ClearSign Technologies Corp (CLIR) 2014 Q1 法說會逐字稿

Good afternoon and welcome to the ClearSign first-quarter 2014 results conference call. All participants will be in listen-only mode. (Operator Instructions)

Before we get started, during the course of this conference call the Company will be making forward-looking statements. I caution you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other financial statements; any statements about plans, strategies or objectives of management for future operations; any statements concerning a proposed new product; any statements regarding expectations for the success of our products in the US and international markets; the outcome of product research and development; any statements regarding future economic conditions or performance; statements of belief and any statements of assumptions underlying any of the foregoing.

These statements are based on the expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks are described in the section of today's press release titled Cautionary Note on Forward-Looking Statements and in reports we file with the Securities and Exchange Commission.

Investors or private investors should read these risks. ClearSign Combustion Corporation assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so.

Please note this event is being recorded. I would now like to turn the conference over to Rick Rutkowski, CEO. Please go ahead.

Thank you very much. Good afternoon, everyone. Thanks for joining us on what here in Seattle is a rainy spring afternoon, not atypical for this time of year. I'm going to ask Jim Harmon to take us to the operating results, financial operating results, and then we will get into a recap of what has been a quarter of enormous activity behind the scenes, really setting the stage, we think, for a pretty darned exciting 2014.

So, Jim, why don't you share with us the results from operations?

Sure, thank you, Rick. So for the quarter we recorded a loss of $1.6 million, which is $300,000 increase over the first quarter of 2013. Our R&D expense went up $150,000 to a little more than $600,000. That was as a result of some increased compensation, about $90,000 and about $60,000 of consumables and testing materials from increased testing.

On the compensation side, we added three new employees in the R&D section in the fourth quarter, so that would account for that. On the G&A side, our expense went up by about $140,000 and it was almost exclusively associated with increased marketing and business development expenditures.

We have -- as most of you know, we had a registered direct offering during the quarter. It closed on March 5, where we issued 112,000 shares at $8 a share, so the gross proceeds was $6.5 million. Our net cash proceeds was $5.8 million. As a result, at the end of the quarter we have $6.5 million of cash, which is enough cash to hold us until early 2015. Back to you, Rick.

Great, thanks. And just a note on the cash estimate that Jim mentioned. That assumes no additional contribution from development contracts or other revenue-generating, so we think we are in very good shape relative to our balance sheet and given the level activity that we see over the next -- the current quarter and the next quarter.

I think the second and third quarter of this year are really an important part of what is, as I mentioned in our last call, really an important transitional time for ClearSign. 2013, again, about developing, scaling, demonstrating results, frankly results that exceeded even our own best expectations in terms of performance. 2014 being the year that we partner, pilot, and otherwise prove out to the marketplace, set the stage for markets, partnering both with OEMs for integration, partnering with companies for distribution and retrofit strategies, as well as creating some distribution partnerships where we can sell through those partners into some very, very large markets.

As we mentioned here in the press release, this first quarter of this year has been especially important and especially gratifying recently. Early in the quarter we did report that we had achieved an important scaled-down milestone, which I neglected, unfortunately, to recap in the press release. But we did show that we could scale down the Duplex and achieve the same kinds of results, single-digit NOx emissions in even residential systems.

Most recently, we reported a very, very important scale milestone, scaling the technology up to 5 million BTUs per hour. I'll give you sort of a handful of key parameters that are in the most recent press release relating to this, but the key here is to achieve single-digit NOx is kind of how the industry refers to it. 5 ppm is a key figure because that represents new regulatory requirements that have come into play over the last couple of years in Southern California and Houston, Texas. Oxygen is important as well, so the trick is to be able to achieve that single digits, that below 5 ppm at a 3% O2 level, which is very significant for efficiency. So those are all very significant metrics to appreciate collectively.

The other features of this technology, and I apologize for some of you but this is an important drumbeat to sort of stay on because what has continued to really encourage us and really actually create a lot of enthusiasm internally is not just the idea that we are achieving this state-of-the-art NOx performance that can we think uniquely meet some of these requirements, certainly with respect to ultralow-NOx burners, but that we also deliver in conjunction with that several other important features.

It's common in low-NOx burners to have an elongated flame because of the technique is often used is staging the mixing of fuel and air. That slows the flame, it lengthens the flame, and with that come a number of often design constraints at the system level and operating constraints, meaning the long flame can create flame impingement in things like refinery heaters. It poses other problems in package boilers. But the overall impact is a loss of productivity, a loss of energy efficiency, a loss of throughput, an increase in maintenance requirements. So the real magic, if you will, of the Duplex technology is the ability to marry these very, very low NOx numbers with very, very short flame lengths and zero external flue gas recirculation and really virtually eliminate the need for supplemental backend systems such as selective catalytic reduction.

The reason that 5 million BTU per hour milestone was set by us as an important one is it is sort of a sweet spot in the middle of the process heater space. Process heaters will range from anywhere from 1 million BTUs per hour to 15 million BTUs per hour. You start to get into boilers and very large boilers like once through steam generators, you are going up as high as 40 or 50 million BTUs per hour. But that 5 million BTUs per hour really gets us into the middle of a very exciting market. The larger systems tend to have greater costs, greater economic leverage associated with them as well.

So we are delighted not only with the milestone, but I think as importantly, our experience in getting to that milestone was that the scale rules tend to be very linear, meaning that we didn't observe any non-linearities. Often it's the case that you may be able to achieve low NOx emissions at a smaller scale and then as you scale up you lose some of that benefit. Not the case here. It seems really that the scare rules have to do with actually the heat density loading on the tile, and we think we are well within the limits of that.

We continue, as we work with this technology, to appreciate the great breadth of its strength because in addition to the short flame, the lack of flue gas recirculation, you actually get an increase in emissivity. The black body of the Duplex suspended in the firebox actually is a superior radiator to a flame and as a consequence, we can improve heat the radiation profile.

Our intellectual property in that regard extends into the systems domain. We recently filed several patents relating to the Duplex that can comprise several hundred claims and we believe the industry literature bears this out. If you look in the industry literature, you will see lots of statements about long flames and the intrinsic nature of these trade-offs or constraints as it relates to low-NOx burners.

So as we mentioned here in the press release, these features offer the potential to deliver not only the lowest NOx emissions of any available NOx control technology, and in that we would include aftertreatment systems like selective catalytic reduction, but that comes with these performance advantages that I have just mentioned that in turn result in and can result in major cost savings across multiple market segments. So on the scale front we have set a very aggressive goal to scale to now to 40 million, 50 million BTUs per hour during this year. You will see us go in the short term to about 7 or 8 million BTUs per hour, which is what our internal facilities will accommodate, and then methodically to 20 million and so on.

We just received an RFP yesterday for a 50 million BTU per hour demonstration system in a water tube boiler, a little bit different animal than a fire tube boiler. It resembles in a very real sense a refinery heater. It's an array of burners, wall-fired burners, surrounded by water tubes. That is really representative recently of a lot of activity that I will sort of march you through here.

One of the things we have talked about that is very important, I know there has been a lot of anticipation about the idea that we are in these negotiations with prospective partners and customers, and we are and we have progressed. We had hoped to have concluded probably by this time, I mentioned I think in our March call that if it wasn't by the end of the first quarter, we anticipated it would be just a few weeks beyond that. We are little late of that date but not terribly much. Part of that is I guess I failed to account for the unusual sort of staggered spring breaks that occur, so we did actually encounter some mundane things like that.

But more importantly, we are really committed to ensuring that as we launch this disruptive technology into the market, we do that from partnerships that are really strongly founded in shared assumptions about the size of the market, the rates of penetration, pricing models and strategy, geographic categories, where do we go first and so on. So in our view, we really think there have been some significant improvements to that sort of consensus view that give us actually a great deal of confidence and clarity about what this can look like and, in fact, there is a lot of upside in that.

We actually collectively I think have concluded that the market in some segments that we are preparing to enter is substantially larger than we might have thought it would be by virtue of some of our interactions with the downstream channel partners, who are very enthusiastic, we are delighted to say. So our emphasis again is not just on entering these markets but entering with the correct level of focus, intensity, clarity, and vision about where we are headed and how we are going to get there.

We believe that because this technology is disruptive -- and I will define disruptive in this context as something that exceeds the performance of other systems out there but also marries to that improved emissions controls performance the kind of economic advantages that we are talking about in terms of operating costs. From our perspective, what that translates to his inability to really gain share by virtue of this competitive strengths and gain that share not at the expense of pricing or margins. Again, what we are committed to here is driving rapid, sustained high growth rates and the appropriate kind of profitability that ought to be associated with a technology that is by some reports game-changing. Some of our partners use that word to describe, for example, just the fact that you can eliminate flue gas recirculation.

So the other thing that has changed and we think this is really very exciting, I will try to capture this in a way that is accessible and discernible. The once through steam generator market is really exciting in a couple of different respects. It's exciting because it's a big market, there's a lot of demand, but that demand is also consolidated geographically. In other words, these exist in oilfields and, as we know, oil tends to be geographically selective. So what you find is large numbers of systems across small geographies and the people who own and operate these systems, there aren't hundreds of oil companies, there's a handful of them that really are of course the big difference makers and they are the household names.

So in other words, we are able to access a very large market in a dense geography of very large, high-value systems, which means you can really target high sales productivity. There's a great infrastructure of engineering firms that service, build, maintain, operate those systems. They are very familiar with all of the thermal requirements and otherwise. We are able to, as we go partner with those downstream engineering firms, to address that market. And the beauty of this is we think we can pilot and begin to install systems there.

Our strong sense based on the last few months of activity especially in and around Kern County in California, where a lot of these systems exist is significant pent-up demand and we think we are going to be able to [drive] the timelines developing these systems to that scale and demonstrating them.

As I mentioned, like 5 million BTUs per hour in the 1 million to 5 million range, you are already covering a pretty significant part of the market. We are reaching up to the next rung here in the 5 million to 20 million and 20 million to 50 million range because we think that's where a lot of the really high-value applications live. Again, what we want to achieve here, especially as we drive into entering the market and establish a footprint, is to keep some combination of high-value but also the potential to drive volume and scale economies as we go.

So we are really very enthusiastic. We have, as I mentioned, there's an RFP that came across the transom yesterday from a large company in the paper and pulping industry that has a significant NOx problem and are very anxious to the extent we get the results we think we are going to, they are anxious to publicize those results.

So as I mentioned, we have a set of really clear advantages, compelling benefits to offer. I have covered a lot of what we have said in the press release here about the advantages for package boilers, the advantages for once through steam generators. In the refinery segment, and again you have heard this before I think, some of you, a flame shape is a huge issue.

If you want to google online, there's a really interesting and well-done paper, I think, called Process Burners 101 that will give you a nice, accessible introduction into the use of low-NOx and ultralow-NOx burners in process heaters and why that flame length has been such a design constraint and the kinds of operating constraints and costs that are imposed by it. But flame impingement on process tubes is, I think I quote actually from either that article one of the textbooks, to be avoided at all costs. And the reason for that is, one, if you degrade those tunes and you have to replace them, you have to take a very expensive, high-throughput, high-value piece of equipment off-line and that is enormously expensive. If you have a breach in the tube, you have safety issues as well.

But at a simpler level, imagine for example you have six burners ringed around in a crude heater or something like that and one of these burners has a flame that is 4 feet tall and the other five of flames that are 2 feet tall. Well, the 4-foot flame is the one that constrains your process throughput. That is very representative of the kind of thing you are likely to see.

So with the Duplex technology, we virtually eliminate any potential -- any of the artifacts that would give rise to this challenge with flame shape. There is no potential for nozzle-to-nozzle interactions, no potential for burner-to-burner interactions. The flame is collapsed dramatically by the fundamental mechanisms of the Duplex technology. So this is a really exciting solution.

The other thing that is powerful here is we have -- and this is important -- we've had a lot of inquiries from in particular the South Coast Air Quality Management District and have a great ongoing dialogue with those guys about the technology. They did ask us to submit cost and feasibility data with reference to their review of candidate technologies for best available retrofit control technology for refinery heaters and I think they're looking at a broader array of heater types as well. They actually also invited us -- Joe Colannino will present at the annual Air and Waste Management Association, which is sponsored by the South Coast AQMD.

Again, the important theme here is partnering, pilot, customers, commercialization. We are very pleased with the funnel. I guess I want to emphasize that while this has taken a little longer to get some of the consensus views off the ground that we think are the important foundation of at least one of our partnering arrangements, that I don't think that that really has disrupted the overall timeline, meaning that in parallel we have made this tremendous progress on the technology that we believe puts us in a position to enter the market quickly and the technology by virtue of its characteristics we believe lends itself to being able to move fast.

So I think, as I said, a little bit of delay but the payoff here is, I think, more focus, more intensity, and again a vision of a market that is substantially larger than our partner had at first estimated, which of course we think it raises the level of importance that is associated with it. We are very pleased by that. I think we have an agreement among ourselves and several other parties, partners and so on, that there is a potential to achieve a best available control technology kind of designation. So again, that sort of shared vision, shared strategy we think is really fundamental to the long-term success of these partnering deals.

We continue to have an advanced stage of discussions with regard to some pilot demonstrations at a larger scale. We have I think in large measure an agreement on many of the contract terms. There's a little bit of discussion to have and resolve still in terms of some pricing concessions for the early small number of units that would go into this one site in particular. In the other case, the RFP is brand-new but we think that can move along very quickly as well.

Then we have an ongoing dialogue with a very, very large refinery -- oil company -- in the US about a pilot site demonstration and then more recently a smaller refinery, which is great because it's very manageable, it's geographically convenient where we think we can potentially move very quickly as well. We think that once we actually get these systems in the field, you will see further acceleration of the level of interest.

I am setting aside for the moment the fact that we have very high-level inquiries from places like Saudi Arabia, Latin America, and other places where we are obviously focused on getting as much traction and momentum as we can here first. But in general, I think the important thing here is that what we have shown recently is that this does scale. It scales with the same really unmatched set of performance requirements and features that we have demonstrated at smaller scale. Again, I think our confidence level understanding what the scale rules look like is that we can scale this to much larger scales pretty quickly.

The actual exercise -- I will give you a sense of this. It won't surprise you. It took us longer to permit the 5 million BTU per hour furnace than it did to actually put the Duplex in and get it up and running. Once we had everything built, ready, shaken out, constructed and permitted, the actual development timeline was in fact very, very short indeed and again very predictable. We have mentioned that we have seen results below 5 ppm in our press release. We think the trajectory in the intermediate and long-term is very promising, if not something closer to astonishing.

We think we're going to be able to get with the industry has pursued for many, many years, which is called near-zero NOx emissions. And I have encouraged people in the past to think in the macro sense of what that means. If I am a natural gas producer and I can look to a world where NOx emissions are not an issue, then I have really a pollutionless fuel, an emissions-free fuel. I know it sounds a bit like a pipe dream and I would have said the same thing myself, but we think it is something that is now realizable.

An important thing to emphasize and recognize if any of you are combustion emission control experts, another key feature -- we are getting zero CO or single -- low, low single-digit parts per million the CO at the same time as we were driving the NOx below 5 ppm, so it's not sort of a bubble under the rug trip. And again, that's the same importance of that low O2. Other solutions can achieve single-digit NOx, but at the expense of 8% to 10% oxygen in the stack, which is very, very inefficient.

In the solid fuel sector, we did report some scale-up results that we had achieved in flame shaping. Covanta was kind enough to sponsor that effort in the fourth quarter of last year. We've done some more work with that, created some new electrodes that we have optimized that got us even more impressive results with regard to flame shaping. Again, this is largely about process tube impingement, about uniform heat distribution in the firebox, which is about efficiency. It's about avoiding unscheduled maintenance and minimizing maintenance cost, but it is also again about capacity, the fact that you can get the same amount of heat released in two thirds of the physical volume now means that you have got another 30% of furnace capacity to scale into.

This is another very powerful aspect from a refinery perspective is that what you encounter with these long flames and where you have flame impingement is situations where people are required to end up having to derate their heater and we believe not only can we rerate those heaters but with the Duplex it may be possible to overfire them by 5% or more. That's a very, very big number and it's important to understand that if you do that in one part of the refinery, it may or may not solve a big issue. But it's always important to have that latitude and that capacity to refinery operators. We begin to really understand how those economics work.

So in the solid fuel domain, what you can look forward to here I think in very short order is the first members to join what we have termed loosely a consortium to help sponsor the effort going forward. There are other companies that will be joining with us. I think that we will end up between this quarter and next having a total of 6 to 8 companies. I believe right now we've got about three signed and so we will probably report on the first three or four in the next week or two. We did had some success in addition to flame shape reproducing some results that we had seen at the bench scale with regard to dramatically reduced opacity, meaning smoke and soot that escapes from the stack is dramatically reduced by the electrodynamic control of that system.

We have substantial interest from one of the larger utilities in China that we are having an ongoing dialogue with with regard to partnering on that and we've also been invited to build a couple of demonstration systems in a major Chinese city by the local administrators and municipal government in that city. So we are getting the right kind of visibility. People in China, as you can imagine, are clamoring for solutions to emissions challenges. They do have some NOx goals. They have not been successful in meeting those goals in terms of NOx reductions.

A huge part of the problem in addition to PM 2.5 is NOx that is a precursor to ground-level ozone. So we think there's an enormous opportunity in China and there's a continuing high level of interest. One of the fascinating things about some of the discussions that we are having with companies overseas is they are tending to occur at very, very high levels in the organization. So chairman of a significant Chinese waste energy company visited with us recently. We have a follow-on meeting with them next week. The head of the Clean Energy Research Institute at this major utility that it is mentioned is in direct contact with us. In the case of Saudi Arabia, it's again a C-level contact from a large engineering construction company. And we think this is really just a glimpse of what the future holds.

Again, to us what is gratifying, what is confidence-building is when you look at the pure feature set and the competitive strengths of the technology, it really suggest and I hesitate to use the term but in many respects it's ours to lose. We have something that offers significant advantages. It's now up to us to both get that in the market quickly and to full value our participation in the technology as we bring it to market. That is very much the balance we are wanting to strike and, as I have said, I think we are very happy with that overall picture.

This is the hardest part of the curve. If you keep that bell curve in mind, it is the early part, the thin edge of the wedge and there's a lot of stuff that resides in that blank space up the curve, which is unfamiliarity. We've got to create awareness, we've got to be credible and convince people that we have done these things that historically, frankly, people thought were simply not possible with ultralow NOx burners. So that's the flip side of the very good news is that we have to go through that little extra bit of process. But I think we are well through that in many corridors and many of the key applications segments that we have identified. We have identified some very powerful early adopter champions at some very big companies and again we want to stay focused and disciplined about executing on these pilots and partnering initiatives.

So we think it has been a very satisfying period of time for us. The landscape has really developed. In particular I guess I would point to the addition of the once through steam generator opportunity as really a key component of a strategy now that we feel really gives us the ability to set the pace with regard to that marketplace and address what is a very, very large market, again in a dense geography. So it means there's a level of convenience associated with that, as you can imagine and leverage. Lots of excitement among many of the engineering construction firms that serve that region and that industry.

So I think that's it for my comments today. It looks like we've got a question lined up.

Yes. Thank you. We will now begin the question-and-answer session. (Operator Instructions) Jim McIlree, Chardan Capital.

(technical difficulties) for the steam generator market as well as (technical difficulty). Just want to make sure I understand that these are two separate initiatives for you right now. If that's the case, which do you think is first in terms of generating the license revenue or the development process?

Your phone was breaking up quite a bit in the early part of the call. I got the latter part of what you said, but what were the two segments -- I think it was two segments you wanted me to compare and contrast?

Yes, you talked about the once through steam generator market and about the heater market. My question was are these two separate initiatives for you?

They are in terms of the market segment that the address. From the standpoint of product development, one of the nice things about this technology is that there is a lot of platform commonality across all of these applications. So the difference between those two from a systems level is that many process heaters would be natural draft and most boilers, including once through steam generators, have blowers and are either what are called forced draft or powered burners.

We have shown that we are -- while there are differences in those two types of approaches, we are more or less indifferent to them. From a go-to-market standpoint, the timing really just has to do at this point with where we are seeing -- I was about to say the greatest pull, but I don't think it's that so much. We have -- on the OTSG side we have several guys who are pulling pretty hard and have sites identified. In fact, this recent RFP has kind of a leapfrog characteristic to it with respect to this water tube boiler.

So in the world of pilot site demonstrations, that is really about to sort of going as fast as we can. So it's a little bit of a horse race. Obviously, where we are being strategic about the referenceability of these systems to very, very high value applications, so we want to get in, demonstrate the characteristics that process engineers in the category know correlate directly to the various economic advantages. At the moment, between once through steam generator and refinery process heater, it looks very much like the once through steam generator would be the first of those to actually turn into an agreement.

Then I think there's a strong likelihood based on at least my current understanding that this large water tube boiler, which is about the same scale -- the burners are about 40 million, 50 million BTUs per hour, could start to move along pretty quickly in terms of a pilot site demonstration as well. But the reason we are -- one of the things we're really focused on in that once through steam generator market is, again, we think it's kind of a unique animal in that we can get in there and partner directly with the distribution channel. We don't necessarily need to negotiate license terms. We need to set prices and sales incentives and go to market and try to cover as much ground as we can.

Roberto Ruiz, our senior VP of product development, has been given the task of performing that analysis and putting the business case for market entry together. We have several engineering construction firms in the region there, big ones and little ones. One is a division of a multinational; the other is a very successful early-stage company, there have a headcount of about 450; and everything in between. It really is the industry in that part of the world and there's a lot of service infrastructure to address it, so we can go into that market partnered with those teams from those service entities and really install these systems directly.

And by the way, they know these OTSG systems intimately because in many cases it's these engineering and construction firms who designed and built them and/or operate and maintain them. They are on contract with the oil companies on-site. So there's just great infrastructure in terms of the intermediate steps behind ClearSign, who has developed the technology and the ability to get through to market. We have the combined resources that would be required between us certainly to set that market.

We do have interest from folks who are interested in licensing that for that segment more broadly as well, but we think we will gain great insight as well as some real strengths by demonstrating both the system and the economic benefits of it on-site.

Great. And can you talk a little bit about this RFP in terms of what it is, what's the deliverables, if there are others involved in it, if this is a competitive RFP, how much time and money you would have to invest in this?

Yes, I don't think it's been put out for competitive bid but -- I am pretty certain it hasn't but I don't know. I think they view this as kind of unique situation. This comes on the heels of several meetings that we have had with these folks. So the cost associated with it from our perspective is a very manageable number. It's probably a few tens of thousands of dollars. We do believe there will be cost reimbursement both from the customer as well as potentially some of the air quality folks in the region up here.

It's brand-new, but I think there is a great deal of enthusiasm behind us. So I don't think we are competing that and I think what is kind of interesting and exciting to us is that it's in our backyard. It's a segment that we can demonstrate and it's very -- the overlap with the OTSG solution is very significant. So one of the virtues of our technology in particular is that even in a case where we go in and we say, look, we will foot the bill on a pilot installation, it doesn't really cost us a lot of money to do that.

Now in most cases there is usually some in-kind contribution or the customer will say, we will cover the installation costs or we will throw in some of our process engineering time and things of that nature, so it ends up being kind of a shared deal. In other cases, we will get paid and I think paid even substantially for it. So it varies a little bit on a case-by-case basis. I'm a little reluctant that people who are listening to this call are going to say, gee, why did you give it to that guy for free?

But the beauty again of the technology is that we can be very horizontally integrated around the technology and what I mean by that is in order to -- we don't have to quote-unquote manufacture a Duplex solution. We source the component parts, the ceramic tile parts. We source the fixturing parts -- and these are pretty mundane commodity kinds of things -- from a very robust supply channel that is pretty broad. It's not a large parts count. So the supply chain piece of it and sourcing is very straightforward.

Then, as we mentioned, downstream in terms of engineering resources to support the structural engineering field installation support, we can partner with folks who know these systems intimately, have deep process engineering expertise. So again, that's part of one of the other beauties of this technology and its performance set and its fundamental sort of physical characteristics is it actually allows us to move in that fashion. There aren't, for example, a lot of really tight tolerancing with nozzles. And as we mentioned, you don't have to be concerned with things like nozzle-to-nozzle interaction because ultralow-NOx burners, especially as you get down into single-digit performance, can become -- traditional ultralow-NOx burners -- can be very finicky things. The Duplex doesn't really have those kinds of characteristics.

So we are really excited about this. You and I were talking about this the other day, Jim, about just kind of how early on really the concept behind this technology had a lot to do with this we call the increased entrainment length and the idea that you get more -- the fuel and air mixed more thoroughly before emission and that's what gets you that short flame -- but it's only later, and we have done analysis on the radiative effects and the heat transfer, because that's another one of the big challenges with ultralow-NOx burners is that if you replace the conventional burner with ultralow-NOx burner and you get this elongated flame, it also tends to shift the heat transfer profile and you don't get sufficient amount of heat transferred in the radiant section of the system. And that can create too much of a load in the downstream convection section, including reheaters.

One application that I am very interested in and we are having a pretty early dialogue -- and again it ties in with the scale requirements that we are targeting at 40 million, 50 million BTUs per hour, but coal to natural gas conversions, this is the single biggest challenge that they face. When you yank a coal-fired burner out of the system and replace that yellow radiant flame with a blue non-luminous flame or non-radiant flame, they lose heat transfer in the radiant section. That involves, in many cases, a reengineering of the downstream convection sections and the reheaters and all of that. So by introducing the Duplex into that scenario, we believe -- and we have got to flesh this out and beat it up and really let some people play devil's advocate to it -- but the idea here is that you would restore radiant heat transfer, we get the nice emissivity of that -- blackbody emissivity of that tile -- and at the same time potentially obviate the need for a $60 million plus selective catalytic reduction system on the back end of that system.

So it offers, we think, a broader feature set then we had even first anticipated and we are, as I said, right now trying to stay very focused on the segments that we have discussed. But the beauty of that, again, is there is not a lot of highly differentiated engineering once you get to a scale requirement at 50 million BTUs per hour, adapting the system from a once through steam generator to a water tube boiler to utility boiler are not that challenging. So it offers us that kind of flexibility.

But we think -- and I think the analysis that Roberto and Andy have done on this once through steam generator market -- I think the numbers -- and we have just gotten a research report in the last couple of days that will give us some better numbers. So these are sort of back of the napkin estimates from anecdotally that come from our conversations in Kern County with various folks including the oil companies and these engineering firms, that there's about 1200 that these things just right there in that Bakersfield area around Kern County.

Then of course you get up into Western Canada a good many more, in Germany large numbers of these units, other places in the United States, so we think it's a very, very large market. A selective catalytic reduction system for a system of that scale would be priced on the order of $500,000 per unit, so that's what we are shooting against and of course we offers some other advantages.

One of the things that selective catalytic reduction systems, people don't tend to like the idea that you got a catalyst, a consumable -- whether it's urea or ammonia, the worst-case anhydrous ammonia, you are now into hazardous materials. But in the last couple of years, people have discerned the idea that you have NOx -- you have got precursors from -- escaping into the environment that are precursors to ultrafine PM 2.5. So there's a lot -- a paper if you are interested and I can share with you that was written by some folks at Chevron talking about why, for example, SCR systems are not a desirable choice for refinery heaters and we are hearing really the same thing in the once through steam generator market.

So there's I guess a part of a strategy that may seem obvious to me but it bears repeating, which is we think there's a real pent-up demand in those markets where the regulatory requirements are very aggressive and there is a lack of cost-effective solutions to meet those requirements, meaning, gosh, in the boiler space, for example, in Southern California today if you want to meet the 5 ppm requirement you are typically doing that with a combination of a low NOx burner that's got a pretty healthy amount of external flue gas recirculating through it, maybe as much as 30% or more and in turn has a selective catalytic reduction system on the back end. The cost and complexity of those systems adds up, as you can well imagine. So we are getting, as I said, a really enthusiastic response.

Okay, great. Thanks a lot.

[John Lair, Lair Investments]

Stack performance has not been good recently. I am sure you are well aware of the. My sense is it's the lack of revenue, because revenues coming in a lot later than folks had originally anticipated, or you and led them to believe in previous calls. Can you share anything with us at all about your expectations when we will start to see revenue booked?

Yes, again the -- revenue expectations for this year have mostly to do with contracts and I don't know if you were on a previous call when some asked the question about it. I don't think it's so much revenue is the driver as the partnerships that people had hoped would form sooner. The capital markets have been pretty messy recently. The indexes are not telling the full story. If you watch certainly many smaller and microcap stocks, there has been a broad meltdown. You have seen in the news headlines about the rotation away from growth and stocks that have had big runs into others and so on and so forth. So I think there's a number of variables.

I don't think the focus has been so much on revenue as it is has been on forming these partnerships and getting the validation and endorsement of those partners. There's always a decision we face, which is can I do this deal today, or if it takes me a day longer is the deal that much better? I am a large shareholder in this Company. I don't like seeing the stock down at all, but I am also focused on where we are headed in terms of value creation not just this quarter or next quarter but 10, 12, 20 quarters out. We are going to live with these long-term licensing arrangements for many years.

When you start to do the marginal analysis, a 2% difference in a royalty rate or a 20% difference in annual minimums can make a big difference to the long-term picture. So in any negotiation, obviously there's multiple layers of complexity, but the landscape has changed for us in a way that has been, we think, very, very favorable. We think we have made some decisions and choices about the timing versus the quality of these arrangements. Our sense at the moment, based on the information that we have and the dialogue that we have, is that that looks like it was the right thing to do if that is your metric.

If your metric is how do we cut the best deal that gives us the right level of participation to achieve the appropriate value consideration for our contribution, i.e. this technology that enables share, that enables profitability, that enables competitiveness, we need to be able to participate in that. And that is also how do you attach the right level of importance to this? If you are my partner, John, and you think the market is X, you're going to have one level of focus and intensity and enthusiasm about it. If you think that market is 10X your level of focus, enthusiasm, intensity and resource commitment are going to be substantially higher. So that's a part of the equation as well.

I hate to be so blunt as to say we want to make sure our partners get it and get it as much as we do. I had a conversation recently when one of them and said, you know, the problem here, guys, is I have fallen in love with our technology. We think it's a game-changer. We think it's a worldbeater. Now I am not going to sit here because we are in love with it and hold it and cradle it and clutch it to our chest. We want it in the market but we also recognize for what it is, how broadly enabling.

Frankly, part of the challenge is it's better than we thought. We didn't know we were going to be to get the same kinds of results and better than what we had published at this scale. We didn't know that it was going to scale in such a linear fashion. We also didn't know that we were going to get this tremendous pull from this other very large market that lots of folks are very interested in. So several things have happened that have put us into a more favorable position.

Keep in mind, we are coming into the equation as the little guy, right? So even though we've got the big game changing technology, we are still the little guy. Part of what has to happen for us is we need to make sure that our big brethren, our partners, really get it and understand the level of contribution that we are making.

So I think it's not so much again the revenue associated with this contract. There is some that will have the effect of offsetting our burn rate, stretching our capital. Again, part of our theme here is capital efficiency. So could I have gone faster by throwing a lot more money at this, a lot more bus-dev resources? Maybe. Am I leaving money on the table by doing that? I don't think so.

I think at the end of the day you are always dealing with that bell curve in the front of that bell curve -- and I've been doing this for a long time -- it is very challenging indeed. I have used the example before, look at the challenges -- and we don't face, and are not facing anything near like this -- but look at the challenges that Qualcomm faced. If you ever talk to some of the guys who owned Qualcomm in the mid-1990s and early parts of this decade, and it was -- there was downright hostility toward that company. They were called frauds.

So there's always a little bit of a delay time when you are bringing disruptive technology to market. It's always the toughest thing to predict, because this is about aligning the interests of our Company, which are pretty straightforward -- there's 15 of us -- with the interests of much larger companies who have got multiple initiatives. It's hard to predict exactly how that is going to come about, but as I said, what is important to us is that shared vision. How big is this market? How excited should we be? How aggressively should we penetrate? What kinds of resources should we stack up behind this to drive the market? Should we, for example, pursue something like best available control technology that really puts us in a very powerful position of strength?

So there's that sort of complexity that goes into these things and to me it's as important to do the right deal as it is to get the technology in the market quickly. We do have some time-based considerations, but we don't see a window slamming on us because, frankly, I think if you look at the characteristics of our technology and development trajectory in terms of where we are and where we are headed from a performance perspective, I think we are the ones who are going to be able to drive the obsolescence curve. So I am not worried about today at least someone leapfrogging us and getting to 2 ppm with the same characteristics that we see. We just don't see anything like that in sight.

So competition always has a time-based element to it but, again it's real important for us especially on these early deals to do them right, to set a strong foundation, and to proceed from a position of strength and a really shared view of what the marketplaces like. I think we are now there and now we need to go back and forth, push some paper through, and get out there. We have affirmed and our partner -- our prospective partner has affirmed that their channel is really anxious to get going. And that's where we wanted to be.

Not to toot your horn for you, but I think the good news, in fact the great news is that ClearSign controls all the top patents -- the game-changing patents -- in the world, you know?

Well, I appreciate the enthusiasm, John, and I think you are right. One of the things that we do in our patent strategy is we say, well, gosh, when you have this type of burner in something like a fire tube, for example, is it still a conventional fire tube boiler, or is it a whole new kind of boiler? Does it enable new kinds of heater designs, not just new emissions control techniques? So we do what is called patenting down into the application space and we are now at about 150 patents. I guess that's another metric that I neglected to include in the press release update, but you are absolutely right to call attention to it.

It's a fundamental part of our strategy and it's fundamental because that is what our partners are valuing. Our partners are valuing the ability to enter the market with disruptive technology that is protected so they can protect that franchise as they go to market and we and they together can really do very significant things in terms of share.

I will tell you something that is really quite interesting. I mentioned there is a perception that the market is larger than they might have thought. It's a factor of 4 times. So the market is 4 times larger than what they thought it was, and they thought it was pretty large to begin with. I should say we, we have done an analysis. Again I don't want to sound like I am protesting too much, but it is so important, clarity. I think there's -- one of my favorite movies is called The Sniper and one of the great lines from that movie that I often tell entrepreneurs because there's a tendency to go fast, fast, fast and it is absolutely important to go fast, but the line in the movie is: slow is smooth, and smooth is fast.

What you are really is getting at is, as we all know, is preparation is as important as speed. Because preparation is what buys you the momentum, the speed and the intensity that is required to really enter these markets and be as competitive as we should. So -- (multiple speakers)

The protection that you have through the patents, I think, is good too. It's outstanding.

No question. Absolutely, John. It's fundamental, as I said, not only to us but to our partners. That's what they look to us for is to give them that protected position and unique highly differentiated position in the market that is protected against competitive threats.

So you are absolutely right and I appreciate you calling that to my and everyone's attention again. Thanks.

Thank you.(Operator Instructions)

All right, as there are no more questions at the present time, this concludes our question-and-answer session. I would like to turn the conference back over to Rick Rutkowski for any closing remarks.

Yes, again thank you all not just for coming today. Many of you have been so supportive, so loyal, so patient, so enthusiastic, and that is invaluable to us. We have been -- had the really great fortune to have some tremendous shareholders. One of the things that was great about this last financing is that we got to bring some new institutional shareholders into the mix who we think are very high quality folks who are capable of holding much larger positions over time. We hope to earn that further confidence by executing on the plan.

But again, to me personally, if you said what is the most exciting thing that has happened, the fact is we have now demonstrated that we can achieve full industrial scale, 5 million BTUs per hour plus, with performance characteristics that are unprecedented in the category and that deliver really compelling economic value in the segments that we are targeting.

So the momentum will continue to build here. The segments that we are targeting continue to be the same ones. I appreciate again your patience in working with us as we work through these negotiations and preparations to get to market with the most in the strongest way that we possibly can.

Stay tuned. There will be developments coming very soon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may all disconnect. Have a nice day.