Listed are interviews we had with ClearSign Combustion (CLIR) insiders. The sentences that our questions are our questions. The rest of the transcript is the ClearSign insiders.
First, we interviewed the inventor of ClearSign’s Duplex Technology, Igor Krichtafovitch:
I left company (ClearSign) about 2.5 years ago.
I founded Pacific Air Filtration 2.5 years ago. This company develops my air purification technology, asthetic air purifiers. This has 2 market dirctions. One is to have an air purifier to put in bathroom or office. And there’s air ventilation to put on the room of big buildings to filter air coming into the building. We work with a couple customers that may want to license the technology. We have several patents already granted all over the world. And up to 30 patents pending.
ClearSign was founded to develop another technology, not Duplex. The application was for high voltage electricity to the flame, to the combustion. In some cases, it is very beneficial, it brings much less pollution and improves the combustion process.
However, after I worked for ClearSign for a year, I invented another technology, the Duplex. But this has little to do with high voltage, it’s simply a new method of combustion. And to our surprise, it was like serendipity. It was working, and applying one or another methods of combustion, and it was beneficial in all aspects. First, it’s cheap in implementation. And at the same time, it has naturally decreased pollution and NOx about a quarter of magnitude immediately with no other development. It took me several months to convince them that this technology is valid. Because they said “OK, Igor, we started this company for high voltage, and this has nothing to do with high voltage.” But I told them, “you know what if you’re silver mining, and you accidentally found a bunch of gold, would you give it up because you’re a silver miner?”
And they found to change it to their technology.
Why did you leave the company when they started making sales in 2015?
Well, they knew up front that I was developing air purification technology on the side. That was legally right, because I warned them that I had some project aside of the company. But when that project took more of my energy and time, they decided to terminate me and said good luck with your technology. And immediately after I sold all of my stock options and shares, I believe I sold them for $5.50 and $6.10. And then, to my surprise, the stock started to decline sharply.
The company makes the claim that the Duplex decreases emissions by 95%, and at the same time has better efficiency and profitability. So that sounds great, what is the issue, why are these refineries testing it out and not buying it?
You have an iPhone right? Me too, and so does my wife. But is really iPhone the greatest smart phone ever? No, people buy because they are convinced to buy it. So there are 2 facets for technology to be bought. First, there’s the technology itself, and then there’s the management behind the technology whose job is to convince customers to buy it.
If the technology is great and unmatched, then why do big companies hesitating to buy it? I don’t know but probably nothing to do with the technology but the management.
At the same time when I left the company, you can look through the history. The company switched CEOs. Old CEO Rick Rutkowski. When they terminated him and hired Steve Pirnat. Pirnat was brought into the company on the premise that he has great connections in the industry and he’ll just call someone on the phone and they’ll buy it. But that did not happen for some reason.
Honestly, I see no downside to the technology. Because the technology is very very simple, elegant, and it does what it claims to do. And this industry however is very conservative. Combustion never changed dramatically in 100 years or so, and suddenly someone tells them “OK, I have this snake oil, and it will solve all your problems.” And they may be skeptical about it and say “ok, prove to me in one year or 2 year non-stop operation.” But what’s important is the relationship between the management and the customer. And I don’t think the technology is to blame for that, the technology is great.
My presumption is there’s a problem in the communication between management and the customer.
Why did these refineries go through a demonstration of the technology and not buy it? Do you know why that happens?
No, I don’t, of course I wasn’t heavily involved in this process. However, 2.5 years ago they changed the CEO, and they changed the CTO, and there’s a new guy who I don’t know, and tall guy is now doing some engineering work and not research work. So two main guys in the company, the CEO, the CTO, where replaced by other guys.
Rick Rutkowski was a businessman and he was a very aggressive guy. And Steve Pirnat, I don’t know him really, but he’s a heavyset, older guy, and just imagine this startup company with no revenues, six of them are taking a salary of more than $300K per year, with no revenue.
And Steve Pirnat gets paid more than half a million. I don’t know how that may happen, when the stock declines, they pay themselves benefits. But would they have incentive after that? I don’t know.
Yea, if I would start company, and I did, I would put myself and main guys a modest salary, and say “if you perform well, then you will be paid in stock and stock options and everything.” But if you give yourself an enormous salary, then that means you don’t believe too much in the technology. You don’t make today’s payments.
They stock has gone up recently, does that have to do with them selling in China and the middle east?
I don’t know about the Middle East. They had some connection in China. And they wanted to set up an office there. That was a long time ago. I don’t know how it goes in China. In China they look more at the technology, and management is number 2 for Chinese investors. So what’s going on in the China market, I have no idea. I work myself in China. But again, you have to convince them, because the Chinese are very suspicious and conservative as well. So they say “prove me this, prove me that”, so it’s up to your skill, up to your eloquence, how you can convince them.
ClearSign sold six plug and play Duplexes to China. Do you think they’ll sell better in another country, or will they have the same results as in the US, which isn’t very good?
I think the main focus should be in China, because China is more sensitive for air pollution than the Middle East, and China has money. So that would be a Klondike for any new technology related to air pollution or air cleanness. So that will be a gold mine for them. Why it did not happen? I don’t know.
How does it work with profitability or efficiency? Or does it mostly have to do
Combustion efficiency is a little different. Because it has theoretical limits. Any decent modern air combustion technology is close to the limit. Suppose the limit is 43%, and your combustion works 42%, you only have 1% to gain. This is a different issue. But even 1% is huge, if a technology saves 1% of all fuel in the US, that’s huge, bigger than Microsoft. But honestly, I don’t know what the fuel efficiency of the Duplex technology really is. In my experience there, they didn’t have any valid data on that. But air pollution yes. But for efficiency, I don’t think they had any data at that time. Whether they have it now, I don’t know.
Maybe in the US anyways, the refineries are more concerned about profits over pollution? They are more interested in profits. Maybe what the Duplex offers, they aren’t interested in it, they are more concerned regarding profits?
True, you’re absolutely right. And especially when the oil price declined, then big oil companies didn’t have extra money for new research. That might be a reason but now oil is on the rise, and they definitely do have some money for trying new stuff. That may be a different issue.
The following is our inteview with ClearSign’s investor relations rep, Matthew Sellinger:
Sorry I didn’t get back to you, I was in meetings all day at ClearSign’s headquarters, doing some review and planning.
What’s the story with the S-1 being pulled?
We put a PR out about it. A couple things happened with the S-1. There was a bank engaged, put the S-1 out there, there was marketing going on regarding the deal. There was a wall put up, people weren’t supposed to be trading. But the stock was being manipulated, that’s why the stock was beat down to sub $2 levels. The company was approached by a couple different groups with proposals for funding, and then they realized that they were going to pull the S-1. And that’s what the company did and they are still reviewing the proposals that went out there.
In the past, MDB Capital has been the bank to do the fundings. In this last S-1, Ladenburg Thalmann was the IB firm. But the previous financings from the company have been done by MDB Capital.
Is MDB Capital a shareholder?
MDB Capital combined with its principals are shareholders in CLIR, in total, it comes around to 9% ownership.
The stock was being manipulated, and a lot of people short the stock. Really quickly, the stock went down to sub $2 levels from about $3.60. Pricing hadn’t been locked in, and if you have a stock price coming down, the pricing keeps changing. The company now didn’t like the terms that were being discussed by the bankers. So they said this has gone wrong, lots of people shorting, and they aren’t willing to sell their stock at sub $2 levels, which would also potentially be with a warrant. For instance, let’s say the stock offering was at $1.80, and they put in a warrant, and the warrant itself probably has an inherent value of $1.40. So that means you’re selling the stock at about $0.40 ($1.80-$1.40). It got ridiculous. And the company said look we aren’t going to do the deal, and they pulled it.
It is possible that the company will put the S-1 back up. Speaking of possibilities, the company can do an offering two ways, a registered deal or an unregistered deal. With unregistered, the company doesn’t have to put up the shelf. They just do a deal and the shares will be unregistered, and they’ll have to register them afterwards. The other way is the company can put up another registered statement, and that would be public obviously.
You’ve gotta have the ability to register the shares with an ATM. You can do an at the market unregistered deal, or you can do an at the market registered deal. In order to be registered, the company will have to put up the statement, and that’s public. And there’s multiple possibilities being discussed, but no decision has been made. The company has a high degree of confidence that some sort of funding will come through, otherwise they wouldn’t have pulled their S-1 registration statement.
Is the revenue just for selling the technology? Is there replacement or maintenance revenue?
In the model, there isn’t a whole lot of maintenance or recurring revenue built into that. There has been some discussion, but the majority of the revenue comes from the duplex, and there is some engineering, pass-through revenue, but it is basically a one time sale.
The refinery hasn’t gotten follow up revenues in the next two quartes. Does that mean the refinery has cancelled the deal?
They’re still working on the deal with the California refinery. The flare project is cookie cutter. This number is still out there to book, but we haven’t completed it so it isn’t recorded yet.
It says the emissions are decreased by 95% from the duplex technology, and profitability and efficiency are increased at the same time. What are benefits over what they refinery already has?
There are 2 different competing technologies. Flue gas recirculation (FGR) and Selective Catalytic Reduction (SCR). With FGR it’s like an exhaust system, where you’re capturing exhaust, and you’re basically fanning it back into the flame area. FGR is more expensive to put in to begin with, usually it’s 10x the cost at least. FGR is large and you have to have fans and there’s an ongoing cost of running the system. Now with SCR, they’re using a catalyst. It’s anhydrous ammonia, and a system like that is more expensive to put in. You’ve got the ongoing catalyst costs and operation costs. FGR you’re not getting sub 5 PDM, SCR you’re getting close to the same results, but you have an ongoing maintenance costs.
The other issue we talk about are the operational efficiencies there. For instance the Delek project, theirs is a flame impingement issue, you have a large flame coking up tubes a charcoal, they had to shut down 3 times a year to decoke, cool off. Ours reduces the flame, we’re heating up the title. Lastly, we showed operational efficiency from our first installation at Aera, we showed up to 3% fuel efficiency costs savings. Which again, FGR nor SCR shows fuel efficiency savings. Depending on the application, the one time installation costs, the other 2 technologies don’t compete.
OK, and what are the drawbacks to it? Because it hasn’t been getting much adoption and it has been around for a few years now.
Adoption is a big thing. You gotta look at the verticals and the people we’re selling into and the companies, oil and gas operators. Oil & gas operators are few and far between. These entities are slow to change technologies. We just got our first plug and play installation, and our first multi-unit plug and play order. Having a plug and play, a full burner unit that we’re selling, I think we’re going to see more and more sales and adoption. We’ve had a lot of first installations and a lot of people are testing the technology. This is a slow moving industry, and you’ve got multi-layers of people evaluating the technology. Even if you’ve got a person at the company who’s excited about the emissions reductions, you go to the ground floor and the operator running the refinery has to shut down to put in an experimental technology. The big question about the company here is what is critical mass? How many installations do we need? And that is yet to be answered. But I think we’re starting to see more orders, and with all the customers that we’re in with they have the ability to order more. But you gotta take a good macro look into the industry that we’re selling into. And I think we’ll see more and more sales. But I think we gotta just put up more numbers, we gotta do more demonstrations and I think you’ll see more multi-unit orders.
The Middle Eastern deal was the first multi-unit plug and play deal. They didn’t have a test run, they just went out and bought 6 units. They did send representatives to look at Delek, which is in Texas, they came out and bought 6 units right off the bat. We don’t book revenues until the installation is done. So there isn’t a trial period. There’s an acceptance period where they run them for a certain amount of time after installation, but when we’re done with the installation is when we book the revenue. The installation is going to happen for sure, they aren’t going to change their mind, and it’s slated for Q1. It’s a done deal, it’s a signed contract, we’re moving forward on it.
I know the sales details aren’t enclosed, do you know ballpark what ClearSign is getting per plug and play installation?
Ballpark they’re getting around $50k apiece, this contract might be more because there’s engineering attached to the frontside of it, so it will be probably total just south of $500k. For this application for a Duplex plug and play burner, its about $50k, unless it’s a bigger unit. With engineering work on top of it it will probably be just below $500k because there’s some pre-engineering work to be done. With our initial applications there has to be some work done too. It’s a good order.
I see you’re expanding into the Middle East and Asia as well, is this an issue because the company is located in the US with a factory and you need to ship and install it all the way over there?
No, there’s no issue. There’s no factory. We’re an asset-light company. We go in and retrofit burners. We use sub-contractors and our special piece of that is the intel inside. And we do the Duplex tile system at the top of the burners. So it’s not a heavy asset build. And in China, they are working on boilers, so we’re retrofitting using the boilers they have over there, and we’re using local labor. Labor is extremely cheap in China. In fact, we can roll out stuff in China, we’re in the process of doing a heating unit demonstration unit for the company over there.
I was just up at the company and we were talking about this, and we could roll out in China probably better than anywhere, because of the cheap, skilled labor.
Our duplex tiles are sourced elsewhere, we haven’t said where we sourced them but it’s in Europe. But a lot of it is engineering and know-how. You gotta have the right fuel mix and the right amount of Duplex tiles to burn correctly. And keep in mind, in the Asian project, we are retrofitting existing boilers, so the burners are already there, and we’re doing a retrofit on top of it.
So there have been several testing and sales with companies in the past, some sales fell through, and others decided not to do business with ClearSign, Is there a fundmental issue with it? Like the efficiency or something?
Your questions confuse me because you want me to confirm a negative. We’ve never had a failure of our technology in an installation. There’s no question about the technology working or not. Most of the time we come in meeting our clients specifications, especially for NOx. Again, you’ve got to understand the companies we’re dealing with. Most of the time a company isn’t going to give you their most highest producing, most important asset. They’re mostly going to give you an asset on the side somewhere, and we need to demonstrate that the technology works. For example, in our partnership with Exxon, we’ve shown to them in their own lab that the technology works. But you have to understand how big Exxon is and how Exxon works. They’ve got to go back, they have to do an internal report, they have to report to their safety committee, and you’ve got a huge company. They have to talk about where can they install this? Then they have to go to another group asking where to install it. So they’re a big company, they don’t move at lightening speed. I think we’ll see follow-on orders, with Aera we’re onto our 3rd installation. Aera has the ability to do preferential pricing on up to 40 units.
Has Aera drug their feet? Yea, they have. Part of that has to do with where the companies are located, like in the south coast district in the San Joaquin valley. They’ve been paying fees and fines. They’re changing the program down there where it’s not going to be cap and trade. No they’re changing every burner there. A couple things, one is regulations are going to come our way. I think we may get some designations like there’s BACT. In those regions, if you see the regulations come our way, it will help orders. There are companies that aren’t being pushed to order our products yet, so I think you’ll see that changing.
The question is why is Exxon evaluating the technology? Why are they paying for testing at our HQ and looking at it? They’re doing this because it does work. The way refineries work is they push as much “dinosaur juice” through the metal as they can. So anytime you’ve got to shut down for any reason, you aren’t making money. In order to install our technology, you have to shut things down. Also, because it’s a newer technology, they want to make sure it’s bomb proof. They don’t want to shut down to put the technology in, and then have to shut down again to fix it. Those are some inherent things in the industry that we have to deal with.
Regarding regulation, isn’t the Trump administration not very environmentally friendly?
The way air regulations work is you’ve got the EPA which is the whole country, and then you’ve got the state and with you’ve got the county. If you look at California, you’ve got 47 different air districts. The ones we focus on now are the Bay Area, san joaquin, and the South Coast is the LA county area. Those are the areas that we focus on. Those counties have the jurisdiction over those areas. I think, as a macro, you’re not going to have a refinery in Alaska that will be pushed to hit certain NOx levels, but you’ve got counties in the San Joaquin and the South Coast are being pushed and do have stringent air requirements. So that’s what we’re focused on right now.
Then look at the Middle East, the country where we’re installing has a big pollution problems, that’s why they ordered 6 units right off the bat. Look at China, China has huge air pollution problems, that’s why they’re excited about our technology. We aren’t concerned about the Trump administration because again, it comes down to more of a state, county jurisdiction air districts that we’re focused on.
We’ve been lobbying for a couple regulations. One is BACT (Best Available Control Technology) for NOx. Then there’s BART (Best Available Retrofit Technology). We’re pursuing those designations in 3 different verticals in basically 3 districts, pursuing for steam generators, for refinery burners, and for flares. And we’re also pursuing in the Bay Area. We’re saying look what we’re doing in the south coast, see what we’re doing there as well. That will be deemed by the regulators the best technology to use. We’re hoping we’ll see some regulations in 2018 for sure.
Regarding the Middle East deal, the engineering costs are pass-through right? That revenue won’t go to the company?
Let’s say we have $500k. Lets say the units are $50K apiece, so that’s $300K. Give or take we’ve got $100k for engineering, that’s not for installation, and we’ll collect some of that money, but some of that will be pass through, that’s some of the design/engineering that we can do ourselves. Still you’ve got the cost of the units themselves, that doesn’t change at all.
You said you’ve met with the company. Are there any developments we can expect in the near future?
We’re focusing on China, we’ve said China, China, China, that’s a huge focus right now. Other there, if A, then, B, then C. If A, once we demonstrate the first installation and we go to the acceptance period, then B what is the follow on order? They’ve got a massive follow-on in that district. What will the roll-out look like? Then we also talk about strategic investment. We’re talking about strategic investment in the company. Whether that’s A in the project, B as a JV, and C into the company too. There’s a lot of excitement of China right now, that’s in the nearest term. We’re talking about other orders in other areas. There’s a demonstration project going on in the south coast, that’s a 2018 project. We may talk about other technologies in 2018 too, but as of now we have nothing to talk about yet, but there’s other technologies in the development queue.
Now, a JV would be an investment in a project or marketing, but wouldn’t be a direct equity investment right?
It could be an investment in the JV, like a Hong Kong JV. Part of that could fund a project in China. Some of that can be repatriated to the company as well. It’s hard for me to talk definitively about what’s happening there are a few possibilities discussed, but we haven’t said which of the tracks we’ll go down yet. It’s all predicated on we’ll have to get through the first demonstration first. With all the projects, the first one always takes the longest. You have to get it installed, then you have to adjust it and fine-tune it. We gotta get the first one up and running, and then all the other discussions will happen after that.