ClearSign Technologies Corporation (CLIR) Q4 2016 Earnings Report, Transcript and Summary

Good day and welcome to the ClearSign Combustion Corporation Full Year 2016 Results Conference Call. All participants will be in a listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Matthew Selinger of Three Part Advisors. Please go ahead, sir.

Thank you, Daniel. Greetings everyone and welcome to the ClearSign Combustion Corporation full year 2016 results conference call. During the course of this conference call, the Company will 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 remarks about the Company's projections, expectations, plans, beliefs and prospects. These statements are based on the risks and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call include, but are not limited to, whether field testing and sales of ClearSign products will be successfully completed, whether ClearSign will be successful in expanding the market for its products, and other risks that are described in ClearSign's public periodic filings with the SEC, including the discussion in the Risk Factors section of the 2016 Annual Report on Form 10-K. Investors or potential investors should read these risks. ClearSign assumes no responsibility to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. Now, on today's call will be Steve Pirnat, ClearSign's Chairman and CEO; and Jim Harmon, Chief Financial Officer. So, with that, I'll now turn the call over to Jim Harmon. Jim?

Thanks, Matt, and thank you to everyone for joining us today. Before I turn the call over to Steve for his thoughts, I'll review our 10-K which was filed earlier today. I'm pleased to report that 2016 was our first year, meaningful product sales, which totaled $621,000. $260,000 was recorded during the third quarter and that related to the condition of sale of our Duplex technology in a wellhead enclosed flare for a major California oil producer. The remaining $361,000 of sales was recorded in the fourth quarter related to conditional sales in the oil refining and enhances oil recover industries. Therefore, we've recorded 2016 revenue in three of our five target market verticals. Of course, this is an important first forward step for us; however, we are much more excited about the prospects of Duplex enabled burner product lines. This line can begin to address the target markets with the complete burner product, and I'll let to Steve to talk further about that including the Duplex Plug & Play, which we announced recently. Also as we've announced, you'll notice that our gross profit was $136,000 for a gross margin of 22%, now because our sales were conditional upon successful installation in our field development. The costs prior to June 30, 2016 were previously expensed. Further, there were additional costs associated with these installations since they were new and our operators were unfamiliar with them. Since these are early installations, we decided to provide good customer service and make only to repair at our cost. Therefore, the gross margins involved are not indicative of our expected future sales. As we previously stated and I reiterate that we continue to believe in the future, we would expect gross margins approximately 50%. To our backlog, we are currently working with our existing flare customer on five additional wellhead enclosed flares for $900,000, that’s the major California oil producer. These are expected to be completed over the next six months, but it depends upon the availability of the customers' equipment. Now, we've received a 40% down payment of the contract amount in that standard for this industry. These sales are going to be recognized as each of these five units are installed and accepted by the customer. We also have an order from Tricor Refining regarding a water tube boiler installation. This can just be characterized as a conditional sale as we work through the design of this installation and Steve is also going to comment on this in a few moments. As we announced previously, during the third quarter, we reassessed our patent portfolio in order to ensure that we both maximize the cost effectiveness and the value created through the portfolio, and to focus resources on our most promising patents. The patents that we considered to be the most beneficial were retained of course and the pending patents projected to be unnecessarily costly that could be disposed of without meaningfully degrading the quality of the remaining portfolio were abandoned. So, as a result, we recorded an impairment loss of $1.7 million in the third quarter, a step that will serve to better focus on our future patent cost. So that means at year end, we hold 36 patents and have 69 patents pending. We were issued 15 patents in the fourth quarter, and we made four new patent applications. So, due primarily to the increased development in field testing of our Duplex technology and the right-offs resulting from a reevaluation of the patent portfolio, we incurred a loss for the year of $11.2 million which compares of $7.9 million for 2015. As most of you know, we completed our rights offering on January 25th, just last month, where we raised net of approximately $8.7 million. We sold about 2.4 million units at $4 each, and each unit consisted of one share of our common stock and one warrant entitling the holder to purchase another share of common stock at $4 over the next two years. So, it has an expiration date of January 25th, 2019. We got the warrants listed on the NASDAQ under the symbol CLIRW and they've been trading since then. Half the units that we sold in this rights offering resulting from the exercises of rights by our existing shareholders, and that includes the full participation by our directors and officers who purchased 104,000 units. Many thanks to all those who participate in this offering, we appreciate your support. I'll also note that last week we issued 219,000 shares to directors and officers, as compensation that would otherwise be due in cash. These shares have a one-year vesting period in the form of company, repurchase right. So, our cash balance at the end of the year on December 31, was $1.3 million with the proceeds of the rights offering amounted to about $8.7 million and assuming no other revenue other than our known backlog, we have over a year's worth of cash at this time. So, there's your financial summary. I'll turn it back over to Steve for additional comments. Steve?

Yes. Thanks, Jim. Good afternoon and welcome to the ClearSign quarterly call. Now that Jim has covered the financials, I'd like to provide a brief update into overview of our general business situation and our commercial progress. However, before I begin, I'd like to again thank our investors for their commitment and support through our recently completed rights offering. Fundamentally, ClearSign will continue to build the industry credibility and confidence in our unique patented disruptive technology through the successful installations within our core vertical model. Success continues to drive success, virtually all of our early adopters have purchased additional units, and the momentum within our order pipeline is growing. Industry interest among even the super majors has increased, as I see the technology as a viable solution to the long-term environmental compliance needs. We have sold more than 10 demonstration units in the first -- I'm sorry, the last 30 months of operation; and we will likely double this number in the next ten months. This success, not only in our core markets, has led to additional success in adjacent vertical markets, as evidence by our success within the once through steam generator business where success in that space has led us to success and installations of low emissions burners within the enclosed ground flare market. Another example is Tricor, our success within their fundamental heater application led to a large contract for a water tube boiler, which is our first entrance into the packaged boiler business. More importantly, our successful engagement with customers has recently led to the launch of our new Plug & Play burner product, which will be installed in a Texas refinery in the second of 2017, after extensive testing in our facility here in Seattle. The productization of our Duplex technology is a game changer for ClearSign. Why? these products will accelerate adoption of our technology and produce a clear path towards scaling the business and developing potential licensing opportunities and international expansion. It also helps support meaningful dialog with regulators looking at BACT or Best Available Control Technology Solutions, to environmental problems they face. We'll take each one of these issues separately for a moment. First, licensing, today we've been approached by two large commercial combustion companies, who have specific interest in exploring ClearSign technology for different markets. Both of those companies, one of them has been to our facilities as of actually yesterday and is expected -- the second one is expected to come in later in this month. These are great opportunities, if you could imagine. Our licensing agreement which has always been part of our core strategy for both new equipment and retrofit equipment has always been a core part of our strategy for growth. Two, international expansion, we've seen again because of our success in the U.S. and because of our the awareness of the market and our ability to satisfactory meet low emissions as well as operating improvements, interest in our technology both in New York and even more interestingly in China, where as we all know the environmental challenges in China are very severe. And finally regulators, this month we have a schedule meeting with the South Coast Air Quality Management District along with the major South Coast Southern California Refinery operator and the third-party consultant to talk about optionality regarding use of ClearSign technology to meet the challenging requirements of the emissions reductions within Southern California and actually throughout the Western California. This is an exciting opportunity where we feel confident that these meaningful dialogs with various regulators will result in a more formalized designation as BACT for ClearSign sometime this year probably around August. This is then will not only influence the decision making among our clients, but in main cases mandate to use of our technology in certain applications. Regulated continue to see proven cost effective solutions to promote emissions reductions. As I've said before, everyone wants clear air, it's not a question of that, its portion of what does it cost and how affordable is it. And for the most part, ClearSign provides a clear simple cost effective way to reduce emissions in a way that compelling value for our customers and an attractive opportunity for regulators and end users on a global basis. At this point, let me turn the call back to the operator for questions.

Thank you. We will now have a question-and-answer session. [Operator Instructions] Our first question comes from Lou Basenese with Disruptive Tech Research. Please go ahead.

Just curious, if you can provide us with some more color on the active pipeline, I think last quarter you remarked that the amount of incoming opportunities was growing at a rapid rate. Just wanted to see if that’s acceleration is continued and then if you could give us some context around the number and perhaps status of engagement in each vertical?

Well, I think in the two principal verticals, once through steam generators and refinery, we see increased activity from our, again our original and traditional customers in that space. It's been a little bit more slow going in the boiler space because we've just started to test our prototype burners for package boilers, that test is actually going on while we suite back in our laboratory. But we typically don’t comment specifically on the dollar volume with the number of enquiries that we are seeing, but my basic comment is that, it's taken us 30 months to get these ten installations in the field. And in less than 10 months, we will double that number while having the 10 installations. Some of those orders already, actually already in, not only in the pipeline, but they're in various forms of completing those contracts. So, I think we are going to see a lot of compression in terms of the cycle with respect to getting business. And of course it makes sense Lou because the first 10 installations required a lot of convincing and a lot of trial in the field. And the next batch of orders don’t require that because customers within those vertical markets once through steam generators, refinery and even boilers for that matter have already seen the equipment in the field up in operating. So, it's not a question of sort of persuading somebody as to whether at work. It's picking the right application and getting them to find the budget money and the time to schedule the outages in the refinery when you sold the equipment. I think also and I've alluded to this before, I think our ability to provide a standard off to shelf Plug & Play burner will improve the cycle time for us to get in order. Because what we had to do in the past, as some of you know as we are invited to go to the field by the client, and they typically have asked to retrofit in an existing competitive burner, and that takes a lot of time in terms of the engineering and the access to the asset to do that. What we are doing in the future is, we'll be able to just disconnect the existing burner and bolt in our Plug & Play process, which will speed that up. Now, just to make a point, we still will have situations where clients will ask us to come into the field and retrofit their existing burners. And some of the reasons they like to do that is by retrofitting an existing burner. There, in many cases, allow to operate under their current permit where as if they put in a new burner, they in many cases have to go back and get another permit issued for that transaction, which adds some cost and some time to their cycle. But nevertheless I think, the pipeline is filling at a more rapid rate than we've seen before. It makes perfect sense because we've now got 10 successful installations. And again I think, inside the next 10 months, we'll not only have a successful application of our Plug & Play burner in Texas, but we'll have another let's say double the number of units operating. So, 10 months from now, we'll have 20 units operating, and it'll make the task of persuading people and convincing them to use our technology much significantly easier.

Okay. Is it a lot to -- just a couple of follow ups to that, if you don't mind.

Sure, keep going.

Just on these follow on orders, just want to confirm these are on standard, standard terms right? There's an upfront payment, it's not wait until it’s completed?

They're on standard terms, but if it's a one-off burner and the transaction is a $100,000. There really isn't an upfront payment on contracts like we had for this production flare facility where the project was several hundred thousand dollars albeit almost a $1 million. Those types of projects require or typically the industry accept advanced payments because this custom engineering and certain material that has to be purchased in advance, and the oil companies don't expect, a company like ClearSign to fund the working capital to do that.

Well, Lou. This is Jim, I'd also add on that one that there could be a couple of exceptions to using the standard upfront sort of approach that we're adopting by and large, an exception would be this water tube boiler project for Tricor Refining. They've -- it’s a conditional sale, so there wasn't an upfront payment associated with that, that we're still trying to nail them the design and they were trying to work with us to nail down a design that would work for their particular installations. So, that would be an exception, but I'd say by and large on a going forward basis, you should expect the industry standard payment terms.

And then just a comment Lou on Tricor, specifically, we're back and forth with them on design conditions and once they lock those in place then we're ready to go. But we have to deal with the customer requirements and sometimes those aren't so clear upfront as we like.

Okay, and then just I guess couple of follow ups to the prepared remarks about I think I heard, I want to make sure I heard you correctly. Did you say you were going to report the individual installations for the flares on each unit that's installed? Or you're going to wait until the additional five units are all completed before announcing completion?

Well, no. Well, I don't know, if we're going to announce that. We will record the revenue at each individual installation is in; and then we'll -- whether at what point it becomes a reportable event or we see that it’s a good idea to report each individual completion that’s kind of a separate question, so.

And just to further that for some more clarity, if you will, the regulators have asked us to meet with the specific customers, which they've agreed to do, but not at their facility, talk about the performance of our flares and also discuss potential future regulations that would reduce the emissions requirement for enclosed ground flares based on the tremendously low emissions performance that we're able to achieve at the site. Now, you've seen yourself and this is always the awkwardness in this, why can't you just us, who this client is. Well, the client is a little bit concerned to that creating too much visibility with not only the regulators but with certain environmental groups, they are really not looking to attract a lot of attention, especially to their credit because they were one of the leaders in installing state-of-the-art low emissions equipment. But the regulated themselves who are aware of this, see our capability to provide the low emissions ground players, is a potential opportunity toward developing the new class of regulations. And again as I alluded to indirectly, that capability has also attracted the attention of a potential license or who we have schedule to actually go to that job site, in the weeks ahead to see the installation and talk to what's about potential license agreement for that technology. So there is lot of collateral downstream benefits coming from this customer both in terms of potential increased regulation and potential opportunities to license the technology to a major combustion company.

Okay. And then just as we think about the potential for licensing and then you also mentioned international expansion to China and Europe. I mean is that -- are those both 2017 things that we can expect to happen or that you feel are likely to happen in 2017?

I think that with respect to what we're doing perhaps in Europe might be in 2017 events, my problem with trying to commit to a date and I'm not trying to be covered by half year is, you put yourself in awkward position when you're trying to negotiate a license agreement. If the person you're negotiating would say, what said on the conference call, what was going to be done by this day, so what it worth duty to make it happened? And as I've said before Lou, I want a good deal not a fast deal.

Understood, I'm just more asking along the lines of, is it even in the realm of possibility versus --

I think you're slower with the realm of possibilities for something to happen at 2017.

Okay and then a last question, I will jump in the queue is just, maybe if you can provide some more color, seeing that you've been in this industry for so long on the significance of Plug & Play. For instance, if you were at John's Inc still and you saw this type of product with all its benefits introduced. What would be the response from a competitive stand point?

I'd license it. I think after it -- also I think I'd be concerned about it. But here is the broader point, other companies can replicate the ability to retrofit a burner mechanically, you know what I'm saying, you unplug it, you stick the next one in. But those burners won't have unique disruptive capability of ClearSign; and in a lot of cases, the refinery in Texas is the perfect example. The reason that they are putting in our burners and the reason that Plug & Play is exciting for them, as they have an existing cap and heater here with six burners. And they want to be able to take them out one burner at a time, put other burners in and eliminate the problem they have now with the six burners tend to have flame intercepting and overlapping. So, they call it burner to burner interference and flame at entry. So, our ability to solve that problem uniquely to our technology is really the biggest advantage. The mechanical ability to just replace the burner on fly is something that can be replicated by others and might exist in different places. But back to your question if I see technology like this and I was back in at my formal company I would say well Wi-Fi city whole. They want to license to technology and I would now license it.

Hi, Steve, well maybe a between questions here -- you've raised the point that I actually saw a question on Seeking Alpha few weeks ago. They were wondering about how the Plug & Play can be interchanged, installed while the process here to continue to work maybe we you would like to explain them?

That always depends on the safe practice operating conditions of the refinery itself. But you have to do it with the certain amount of caution, but it's certainly possible to disconnect the gas lines, unbolt burner drop the burner at bottom of the heater. And then put the Plug & Play burner back in the original state connect to gas lines and start the burner.

So another words, if a process to this working with six burners, you simply pull this one while the other five are operating. So, you don’t shut down the process.

And what happens in the fields today is that they have failure of an existing burner. They might shutdown that burner and remove it from the heater even if they don’t replace it with another burner. They just take it out send it repair shade and then somebody puts new refractory or new tips or something in it. And then later on they will put it back in the heater. So that type of replacement on the fly of capability is not something that solely unique to what we do, something that people do.

Thank you. The next question comes from David Brown with Seeking Alpha. Please go ahead.

My question is about the licensing the two companies, I am not sure if you don’t want to give me a whole lot of color on that, but I was wondering if you could tell me or maybe what vertical that was and as I know that boiler space is something that the Company has mentioned quite a bit as far as warning to license or is this a different vertical or more than one vertical?

I don’t know that you want a comment on what vertical market would be involved in a license. I think the message here is we have been approached by two separate combustion companies of that licensing our technology. And we are wedding those possibilities as we speak. And both of these companies are actually capable of licensing of variety of technologies for different verticals, refinery boiler and in some cases enclosed ground flare. So the Company themselves would likely have interest in all three of four verticals. And we would have to look at that in terms of the specificity around what exactly they are looking for not only in terms of the market but geographically where they are and what that would mean to some other activities we have going on. For example, if somebody would come in tomorrow and say, boy we'd really love to license your technology for a large and once through steam generators, we think you got great technology. They'd be absolutely right, but we made a major inroad into that industry. We have a great reputation with all the major once through steam generators not only in the U.S. as we talked about, but we've also had some really good success in Western Canada as we've reported. So that would be an area where it probably wouldn’t even be in our best interest to pursue that at this point.

And just a quick follow-up on the Plug & Play, so I just was want to making sure that I'm understanding the comments thus far. It sounds like you have that going into the Texas company within the next, can't remember that timeframe you said, but the next several months and --

Yes, I said the next quarter.

Okay, the next quarter. And then it has to be approved in the field basically, you’re going to be vetting it in your own company headquarters in your own equipment first. And then, so what would the timeframe from when approximate of course from when they get it installed and what kind of testing and how long will -- could that roughly take to --

I don't know for sure, but we've certainly tested for several weeks that product before we're going to ship it. So unless there's some mysterious situation in Texas that we don't understand that burner's going to get installed and it's going to work right out of the shoe. So it wouldn’t surprise me if they in 30 days say, great it works fine. But by the same token you know I don't know, I mean they might decide hey let's try it for six months, I would be surprised we're under the impression they really need to get this in and operating so my bet if you're asking me to bet, I'd bet 30 days from the time we install it, they'd be ready to go, but as you know I can't really say.

David, this is Jim Harmon. I guess I talked into that, that I did encourage the as much as we can get away with, with that particular refinery distressed asset, as much as possible. We run another a whole variety of conditions so that we can -- because each refineries has got its own unique conditions, not the least of which is the fuel mix that they have, we'd like to have as much vetting of it as possible, so we can consider the applications for all kinds of other refineries. I suppose the first one we do, they are the refineries owned by this particular refiner and try to expand it from there so you know we’ll just have to see how far we can push this and balance that with them wanting the cost of rating refineries.

I think they'll put it in and fairly quickly as I said they'll say yes this works, the question then really that I'm asking and the people are asking is when are they going to give you the order for five or six or 10 more.

[Operator Instructions] Our next question comes from Bob Meeder with UBS Financial. Please go ahead.

Hi guys, a couple of questions. First of all, you've been approached you said by two separate combustion companies. Are these domestic companies with an international presence that can take you overseas?

One is a global company they recall themselves with opportunities and take us overseas. And the other company is a foreign company with global reach also.

Okay. And you said you got 10 installations and you expect to have another 10 installations installed in the next 10 months. Did I get that right or --

That’s absolutely correct. That’s exactly what I said.

Okay, so I guess. So you've got 10 installations in the last, I'd say 18 months or so and you're only expecting to do another 10 installations in the next 10 months. Last year you did 10 installations, is that correct?

In the last 30 months, we did 10 installations. And then in 10 month, I expect to do another 10.

How may did you do in 2016?

I got to think about that, in the last thirty months, certainly 2016.

We've have recorded sale on five installations. Prior to that, we were doing the more on a, if you're on a research basis. So, not necessarily as many, meaning you got to listen to this call when you say that we can expect to have at least 10 installations. I know we may surprise, more than 10.

I understand, but that’s roughly double the installations you had in 2016?

It's doubled the installations in the third time.

And did you circumstance story end up -- I'm slow today at least. So, did you have five installations in 2016? Did you install five units in the 2016?

Where we have recorded revenue, that is correct.

Yes, that’s probably right.

Okay and this year you're going to have at least 10?

That’s our conjuncture, yes.

Okay. Are you marketing Plug & Play yet or you’re going to wait a couple of quarters to its installed and running before you got market this?

We're not marketing and in fact we did send photograph to one of the large shape magazines, who want to do some kind of a feature on the product. I'm not sure what the timing on that is, but the answer is we're out marketing. And probably more importantly people are calling us because they are interested in it.

Okay. And as you look out over the next 18 months, where do you see the greatest revenue opportunity? I mean is it one through steam? Is it packaged boilers? Is that flares? Where do you really see that the next 12 to 18 months revenue opportunity?

Well, I'd say because there is a momentum we've developed in the OTSG, the once-through steam generators market and because there is a oil price system to become in that and people are now talking about, people in Western Canada are talking about, one of the large producers talking about the 14% increase in their output. It would likely be once through steam generators and probably second there will be refinery, because we're still on that more of an embryonic state with respect to the packaged boiler product. But to give you a fair answer it could be any or all those.

Bob, this is Jim. I would probably handicap that because I let this kind of the way I work in my world is being, my best guess would be refinery, because of the anticipated success of the Plug & Play, however that’s going to be highly depended upon, how this first installation goes, what kind of field test result we get. If what we expect my personal expectations will be over the next 18 months I would expect that to be much more significant.

What I haven’t even talked about because we haven’t talked about it is there is still wildcard opportunity that there will be other insurance of the large enclosed ground flares.

Okay. And on the once-through steam generators, for now is that largely a Southern California, Western Canada opportunity?

Yes because that’s where enhanced our recoveries taken place in the North America.

Our next question comes from Steve Emerson with Emerson Investment Group. Please go ahead.

Let me go a little further into best available controlled technology and what a possible timeline for affecting revenues. You did mention that you have a meeting in February and your best gas is August you might designated best available technology I assume that’s California or Southern California. If this happens, first give a time range around that in your best gas? One would it result in revenues, descent revenues, and how should this opportunity ramp up?

Well, you are saying let's assume that something like that happens in August of this year as we kind of predict?

Yes.

And then when there will be revenue as a result of it. I mean --

No, your fast experience in this industry and how quickly would your gas it could give you sizable revenues from this opportunity?

Yes, I think that to actually see an order and an invoice. You're still looking at several months after August because you have to get the order, shift the order and sold the equipment. And that would constitute revenues in my view in sales. So, you are still looking at some six months plus period after August, but I want to say this, people aren’t waiting for this BAC designation. We have clients in Central California, Western Canada and Southern California who fully expect and have considered us the best solution to their regulatory slash environmental problem that are working on funding projects in parallel to this designation. So I don’t want to imply that the clock starts in August when this designation is received, the clock has been running in parallel along.

Our next question comes from Robert Hoffman with Princeton Opportunity Management. Please go ahead.

I had to step away for a little bit part of the Q&A, so if somebody of you've already answer this. But I was trying was to get a handle on, how you structure a licensing deal versus, if you were to supply the product yourself? In other words, if you look at it in and say it well if we were to put in our own Duplex system, we get a freaking number $250,000. So, we want to effectively get $250,000 or is that -- and then I guess parallel question, is how much work do you guys have to put in post deal? I mean do you have supply, do anything or is it purely a license, like a royalty sort of things? So that in my example the 250,000, you're just really looking to grow 100 in the quarter because that’s what you're and such a gross margin are. Can you give us ahead of some sense of how you aim?

Let me give you a very overly simplistic, a short answer to this extremely complex question. What we would typically do and your example of $250 sale, I'm sorry; $250,000 sale is we would get some percentage of the sale price. And the reason for that is, we wouldn’t be making the product, the licensor would be making the product. So all the cost of goods sold, all the material, all the labors would be fundamentally there and they would also have a large portion of the sales distribution and after sales component of that. So in the simple terms the licensing percentage tends to be 5% or 10% of the sale typically, but the cost transference to the licensors is significant. Again the material, labor, assembly, selling effort all go on to the licensor, and that’s why you have to pick at the licensor. Now, we've taken and this is a longer conversation, I would love to have with you separate from this call, but we've taken strategic approach with respect licenses that's based on splitting the value created for our customers. So forgetting about the sale value for a second, if your product saves the customer a $100,000, how much should the licensor get of that $100,000, how much should we get and how much do we give the customers an incentive to buy our product.

Right, well it's also similar to, if you’re selling that prepackaged boiler with your technology, isn’t that maybe an instance where that boiler is then going to be at the top of peoples list where as whoever is making that boiler without your technology, wouldn’t necessarily be at the top of the list? So, you’re going to get some premium or I know you got any premium or benefit from that sale being easier because it has your technology?

I mean the answer to that is, yes, absolutely. But again I'm trying to do your question justice. I think in simple terms, you take $250,000 sale price and deal with their percentage, the comment that you made which is valid is, most of the cost associated with the product go to licensor. So the licensing can be a very, very, very lucrative transaction, particularly when you're trying to scale a small technology based company because we wouldn’t have to build the kind of infrastructure, even modest infrastructure given our current asset like model that would be required to be a $100 million company. We could do that much faster and much more continually as a license then as a manufacturing company. But that said our philosophy towards licensing fees in general is determining the value created for the end user and negotiating split and that value created. And we actually and use your example of the boiler OEM, we actually set down and had a frame work agreement with one specific boiler OEM before this particular company and frankly become available for sale and the deal kind of evaporated. But that idea is a very solid idea because what happens to a boiler company, who's arguably using our technology, is we make their boiler more valuable. So, there is a leverage effect in our technology on a whole product. And that’s why we again went back to the -- how do we split the value created because we don’t want 10% of a burner. We want 10% of the boiler transaction.

Rob, this is Jim Harmon. I'd add to that that what are the fundamental things to understand and our particular pricing model is that. Just about everybody else in the industry figures out how much is their item cost, and then put some sort of modest profit on top of that. And then say, can my -- will my customers be willing to pay that amount? Whereas we go the complete opposite direction of, what’s the value to the end user and what kind of price do we get from that, because our cost of sales are so much less. This is kind of a foreign concept to some of these guys. But that’s where when he is referring to, we're looking at what value we're bringing to that the new product and what to put that, they get the key, what they bring to the table, we get to get our unreasonable fair share of what we bring to the table to make the joke about the whole thing. And then we will both benefit from the increase volume, hopefully of a product that has not been in the market. So, it’s a decidedly different sort of approach then the industry is used to, they used to selling about the pound.

One quick question on those and I'm driving, so can't swipe the actual numbers. But the kind of the one-off costs, so are those in the G&A expenses or they partly in the R&D expenses?

R&D.

So, all of in New Year side have an increase in R&D expense and then you have the right-off its pattern and then maybe I guess can't remember what the third one like in whatever it was, but it was about 1 million bucks. So is that all in that R&D figure that we see?

Yes. Bob, being a safety guy at heart, I'm concerned that why you're having this wonderful conversation was actually going to crash your car, I'm going to feel terrible. So, could you just pull over and talk to us.

No, I think I'm good, I'll call you later or later but, I'm good thank you.

Feel free to call us later Rob and be safe.

Our next question comes from Jason Cavalier who is a private investor. Please go ahead.

Hi, Steve, couple of questions. So and I'm not sure who of the two want to answer this, but you ended 2016 with 355,000 working capital. I mean cash equivalent at a little over $1 million, is the gap there because of received revenues that you were not able to count so to speak in the balance sheet?

The gap between working capital and cash on hand, is that your question?

Yes.

Well. Look, working capital is the current asset minus current liability, so there is certainly different calculation. I think if you look at the accruals you will see that I don’t have 10-K right in front of me I'll grab it but closely account sustainable in the accrual compensation.

And you had mentioned, you talked a little bit about share count and how the share count went out for couple of reasons, one of which was and this is what I wasn’t sure. Did officers forego salary to receive shares or was the piece around officer compensation having to do with just option grants?

Actually, all those officers are compensated with three levels of compensation. One is salary. The other is short-term cash incentive, and the other is long term stock and stock option incentive. The stock credit officers were in lieu of the short-term cash incentive, cash bonus incentive. In addition to that, our Directors even direct made office, but let me give you a more completed answer. Our Directors by contracts are compensated half with cash half with stock. In the speared of eating their own cooking, they decided to take all of their compensation in stock. The other thing to note is that this stock compensation comes with the one year vesting period associated with the stock grant. So, it's significantly different than cash compensation.

And there was some discussion earlier in the call about the five units that were completed in '16 where you realized revenue. I just want to clarify is did I hear that correctly?

We've recognized revenue that’s correct.

And so that total revenue as relates to AK as $621,000?

Correct.

And you are going to do -- you believe with some level of certainty that there is, 10 orders out there going into 2017?

Correct.

So could we just do simple math and take the 621 and multiplied by 2 to get to the ten that get a sense of what kind of revenue you may recognize from those 10 orders?

Well, I'll be slightly forecast and tell you, you could do simple math, but I wouldn’t and I am really not in the position to write any additional inside to you as what the unit prices are on each of these.

Yes, we are not trying to be clever, but we don’t know what we have -- we certainly are talking, again just to get step back. We are talking about the potential we get another 10 orders. And we obviously have more than 10 outstanding proposals to get 10 orders. And we don’t know what mix of those outstanding proposals will be realized with order, so we don’t necessarily know whether they are going to be large flares or small burners. So it would be -- and I guess there is certain simplicity and allegiance to your math, but in probably wouldn’t necessarily be accurate.

Okay and in prior calls you know there was some commentary around super majors and making progress. And there was a large super major I think at Sothern California that had a consulting partner that you all were engaged with. Can you shed some light on where those times of conversations are going? And what if anything is moved along with the current relationship and possibly others that you anticipate?

I think we might be continuing in super majors and this company in Southern California, we were speaking up specifically was Tesoro. Tesoro has, I think, actually seven refineries in Southern California. They had -- we had announced this a year or so ago, they had paid ClearSign to do an engineering study with them to look at doing a demonstration site at one of their refineries to validate the technology that process is still ongoing. We are still waiting for Tesoro to identify what size, what's either they want to take out at service, and let us into their refinery to do that. We have had continuing dialogue with Tesoro specifically, and in parallel some discussions with a company called Norton Engineering that you might have seen us on our website. They did a fairly comprehensive analysis of the economic value of ClearSign technology versus selective catalytic reduction. And of course that’s one of the decisions that Tesoro has to go through is do they use burners and they use SCRs. And I think, if you read the work that was done by the Norton Engineering Group. The economics clearly favor our burner technology and that of course has gotten some interest in the South Coast regulators, separate independent of Tesoro. So those three forces are coming together, but the Company specifically we're talking about is Sothern California was Tesoro. And to the best of our knowledge, they are still intending to try our burner technology in one of their refineries although they have not again identified which process heater they want to take out a service to give us access to it. And of course, they were on a refinery they have got their own business to take care of. So, we tend to have to wait for them to tell us when we go we go, but look ready.

Our next question comes from Richard Deutsch with National Securities. Please go ahead.

You guys have some of the most frustrating calls I have never been on because you get lost in the weeds. You have a technology that’s basically transformational and could be adopted by the widest array of industry I've seen. Pretty much similar to when the jet engine was invented and ultimately it replaced all sorts of other aircraft engine, and you get stuck talking about which plane and when it's going to be installed. I wish you extend a little more time on the real value driver, which is the fact that you have invented patented and now have, not only field tested, but commercially sold transformational technology, not only in pollution control, but also in safety which actually is number is one in most people's mind anyway. So, I kind of want to bring you into that, and so investors get your real idea what we are talking about here. Just the industries that are currently at risk of being absolute by you guys are the full gas recirculation technology and the selective catalytic and non-catalytic converter technologies, which are in the tens and hundreds of millions of dollars worldwide. That might just completely go away through the adoption of your technology. You're already said to be a recognized as best available control technology as Ms. Emerson and some other people are pointed out. And that is the housekeeping shield that does allow the licensing and adoption of this worldwide. So, I just wanted to get on course here with lie on buying it. I don’t care about 10 burners being sold this year. What I do care about is the overall direction you're going and how soon you're going to get there? So do want to -- and there are so many questions because you're already doing so incredibly well. Getting this technology, not only in people have to understand also, it's just proving that it's durable and reliable. Just like I wouldn’t want to be the first guy in an airline company to put jet engines in, I wouldn’t want to be the last because nobody would want to get on my propellers driven airplane and jet there?

Rick, excuse me for a second. I think you make a good point that’s why I think if you go to our website. There is quite a good comprehensive independent research report by a consultant on the economics of our technology versus SCR and also about the safety and operability of our technology. But with -- and you know when I appreciate your comments, but do you have a specific question you want me to answer.

Yes, I do. I just wanted to bring this back on course. So, I want to talk about the licensing. First of all, do you have an investment banker or outside party that is representing you or soliciting on your behalf?

Well, our current investment banker is the Company that just completed the rights offerings is MDB Capital, who you're familiar with. But if your question is, do we have an investment banker engage in discussions with potential license source? The answer is no.

Okay. Then of course it is on, on these license agreements. Do they cover new manufacture because that’s almost never brought up in anything I've ever heard, and I would think that the opportunity to sell a new boiler and on worldwide basis that's a gigantic market. Boilers that not only could be safer, more efficient, pollution control, but also smaller and lighter, so are your license agreements that you're envisioning discussing new or retrofit or both new and retrofit? And the other part, are these envision with the exclusive licenses or are they not exclusive?

Well, in not in any particular order, ideally the license was the right part that will include both the new and retrofit. And as previously stated at some other occasions, the retrofit market in generally is vastly larger than the new market. There is 300,000 plus packaged boilers in the United State in operation and maybe there is a couple of hundred new one sold every year. In China there is obviously 500,000 or 600,000 packaged boilers installed. So, the installed based rick is much larger. So we would want to have the license agreement likely covered both new and existing equipment. It's also difficult to separate license agreement when you show it to somebody how to do something on a new boiler it's tough to not have him do it on a retrofit basis.

And just one other question, you did mention that you have got this Canadian oil sands company that’s already accepted your engineering drawings and actually paid for them during the recent quarter. Can you tell us now what are they getting mechanism is for the decision to the first installed?

Yes, they have got to pick a site and release the project. We understand from the people we spoken to there that they have gotten significant funding approval for major capital investment in those oil sands in excess of a $1 billion obviously that doesn’t and just include our equipment includes the total investment. And that they have announced publicly that they plan to dramatically increase their out foot and of course that would evolve to some degree using our equipment. But to answer your questions specifically we don’t have an exact date to start the physical retrofit in installation of our technology. Although we do know what site they are looking it doing. We know the location of sites. But if I told you the locations of the sites then I would indirectly probably reveal who the customer is, and as I said earlier, the customer has asked us not to disclose their name.

Let me just finish with one question. How confident are you that you are actually going to move forward with this year?

Well, I am highly confident because that’s what I said.

Thank you. This concludes our question and answer session. And with that we will now end the conference. Thank you for attending today's presentation. You may now disconnect.