ClearSign Technologies Corp (CLIR) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the ClearSign second-quarter results conference call. (Operator Instructions). Before we get started, during the course of this conference call the Company will be make forward-looking statements.

We 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 objections -- or objectives, rather, of management for future operations; any statements concerning proposed new product; any statements regarding expectations for the success of our products in the US and the 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 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 these forward-looking statements. These risks are described in the section of today's press release titled Cautionary Note on Forward-Looking Statements and the reports we file with the Securities and Exchange Commission.

Investors or potential 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, sir.

Thanks, everyone, for joining us this afternoon. I want to apologize ahead of time; I am just on the tail end of a cold/flu sort of thing. So I think my voice is a little bit better, but I cannot guarantee the same for the quality of my thought today. So in any case, we do have a lot of exciting news to report and probably even more exciting things to talk about prospectively. But before we get to that I will let Jim take us through the numbers and then we will jump right into it.

One quick note, you will probably notice that we do mention, both in the headline and in the press release, that we recently entered into a field test agreement that is in fact the much-anticipated agreement. Having said that, there will be a formal press release providing more details about this agreement and so on.

We are waiting for approval of that, but we wanted to -- since the contract was actually signed some time ago, about a week and a half ago or so, we wanted to report that. It is in the subsequent events disclosure in the Q, but there should also be a follow-on press release to provide more detail. Including hopefully -- as I said, we're waiting for approval on it -- the identity of our prospective customer in this regard and it is a really very exciting opportunity.

So I wanted to just clarify that that is not old news, that is new news. But there will be more clarification of that to come. Go ahead, Jim.

Thank you, I will be a real brief as our quarter was pretty simple. We recorded a loss for the quarter of $1.626 million. That was a couple hundred thousand dollars more than the same quarter in 2013.

Our R&D expenses went up about $20,000, that is some offsetting things. Our personnel levels increased adding about $80,000 and -- but our consumables and testing materials decreased by about $50,000 and there were some miscellaneous other items.

On the G&A side of things our expenses increased by $200,000, so that is reflecting our increased expenditures and marketing and business development which leads back to exactly what Rick was referring to also as well as a number of other initiatives that he will speak to.

Lastly, I will point out that our cash at the end of the quarter was $4.750 million which is enough to bring us into early 2015 at the current burn rate and assuming no revenues. Rick, back to you.

Thanks very much, Jim. So I think thematically I guess where I would like to start and talk about 2014 in context of the transition from technology development to commercialization. And it now looks as if we can look to early 2015 as commercialization of the technology with the latter part of this year, the next couple quarters being about these site demonstrations and tests.

And it won't strictly be the case, but it is instructive to think of this in terms as sort of seeding the market. Meaning that the contract that we've just reported on refers to a once through steam generator that will be installed in the field.

You will see us do and endeavor to do similar things in the refinery space, in the package boiler domain and in some other application areas. One example is pipeline here. We've got a major oil Company talking to us about some NOx and CO problems that they are having with these cabin heaters which are positioned every several miles along the pipeline.

California is a place that is rife for these kind of demonstration opportunities partly because of, if not principally because of a very demanding regulatory environment that exists there. It also works well for us in terms of the logistical convenience of being able to operate reasonably close to home. And in fact, within the San Joaquin Valley I anticipate that we will see several of these develop.

We have, in that context, an early group of distribution reseller partners forming led by some guys that we are actually very, very excited about, as well as some formative partnerships with engineering and construction firms that we think can be important strategically and actually help extend the work that we do from that area into other parts of the country and indeed the world. Some of these companies have a global footprint.

So to come back and sort of take it down to a level of detail here. I referred to in sort of the first paragraph of the quote here what I called an intense level of activity in market and business development. And I want to emphatically underscore that that is the case. That what we have seen happen in the last 90, 120 days is really the results of an awareness campaign that's been going on for a couple of quarters prior to that that is really beginning to take hold.

We are seeing awareness reach the level that we have a lot of incoming inquiries as well as a lot of positive response and, as I mentioned, we have some informal partnerships going that have been quite productive in terms of generating new leads.

So Andy Lee is actually here with us today; I may ask him to provide some color on some of these opportunities as we go. But it is tremendously encouraging in that the course the process is to validate the technology in the field, demonstrate it in the field and then in the best case begin taking orders and installing systems as quickly as we can.

I think I mentioned -- while we're up at high level here I will throw this other point in there. I think I may have mentioned this previously. We will be getting a better feel as we go here for what the cycle time looks like from the time we book an order to the time we install and bill. It is likely to vary.

There are some cases, especially some of these early adopter cases, where there may actually be some level of urgency driven by regulatory compliance need to get systems installed. But one of the things we will be working to do in terms of trying to get a handle on how the business will operate going forward is understanding sort of the bookings and billing cycle. Because we do expect that in some cases we may get an order for multiple units that would be installed over some period of time.

So I think what that points to in the longer-term is that in the best case we have a business model where revenue is being billed against a backlog and we think it may be possible to build a pretty substantial backlog if early indications are good.

So we do -- I do expect that so -- for example, by the next call that we have with you, the third-quarter call in October some time or early November, that we will be able to provide greater visibility on what that 2015 rollout looks like and what we think some bookings and billings of some of the early systems might be.

It appears that there is real business both in once through steam generators and refinery heaters. In addition to all of the pressures that exist to meet current regulatory guidelines, the Air Quality Management District is indeed in the process of convening stakeholders to discuss new guidelines that are even more aggressive in terms of NOx emissions.

The discussion has been put on the table for 2 parts per million of NOx at 3% O2, and right now there are really no good alternatives to meet that except for our technology. Selective Catalytic Reduction is an option; it has a variety of different costs associated with it including some other features environmentally that may be suboptimal.

In addition to the handling of hazardous materials it appears that SCRs may in fact be promoting the creation of ultrafine particulate matter as part of the catalytic process.

So we are really encourage and that is before you get to the notion that in refinery process heaters in particular, one of the powerful advantages that the duplex offers apart from these unprecedented emissions levels, apart from the low O2 levels and therefore the high-efficiency flue gas recirculation is used sometimes, but not commonly in refinery heaters.

But a very, very significant set of advantages that we'll be quantifying because -- and they can vary from one heater to the next -- are the advantages associated with flame shape and heat distribution.

One of the key trade-offs associated with low NOx burners, in process heaters broadly and refinery heaters in particular, is the long flame that can lead to process tube impingement, poor flame pattern, de-rating of heaters, more frequent coking and therefore more frequent maintenance and overall reduced capacity.

So we've done a preliminary analysis in conjunction with some fired heater specials from some large oil companies. We will be taking that to the next level using a third-party to conduct an economic analysis so we can really look at these projects with a fine pencil in terms of what the ROI on them is.

But we think it can really be quite compelling and it is really, again, unprecedented, the idea that it is possible to have ultra-ultra low NOx emissions and actually improve flame pattern and improve heat distribution.

Just to put that in perspective, we are literally comparing systems in which flame lengths may reach 20 or 30 feet or more to a scenario with a duplex where the flame height is likely to be 6 inches or less. It is basically about the height of a tile that we use and right now the largest tile we are using is about 6 inches thick.

So this is a major change in the longer-term, that greater heat density implies improvements to systems design. So another sort of high-level view of our business model going forward, and we think one that is really advantageous in terms of how we view value creation in the franchise.

The duplex is ideally suited for retrofit because it can be done very surgically. It fits within the furnace dimensions, the heater dimensions. This is another big problem for Selective Catalytic Reduction systems, they require quite a bit of real estate; in some cases refiners literally don't have the real estate available. But in addition to that there are the other kinds of advantages that I talked about.

So that small footprint really lends itself well to retrofit. When we perform this work in the field, which we anticipate at this point ought to be mid/late September, it looks like that is what we are on track with. We have got our subcontracts, one of them in place, another one coming into place to install that system. Those should be in place in a few days.

Permitting is looking pretty good. So right now we are on track for kind of a mid/late September install. That may slip into early part of October, but we are obviously focused on getting that done as soon as we possibly can.

The point that I want to really make though is it ought to take somewhere in the neighborhood of three to four days to actually affect the installation, a day to shut the system down and cool it off, a day or two to actually complete the installation and fine-tune the positioning of the tiles. And then a day or two to bring it back online.

So these can be done quickly, surgically. That is a very important feature for a retrofit technology, the downtime can be minimized and indeed another way in which the duplex (inaudible).

So we think there is a variety of important features that can allow us to move quickly into the market as we continue to create awareness. There is little doubt in our minds that the presence of the units in the field, the demonstration system is going to have yet another -- create another boost to the level of awareness that we are getting.

I want to emphasize this installation will be important for two reasons, one of which is clearly that it will be the first time we demonstrate a system on a commercial site in a live application. It will also be about close to a 10x scale up from what we have done internally here.

And as a consequence of that you will now be able to address the great bulk of certainly the process heater market which begins in the sort of 1 million to 15 million BTU sort of range through really all of the steam generation market for package boilers as well as OTSGs, which run anywhere -- small package boilers might be 3 million BTUs per hour up to 40 million BTUs per hour. So some larger. And that is sort of the lower end of the OTSG space.

As you get up into Alberta some of these things are 200 million, 250 million BTUs per hour. That is provocative because at about 50 million BTUs per hour you are roughly the equivalent of 12 megawatts or so, 12, 15 megawatts or so. And that means that as you get up into that size and above you are starting to get into the utility domain.

We think the duplex -- this is one of the other things you may see come onto the horizon later this year in addition to our work with OTSGs, refinery heaters and package boilers.

Coal to natural gas conversions for utilities continue to be performed and the duplex is a very, we think, potentially ideal solution to solve the problems of lost radiant heat transfer, the most common and expensive problem associated with coal and nat gas conversions and to either minimize or eliminate the need for Selective Catalytic Reduction downstream.

So that could have some really compelling economics associated with it. We have several companies, large engineering companies talking to us about that as we speak as well.

So this really goes back to -- I'm just kind of going back to sort of the current quarter and the next quarter. May was a really significant event when we fired the duplex for the first time at 5 million BTUs per hour, 3% oxygen, temperatures at and above 1,600 degrees Fahrenheit. And these are all important aspects.

The trick is bringing together the low O2 level, the low NOx levels, the uniform heat distribution. It is really this combination of features that makes the duplex so powerful and really game changing in the space.

Joe presented those results at the Air & Waste Management Association's annual meeting in June, and quickly from that ensued discussions with several large oil companies in the US and Canada. We have begun to garner significant interest in Alberta based on our early traction in the San Joaquin Valley.

And we really -- the San Joaquin Valley and Southern California are particularly attractive to us for the reason that I mentioned logistically. To manage several installation projects in that geography is quite doable for us. We've got some very capable partners aligning with us who have engineering resources that we have been educating and training about the technology so they will be more than capable of conducting these installations with our guidance and support.

And as I mentioned, we have, in addition to the once through steam generator demonstration, several opportunities to conduct site demonstrations in refinery, pipeline heater and other kinds of applications. It is always difficult to prognosticate with total precision, but we are very encouraged that some of these are very high probability candidates indeed and we think will be quite visible.

We continue to get strong support from the Air Quality Management District. Indeed Joe's presentation at Air & Waste Management Association was in a panel that was sponsored and conducted by the people who run the NOx initiative for South Coast Air Quality Management District and they chose the presenters for that.

The once through steam generator market we really like and some of this I have discussed before as a launch opportunity. Because it is a high value application, there is more than 750, the number our research report indicates in the San Joaquin Valley alone is about 768 units. I think there is somewhere closer to 1,000 in California. And then there are more larger units in Alberta. The regulations are not astringent in Alberta, but the desire to eliminate flue gas recirculation is really common to all markets.

Geoff recently presented at the Council of industrial boiler operators a couple of weeks ago. And one of the interesting things that came out of that, one of the keynote speakers at the conference was an EPA officer for the federal emissions regulations and he pulled Geoff aside after Geoff's presentation and mentioned to him that they are actually contemplating following suit with some of the regulatory efforts that we see in California and introducing more aggressive NOx standards nationwide.

So that is encouraging to us certainly. And again, I think what is powerful about the ClearSign solution and unusual and really unprecedented in some ways is the degree to which we can align the goals environmental regulators in air quality generally speaking with the incentives of operators to minimize cost and maximize system capacity and profit.

And that is what is so powerful about this piece of technology is the fact that we can achieve these kinds of low, low, low environmental emissions with a minimal impact, if indeed not a positive impact, to the operations of these very expensive capital systems.

That message, by the way, as you can imagine, resonates very well in China where this is a concern on the macro scale, how do we improve air quality, because it is beginning to have the effect of constraining overall economic growth. But an equal concern is to be able to do that while minimizing the impact to the businesses that they want to continue to drive to keep GDP and employment rates high.

So we've had some very productive series of meetings in China, had some meetings in the US with Chinese companies and officials who have visited us here. We are talking to large engineering construction firms, boiler manufacturers, waste to energy companies, several of these companies have asked for proposals in terms of collaboration and have indicated a strong interest in pursuing collaborative initiatives.

So I think we may in fact be on track, as we suggested earlier, within the second half of this year to report some significant alignments in the Chinese market as well.

I'm going to get to the point here where we are going to turn it over to questions because I am sure there are some, I hope there are some. But let me just add an emphasis that the model here with respect to once through steam generators is one where you will see us talk about distribution and channel partners. So in effect we will be setting up a reseller network as well as partnering with both large and small engineering and construction firms to affect the installation of these systems.

Some other initiatives that are slightly longer-term -- we announced today that Plum Creek Timber has joined the solid fuel working group. We expect at least two or three others to join that. We have had commitments from these folks for a while, we have just begun receiving the signed documentation in recent days and there is more on the way here though.

So that will have the effect of helping to accelerate Electrodynamic Combustion Control efforts. We have very strong interest in China. Solid fuel is very important to the Chinese economy. While on the one hand they are switching systems over to natural gas and we can really provide a significant improvement there and, again, minimizing the cost impact of that is all the more important where natural gas is so expensive.

It is also important to China to try and maintain solid fuels waste to energy and coal in particular as viable candidates longer-term. And so, there is considerable interest from some large research institutions and large companies including utilities in helping to support the development and deployment of both technologies.

In addition to -- I mentioned coal to natural gas conversions may be something that you will see us talk about more as we get through into the third and fourth quarter. That dovetails nicely with those larger steam generating units in Alberta. And indeed in the Chinese market they are converting industrial scale systems from coal to natural gas.

Those are principally going to be water tube boilers. They do use fire tube gas-fired boilers for things like hotels and apartment complexes and things of that nature today, but in industry there are a lot of wall fired water tube boilers that today use coal that are being shifted over to natural gas. Those are really good candidates for the duplex technology and indeed analogous to some opportunities that we are looking at here for early demonstration.

We have some longer-term initiatives in ethylene cracking where uniform heat distribution is a very high value feature, some tremendous intellectual property around that domain. And on the intellectual property front I think the latest tally is somewhere north of 160 patents that we have filed.

We continue to invent at a very aggressive pace and we have a substantial backlog of inventions that we are prioritizing as we push them through the prosecution process as well.

As I mentioned, I asked Andy to join us just to sort of comment a little bit on the intensity of activity that we have seen. But is there anything you can add to sort of the color of what we're seeing out of -- I guess out of California in particular?

Well, as you probably can surmise, the industry down there, especially the oil refining and what they call the EOR or enhanced oil recovery market is -- it is very large financially but very small from a personal standpoint. When you get thought leaders that get behind your product, your project, your technology they tend to talk and we've been the beneficiaries of that networking. And so doors have flown open that have previously been closed.

So we are very pleased with the pace and we are getting calls on quite a regular basis and so we are quite busy. I joke to you today that we need to get a plane that we can fly directly into Bakersfield because I think we're going to be doing a lot of work there.

So, we promised Andy that we would be in the market for an ultra-light if anyone knows of a good used one or maybe even just a hang glider we can strap a propeller onto.

But it is a great opportunity there because you have really an end-to-end representation of the oil and gas industry with the enhanced oil recovery being what folks refer to as upstream, the pipeline heaters would be in the midstream and then refining, including both oil refineries and asphalt refineries -- or asphalt processing plants is a downstream element.

And so, again, it is a great reference point from which to grow. Maybe you can characterize just -- without saying too much -- the type of conversations that you are having. One that you and I were particularly excited about, Andy, was the engineering and construction firm.

One of -- this firm is going to be working with us on the installation of this once through steam generator. But they are excited about the technology more broadly speaking and they are a big organization and they are a part of a much bigger global organization.

Yes, they are a $1.3 billion unit of a $12 billion construction firm. And they obviously work quite a lot in the oil patches primarily in the Bakken and Colorado obviously in San Joaquin Valley and Alberta. And I related to you that they have seen a lot of technologies paraded through their company headquarters.

And the head of the division took me aside as we were leaving and brought me into his office and said, I will tell you what, we are firmly behind this? We've seen a lot of things paraded through here. This looks like a real game changer for us.

So we are on your side and we are going to be really doing whatever we can to help you up on these initial installs. So that was an incredibly gratifying thing to hear because this guy is very seasoned 30 years plus in this oil patch business.

And I think importantly this is representative of how the model can work. So we can begin working in a very focused way with a company like this, but that company then allows us to really create broad awareness globally both within the subsidiary company, which is a large company -- and in fact this gentleman even offered that it would take it up to the parent company. And I think --.

Well, yes, he would make it is mission to take it to their CEO to take it to the CEO of Exxon Mobil and others. That was gratifying.

So and I think -- again, I want to point to this not as an individual or isolated example, we believe we're going to see the same kind of dynamic repeated. And we think that that is how we can potentially over the next 12, 18 and 24 months begin to scale this business very rapidly indeed.

And I will circle back to that idea of beginning to develop a backlog and through 2015 what we hope can be even substantial backlog. And hopefully within a quarter or two we can actually start putting some better numbers to that.

One of the things that the duplex allows for, because our bill of materials cost is quite low and because we do have partners who are willing to help us get into the market in this way so we are able to cut some advantageous deals.

We think we will be able to get into -- through this demonstration phase and to the extent that we need to be aggressive on pricing or we need to share cost or even underwrite cost for doing installations where they have high-value, we can do that without enormous expense so we can do that very cost-effectively.

In fact, we had a similar reaction from one of our guys that was down taking measurements in the last couple days meeting with the company that's supplying the logic controllers for the burners. And he said -- he said, gosh, can I get just 20% of the business that you guys might do?

So the excitement is there and it is spreading. And we share this with you because it is what helps drive our enthusiasm. There is a lot more that we are not sharing with you yet because it is just premature and we want to continue to stay on track with expectations. But we feel very good about our ability to do not just one but probably several demonstration sites.

And I think there is a strong possibility that at least a couple or three of those could be installed this year and more activity continuing through the first quarter. Some of the oil companies that we are talking to are large. They are talking in sort of a global view because we are not only talking to operators, we're talking to senior environmental officers.

So it is a very strategic view about how the technology might be deployed more broadly across their operations as we go in the various ins and outs of the different system types and when they might have downtime and whether it might afford an opportunity for installation and what the specific nature of the system is.

So the good news is that we are getting to that level of detail of actually beginning to sort through the logistics of how we get the technology into their fleets referenceable and then following that how we might begin to actually deploy it.

So I think as I promised, my voice is getting a little thin here, as you can tell. I'm going to go ahead and open it up to questions.

(Operator Instructions). Jim McIlree, Chardan Capital.

I would like to ask just a couple of questions. It sounds like -- well, congratulations first on the once through steam generator agreement. And it sounds like you are pursuing others at the same time.

My first question is do you have the bandwidth to do multiple tests or trials that is at the same time? Or is it more likely that you would have to finish this one or get near completion of this one before you start doing something else? And that is just from a personal perspective.

Sure.

If I can I'd like to ask a second one as well.

Yes.

Is reducing NOx enough? Are there other things that the end-users want to reduce as well? And I'm just going to make stuff up, SOx, Mercury, VOCs? Is just reducing NOx enough or do they need something that is going to reduce a whole suite of things that they need to get rid of?

Okay. I will take them in the order you gave them to me. The bandwidth question, I mean this is one of the things that is really exciting to us about some of the partnerships that we are forming here. In one case we are very close and have been very actively engaged with a small engineering company that has a staff of 17.

These are very competent, very experience combustion engineers, lots of field experience in this particular geography, they are based in Bakersfield.

So the way the model works is we source the tile and the fixturing, that is really done in a pretty virtualized way. It is a pretty small supply chain on the backside. And then as we go we are -- of course we're training them as we speak. In some ways they have been exposed to the technology, they understand the technology, but we will get some hands on experience.

So as we go through these first handful we will be very hands on, but these guys are more than capable of carrying the torch for us as we pass the baton to them given the level of experience that they have. And again, the tolerance thing around the duplex installation and so on is such that these we think would affect that handoff pretty easily.

We are blessed in that our Chief Technology Officer in addition to having significant combustion industry experience and expertise and a strong reputation in that regard is also a knowledge management professional. And so, when it comes to transferring documenting a knowledge base, institutionalizing a knowledge base and training for this kind of education of our channel partners I think we are well equipped to do that.

So it is a good question, it is the right question, it is certainly a question we ask ourselves. We actually have been asked this question by some prospective customers in recent days. And there are others like that. So when we talked about sort of building this channel, it is in effect as if we were to hire a group of field engineers, except instead of hiring them we will essentially make them a part of our distribution channel.

Similarly for the large firm that Andy talked about a few minutes ago, I'm not sure what their headcount is, I am guessing it must be a few thousand or so --.

Well, just in Bakersfield it is over 400.

So, over 400 engineers and --.

And installation and combustion experts.

Right, in Bakersfield.

(Inaudible).

They actually build and service these once through steam generators. That is how we met these guys, they were actually referred to us by our customers. So it is a great marriage because they know the individual systems very well, have been working on the design and maintenance of those systems ongoing. And then of course have other relationships in the field as well.

So there will be some constraints. Joe and his team are going to be plenty busy supporting these guys. But the solution to the bandwidth problem is that and we think it is basically as good as if we were to have these -- the same types and numbers of people working on our staff. And of course better from the perspective that we don't incur the fixed cost associated with those but still get the benefit of that expertise.

And we can create, as we said, incentives for them to become resellers of the technology as well in those kinds of discussions. With respect to -- so let me make sure -- did that speak to your first question?

Yes, that was great, thank you.

With respect to your second question, when it comes to this type of system, refinery process heaters, package boilers, really anything that uses natural gas or some mix of natural gas from refinery fuels. NOx is overwhelmingly the primary culprit.

As you start to get into -- I mean they have -- volatile organic compounds are an issue for the oil and gas industry typically way downstream at like service stations and things of that nature and in other kinds. But in the kinds of operations that we're talking, what we are competing with are NOx control solutions, selected catalytic reduction systems, low NOx and ultra low NOx burners. And so that being the case the conversation is very much about NOx, NOx, NOx.

From a regulatory perspective there are regulations on all those criteria of pollutants. Where you tend to get into the whole array of NOx, SOx, Mercury, dioxins, particulate matter, ultrafine particulate matter, that's solid fuels because in the chemistry of coal or biomass you tend to have these complex chemistries that you are going to evolve multiple species of pollutants.

And that is one of the things that is sort of a pretty powerful notion here that this NOx really is the primary concern for the natural gas industry. So what we are doing here is we get to these extremely low levels of NOx -- and we can begin to talk in terms of near zero NOx emissions we think based on some of the things we have seen internally.

That is viable not only to the end users of these systems, the refiners, the operators, the package boilers which are anything from hospitals to universities to food processing plants, but also to the suppliers of natural gas, meaning both the guys who explore for that fuel and in fact our -- interestingly our OTSG operator is a significant natural gas producer. And then the utilities that push those supplies through to residential, commercial and industrial users of the fuels.

And in fact, one of those utilities has a pretty robust program in place to help facilitate the introduction of new technologies like ours. And you may in fact see them involved with us as we start going through these demonstration systems or they tend to be pretty active at funding demonstrations like this and we certainly have an active and ongoing dialogue with them.

So our work with ECC will focus on a broader range of criteria -- pollutants --. I guess let me back up -- NOx and CO, right? Because historically one of the challenges even with natural gas is that if you push NOx down you often do it at the expense of increasing carbon monoxide and we are, of course, operating at near zero levels of CO most of the time when we refer to the duplex technology at zero point something or a few parts per million of CO. So that will always be important but that is sort of the given when it comes to natural gas.

Our work with ECC, you will hear us talk about particulate matter and ultrafine particulate matter as well as NOx and SOx and it is important to understand that NOx and gas-fired systems is purely what we call thermal NOx where it is the nitrogen from the air being fused with oxygen at high temperature, it is an intermediate.

As you get into solid fuels you have both kinds. You have a fueled down NOx, nitrogen in the fuel that is bound to oxygen and then also nitrogen from the air thermal NOx. And so, ECC we think will allow as techniques to deal with both. We're going to do some work.

There's questions, concerns, risks associated with them, but we are going to do some work testing the duplex in a pulverized coal configuration. Because on the one hand, gee, maybe it would abrade the tile, maybe we would have plugging concerns, things of that nature.

On the other hand we don't know that for sure because the mass and momentum of that pulverized fuel, which is like a talcum powder, would in many instances potentially be largely dissipated by the time it is ignited at the tile. So short answer on that is we just don't know.

But when you get into multiple criteria pollutants, that usually is associated with solid fuels, natural gas is really predominantly about NOx and CO. And that is for us the low hanging fruit and especially given the other features that we have talked about with the duplex with regard to flame shape and requirement for flue gas recirculation, etc.

[Richie Jayne], [Antonio Park].

So I want to understand how the working group is -- I guess what the understanding is between the members of the working group and you guys. And most importantly, is there -- are these funding some sort of -- some portion or all of your R&D together? Are they contributing money? Or it just seems that -- I'm feeling a little bit confused about what exactly is going on with this group.

Okay, it is essentially what it sounds like. It is a group of people who share a common interest in the industrial combustion of solid fuels. Can you maybe mute your phone just while I'm answering and then you can take it off mute?

Absolutely, yes.

That would be great, thanks. Thanks. And one thing that is really important to understand, the industrial scale combustion of solid fuels in the US is very much a niche market, it is a big market, but in comparison to the market for natural gas combustion it is tiny.

So the big dominant players in the combustion space are really all guys who make low NOx and ultralow NOx burners and NOx controls. That is really where the business is. That is actually becoming more the case because we've seen the ascendance in the west of natural gas versus coal.

As I mentioned, that is not the case in China. China we are about 30% coal, 70% natural gas in terms of overall energy footprint. China is the exact opposite, 80% coal, 20% natural gas. So, and the importance of coal in the West has declined.

Actually there was an interesting dynamic with some of these engineering construction firms where they have seen a decline in their business from two fronts: one, a reduction in capital spending which is changing, that is another very bullish trend for us. If any of you have been following this in the news you will see that the indicators for increased capital spending beginning next year are very bullish.

And the other, the decline in construction of new coal plants and the conversion of those coal plants to natural gas has created some business for them. So the working group is a way to in that environment consolidate the interest of companies like Plum Creek and Covanta and the others that are part of our working group so that we can continue to advance the Electrodynamic Combustion Control while we bring the duplex technology to market.

But I guess I want to be careful here not to minimize the importance of ECC because we think that's another hugely disruptive technology. But the duplex technology will come to market ahead of the ECC technology. We think the sponsorship that we get from companies in China will be very, very important to further accelerating that work.

And to answer your question more pointedly -- the contribution of the members of the working group in some cases is cash and in some cases is in-kind, meaning they're --

In some cases both.

In some cases both. And in most cases we have asked them to identify the early systems for installation of the duplex technology that might be candidates. And the other value that we get out of that, which is extremely valuable, is prioritizing the feature set.

So I even got sort of anecdotally described this before which is that when we first had our meetings with Covanta and others we asked them among the features which was their nearest term priority. And the answer has been flame shape and that is why we conducted the experiments that we did in the fourth quarter of last year.

Particulate matter is a huge issue, as you would guess it would be especially in China. And again, the industrial scale is far more important, of solid fuels, is far more important in China than in the US. In the US solid fuels are overwhelmingly utilized at the utility scale and of course it is principally coal.

So it's a combination of cash and in-kind contributions as well as helping to drive and prioritize and define the feature set to drive development and also to identify candidate systems for early installation. And we do have two or three companies in China who will likely either join that working group or we may create a separate working group for the Chinese market.

We have been invited to set up two demonstration systems in China, one for each technology. And we're actually being courted heavily by several municipal and provincial governments as well as both state owned and private enterprises over there.

Okay, that is great. And then I guess the second question is, these agreements that are coming up, for instance that large sort of 50 million BTU projects you had mentioned. Is the way -- and I know you said you released more details, so maybe that is the answer.

But will you guys be -- will they be funding kind of the creation of the demonstration plan or is that coming out of I should say your pockets or rather ClearSign's pockets in order to demonstrate that and they are just kind of giving you the equipment?

And obviously the aim here is to figure out either sort of the cash burn and the likelihood of coming to market or of these partnerships -- how much skin the partners have in the game.

Yes, yes. Well, they've got a considerable amount of effort in the game. The short story is it is a shared cost, a cost-sharing exercise. They are providing all the expenses of their team and their support and taking their system off-line and the fuel and all of that. We are providing our team to them and we are handling the costs associated with the subcontractors.

It is actually a very reasonable cost number. Obviously our team is already embedded in our current budget, so it is well within the scope of our 2014 budget. We are very cautious about this. We don't want to be penny wise and pound foolish, but we are very focused on capital efficiency. And so, we weigh very carefully the cost versus the probability of success.

And I think if Joe were here he would tell you that he is quite confident of having a success in this scale-up effort. It is probably a better off-line topic, but if you want to dig in more in terms of scaling and why we feel this level of confidence, I am happy to share that with you.

But our experience with the duplex and our prognosis regarding the duplex is that it has scaled in an extremely linear fashion, meaning we believe that it is fundamentally scale and variant because we believe we now, based on our experience, understand the scale rules. And it appears to be driven by the physical area, meaning if you want more BTUs you make the tile bigger.

Fortunately in virtually every case the correlation exists within these systems. So, in other words, within a refinery heater there is plenty of real estate to accommodate those rules, within OTSGs there's plenty of real estate to accommodate those rules. In package boilers you start to get into more dense configurations, but we still think we are well within the scale limits. And by the way, those are conservative estimates of the scale limits.

We will be reporting more data I think in the very near future here because we now have added a load to our furnace internally that is going to allow us to put more heat density onto the tile and into our furnace, run it up to higher levels of thermal output beyond the 5 million BTUs per hour that we've demonstrated. And also to work with modulating the system to demonstrate turn down.

We are very encouraged by the early indications that we see on turn down, by the way, and we think that is going to be yet another feature that distinguishes the duplex from other ultra low NOx burners is a higher turndown ratio. And that is before we sort of dig into the bag of tricks. In any case I hope that answered your question.

Yes, thanks. I will jump back in queue.

[Steven Kind], private investor.

One of the things you referenced there when you were talking about the reduction of NOx is you were also mentioning the ultralow carbon monoxide emissions. And with carbon monoxide emissions being strictly a product of basic combustion efficiency, can you go into the improvement in energy consumption and thermal efficiency that you are seeing within the duplex burner?

Yes, actually, I'm going to -- Joe just joined us a few minutes ago, so I'm going to let Joe Colannino make a guest appearance here and answer that question for you better than I ever could.

Well, good morning, everyone, and hello to you, Steve. So, yes, efficiency is -- there are a couple of kinds of efficiency and obviously you are alluding primarily to combustion efficiency and that is usually pretty good. As Rick already mentioned, sometimes you get into trouble; when you try and squeeze down on NOx you actually inflate your CO.

But there are other efficiency concerns, and, Steve, I know you are well aware of these, which is basically how efficiently you can transfer heat in the radiant section, for example. And here we think that there is a marked advantage with the duplex technology compared to natural flame. Because the flame is a poor radiator of heat, tell that to somebody who is too close to a fireplace.

But in fact a much better radiator of heat would not be a gas flame but actually a solid surface. And that is why you may notice bricks in front of a fireplace or something, they retain that heat and radiate it long after even the fire is out.

Well, this duplex technology behaves essentially as a black body, which means that there is -- the emissivity of a gas flame is very low. The emissivity of a solid service, especially this one with channels in it, is very close to one and it is nearly a perfect radiator. So it transfers heat very efficiently in the radiant section of the combustor or of the furnace.

In addition to that, when you keep in mind that we aren't using flue gas recirculation and we are not taking a lot of flue gas around in a circle to try and reduce NOx, we don't need to do that and we're not having to add a bunch of excess air to try and cool down a premixed flame or something. So all of those are huge efficiencies. So we expect to see a substantial increase from all of those, and that alone is important in many cases regardless even of the NOx benefit.

Yes, we did have an interesting experience recently where a local Company brought in their comrade monoxide expert and, against his better judgment, Joe did sort of a live demonstration in response to this gentleman's request. So we typically like to operate at the level of about 3% O2 because that is really where you are maximizing efficiency and versus higher levels of oxygen and stack.

This gentleman said well, take it down to 2%. Take it down to 1%. So reluctantly Joe did that and we saw little or no gain in carbon monoxide even at those much lower levels of oxygen. So I think the efficiency you are referring to, Steve, is carbon monoxide is essentially unburned fuel, so to the extent that you are getting -- not only is it a harmful pollutant but it is wasteful.

It tends to be small numbers in terms of overall efficiency and I think Joe is right to point to the thermal characteristics as a greater contribution to overall efficiency. But I think what this does tell us is that we have very uniform heat distribution because typically where you are going to get NOx and CO, what that is telling you is part of the thing is too hot and part of it is too cold. And if you push the NOx down by cooling things off and you create CO, then it means you are at -- you are burning at lower temperatures and creating the CO.

So we are now -- as we apply the load to our furnace in the form of the cooling tower, this is one of the other things we are doing is equipping it with an array of sensors and some infrared imaging capability so that we will be able to map heat distribution. But we anticipate, based on this very indication, that we're going to see very good results. Because if indeed you had cold spots in there that's exactly where you would likely see some CO emerging in the system.

But folks like that Dr. [Frank Locke] have noted this is a very significant characteristic, the ability to independently reduce both NOx and CO because they do often correlate inversely.

Well, I'm also interested in also the reduction in overall parasitic losses. Because you are talking about competing against flue gas recirculation systems or package FTRs which charge their own energy penalties to the process as part of the overall reduction of pollutants.

Yes. No, absolutely. In fact, it is not uncommon at all, even with the existing standard in California at 5 parts per million, to see a combination of a low NOx burner that get you down to maybe 20 parts per million; flue gas recirculation, 30%-35% flue gas recirculation, that gets you down to 9 or 10 parts per million. And then that last bit you often are required to put a Selective Catalytic Reduction system on the back end.

And you are absolutely right, both of those systems impose a parasitic load. The flue gas recirculation reduces efficiency in other ways as well. But they also have the problem with Selective Catalytic Reduction of the installation costs and the real estate that is required and the hazardous materials and the access you need to now bring tanks of catalyst in and out of the facility.

And probably one of the real bugaboos, as we mentioned, is they are now discovering that the Selective Catalytic Reductions appear to put out precursors to ultrafine particulate matter, which in China especially is a big no-no because they're highly, highly sensitive to anything that would potentially increase emissions of what they call PM2.5 or ultrafine particulates.

So no, we think it is very much a part of the calculus of cost of ownership. And again, that is really we think fundamental to the advantages of the duplex, that the cost of owning and operating the system can be much lower than competing NOx control technologies.

And indeed when you then begin to factor in the benefits of reduced flame shape -- for example, we were talking to a major refiner today, in addition to a whole variety of other types of heaters, about a boiler that they operate on site. And they were identifying exactly the problem of flame shape and tube impingement in the boiler.

Another one of our refinery prospects in Kern County talked about the fact that they have had to replace their process heater tubes so often. So flame shape is I think going to be a huge savings for these companies in many cases.

Well, all right, that is what I needed to know, thanks.

[Derek Platt], private investor.

A caller or two, I guess two callers ago, I think he covered my question really trying to get down to -- not that any of us don't believe you and your expression of the potential and the promise. But you can appreciate that paying customers or partner commitments right now are really key forms of validation for the Company and of course key to Company valuation, share price and all the rest. So just forget my simple brain here.

I just want to make sure, so the field test application commitments, those are not paying customers, but rather joint development operations -- part of that is borne by ClearSign. And will we be getting some indication -- I mean, of course having a brand to brandish about would be a real feather in ClearSign's cap right now. And I think a lot of us are really waiting for an announcement with a household name out there.

So I'm really just trying to get an understanding of what level of commitments these people are making.

They are making a substantial commitment. We indicated that there would be more information forthcoming about the details of this. Ideally they would report their name, they are more than household names. They are widely recognized household names. To us this is an enormous validation. You might want to call our Chairman and ask him what he thinks of it. He has been in the industry for quite a while.

So I get what you're saying, but a lot of our investors are pretty sophisticated investors in the energy space and are aware of the importance of these kinds of things and how difficult it is to execute these. In fact, including the guys who sit right here on our staff who have collectively about 100 years of experience in the combustion industry and weren't able to make these kinds of gains with their new technology at very established companies in the space.

So I get we you're coming from that in particular retail investors often look to that sort of brand name. That is coming, it will be there. I am focused on how much money we can make providing value to customers and demonstrating that value and not so much on trying to move the stock price around based on some brand recognition.

So I get where you're coming from. We share the view, we try to communicate closely with investors as we can. The ones that we know, of course, we are limited by. But we invite people to call us who require or want that kind of clarity and color on the situation.

But I think you are doing yourself a real disservice if you discount the commitment that is being put forth by these guys. It is quite an exercise, just the internal cost of them putting together a contract like this is not something they undertake lightly. So does that answer your question?

Yes. And I don't -- with all due respect, I'm not trying to impugn that that is a small feat getting these commitments. I'm just -- my addled brain is just trying to get more detail on (multiple speakers).

Well, no, it is an interesting contrast because I have opportunities where I could do deals with people who value their brand excessively and we might get some play for that. But we actually get the most value by validating the technology in the field. Because what we are able to do, and again, I get the idea that there needs to be a suspension of disbelief and especially in this case.

In fact, probably the most common comment that gets made by very experienced operators is this is too good to be true. So, yes, there is a degree of folks saying how is it possible that I could get both unprecedented emissions of NOx and solve my flame impingement problems, reduce my maintenance costs, increase my system capacity on these multimillion dollar systems.

And so, these proof points, getting the technology in the field is very valuable. And frankly, I think most of our significant investors would be more than happy to see us make whatever economic contribution that we can to make that happen more quickly.

In fact, one of the virtues of having a technology that is both so powerful and so affordable is that we're going to be able to do these kinds of things and it doesn't come at great expense to us, it is far less expensive than the time of waiting for someone at a later stage in the adoption curve.

And we can accelerate time-to-market. Similarly we can create incentives for our channel partners and still enjoy the benefits of sharing in the profits to get to critical mass penetration of these markets pretty quickly.

So I think you are likely to see things gain some momentum. I'm not sure -- many of the names in the space -- obviously there is the big oil companies. Frankly when you get past the big oil companies in the combustion space, I am not sure that they will be what people will view as household names for the most part even when you get into like large package boiler companies or who is the leader in immersion heaters or those kinds of things.

But I will tell you this, it is very, very big business and it is very profitable business and when you are able to impact the productivity of a multibillion-dollar piece of capital plant, that sort of says it all.

So, if you really want to get sort of a breathtaking sense of the value proposition, just go stand in front of a midsize or good-sized refinery and start to let your mind run on how much money it costs to build it and how much money is going into it every day and how much money is coming out of it every day and how important the quality and capacity of those operations are.

So I hear what you are saying, there is a little bit of a lowest common denominator aspect to that. And -- but we have also got to really drive the business where it goes. And as I said, fortunately and especially recently we've had the good fortune to have some really strong institutional investors who have deep expertise and knowledge in the energy markets who I do think understand the value and the opportunity and the strategy that we are pursuing.

But we appreciate also the need for validation. We think there's going to be enormous validation, as Andy said, within industry circles. It is a big market but it is a small world when you start to get into these companies. And we've managed to get into a lot of the major companies at very high levels. So stay tuned. There certainly will be some household names in the mix along the way.

All right, thanks, Rick.

Thank you. And as there are no more questions at the present time, I would like to turn the call back over to Mr. Rutkowski for any closing comments.

Yes, thank you very much. I appreciate all of you participating in the call today. We are, as I mentioned in my starting comments, 2014 is a tremendously exciting year for us and we are making in the timeframe that we had targeted and anticipated the transition from technology development to commercialization of the technology.

As I said, by the time of our next call I think we will be able to provide more granularity in terms of what 2015 could begin to look like with respect to bookings and backlog and how this will build into revenue and profitability and a very sustained growth. We are really just scratching the surface of some very, very large markets here. So I think it is going to be an exciting time for all of us and we appreciate your support and your participation.

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