Clearsign Technologies Corp

NASDAQ:CLIR

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the ClearSign Technologies Fourth Quarter and Full Year 2023 Conference Call. [Operator Instructions]. Please note this event is being recorded. I will 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 Fourth Quarter and Full Year 2023 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 2023 Annual Report on Form 10-K for the period ended December 31, 2023. Those 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 are Jim Deller, ClearSign's Chief Executive Officer; and Brent Hinds, ClearSign's Chief Financial Officer. So at this point in the call, I would like to turn the call over to CFO, Brent Hinds. So Brent, please go ahead.

[Brent Hinds, executive]

Thank you, Matthew, and thank you to everyone joining us here today. Before I begin, I'd like to talk about our most recent news, which was the completion of our capital raise. In short, we successfully raised approximately $9.3 million in gross proceeds through 2 separate offerings: one, an underwritten public offering and the second, a concurrent private placement. If we add the net proceeds to our 2023 year-end balance sheet, we would have reported approximately $13.7 million in cash and cash equivalents after this raise. A more detailed description of these offerings is included in our current report on Form 8-K filed with the SEC last Friday, April 19. This added working capital gives us more flexibility as we execute our commercial growth plans. And Jim will give more specifics about this and the use of this capital. Now I'd like to shift and discuss our 2023 year-end financial results. As a reminder, I'd like to point out that our financial results were included in our annual report on Form 10-K, which was filed with the SEC on April 1. For the fourth quarter of 2023, the company recognized approximately $1.3 million in revenues compared to $50,000 for the same comparable period in 2022. I do want to make a keynote about our fourth quarter 2023 results. We reported gross profit margin of 43.9%, which was 12.8% increases compared to our prior year gross margin. This increase was primarily driven by shipments of our process burners. For our full year 2023 results, our revenues amounted to $2.4 million compared to $374,000 for the same period in 2022. This was a 642% increase over the prior year. The year-over-year increase in revenues was driven in large part by our 2 on-going California refinery process burner projects. Now I'd like to shift focus from revenue to cash. Our net cash used in operations for the quarter ended December 31, 2023, was approximately $1.5 million compared to approximately $1 million for the same period in 2022. This $500,000 year-over-year increase was driven by project execution costs. Now turning our focus from cash to the income statement. Our net loss for the fourth quarter in 2023 was approximately $1 million, which is a favorable decrease of $300,000 compared to the same period in 2022. Net loss for the full year 2023 was approximately $5.2 million, which is approximately a $500,000 decrease year-over-year compared to the prior year net loss of $5.8 million. This year-over-year decrease was predominantly due to our overall increase in gross profit and increased sales volume. From a financial perspective, we believe we are much better positioned to scale projects and partnerships. Said differently, this capital raise has bolstered our balance sheet, and we believe this will instill greater confidence in our customers and suppliers when doing business with us. And with that, I'd like to turn the call over to our CEO, Jim Deller. Jim?

[Colin James Deller, executive]

Thank you, Brent, for the financial overview. As always, I'd like to thank everyone for joining us on this call today and for your interest in ClearSign. On today's call, as usual, I will review our business segments, starting with our process burners, followed by Boiler Burners and then discuss the outlook for the coming year. I do not have a lot to report regarding our China operations. We do have some new developments in technology and government validation in addition to business progress, including both successful start-ups and new sales that we will cover in this call. As Brent discussed earlier, we have also just completed a capital raise. I will discuss this and particularly what that means for our business and how that positions ClearSign for the future. Before I start, I want to give a quick update on our open position on our Board of Directors. We do have a highly qualified independent director identified, and we anticipate completing their engagement in the coming days. As always, we will issue a press release with the details as soon as this is completed. I will now turn to the developments in our process burner line. We have a number of significant developments, some of which are tangible and have resulted in press releases, which I will elaborate on today. Others are more subtle, but nonetheless encouraging and are worthy of discussion. I will start with what may leave the most meaningful announcement we have made for our long-term business. On February 13, we announced that following a year-long process of assessing operational fired equipment review and feedback from industry and other stakeholders and the assessment of the economic benefit that California regulators established 2 new best available control technology or backed thresholds based on the long-term performance and proven emissions of ClearSign process burners. These 2 categories were process heaters with a single burner and process heaters with multiple burners. While this designation does not stipulate the technology to be used, it does set the performance levels of which future regulations and permits should be justifiable by both industry and regulators. That being said, the regulators do separately maintain a technology clearing house register that lists the technology program to meet the bag performance. And as our burners are used to set these new limits, they are automatically included on that register. What is also significant is that there is not a bank program in every state. In fact, there are only 2 in the U.S.A., California and the federal EPA. The expectation is that once established in California, the data will roll up to the federal national level. So why is this important? Firstly, this assessment was made considering all equipment operationally in California, so providing the technology that sets what is designated the best performance is a meaningful achievement. Additionally, the assessed equipment has to be operational long term to be considered, and the recommendations go through a process of public and industry review and comment, which further validates the reliability of our solutions. And going forward, we believe that this will set a guide for all future regulations, permanent applications, not only in California, but also a reference for other states as they develop and update their NOx regulations. In the near term, this determination is a great validation of our technology in the industry, providing another data point for our prospective customers who understand the great value of what we provide, but also looking for comfort in other operating re-centers before committing to a technology that is not yet familiar to them or something they are used to. Since we last spoke, we have completed the installation startup of our 2 most significant process heaters to date. These heaters are side-by-side, 1 fitted with 8 burners, which is completed first, and this was included in our press release on January 17, announcing the successful third-party performance test for this heater, the second fitted with 5 burners was refitted late March and was tested earlier this month. We are waiting artificial third-party confirmation, but our observations of the formal testing give us confidence to believe that our emissions were comfortably below our guarantees. We believe these installations are meaningful as references for us, but also the revenue the projects provide. Beyond that, I believe that what we have achieved here will receive attention in our technical custom community. The fuel gas on this application varies from almost 0 to 80% hydrogen and the burners operate throughout that range. In addition, the firing is so intense in one of the heaters that it has doubled the industry-recommended level. In our understanding that this client initially sought a back-end catalytic cleanup system, commonly known as an SCR due to the technical needs and demands of these heaters. But given the complexity and magnitude of that solution, the client changed its course and selected and ClearSign solution instead. We believe that by successfully completing these projects, we have made a powerful statement for ClearSign, significant to both our customer base and also the regional air regulators. While both of these are valuable additional installations in the field showcasing our technology, each one of these has a unique story, which we intend to build on as a basis for conference presentations, white papers, et cetera, to assist recognition of what we can provide in the industry and to support our sales efforts. This client was already a repeat customer of ClearSign, and we anticipate that there will be future opportunities for us to work together on this site. The other 20 Burner California project is also progressing but on a less tight time frame. As we previously stated, the final witness testing went as planned. These burners are now being fabricated by our partners, [incredible] and are scheduled to be shipped to our clients in the Los Angeles Area, California late in the third quarter this year. When up and running, there will be another 2 heaters this time with 8 and 12 burners, which will provide a very significant reference for us, especially given their location in the large refining hub in the L.A. area. At this time, we do not have the exact date of the site shutdown during which these burners will be installed, but our client has indicated early 2025. Bear in mind that there are a lot of activities included in these refinery shutdowns so the planning process is complex and dependent on many factors. We will be able to invoice and receive payment and recognize revenue upon the delivery of the burners and only a small portion of the related purchase order will remain until installation. As we have said in the past, we very much believe that a lot of the industry is watching these larger multi-burner orders. We believe that the effect of being able to reference the very recent startup of the 2 heaters at the California refiner has been significant and has resulted in a marked change in attitude and response when talking to customers. To give color, in the past few months, we have had 2 global refiners taking upon themselves to contact the engineering companies working on projects for them and asking them to make sure that they include ClearSign in their evaluations. We have also had a global hydrogen producer reach out to us directly to preemptively start the process of adding ClearSign to their approved vendors list. Our apartment of Energy-funded hydro project is progressing. We have the first burner fabricated and installed for testing. This is not expected to be the final production version that is likely best described as the first physical draft of what we expect to be the production version. Nonetheless, it is good to see all the design and engineering work put into this project manifest into a physical product. We're excited to see how it performs in the test furnace. I look forward to providing updates as this project continues. This is also encouraging that we are already receiving inquiries about when this burner will be ready in addition to expressions of interest from customers looking for solutions and wanting to discuss opportunities to be one of our first demonstration sites for these hydrogen burners. Before moving on to our burner product line, I want to talk about a new development that has gained significant traction in the past few months. The reason for talking about it now is that it is a hybrid of our process burner and boiler technologies and markets that I believe is developing into a whole new business segment. Previously, we announced the sale of a burner into a chemicals manufacturer in the Gulf Coast of Texas and that this burner was an application tangential to our boiler burner product line, and the heater was a horizontally fired heater bill by Heater Company Tulsa based here in Tulsa. This application has opened up a range of new opportunities for us requiring low NOx and [indiscernible] applications of a similar nature, including inquiries from a global oil company and another from a major energy infrastructure company. We are also discussing and developing a standard offering with Tulsa Heaters Midstream of their low NOx client needs. The Tulsa Heaters Midstream, these projects to provide a strategic advantage, enabling them to offer a best-in-class low-most heater that doesn't require an SCR system at a lower selling price and lower operating costs for their customers. To add a data point of this development, Tulsa Heaters Midstream is hosting a customer seminar in the coming weeks and have asked to include ClearSign burners as part of their presentation to their customers. A request we are, of course, happy to support. A significant component of this development has been a recent investment we have made in our in-house capabilities. Back in November, we announced the hiring of Matthew Martin as our Chief Technology Officer, and we discussed his background and expertise in our last call. One of his many credentials that he is a world-class practitioner of a very sophisticated computer modeling technology that allows us to predict the structure, flame patterns, heat transfer and chemistry and planes and heaters or boilers in which they are positioned. We have now invested in this capability and this has allowed us to not only meet the immediate requirements of this new application for us, but to vet the road map to develop the next generation of horizontally fired ClearSign burners. I cannot go into technical details here. We will not be in a position to publish those details in the short term, while we are still ensuring a new intellectual property is protected. I do believe that this will be significant for this new market and will also have implications for our boiler burner market. Turning to our Boiler Burner product line. We are happy to report that our first permanent installation in California continues to run well, and we have been using these as demonstration sites that prospective customers can visit while looking to purchase. In terms of order flow, we're also able to announce back on February 21, our first multiunit commitment for our Boiler Burner product line. This order from a fruit and vegetable multi-use processing company located in California Central Valley. Our partner, California Boiler, initially received the letter of intent for the purchase of 475 horsepower boilers, including ClearSign Core or Rogue burners, followed by the first order in the series of 4 new boilers. The additional burner orders will be issued concurrent with the construction of additional planned through processing lines of the customer. There are also a number of other proposals issued and in discussion. We will, of course, let you know as we get these over the line. We have a large 1,200-horsepower burner scheduled to install and start up around midyear on the site of the California recycling business. This burner was sold in February 2023, and we shipped California in September that year and has been awaiting installation since then. This boiler is large and falls in the range requiring 2.5 million NOx. This project has been held up in the construction permitting process, which we believe is now resolved. This slide will provide a very significant reference for us when up and running because this will be the first customer site running under 2.5 million NOx guarantee. This is the burner branded as NZN or Near Zero NOx and truly sets ClearSign apart in the mid- to large California boiler market. We are very much looking forward to getting this burner in operation. As I said at the start of this call, on April 19, we announced fine details of our recently completed capital raise. With the recent process burner projects in production and also now in operation and with our boiler burner product line now also gaining the much-needed reference sites, we believe we are at a point, our products will be more readily accepted and sought in the market. Over the last 5 years, we have developed our burner technology to offer product platforms that are standardized and products that install and operate like the burners a customer they're used to with the exception that we deliver NOx numbers that allow our customers to avoid having to install very expensive and complex pathologic systems to remove NOx emissions from their boilers and heaters. We have also fallen partnerships with the leading global and national equipment manufacturers, which allow our projects to be fulfilled with the resources and credentials of these well-established industry stalwarts. Our markets are also developing. We have seen new regulations issued in California and expect that Texas, Colorado or Salt Lake City are moving in that same direction. And our technology has also been recognized and de facto endorsed by the regulators in California under their backed review process. With all this stand, we believe our final hurdle to sales will be overcoming the perception of being new to the market. We anticipate that getting these new installations up and running will be fundamental to overcoming this remaining impediment on accelerating our sales and ClearSign development as a business. Our estimate of a run rate to breakeven is just 160 burners per year. Bear in mind that the 2 heaters we have just started up in California included 13 burners and the order we have in production for the L.A. area includes 20 burners. We do not believe that this is an extraordinary number. And given the developments I've just summarized, we believe that the path to get there is tangible. Simply put, the money we raised was strategic and based on our estimate of the amount that we believe will be required to get us to that critical point of cash flow breakeven. In closing, there are a number of significant items to participate in the near term. The formal third-party emissions testing, the second recently started up heater is expected to be impactful in the industry due to the extreme technical complexity of that operation, and we will issue a press release where this performance as officially confirmed. The performance of both of these heaters will provide data for other case studies and industry presentations. These will also be available on our website as they are published. This will be the same for our large boiler burner expected start-up around midyear. We have the hydrogen burner just starting the initial phase of physical testing. I appreciate that the computer modeling capability we have recently invested in and the acceleration of the development of our technology that, that enables in conjunction with the addition of people like Matthew Martin, our new CTO, are less tangible looking in from the outside. From my perspective and considering the long-term potential of ClearSign, I believe this will be a significant lever in the growth of our business. I want to acknowledge and thank our California refining customer. The installation we have just completed are 2 heaters that are critical to the operation of their refinery. The engineering and project teams at both the refinery and ClearSign deserve recognition. To step in and replace our projects originally selected reduction NOx control system and produce the results that we have requires significant effort and dedication throughout the project and especially through the startup and a handover of the new equipment to the plant operations team. Ultimately, it is all about sales, revenue and profit. The orders we are executing are generating revenue and the profit margins we anticipated and our successes are being noted by our customers. As I mentioned earlier, we have a heater manufacturer working with us to provide a future offering for their low NOx applications. We have quotations being provided to engineering companies that were initiated at the request of the global refining end users and new business segments developing from recent equipment start-ups. And finally, we also have as effect of validation for the California bank program that we anticipate will impact inquiries and sales opportunities in the future. With that, I'd like to open up the call for questions. Please, operator.

[Operator]

[Operator Instructions]. Our first question comes from the line of Amit Dayal, Wainwright.

[Amit Dayal, analyst]

So Jim, you gave some color on some of the items that are in the pipeline. From a dollar amount perspective, how much would that translate into, I guess, if there's a backlog number you could share or maybe some color on how big the pipeline is on that?

[Colin James Deller, executive]

I think we need to be careful when actually putting a strict dollar figure to a pipeline because things do move around, but there's some significant developments I think are worthy of note. And we referenced in the call that there are end-user customers. These are global refiners that are requesting ClearSign to be included in the evaluation of projects that they have placed with engineering companies working for them. So this is the end users basically pulling ClearSign into their projects for assessment. I can't put a figure on that. I don't think it's appropriate. But one of those is in the order of the large order went into the LA area. Now there's -- for everyone, an inquiry is not a guarantee of the sale, but it is an expression of interest. It's included in the sales pipeline, but what's significant is that we -- I think for the first time for ClearSign, we actually have the end users making the request and going to their engineering companies and asking them to come to ClearSign to make sure that we're included. Up until now, it has always been us pushing our technology out. So those are, in my mind, very significant for our pipeline. The other comment I made that it's also worthy of note the hydrogen producer coming to ClearSign and taking it on themselves to request that we go through the process to be evaluated for inclusion in their approved vendor list, is significant for the same reason, again, this is a global customer, a very technical customer in the field now coming to ClearSign but to make sure that we're available to them to use as a supplier to them for their needs. So from where we are, we've got a lot of general interest, but those are the big changes to me, and there are shifts back in 2019 when we set out on this path of commercialization and laid out a plan. There were some milestones we identified. We're getting to the point that we have, where the end user customers pulling and asking for equipment to be included and for the engineering companies recommending our equipment, those are key milestones we've identified them. So to finally get to that point now, I think, speaks volume for the developments here at ClearSign.

[Amit Dayal, analyst]

So in that context, it looks like interest is building, you have the backed validation as well. You've completed this financing. So is part of the financing going to go towards just building a sales team internally? I know you have channel partners, but how are you taking a little bit more control of the sales process with all of these developments?

[Colin James Deller, executive]

We are developing our sales capability just with our business structure that is not only an internal function, but it's also through partnerships and outsourcing. We're getting to the point that our technology is being recognized in the industry. From a sales perspective, there are a very effective way of making sales in the industry, especially smaller companies, is to engage with a third-party call and consultants, sometimes sales ages for third parties that may carry a or represent a number of products. They're talking to the end users and customers all the time and very familiar with the projects in the area. Up until now, this has been a comp that's not been appealing to them because we were not well known in the industry. And from their perspective, we'd be a hard technology to sell. We're now in the process we've got interest from those third parties. So just as an example of what this development does is allowing us to expand our sales team, but efficiently through leveraging these third-party companies and engaging with them to benefit from their contacts and their personal relationships with the customers. So it's having the technology developed, but also being able to engage others in addition to the development in-house that we're making, I think are really bolstering our sales capabilities overall on a holistic level.

[Amit Dayal, analyst]

Just one last one. So for the 4 quarters of '24, how should we think about sales ramping? I'm sure there's going to be some lumpiness as you make deliveries, et cetera. But are you expecting revenues to just be distributed a little unevenly throughout the year. How should we think about sort of the guidance of revenues this year?

[Colin James Deller, executive]

So at a practical level, I think that's really what was meaningful. We don't want to start and give forecast, but the revenue is a result of up work as a result of products being shipped and meeting the obligations of those projects. We've shipped and started up the burners in the California refinery, where we announced the successful start of improving the emissions of one of those heaters that was installed or ship late last year and start-up in January. We've recently shipped a burners for the second heater, shipped in March started up in just the last few weeks. That was very successful waiting on the formal documents confirming the third-party assessment of that. But those product shipping will drive revenue. And then the large order that I mentioned is being fabricated at this time to ship out to California. Shipping those burners is going to be a key milestone for us along with some boiler projects, but those are going to be the major events that are in process at this time. But as you say, it's at this time with the number of orders that we have, and especially some of them being very large orders with very significant milestones, it is going to create some lumpiness.

[Operator]

There are no more questions at this time. I would like to turn the call back over to Jim Deller, ClearSign CEO, for any closing remarks.

[Colin James Deller, executive]

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

[Operator]

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