this technology in the USA also enables us to provide and optimize the burners where we have our own technical resources to work on them and to then build and test similar burners in China for certification. This allows us to maintain overall progress despite experiencing severe limitations in our ability to work in China as COVID makes it difficult to get personnel into China. As I speak here today, however, our president of ClearSignAsia, Manny Menendez, has been able to enter the country but is subject to a three-week confinement as he goes through the quarantine process that is a mandatory precursor to working on the ground in China during these times of COVID travel restrictions. Following the finalization of our 500 horsepower burner and optimization of the fuel gas controls equipment, our plan is to manufacture a copy of that burner in China and to repeat the certification process that we completed for our 125 horsepower burner. We do not have the schedule for this to be finalized to date, as we need our president of ClearSign Asia to work out logistics with our boiler manufacturer partner there, Jiangsu Shuangliang Boiler Company Limited. The situation is similar regarding our 125 fire tube boiler burner. We announced the formal certification of this product for sale in China in May of this year. Our next steps are to find first adopter customers, but as we mentioned before, we want to be both strategic and careful in the way that we go about this. Primarily, we seek customers in areas we have relationships with third-party contractors who can't provide service, and also installations where we can control access to our technology or at least where we have a high degree of confidence that we can maximize the protection of our intellectual property. Especially in these early stages of our product rollout in China, we want to be able to verify these credentials in person. We also have developments of our water tube boiler burner I would like to report. For anyone not familiar with the technology, these are much bigger where the small end of our boiler burner range is a 125 horsepower burner we discussed earlier, this water tube boiler burner is 20 times the firing rate. This is a legacy product that we have slated for redesign, following the same process as conducted when we developed the commercial design of our fire tube boiler burners. The objective of the redesign is to provide a product that is supplied as a single piece, and once designed, can be repeated rather than having to custom engineer significant components for every product sold, which we believe will enable the products to be produced and installed in significant quantities. While discussing this, I want to recognize the great effort of our CTO, Dr. Donald Kendrick, for the development of this new burner configuration and the scaling of the new design up to and including a water tube product. The first one of this new water tube boiler burner design has been manufactured in Tulsa and is in the final stages of installation into a water tube boiler that makes up part of the test facility at Zico. Switching the initial activities of this project to Tulsa has again enabled us to keep momentum despite the COVID restrictions in China. In addition, operating this burner for the first time in the Zico test facility will enable us to optimize element any elements of the design, if required, and to efficiently validate the operating sequence for the various fuel circuits involved in this large burner. Upon completion, this will provide a new generation water tube boiler product burner line. It is pertinent to note at this point that Zika also has an operation, including fabrication facility, in Shanghai. And we are underway producing a twin burner there Our plan is to arrange for the installation of that burner in China and to proceed with the necessary certifications. However, and I caution, we need to obtain an agreement with the Beijing District Heating Group and coordinate a schedule before this can happen. And with Mr. Menendez just arriving in China and still with some quarantine time ahead of him before he can make any in-person meetings, and considering the volume of activity that is required to complete this installation, and COVID travel work limitation, scheduling and timeline is an ongoing work in progress and yet to be defined. While it has not received much coverage here, we are actively promoting our sensor technology. Our mobile ClearSign Eye demonstration unit is in use to the extent our clients are allowed to meet external visitors in person. We are presenting our sensor technology at the American Flame Research Committee Conference in Houston this October, as well as our ClearSign Core burner technology, emphasizing the performance of our recent installations in a second presentation. Before ending and moving on to questions, I want to provide a quick review of recent activities and events on the horizon. We are happy that our first super major process burner is installed in Europe and look forward to the startup which is expected in the fourth quarter this year. We believe our process burner technology is developed to the point it provides full functionality of standard burners in addition to operating in tight quarters and delivering game-changing low NOx emissions and in cases where heaters are constrained by the size of traditional burner flames, increased throughput. Our process burner opportunity pipeline continues to evolve and we look forward to being able to make future announcements. Our FireTube product, in collaboration with our partner California Boiler, has been demonstrated and well received in California. This has led to significant customer interest and quotation activity on our part. We look forward to moving this business to the truly commercial phase. We have been able to return to China and look forward to re-engaging with the heating districts and developing our product lines, alliances, and sales channels. We anticipate confirming the design and operating protocol for our new, advanced, and redesigned One Piece ClearSign Core Water Tube Boiler Burner product, which we anticipate will open up opportunities like replacing burners for the heating districts in China. We continue to stick to our asset light business model, which also means we do not have excess personnel. I do believe we have quality rather than quantity. Over the past few months, the employees of ClearSign have demonstrated nimbleness and dedication as we have been pushing our technology in multiple areas to bring it fully to market. As we experience COVID restrictions affecting our ability to push forward full pace in China, a domestic boiler program in conjunction with California Boiler was accelerated. And this in a similar time frame to us getting access to the water tube test boiler in Tulsa, enabling us to put the scaling and final design of that product into high gear. In parallel, we have developed our process burner technology to meet any normal firing process heater demand. In addition to the above, we have a progression of new inquiries requiring engineering and design input, which of course we have been pleased to address. I want to thank the ClearSign employees for what they have done this past quarter, especially our engineers, designers, and project managers. It has taken a lot of personal accountability and dedication to do what they have done. And for myself, and on behalf of the board of directors, want to acknowledge and thank them for it. That concludes my prepared remarks at this time. Operator, can you please open up the call for questions?