ClearSign Combustion Corporation (NASDAQ:CLIR)
Q2 2014 Results Earnings Conference Call
August 12, 2014 04:30 PM ET
Rick Rutkowski - Chief Executive Officer
Jim Harmon - Chief Financial Officer
Andy Lee - SVP, Business Development
Joe Colannino - Chief Technology Officer
Jim McIlree - Chardan Capital
Good afternoon and welcome to the ClearSign Second Quarter Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions).
Before we get started, during the course of this conference call, the Company will be making 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, objections rather of management for future operations, any statements concerning proposed new products, any statements regarding expectations for the success of our products in the U.S. and international markets; the outcome of product research and development; any statements regarding future economic conditions or performance, statements or 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 in the reports we filed 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’d 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 called 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’ll jump right into it.
One quick note you will probably notice that we mentioned 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 is actually signed sometime ago about a week and 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 are waiting for approval on it, the identity of our perspective customer in this regard and it’s a really very exciting opportunity. So I wanted to just clarify that that is not holding that is new news but there will be more clarification of that to come. Go ahead Jim.
Thank you, I’ll be real brief as our quarter was pretty simple. We recorded a loss for the quarter but $1,626,000, there is a couple of hundred thousand dollars more than the same quarter in 2013. Our R&D expenses went up about $20,000, that’s 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.
G&A side of things are expected to increased by $200,000, so that’s reflecting our increased expenditures and marketing in business development, which moves back to exactly what Rick was referring to also as well as a number of other initiatives that he’ll speak to.
Lastly, I’ll point out that our cash at the end of the quarter $4.75 million dollars which is enough to bring us into early 2016 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’d like to start and talk about 2014 in context of 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 of quarters being about these site demonstrations and tests. And it won’t strictly be the case, but it’s instructive to think of this in terms of sort of ceding 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. We will see us do and endeavor to do similar things in the refinery space and the package boiler domain and in some other applications as one example is pipeline here. We’ve got a major oil company talking to us about some knocks and CO problems that they’re having with the [cabin] heaters which are positioned every several miles on pipeline.
California is a place that is right for these kinds of demonstration opportunities, partly because of if not principally because of very demanding regulatory environment that exists there. It’s also worked well for us in terms of the logistical convenience of being able to operate reasonably close to home. And in fact within san San Joaquin Valley, I anticipate that we’ll see several of these developed. We have in that context an early group of distribution reseller partners forming led by some guys that were actually very, very excited about as well as some formative partnerships with engineering and construction firms that we think can be an important strategically and actually help extend that 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, if you come back and sort of take it down to a level of detail here, I refer to in sort of the first paragraph of the quote here, what I call the name tense level of activity in market and business development. And I want to emphatically underscore that this is the case. So, what we’ve seen happened 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 but it is really beginning to take hold. We’re seeing awareness reach the level that we had 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 lead.
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’s tremendously encouraging and of course the process is to validate the technology in the field, demonstrate it in the field and in the best case, begin taking over and installing systems as quickly as we can.
I think, I mentioned while we’re sort of up at the high level here, for this other point and I think I may have mentioned this previously, we’ll be getting a better feel as we go here for what the cycle time looks like from the time we book in order to time we install and build, it’s likely to vary there are some cases, especially some of these early adopter cases where they may actually be some level of urgency, driven by regulatory compliance need to get systems installed.
But one of the things where we’re 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 billings 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 longer term is that in the best case, we have a business model where revenue is being build against a backlog. And we think it may be possible to build pretty substantial backlog if early indications are good.
So, I do expect it, so for example by the next call that we have with you the third quarter call in October sometime or early November that we’ll be able to provide a greater visibility on what that 2015 rollout looks like and what we think some bookings and billings 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 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 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 maybe suboptimal in addition to the handling hazardous materials it appears that SCR is may in fact be promoting the creation of ultra-fine particulate matter as part of the catalytic process. So we’re really encouraged and that’s before you get to the notion that in refinery process either 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 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 for flame pattern derating of heaters more frequent coking and therefore more frequent maintenance and overall reduced capacity. So we have done a preliminary analysis in conjunction with some fired heater specialist from some large oil companies we’ll 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’s really again unprecedented the idea that it is possible to have ultra Ultra-Low NOx emission 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 or (inaudible) more to a scenario with a duplex where the flame height is likely to be 6 inches or less, so that’s basically about the height of the 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’s really advantageous in terms of how we view value creation and the franchise. The Duplex is ideally suited for retrofit, because it seem to be done for surgically, it’s such within the furnace dimensions or heater dimensions, this is another big problem for selective catalytic reduction systems, they require quite a bit of real estate in some cases refineries 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 I, we anticipate at this point not could be mid-way September it looks like that’s what we’re on track with, we’ve got our sub-contracts one of them in place, another one coming to place to install that system, those should in place in a few days, permitting is looking pretty good.
So right now we’re on track for kind of a mid late September installed that may slip into early part of October, but we’re obviously focused on getting that done as soon as we possibly can. The point that I want to really make so is we ought to take somewhere in the neighborhood of three to four days to actually affect the installation day to shut the system down and quote off a day or two to actually complete the installation and finetune the positioning at the tile and then a day or two to bring it back online.
So these can be done quickly, surgically that’s a very important future for retrofit technology that downtime can be minimized and indeed another way in which the Duplex sort of answers in mail. So we think some 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 boost to the level of awareness that we’re getting. I want to emphasis that this insulation are being important for two reasons. One of which is, clearly that it will be the first (inaudible) demonstrated system on a commercial site in a live application it would also be about a closer to a 10x scale up from what we’ve done internally here. And as a consequence of that you’ll now be able to address the great bulk of certainly the process heater market which began sort of 1 million to 15 million Btu sort of range through really all of steam generation market for packaged boilers as well as OTSGs which run anywhere small packaged boilers might be 3 million Btus per hour up to 40 million Btus per hour so some larger. And that’s sort of the lower end of the OTSG space.
As you get up into Alberta some of these things are 200 million, 250 million Btu per hour. That’s provocative because at about 50 million Btus per hour, roughly an 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’re starting to get into the utility domain. We think the Duplex was one of the other thing you may see come on to the horizon later this year in addition to our work with OTSG’s, refiner heaters and packaged boilers, coal to natural gas conversions for utilities continued to be performed and the Duplex is a very we think potentially ideal solution to solve the problems of lost radiance and heat transfer that is most common and extensive problem associated with coal to 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’s really just combination of features that makes the Duplex, so powerful and really game changing in the space.
Joe presented those results at the Air and Waste Management Association’s Annual Meeting in June. And quickly from that ensued discussions with several large oil companies in the U.S. and Canada. We’ve begun to growing a 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 it’s quite doable for us. We’ve got some very capable partners aligning with us. We have engineering resources that we’ve been educating and training about the technology. So they’ll 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 demonstration and refinery, pipeline heaters and other kinds of applications.
It’s always difficult to prognosticate with total precision but we’re 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 and indeed Joe’s presentation at Air and 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’ve discussed before as a launch opportunity because it’s 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 they’re somewhere closer to 1,000 in California. And then there are more larger units in Alberta. The regulations are not as stringent in Alberta but the desire to eliminate flue gas recirculation is really common to all markets.
Jeff recently presented at the Council of Industrial Boiler Operators couple of weeks ago. And one of the interesting things that came out of that, one of the key note speakers at the conference was an EPA served for the Federal Emissions Regulations and he pulled aside after Jeff’s presentation and mentioned to him that they’re actually contemplating following suite with some of the regulatory efforts that we see in California in introducing more aggressive NOx standards nationwide.
So that’s encouraging to us certainly. And again I think what’s powerful about the ClearSign solution and unusual and really unprecedented in some ways is the degree to which we can align the goals of environmental regulators and air quality generally speaking with the incentives of operators to minimize cost and maximize system capacity and profit. And that’s what’s so powerful about this piece of technology is the fact that we can achieve these kinds of low, low, low environment 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 a macro scale how do we improve air quality because it’s 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 U.S. with Chinese companies and officials who have visited us here. We’re talking to large engineering construction firms, boiler manufactures, waste energy companies, several of these companies have asked for proposals and in terms of collaboration and I’ve indicated a strong interest in pursuing collaborative initiative.
So I think we may in fact, beyond track as we’ve 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’re going to turn it over to questions, because I’m sure there are some, I hope there are some. But let me just add an emphasis that the model here with respect to ones 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 in partnering with both large and small engineering construction firms to effect 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 be. We have had commitments from these folks for a while, we’ve just begin receiving this, we’ve sign documentation in recent days and there is more on the way here though. So that will have an 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 to that is although more important where natural gas is so expensive. It’s also important to China to try and maintain solid fuels waste energy and coal in particular as viable candidate longer term. And so there is considerable interest from some larger research institutions and large companies including utilities and helping to support the development and the deployment of both technologies.
In addition to I mentioned coal to natural gas conversions maybe something that you’ll see us talk about more as we get through into third and fourth quarter. That dovetails nicely with those larger steam generating units in Alberta and indeed in the Chinese market they’re converting industrial scale systems from coal to natural gas. Those are principally going to be water to boilers. They do use fire tube gas fired boilers for things like hotels and apartments complexes and things of that nature today, but in the industry there a lot of well fired water tube boilers that today coal that are being shifted over to natural gas. Those are really good candidates for Duplex technology and indeed [alleges] to some opportunities that we’re looking at here for early demonstration.
We have some longer term initiatives in [F1] fracking where uniform heat distribution is very high value feature, some tremendous intellectual property around that domain and on the intellectual property trends, 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’re prioritizing as we push in through the prosecution process as well.
As I mentioned, I ask Andy to join us just to sort of comment a little bit on the intensity of activity that we’ve seen, but it’s only he can add to sort of color of what we’re seeing – and depth out of California in particular.
Well as you can probably surmise the industry down there, especially the oil refining and what’s called the EOR or enhanced oil recovery market is, it’s very large financially, but very small from a personal standpoint, when you get thought leaders that they get behind your product, your project, your technology, it can talk and we’ve been the beneficiaries of that networking and so doors are flown open that have previously been closed.
So, we’re very pleased with the pace. And we’re getting calls on quite a regular basis and so we’re quite busy, I joked to you today that we need to get a plane that we can fly directly in big for sale because I think we’re going to be doing a lot of work there.
So, we promised Andy that we’d be in the market for an ultra-light if anyone knows of what good a use to on our maybe vendors to hang a lot of in this trap, probably you will tell your on to. So, but it is a great opportunity, because you have really an end to end representation of the oil and gas industry with the enhanced oil recovery being what folks referred 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’s a great reference point from which to grow. Maybe you can characterize just without saying too much the type of conversations that you’re having one that even I will particularly say about, Andy, was the engineering and construction firm one of the -- this firm is going to be working with us on the installation of this Once Through Steam Generator but they’re excited about their technology more broadly speaking and they’re a big organization and they’re a part of a much bigger global organization.
Yes. They are $1.3 billion unit of $12 billion construction firm and they obviously work quite a lot new oil patches primarily in the Bakken and Colorado, obviously in (inaudible) Valley in Alberta. And I related to you that they’ve seen a lot of technologies created to their company headquarters and they had a division took me aside as we were leaving and brought me into his office and say what we’re firmly behind as we’ve seen a lot of things brought through here this looks like a real game changer for us so we’re on your side and we’re going to be really doing where we can to help you on this initial install. So that was an incredibly gratifying thing here that these guys are very seasoned 30 years or 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 the 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 the parent company.
We think mission to take their CEO to take it to the CEO of Exxon Mobile and others so that was gratifying.
So and I think again on a point so it’s not as an individual or isolated example we believe we are going to see the same kind of dynamic repeated and we think that that’s how we can potentially over the next 12 or 18 and 24 months begin to scale this business very rapidly indeed and circle back to that idea of beginning to develop a backlog through 2015 what we hope can be even a 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 materials class is quite well and because we do have partners who are willing to help us get into the market in this way so we were able to cut some advantageous deals we think we will be able to get into through this demonstrate phase and to the extent that we need to be aggressive on pricing or we need to share costs or underwrite costs through doing installations where they have high. 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 was down taking measurements in the last couple of days meeting with the companies that supplying the logic controllers for the burners. And they said gosh can I get just 20% of the business that you guys might do.
So the excitement is there and it’s spreading and we share this with you, because it is what helps drive our enthusiasm. There is a lot more that we’re not showing yet, because it’s just mature and we want to continue to same track with expectations. But we feel very good about our ability to do not just one, but probably several demonstration sides. And I think there is a strong possibility that at least 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’re talking to a large, they’re talking and sort of a global view, because we’re not only talking to operator, we’re talking to seeing environmental officers, so it’s a very strategic view about how the technology might be deployed more broadly across their operations as we go in the (inaudible) so the different system types and when they might have downtime and where that might afford and opportunity for installation and what this specific nature of the system is.
And so the good news is that we’re getting to that level of detail of actually beginning to sort of three logistics how we get the technology into individual 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 for two questions.
Yes, thank you. We’ll begin the question-and-answer session. (Operator Instructions). And the first question comes from Jim McIlree from Chardan Capital.
Jim McIlree - Chardan Capital
Jim McIlree - Chardan Capital
Hey, good afternoon. I’d like to ask just a couple of questions. So, it’s sounds like -- well, congratulations first on the once-through steam generator agreement. And it sounds like you’re 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 this one before you start doing something else? And that’s just from personnel perspective?
Jim McIlree - Chardan Capital
If I can, I would like ask the second one as well. Is reducing NOx enough; are there other things that end users want to reduce as well? And I am just going to step-up tox, mercury DOCs is just reducing NOx enough or do they need something that’s going to reduce the whole suite of things that they need to get rid of?
Okay. I’ll take them in the order you gave to me. The bandwidth question, I mean this is one of the things that’s really exciting to us about some of the partnerships that we’re forming here. In one case, we’re very close and have been very actively engaged with a small engineering company that has a staff of 17. These are very comped and very experienced combustion engineers, lots of field experience in this particular geography or basin in Bakers Field. So, the way the model works is we source the tile and the fixturing, that’s really done in a pretty virtualized way, it’s a pretty supply chain on the backside. And then as we go of course we’re training them as we speak. In some ways, they’ve been exposed to the technology, they understand the technology, but we’ll get some hands-on experience.
So, as we go through this first handful, we’ll be really hands-on, but these guys are more than capable of carrying the torch for us as we pass the button to them given the level of experience that they have. And again the thing around the Duplex installation and so on is such that these are, we think can effect that hand up pretty easily.
We’re blessed and that our Chief Technology Officer in addition to having significant combustion industry experience and expertise and a stronger reputation in that regard. He is also a knowledge management professional. And so, when it comes to transferring, documenting the knowledge base, institutionalizing the knowledge base and training for this kind of education of our channel partners, I think we’re well equipped to do that.
So, it’s a good question, it’s the great question, it’s certainly a question we ask ourselves. We actually have been asked this question by some prospective customers recent days and there are others like that. So when we talk about sort of building this channel, it’s in effect as if we were to hire a group of field engineers, except instead of hiring them, we’ll 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’m guessing it must be a few thousand or so…
Well just in Bakers Field it’s over 400.
So, over 400 engineers…
Installation and combustion experts.
Right in Bakers Field. They actually build and service these once-through steam generators. That’s how we met these guys that we’re actually referring to as by our customers. So it’s a great marriage because they know the individual systems very well, have been working on 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’s 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 the resellers of the technology as well, and in those kinds of discussions.
With respect to -- so let me make sure did that speak to your first question?
Jim McIlree - Chardan Capital
Yes, that was great. Thank you.
Okay. With respect to your second question, when it comes to this type of system refinery process heaters, package boilers, really anything that you have natural gas or some mix of natural gas from refinery because NOx is overwhelmingly the primary culprit. As you start to get into -- I mean they have multiple compounds or an issue for the oil and gas industry, typically way down stream at like service stations and things of that nature and in other kinds but in the kinds of operations that we are talking, we are going -- what we are competing with are NOx control solution, selective 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, regulations on all those criteria pollutants where you tend to get into the whole array of NOx, SOx, Mercury, dioxins, particulate matter ultra find particulate matter that solid fuels because in the chemistry of pull or biomass, you tend to have these complex chemistries that you are going to evolve multiple species of pollutants. And that’s one of the things that 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 as we get to these extremely low levels of NOx and we can begin to talk in terms of near zero Nox emission we think based on some of things we have seen internally. That’s valuable not only to the end users of these systems, the refiners, the operators of packaged boilers which are some hospitals to universities to food processing plants but also to the suppliers of natural gas meaning both of the guys who the explorer for that fuel and in fact are interestingly our OTSG operator as 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 system, they tend to be pretty active at funding demonstrations like this and more certainly have an active and ongoing dialogue with them.
So our work with the ECC, we’ll focus on a broader range of criteria pollutants, I guess let me backup NOx CO, because historically one of the challenges even with natural gas is that we few push NOx down you often do it at the expense of increasing carbon monoxide and we’re of course operating at near zero levels of CO most of the time when we refer to the Duplex technology at zero point something over few parts per million of CO.
So that will always be important but that sort of given against natural gas. Our work with ECC, you’ll hear us talk about particulate matter and ultra-fine particulate matter as well as NOx and SOx. And it’s important to understand NOx and gas-fired systems is purely what we call thermal NOx where it’s the nitrogen from the air being fused with oxygen at high temperature, it’s an intermediate. As we get into solid fuels you have both kinds, you have a fuel bound NOx nitrogen and the fuel, those bound oxygen and then also nitrogen from unithermal NOx. And so ECC, we think we’ll allow us techniques to deal with both or we are going to do some work, there is questions concerned risk associated with about, we’re going to do some work testing the Duplex in a pulverized coal configuration. Because on the one hand maybe it would’ve break the tile, maybe we’d have plug-in concerns, things of that nature. On the other hand we don’t know that for sure because the massive momentum of that pulverized fuel which is like a talcum powder would in many instances potentially be largely dissipated by the time its ignited at the panel. So we sure to answer on that as with we just don’t know, but when you get into multiple criteria pollutants that usually is associated with solid fuels, natural gas is really predominately about NOx and CO. And that’s for us it’s a low hanging fruit and especially given the other features. So, we talked about with the Duplex point shape and our requirement for Flue gas for circulation et cetera.
Okay. Next question comes from [Rishi Jain] with
Hey, Rick can you hear me?
Okay. And so I want to understand how the working groups, I guess, what the understanding is between the members of the working group and you guys? And most importantly is there, are they responding some sort of some portion or all of your R&D together are they contributing money for, it just seems like I am feeling a little bit confused about what exactly is going on with this group?
Okay. It is essentially what it sounds like. It’s a group of people who share a common interest in the industrial combustion of solid fuel. Can you maybe mute your phone just while I am answering and then you can take it off mute.
That will be great. Thanks. So, Thanks. And one thing that’s really important to understand, the industrial scale combustion of solid fuels In the U.S. is very much a niche market, it’s a big market. But in comparison to the market for natural gas combustion, it’s tiny.
So, the big dominant players in combustion space are really all guys who make Low NOx and Ultra-Low NOx burners and NOx controls that’s really very the business is. That’s actually becoming more of the case, because we’ve seen the ascendance in the West of natural gas versus coal, as I mentioned that’s not the case in China. China we’re about 30% coal, 70% natural gas in terms of overall energy, so in China it’s the exact opposite, 80% coal, 20% natural gas.
So, and the importance of coal in the West has declined actually it is an interesting dynamic with some of these engineering construction firms where they have seen a decline in their business and in from two points, one a reduction in capital spending which is changing, that’s another very bullish trend for us, if any of you’ve been following this in the news, you’ll see that the indicators for increased capital spending beginning next year are very bullish.
And the other decline in construction of new coal plants and the conversion of those coal plants for natural gas, it has created some business for them. So, the working group is away to in that environment to 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 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 and in some cases both. In most cases we’ve 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 sets.
So I think, I’ve 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 shaped, and that’s 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 -- solid fuel is far more important in China than in the U.S. In the U.S. solid fuels are overwhelmingly utilized at the utility scale and of course its principally cold. So it’s a combination of cash and in kind contribution 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 were likely join that working group or we may create a separate working group for the Chinese market. We have been invited to setup two demonstration systems in China, one for each technology and we’re actually being quoted heavily by several municipal and provincial governments as well as both state owned and private enterprises over there.
Okay, that’s great. And then I guess the second question is these agreements that are coming up (inaudible) that large sort of 50 million Btu project that you had mentioned, the way and I know you said you released more details so maybe that’s 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 sort of the cash burn and the likelihood of coming to market or up these partnerships how much in partners have (inaudible)?
Yes, well they have got considerable amount of effort in the gamut, the short story is that it’s shared cost, cost sharing exercise they are providing all the expenses of their team, their support and taking their system offline in the fuel and all of that. We are providing our team to them and we’re handling the costs associated with the subcontractors. It’s actually very reasonable cost number, obviously our team is already embedded in our current budget. So it’s well within the scope of our 2014 budget, we’re very cautious about this, we don’t want to penny wise and time foolish, but we are very focused on capital efficiency.
And so weigh very carefully the costs versus a profitability of success and I think if Joe were here, he would tell you that is quite confident of having a success in the scale-up effort. It’s probably a better offline topic, but if you want to begin more in terms of scaling and why we feel this level of confidence, I’m happy to share that with you. But our experience with the Duplex and our prognoses regarding 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 trial bigger. Fortunately and virtually every case the correlation exists within these systems. So in other words within a refinery heater, there is planning a real estate to accommodate those rules with OTSG, there is kind of real estate to accommodate those rules. And package boilers you start to get into more dense configurations, but we still think we’re well within the scale limit. And by the way those are conservative estimates of the scale limit will be reporting more data I think in the bring near future here, because we now have added a low to our furnace internally is going to allow us to put more heat density onto the trial and into our furnace run it up to higher levels of thermal output beyond the 5 million Btus per hour that we demonstrated and also to work with modulating the system to demonstrate turndown, we’re very encouraged by the early indications that we see on turndown. By the and we think that’s going to be yet another feature that distinguishes the Duplex from other Ultra-Low NOx burners is a higher turndown ratio. And that’s before we started dig into (inaudible). So in any case I hope that answered your question.
Yes. Thanks. I’ll jump back in queue.
Thank you. And the next question comes from [Steven Kai] a private investor.
Yes. Jim and Rick can you hear me?
I can. Steve. How are you?
Yes. I am doing all right. One of things you referenced there when you were talking about the reduction of NOx is you’re also mentioning the Ultra-Low carbon monoxide emissions? And the carbon monoxide emission being particularly a product of basic combustion efficiency, can you go into the improvement in energy consumption and several efficiencies that you’re seeing within the Duplex burner?
Yes. Actually I am going to -- Joe just joined us a few minutes ago so I am going to let Joe Colannino make a guest appearance and answer that question for you better than I ever could.
Well, good morning everyone and hello to you Steve.
So, yes, the efficiency is, there is terrible time for efficiency and obviously you’re alluding primarily to combustion efficiency and that’s usually pretty good. As Rick already mentioned sometimes you getting into trouble and just trying squeeze out not to actually inflate your CEO, but there are other efficiency concerns and Steve I know you’re well aware of these which is basically how efficiently you can transfer heat in the radiance section for example. And here we think that there is a market advantage with Duplex technology compared to natural flame because a flame is poor radiator of heat that tells that to somebody who is too close to a fire place. But in fact much better radiator of heat would not be a gas flame but actually a solid surface and that’s why you may notice bricks in front of fire place 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 -- emissivity of a gas flame is very low, the emissivity of our solid surface especially this one with channels in it, is very close to one and it’s nearly a perfect radiator.
So, it transfers heat very efficiently in the radiant section of the combustor or at the furnace. In addition to that, when you keep in mind that we aren’t using flue gas recirculation, 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 premix 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 local company brought in their carbon monoxide expert. And against this better judgment, Joe did a 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’s really where you are maximizing efficiency and versus higher levels of oxygen in the 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’re referring to Steve is carbon monoxide is essentially unburned fuel. So to the extent that you’re getting not only is it harmful pollutant but it’s wasteful. It tends to be small numbers in terms of overall efficiency. And I think Joe’s right to point to the thermal characteristic has 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’re going to get NOx and CO, what that’s telling you is part of the thing is too hot and part of its too cold. And if you push the NOx down by pulling things up and you create CO, then it means you’re at -- you’re burning at lower temperatures and creating the CO. So, we’re now -- as we apply the load to our furnace in the form of the cooling tower, this is one of the other things we’re doing is equipping it with an array of sensors and some infrared imaging capabilities, so that we’ll 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’d likely see some CO emerging in the system.
So, but folks like [Dr. Frank Lock] have noted this as a very significant characteristic, the ability to independently reduce both NOx and CO because they do often correlate inversely.
I am also interested in also the reduction of overall parasitic losses, because you’re talking about, competing against flue gas recirculation systems or package [FDRs] which their own energy penalties to the process as part of the overall reduction of pollutants?
Yes. No, absolutely. In fact, it’s not uncommon at all, even with the existing standard in California and five parts per million to see a combination of a Low NOx burner that gets 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 bid you often are required to put a selective catalytic reduction system on the backend. And you are absolutely right, both of those systems impose a parasitic load flue gas recirculation reduces efficiency in other ways as well. But they also have the problem with selective catalytic reduction of the installation cost and the real estate that’s required and 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 have put out precursors to ultrafine particulate matter which in China especially is a big no-no because they are highly, highly sensitive to anything that would potentially increase emissions of what they call PM2.5 or ultrafine particulate.
So, we think it’s very much a part of the calculus of cost of ownership. And again that’s 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 controlled technologies. And indeed when you then begin to factor in benefits of reduced flame shape for example, we were talking to a mentor 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’ve had to replace their processer tube so often. So flame shape is I think going to be a huge, huge savings for these companies in many cases.
Well, alright. Thanks.
Sure. Thank you, Steve.
Thank you. And the next question comes from [Derek Platt] also a Private Investor.
Hey Derek, how are you?
Hey, not bad. How much yourself?
Well, thank you.
Good. 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 forgive 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 further in ClearSign’s cap right now. And I think a lot of us are really for an announcement with household name out there. So, I’m really just trying to get an understanding of what level or commitments these people are making?
Oh, sorry I thought you had more. We’re making a substantial commitment. We indicated that there will be more information forthcoming about the details of this. Ideally they would report their name, 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 and 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. And in fact including the guys who sit right here on our staff who have collectively about a 100 years of experience in the combustion industry and weren’t able to make these kinds of games with their new technology at very established companies in the space.
So, I get where you’re coming from that particular retail investors often look to that sort of brand name, that’s coming it we’ll 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’re limited by, but we invite to call us who require or want that kind of clarity and color on the situation. But I think you’re doing yourself real of the service if you discount the commitment that is being put forth by these guys. It’s quite an exercise, just the internal cost of them putting together a contract like this is not something that Andrew take lightly. So, does that answer your question?
Yes. And I don’t, with all due respect I’m not trying to impugn that’s a small feet getting these commitments, I’m just my idle brains is trying to get a more detail on that?
No, because it’s an interesting context. 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’re 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 cost, increase my system capacity on these multi-million 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 estimate or whatever economic contribution that we tend to make that happened more quickly. In fact that’s one of the virtues of having a technology which 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’s 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 in these markets pretty quickly. So, I think you’re likely see thing gain some momentum. I am not sure many of the names in the space obviously there is the big oil companies, frankly when we get past the big oil companies in the combustion space, I am not sure that there 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 is very profitable business and when you’re able to impact the productivity of a multi-billion dollar piece of capital plant that sort of says it all. So if you really want to get us for a breathtaking sense of the value proposition just go stand in front of a mid-size or good size refinery and start to let your mind drawn around on how much money it caused 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. Here what you’re saying, there is a little bit of a lowest common denominator aspect to that and but we’ve also got to really drive the business or 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’re pursuing but we appreciate also the need for validation. We think there is going to be enormous validation As Andy said within industry circles it’s a big market but it’s 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 level. So stay tuned there certainly will be some household names in the mix along the way.
Alright 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 the call today. We are as I mentioned in my comments, 2014 is a tremendously exciting year for year us and we’re 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’ll 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 very sustained growth. We are really just scratching the surface of some very, very large markets here.
So I think it’s going to be an exciting time for all of us and we appreciate your support and your participation.
Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Have a nice day.
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