Matthew Selinger - Managing Director, Three Part Advisors, LLC Steve Pirnat - Chairman & CEO Jim Harmon – CFO.

Jim McIlree - Chardan Capital David Brown - Private Investor Robert Manning - Private Investor Rishi Jain - Cross River Group Robert Hoffman - Princeton Opportunity Management Richard Deutsch - National Securities.

Good afternoon and welcome to the ClearSign Combustion Third Quarter 2016 Results Conference Call. All participants are in a listen-only mode. [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..

Thanks so much, Dan. Greetings and welcome to the ClearSign Combustion Corporation third quarter 2016 results conference call. During the course of this 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 judgments 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.

These 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 2015 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. That being said, on today's call will be Steve Pirnat, ClearSign's Chairman and CEO; and Jim Harmon, Chief Financial Officer.

I now turn the call over to Jim Harmon.

Jim?.

Thanks Matt, and thanks everyone for joining us this afternoon. Before I turn the call over to Steve, I'll review our results for the quarter as they are being reported on our Form 10-Q. I'm pleased to report that we recorded our first meaningful product sales of $260,000 during the third quarter.

This was from the installation of our Duplex Technology in a wellhead enclosed flair for a major California oil producer. You'll notice that our cost of sales was $47,000. This only represents our third quarter cost.

Because the sale was conditional upon successful installation in a field development setting, cost prior to this quarter totaling $147,000 were previously expensed. Therefore the gross margins involved are not indicative of our expected future sales. In the future, we would expect gross margins approximately 50%.

We also entered into a follow-on sale to the same oil producer for five additional wellhead enclosed flares for $900,000. These are expected to be completed over the next three to nine months, depending on the availability of the customer's equipment. We received a 40% down payment of the contract amount which is standard for the industry.

Under the completed contract method of accounting these funds net of our costs through quarter-end are reflected as a $318,000 liability on our balance sheet. These sales are going to be recognized as each of the five units are installed and accepted by the customer.

Also I'm pleased to report that subsequent to quarter-end, we completed conditional sales totaling $361,000 in the oil refining and enhanced oil recovery industries.

As a result, at September 30, we recorded an asset of $144,000 of costs on uncompleted contracts in excess of billings in accordance with the completed contract method of revenue recognition. This is an asset that's equivalent to an account receivable.

In summary, we have recorded revenue to-date of $621,000 in three of our five target market verticals. This is a really important step for us where after years of R&D we have moved from developing a product to actually recording revenue and looking for more, and I'll let Steve provide more color on this shortly.

With the realization of our first significant product revenue this quarter, we made some organizational changes to better allocate our resources towards sales growth, including repositioning key personnel and increasing our sales staff.

We additionally reassessed our patent portfolio in order to ensure the maximization of both the cost effectiveness and the value created through the intellectual property portfolio, and to focus resources on our most promising patents.

The patents that we consider to be the most beneficial were retained and those pending patents projected to be unnecessarily costly that could be disposed of without meaningfully degrading the quality of the remaining IP portfolio were abandoned.

So as a result, we recorded an impairment loss of $1.7 million for the quarter, a step that will serve to better focus future patent costs. At quarter end, we hold 21 patents and have 80 patents pending.

So due primarily to increased development and field testing of our Duplex Technology and the $1.7 million write-off resulting from the revaluation of the patent portfolio, we incurred a loss for the quarter of $3.8 million.

That compares to a loss of $2 million for the same period of 2015 and a loss of $2.4 million for the last quarter of the quarter ended June 30, 2016. As to our cash resources, we had about $3.6 million at the end of the quarter. And with that, I will turn the call over to Steve.

Steve?.

Thank you, Jim for the overview. I'd like to thank everyone for joining the call today. I welcome these periodic calls that provides me an opportunity to update our investors on the progress of our company.

Frankly, after close to two years as CEO, I continue to be excited and confident about the unique capabilities of our Duplex Technology and the potential for our company to transform the combustion industry. To remind our investors, combustion is a fundamental energy conversion process. Two-thirds of the energy used in U.S.

manufacturing is converted via boilers, furnaces, and process heaters, which is our core focus market. This is a multi-billion dollar global market for which ClearSign's patented and transformational technology provides clear competitive advantage.

ClearSign continues to build on its growing success within our core vertical markets of refining, enhanced oil recovery, and boilers, and has recently expanded into a new vertical market for enclosed ground flares.

We believe the environmental regulators are interested in extending emissions regulations to enclosed ground flares and ClearSign's unique, patented Duplex Technology, which can provide a solution for lower emissions flares based on the successful installations we have at a major oil company in California, will hold in a long-term opportunity for us to convert this market into revenue.

We recently passed some significant milestones and as of today's date we have completed four field tests out of eight duplex installations in three of our target vertical markets. Let me walk through each of these projects in some detail. First, well heading closed flares.

As Jim stated, we completed our initial wellhead in closed flare project for a major California oil producer in the third quarter of 2016 where we recognized $260,000 of revenue.

This was an important milestone because it was the first meaningful product sale and second completed installation following the non-revenue field development installation in our once-through steam generators. Further, we entered into a follow-up agreement to supply five additional units for $900,000.

Our operations team is proceeding on these installations and is expected to complete them over the next three to nine months. With respect to process heaters in the oil refinery industry, we have completed two of our four process heater projects in California.

These are important milestones as two of these installations have become demonstration sites for other refineries including some super major oil companies who have come to visit these sites in order to gain some better understanding of our technology.

Additionally, and worth noting, the completed process heater at Tricor Refinery, which has been out of service since 1984, was allowed to be brought back into service due to the unique capabilities of Duplex Technology to restore this unit to operation and meet the stringent air quality requirements in that location.

Of the remaining two process heater projects, Tesoro has visited one of our working unit refineries. They are furthering their plans to retrofit one of their heaters in their Southern California refineries to include Duplex Technologies as a test.

The Delek project awaits appropriate shutdown schedules to install and test our Duplex unit for its application. We expect to have the Delek project back and installed sometime prior to the end of this year.

Regarding once-through steam generators in the enhanced oil recovery industry, there are three OTSG projects in enhanced oil recovery industry, two units installed in Southern California and one design contract for Canadian operator.

Subsequent to the quarters ending, one of the Southern California units was completed and accepted by our original OTSG customer, a major Southern California oil producer, and the Canadian design project was completed.

We now have achieved emissions results which exceed current local Best Available Control Technologies, or BACT, levels in four installations in California related to three of our target markets. These markets have been identified in our study as being $1.6 billion markets.

We plan to continue to demonstrate Duplex Technology by continuing our field work, pursuing additional lab research and development regarding packaged boilers, and next generations of improved Duplex Technologies, and standardization of design, and further assisting our customers in making emissions results available for the designation as BACT by local regulatory bodies.

We are making solid progress in many of our low emissions duplex technologies and validating its performance across an expanding number of field installations and target vertical markets. We believe that we will be rapidly approaching an inflection point by which additional opportunities in deal flow will accelerate and drive business growth.

Regarding the development of our ECC Technology, or Electrodynamic Combustion Control Technology, we continue to struggle with the scaling of this technology. But, in order to move forward with some alternative strategies, we held an expert summit with industry and academic experts in Seattle.

What came out of this meeting was a clearer path to commercialization with renewed focus on pre and post combustion. ECC appears to be appropriate for solid fuel opportunities and related combustion systems.

We intend to continue our laboratory research and to enter into a collaborative arrangement which would enable us to work closely with the established companies and target industries and to apply solutions developed in our laboratories.

Operationally, the recent success with wellhead flares, oil refineries, and enhanced oil recovery has allowed us to refocus our personnel and resources to enhance our sales and business development efforts, capitalizing on our recent successful product development, and generate revenues.

To that end, we opened the sales office in Houston, enhancing our ability to respond to customer requests for proposals. We appointed Dr.

Donald Kendrick as our new Chief Technology Officer and reassigned former CTO Joe Colannino to a new position a Senior Vice President of Engineering supporting business development sales and operations, a move that has already yielded us favorable results.

Since we have recorded sales in three market verticals, we now have Duplex results for our sales teams in each of these cases. Looking forward, I would expect that our team should deliver sales to existing customers and smaller operators in our current sales locations at an increasing rate.

At the same time, our sales group has been working with large upstream and downstream energy companies. We have also signed a non-disclosure agreement with one major oil company as a precursor to a potential opportunity to demonstrate our technology in one of their refineries.

Needless to say, having a successful demonstration of Duplex Technology among a super major oil company would have tremendous potential opportunities for the company long term. As I have explained in the past, these sales efforts are complex, long term projects that likely will take many months or even over a year to gestate.

However, because of the environmental and operational pressures of our customers in our target markets, any of these sales processes could be short cut depending on the individual operator circumstances. Which brings us to the current economic and political climate in the United States and its effect on our prospective.

We believe that social interest in clean air is not going away. There is no one that know -- no one knows what effect the new presidential administration is going to have on environmental regulations, but people like clean air.

More importantly, ClearSign technology provides an economically attractive solution for combustion related emissions and operational performance problems, thus making Duplex technology an ubiquitous solution for industry.

Again, people like clean air, it's just a question of what it cost to get it and with Duplex technology there is no doubt that economic solution to clean air and operational improvements within a refinery environment are possible.

Our focus remains on continuing to pursue the completion of our field installations, building on our current and future book of business, driving revenues, and providing technologically feasible and cost effective solutions for our customers.

In closing, we have completed sales in three important market verticals and are poised to penetrate these markets.

Our steadfast focus remains on continuing to develop Duplex in vertical markets and next generation of existing applications building on our current and future book of business, driving revenues, and providing technically feasible and cost effective solutions to our customers.

I'm pleased with our progress and would like to thank our team at ClearSign, our partners, and our customers for their support. At this point I would be pleased to answer some questions..

[Operator Instructions]. And our first question comes from Jim McIlree of Chardan Capital. Please go ahead..

I would like to try to understand the pricing. So if I read it correctly that first sale was for six units at $260,000 and the next sale was five units of $900,000, that’s for the flares.

Are my numbers correct and, if they are, why is that first sale for like introductory pricing and it's more of an average?.

The first unit was sold at $260,000 and the next five units were sold for $900,000. The first unit was sold at a slightly higher price because there was some one-time engineering costs involved in the first unit. But to the broader subject of pricing, our pricing, and we've said this consistently, is really based on the value delivered.

In this particular case, this was a fairly difficult application where the customer had purchased some equipment and it was underperforming their permit and they were concerned that they were going to have some problems with the regulators.

So they had called us in on a kind of extraordinary basis and asked us if we could help them resolve the problem with this equipment and we were quite pleased that we were able to, in fact, do that and modify their again their existing units and demonstrate that we get them under their permitted level.

We still have, of course, the balance of the project to complete, which as we said earlier will be done over the next six to nine months..

OK, I'll check my unit references, but does that -- when you start selling these and let's call it volume, are you going to be limited by your engineering talent that is available to go to a customer site and figure out how to best install these units or are you going to try to build up a distribution channel that can take that over for you or, you know, walk me through how you’re going to distribute this?.

That’s really a good question and I think a lot of people had that question. You know more typical of the first projects that we have gotten over the last couple of years we've been asked to go in and modify an existing burner typically provided by one of our competitors.

And that requires a little custom engineering and we've been fortunate and we've been quite successful in doing that. In fact, we've never encountered an application where we couldn't achieve the objectives we set out to achieve. That said, we are in currently in development of what we call a standardized product offering.

We call it a plug and play where you would virtually unplug the existing competitive burner and plug in a ClearSign solution. That type of burner could theoretically be stocked by a local supplier or even bought in volume by the customer or the OEM.

Many cases furnaces are supplied by a furnace OEM to an end user and the burners are supplied by the furnace OEM. So the idea of standardizing on a design that could be replicated on multiple basis is something that we're actively working on. In fact the prototype is sitting about 50 yards behind me in the laboratory right now.

So we're well on our way to having that accomplished. That said, and I think for some reasonable short-term period, we're still going to be requested by customers to come in and retrofit existing equipment and some combination of both will probably be our path forward.

So in the case of how do we accelerate the sales volume, one very likely path forward would be to license the technology and then of course the other is to do what we currently do, which is to use an array of subcontractors and local regional channel partners that do the work for us.

So we would be doing the designs and replicating the designs, a perfect example is our current success in once-through steam generators. After we've done the first couple of large once-through steam generators, subsequent units tend to be very, very much similar.

So scaling them and installing them and supplying them become a much lower engineering effort than they were when we did them initially two, three years ago..

And our next question comes from David Brown, a private investor. Please go ahead..

Hi. Congratulations guys on continuing to make progress and we seem to have some pregnant pieces of business out there that I think have hurt the stock price some in the last month or so.

I'm just wondering if there's any color on, you gave a little bit, but is there any more color on the Aera Energy or the Tesoro or the Delek or the Western Canadian oil recovery company as far as when we might expect some completions, some revenue etc..

The answer is yes to all of those. With respect to Aera, you know we've had a successful installation operating for almost a year now, and again with respect to the Aera were restricted on when we use their name in the context beyond something we've already said before, but we have and expect additional business to come from them.

And they had negotiated, as we had reported earlier, a multiple unit contract that we believe they will exercise sometime in the near future. The exact date we don't know and I don't think they do either, they're -- they have just gone through I believe a kind of a reorganization which has affected their workflow and their schedule.

With respect to Delek, we might have said this earlier….

If I could interrupt real quick, I mean, perhaps David you didn't pick it up in the conversation, but we did indicate that subsequent to quarter end in the OTSG market, we completed, and our customer has accepted our OTSG installation, which is with what we termed our original OTSG customer..

Yes, got you..

So we were restricted on using any particular names at times and so giving you the decoder ring on that one..

In simple English yes it works and yes they paid for it. And yes we plan to sell some more..

Second question, then is basically many of us are a little wary about the Trump presidency having a negative effect, at least short term, on the stock price, but hoping that that's just overreaction.

But one thing that does seem to be an opportunity here is that he certainly has mentioned that he wants to revive the coal industry and the ECC certainly has promise and in that area.

Is the company going, you mentioned, working with some large partners and doing some field testing and would the company also be trying to pick up on this possibly political opportunity of something that the new administration wants to work on?.

Well, you know we've been working to perfect ECC technology for the last couple of years and as I mentioned we're getting a little, let's say, backlogged in our own thinking and the suggestion by some of our research people, which was a good one, was to bring in some noted academic and industrial experts in the field from virtually around the world, and as a result of this kind of summit we had, we've come up with some of alternate approaches which we think will benefit us.

So we are still focused on ECC technology and the fact that, as you point out, that there might be a new opportunity in the coal industry because of the current administration, is just icing on the cake.

It's not like we'll try to go faster because of President Trump, because we're already trying to solve the problems and I do think that if the coal industry is revitalized anywhere near what we envision the Trump Administration could bring to the party, they’ll be a lot of opportunity for us to partner with coal companies and do some work around ECC for sure..

Great, and I'm hoping that some of the experts in the government are aware of your technology as well. So that would be great..

Certainly trying to make their way. If you wouldn't mind, David, this is Jim Harmon. If I could weigh in a little bit with a personal opinion, because you started asking basically two questions and you went off into the coal industry, which is a good question. But the other part you are asking about is what the effect of the Trump presidency.

In my personal opinion is, we just need to kind of look at what he's economically focused on. He's definitely much more focused on economic growth. He stated that his personal goal is to, rather than have 2% GDP growth, have something more like 4% GDP growth.

He's also indicated that he is interested in enhancing the economy through tax reform and other measures. And the effect so far in the stock market on energy companies, in general, who are our primary customers right now, has been fairly positive. I would think that would go well for us.

On the other side, you were asking about environmental regulation. Well, the topic that I see that you seem to be focused on, is number one, getting the XL pipeline approved because he doesn’t consider that much in the environmental issue, just a common sense economic issue.

Oil can be moved around one way or another we might as well do it in a pipeline. It's a heck of a lot safer than moving on trains. And then I would suggest that the rest of it people have concern about what he's going to do with environmental regulations.

It seems to me; he's very focused on climate change issues, which really are not our issues whatsoever. As Steve pointed out, in a very kind of way, clean air seems to be largely popular and the Clean Air Act has existed for a very long time. My personal view is I don't think it's going to be affected virtually at all.

That's what the regulations that help drive us. Additionally, he’s just affecting things federally, not locally. The state of California is very focused on these issues, as is the state of Texas, believe it or not, because Houston there is also a greatly impacted area from air emission stand point.

So I have also seen and heard some of these concerns with regard to ClearSign and what would happen if the Trump Administration were to try and defang the EPA or certain regulations. I don't share that concern. I view all of that is being a net positive for ClearSign in a pretty big way.

I think we whether -- No matter your political stripes, I think it was very helpful thing for our company..

Well, and to be to be very specific, I mean the regulations for example in Southern California which currently exist, would in many cases require the operator to use a technology called selective catalytic reduction, which is quite expensive and in some cases difficult to install in some of the older refineries that don’t have a lot of land area.

In the case of Duplex, our technology can achieve very, very low emissions levels consistent with what regulators are looking for, and do it at a fraction of the cost and fraction of time. So a couple things are true.

There's a lot less pushback in the system for people resisting the installation of these expensive systems because they can do virtually the same thing with our Duplex technology.

And I think that the cases where you'll see intervention by a new administration are places, and using coal as an example, where the current environmental regulations that affect the coal power plants, are hugely expensive and at the point where they would essentially wipe out any hope of operating a coal plant competitively.

In our case, I think you can have your cake and eat it. I think you can have clear air and cost effectiveness, and in some cases, operational efficiency improvements, which make our technology attractive in this current environment..

Excellent. Thank you both for the responses.

They're very much in line with my thinking as well, but I just think that the public needs to hear that loudly and clearly, that ClearSign even though it's considered a pollution control company, or whatever you want to call it, is not going to be gutted by a Trump Administration at all and should continue to march forward, I totally agree.

The last question I have is the three verticals of course have been mention of successes and those and, obviously, congratulations in continued success in those.

How about the other two -- I think boilers were mentioned just briefly on the conference call so far, but there's the other heavy industries such as cement paper, chemical steel industries that use heating processes -- large heating processes.

Are we making any headway on that on or is it still to come and is there any more color about probably the most pregnant of all the verticals is the boiler space, because before Mr.

Pirnat took control we had some kind of supposed that pending deal over two years ago and that never happened? So if you could give me any color on the other two verticals I would appreciate it..

Well, let's just clarify the boiler market. There's kind of two segments in boiler market.

There’s the packaged boiler market, and I think there was some dialogue about a potential deal in that space which didn't materialize somewhat before my time, we actually are in the process of installing a representative packaged boiler in our test lab, and have a design that we're ready to test.

So within the next -- just to be clear about research, we're prepared to start testing in the next 30 to 60 days.

You don't know when you're going to be successful, but we certainly have a design and have test boiler that we could demonstrate to a packaged boiler OEM, and if we're successful, and ultimately we will be successful, we will have a huge vertical market there.

On the large boiler market, once through steam generators are a perfect example of large boilers, these OTSG themselves are large boilers. We have had and we have bid, opportunities for large water-tube Cleaver-Brooks type boilers. We haven't secured any of those orders yet, but they're in the pipeline certainly..

Great. How about the other verticals with the other industries.

Do we do we have any inroads whatsoever into cement or paper or chemical or steel?.

We haven't -- plead guilty to my first sales job at the College was running around the steel mills in the Mon Valley for five years..

I am originally from Cleveland, so I know all about those steel mills..

Well, I'm a Pittsburgh guy and I'm a still a Stealers fan, so can fight that out later.

But we did have actually one opportunity for a steel company here in the area and when we went and looked at the application, what we found is that they really didn't need low emissions, they needed to redesign their heater, and so we actually brought in a company called Bloom Engineering, who did the original design.

So in short, that’s still a huge potential market for us. But it's kind of down on our list of things to do because as we point out the markets that we've already identified constitute a multi-billion dollar market opportunity for us, and we’ll get there, it's just not next on the list..

And I don't disagree that probably what your investors including me would like to see is those more ripe markets for revenue and let's get those sales going to get more revenue coming, so I don't disagree with that. .

Somebody said something like more sales faster..

More more more, there you go..

I wrote that down..

Perfect. Thank you guys..

[Operator Instructions] Our next question comes from Robert Manning a private investor, please go on..

It's great to see some cash coming in. You still have a lot of cash going out each quarter.

Could you talk a little bit about how long that's going to take the cash coming in to ramp up to cash out and what your plans are for helping to cover that gap?.

Well, we haven't made any representation on when the company will achieve breakeven if that's your question..

Well just a question is how do you plan -- you've obviously got some financing needs ahead of you.

What are your thoughts about that?.

You know, we will have to and plan to have the funding event in the near future. And frankly, we have several options that we're considering and are optimistic that we'll be able to fund the company on an ongoing basis..

Great, thank you..

And you know just to put some you know more specificity around that, I expect that will resolve this thing in the next 30 to 60 days..

Okay, great. Thank you very much..

And our next question comes from Rishi Jain of Cross River Group. Please go ahead..

Hey, guys.

Did I miss something? With the Canadian OTSG you said that the design work was complete? And then was there something more to that? What are the next steps of those guys?.

Well the design work is complete, and what they have to do and we think this will happen in the first quarter of 2017.

They have to identify a location and let us go in and retrofit once-through steam generator, the thinking is that they'll identify location we’ll put a ClearSign Duplex Technology in place and if it's successful which we fully expect it to be, then they will make a decision on the rest of their fleet over the coming year or so..

Is that anticipated to be the first one -- is that anticipated to be a commercial contract or are they doing the test?.

Yes, absolutely. In fact the original design contract, was a commercial contract. They paid us to do the design work..

OK, so if the install happens is going to be revenue recognize not a year of testing like Aera and all that stuff..

Correct..

There's no more coupons..

Okay, good, that’s good to hear. Second question actually it's funny enough working on a refinery situation which I will privately bring to you guys as a customer, but the what I've realized is that a lot of these guys and I'm cognizant that that I'm sure some or all of your potential clients are listening and so this is purposely being asked.

Do you believe that some or all that there are regulatory games being played, or maybe some people are trying to draw out certain experimental permits? If so what do you say what is your strategy I think at this point and I want to just put the little asterisk saying that I think a lot of myself and a number of other investors are certainly okay with you guys telling whomsoever it is to get off the proverbial pot or kick them off if they're not ready to move forward, but I would love to know your thoughts?.

Well, I think that’s essentially what you have to do but you have to do it with a certain amount of sensitivity because they’re the customer.

With respect to -- specifically an experimental permit in order for a customer to get the regulators to agree to extend this experimental permit, they have to get us the supplier to agree that the experimental permit needs to be extended -- that we're not done yet. And so as you can imagine, we’re very aggressive on telling people look we're done.

This works. And if they need to buy more then would be more than happy to supply it..

Fantastic. That's great to hear. Thank you guys..

So you know, I think that that's really, you know, not a long term problem for us at least we don't see it. We expect and have seen the regulators do their job though, they've got to do their job..

Right. Okay, thank you guys thanks..

And our next question comes from Robert Hoffman of Princeton Opportunity Management please go ahead..

Good afternoon. I just want to clarify when you guys talk about your $3.6 billion initial target market that these markets, meaning these three that you talked about.

Is it fair to say that about $3.6 billion is what your sales would be if you got 100% of those target markets over the next ten years, is that the way you're looking at it?.

That's correct. And just to be to put some clarity around that number we-- And this I thought made sense, certainly at the time, we didn't just arbitrarily take every possible opportunity and consider that a potential sale.

We applied some judgment on the type of application, the location of the application, what we envision the regulatory environment to be, and the geographic area we're looking at. In other words, a refinery with 20 burners and in Southern California was considered a potential sale for 20 burners.

A refinery in Nebraska or Wyoming with 20 burners wasn't really considered a potential sale because the regulatory environment there is not as intense and we didn't think that that would convert within a 10 year window..

That's fair enough. And I just wanted to clarify that. And I appreciate it, thanks..

I appreciate the question. It’s a straightforward question..

And our question comes from Richard Deutsch of National Securities. Please go ahead..

Yes, thank you for taking my call.

You know I'm dealing with people that find your prospects to be rather opaque for several different reasons, partly due to your success in entering multiple several hundred million dollar the billion dollar verticals and it jumps from one conversation to another in a product that is not retail, these are products that the average consumer would never ever see or know anything about.

So it's hard for them to understand the value of your company and the taste of it which you'll actually be able to produce visible you know, sales earnings in shareholder value.

So first of all I want to congratulate you in the time that you've gone on your watch from proving out your technology works, actually installing it among some of the largest companies and most successful companies in the world and simultaneously.

Now during this quarter and the upcoming quarters actually having commercial paying customers in those three verticals, what I'd like to see if you can make it a little easier for us to understand this scope and the not just the longer term opportunity, but the pace in which you think things will come together.

You know starting from the fact that you're still priced well under $100 million as a company and yet you're dealing in areas of profitability and with your differential technology being so different from what's on the market in terms of these flue recirculation devices and you know scrubbers.

I would like you to be able to speak to a couple of things to demystify this a little bit more. For example you've just now entered your first a revenue period.

Can you give us your feelings as to how confident you are that the ramp will be consistent and organically growing at a decent pace during the immediate future? What can you tell us about prospects for 2017? If you continue to build quarter-after-quarter on overall revenues from all your different initial customer base, can you, can you kind of give us a little feeling for your growth prospects as a starting point for next year?.

Rick, to summarize it -- to make sure we're clear on the question -- are you're asking about 2017 prospects?.

Yes, you've just got your first initial sales in three different verticals. What kind of momentum do you see and how confident are you that you're actually going to be able to deliver..

Well, our pipeline of incoming opportunities is growing at a rapid rate.

As I mentioned in my earlier comments, I think we're reaching an inflection point where certainly some of the installations we have in the refinery space and some of the opportunities we've had with super majors and other refinery customers who are able to visit these sites and get comfortable with our technology, will lead to greater momentum in the market and greater opportunities for sales.

You know, predicting the timing of that, given the nature of the companies that we're dealing with, again major oil companies, and the decision making associated with those companies is pretty difficult to predict.

But you know, suffice it to say it's a huge market, we have unique technology that solves a clear problem which they have and we expect to see it fairly rapid ramp up..

Okay. You mentioned licensing.

In what arena do you feel that you would first like to put on the table and what is your internal target as to when you want to go and actually get into serious negotiations for this licensing? So which vertical do you think you want to license first and when do you think the most ready?.

Okay, the most opportunistic vertical for licensing is packaged boilers, because the packaged boiler market involves a lot of local service capability that the packaged boilers companies have that we would not want to recreate.

And as I again mentioned or you know earlier in our presentation, we've got a packaged boiler added to our laboratories so that we can build and test a burner in a packaged boiler with the expectation that we can bring people in that space and show them the product working and negotiate a licensing agreement based on the performance.

You know, we've had some previous discussions with people in that regard and, for a variety of reasons they didn't materialize. But, nevertheless, I think packaged boilers would be the first pick.

That said, there's no reason that we couldn't license our technology for refinery burners or just about every vertical market that we're in, including flares.

But right now we're so adept at handling the vertical markets for refinery burners, and as I mentioned, we're working on a standardized let’s say it, more or less off the shelf product for that market and we're also pretty adept at handling the OTSG once-through steam generator market, that to license that technology at this point might not necessarily give us the competitive advantage that we're looking for.

So I think that bluntly, I think those things that have to be looked at on a situational basis, both what we're trying to do and what the interest is the potential licensor..

And when would you think that you'd be in an optimal position time wise, you know, to want to try to close out these negotiations would it be six months from now a year from now?.

Well, I mean just let's just start with a packaged boiler -- you know we would probably want to build one, test one, and demonstrate that it works in a packaged boiler and that will take several months to kind of materialize.

That said, candidly I've already had discussions with packaged boiler OEMs who bluntly say look, Steve, if you can show us your technology does what you say of course we'd license it. Why would somebody not want to license a technology to produce a sub five PPM with no FGR and has a major efficiency advantage over whatever's the next alternative.

So you know I think the timeline is difficult to predict, for a lot of reasons, but with respect to the boiler OEMs, we would want to have demonstrated a package boiler and we are adding that to our test facility while we speak.

Concurrently, we have an opportunity and we did several large water tube boilers, which provides another opportunity for us to work with boiler OEMs. But we haven't secured those orders yet. I hesitate for a bunch of reasons to try to predict timeframes for these things, other than sometime next year..

Okay. I'm just looking for new milestones to be able to expect greater and greater certainty of the value of the company's earnings power. Let me just finish with one other point now I'll get offline here.

There was a big excitement generated from your Tesoro announcement of that contract last year, and I'd like you to give us a little bit of color as to where you are in terms of moving forward with them..

Well, as we reported several months ago, Tesoro wanted to actually visit a site where we had a ClearSign Duplex technology up and operating. They have done so. And the feedback we've gotten from them is they were very pleased with what they saw.

And Tesoro is now back contemplating a schedule by which they would test one of our duplex burners in a Tesoro Southern California refinery. We haven't been told what the timing of that is. We expect it to be sooner rather than later because they're frankly quite anxious to see for themselves that our Duplex technology works.

As we mentioned in the press release way back when and as is currently the case, they see Duplex as a tremendous opportunity to avoid the costs of selective catalytic reduction in their refineries and southern California.

And in some cases -- again as I mentioned earlier in my comments, these refineries are in locations where they don't have a lot of space. So, Rick, adding an SCR. and an electrical substation and a blower and then loading racks for the ammonia they would need for an SCR.

It’s just not a practical solution for them, so to some degree duplex technology becomes a very attractive alternative to the SCRs. In fact that might be the only reasonable alternative. But just to make this simple, so far, everything they've seen of our technology they like.

They're moving forward at a pace determined by them and we are anxious and ready to go as soon as they tell us to go to install Duplex technology in one of their refineries, and prove them that it works as good in their refineries as it works as it has worked in other refineries..

Okay.

So you're just waiting for them to approve the first installation site, is that right?.

To identify and tell us when, yes, to identify a site, one of their refineries, and say this is the process heater we want you to retrofit, here's the burner come in and take care of it for us.

And I have to admit I say we're not -- I'd like to think we're just waiting, but we're probably calling them up every couple weeks and being kind of a pain in the neck saying to you ready yet, are you ready yet, you're ready yet..

Exactly. And the mystery is if they've been following you for the last year and correct me if I'm wrong but I don't know of one single installation that has not met or exceeded operating specifications in all the different verticals you've been in, so the mystery is what are they waiting for..

Well, I mean they have internal scheduling and operational issues that certainly are outside the scope of what we're dealing with. And so, you know Rick I can't actually answer that question.

But when they shut down an asset and when we have that access to it that something that they have to determine, they were you know fairly candid you know and I made this comment at an investor conference. The guys at Tesoro said to our folks -- look when we got to this refinery in Central and Southern California and saw your technology working.

Especially after we saw the technical paper that you wrote for the American Flame Research Institute, we had no doubt that you would taking us to a refinery where your technology was working. They didn’t go into this thinking it wasn't going to work.

They just wanted to bring their operators and their safety and health people, and get them comfortable with what we were doing and that's just the normal you know process that you're going to go through with refineries that are looking at a technology they're not familiar with..

Okay. Well, thank you very much. I won't take up any more time, I will let somebody else step in. Thanks again..

Thanks..

And our next question is a follow-up from Robert Hoffman of Princeton Opportunity Management. Please go ahead..

Yes, I’ll try to be brief. Could you just kind of walk through what the bottlenecks for you guys to large growth are? I mean obviously one of the attractions of ClearSign as an investment is the kind of the asset light business model.

But if you, you could walk through what do you when you get an order for let's say five wellhead flares, who does what work and if you got an order for one hundred wellhead flares, how would you attack that?.

It’s a straight up question and one that I've been asked before.

Just as a general comment, a lot of the work that gets done drafting, and finite element analysis, structural analysis, in many cases computational fluid dynamics, the related support services are done through a series of sub-contractors that we have worked with and are proven, capable guys.

So, if we doubled the amount of mechanical work, layout work we had to do we would just go to that supplier and buy more of his time..

In terms of your internal resources, you don't see your company, and I don’t know how many employees you have, but if you look out three or four years, your employee count is not going to be beyond anywhere pace to the percentage of sales increase, is it?.

Yes, I mean that a good observation and of course it's because of our asset light model that we're looking to basically be the technology and design center, and have the actual execution work done by subcontractors.

For example, the controls that operate the burners are done in California area by a very competent controls company that has been in business 10 years. We don't want to replicate the ability to build controls because it's a capability that already exists..

So when you when you have a when you make a sale of $200,000, if you're selling that to the customer, correct -- you're not selling it to the sub-contractor right that the sale is to the is to the burner owner, correct?.

More often than not, that's correct. In some cases we've actually sold to an intermediary, a local partner, and the reason is that the some customers, particularly refinery customers, have what they call a master service agreements with a local company, and it's easier to go to the master service agreement.

The broader answer to your question which is really where we see this thing in one form is once we establish a strong validation installation base in the marketplace, and you've got conviction among let's say the super major oil companies and they've standardize on Duplex technology as a core capability, then our opportunity to license the technology to the current incumbents becomes very straightforward.

Then we have technology that everybody wants, and we're prepared to license it and I ran a company for a few years that had a few thousand employees and they certainly have the bandwidth to expand, to build a few hundred burners every month..

Got it, just my final question of accounting so the so if the sale is to the ultimate client then you have to have sub-contractor in there that does a lot of the engineering and installation work, does their fees are part of your gross cost of goods sold?.

That’s correct..

Of course, it depends on the specific situation. If we are supplying just a burner -- supplying Duplex, an emissions control system, to them and the end customer has a sub-contractor doing some or all the installation work, then, of course, that's not part of our cost of goods sold.

If the agreement that we have with that end customer is that we're doing the full installation, which is more, as Steve pointed out, more often than not the case, then that sub-contractor cost is included in our cost of goods sold. Either way, the margins basically come out to the same sort of thing, at least we're projecting that that's the case..

Right, right - fair enough, thank you..

Our next question is a follow-up from Richard Deutsch. Please go ahead..

Recently you announced a new office in Houston with a new executive that's coming in that had some very deep industry following.

Can you follow up on that, when you mentioned that negotiations with major companies were underway? Can you give us a little progress report from that?.

Well we’ve hired the guy. He’s driving, so you know, he’s calling on clients on our behalf. So he's active in the market. I'm not sure beyond that what detail I'd be prepared to give you because I don't want to tell you what customers you going to see, because I'm sure the three of my competitors on this phone call..

Yes, but you indicated that that interest had already been developed and the standby. So I just wanted to see what your follow on comments were as to how things are proceeding and when we might expect to hear a sale..

Again, I don't make any attempt to try to predict sales for any particular salesman or any particular territory. I think we will see pretty encouraging progress from our Houston sales office because the customer base is there and because the technology, as we've described before, is pretty compelling.

Scott, is his name, has already been in contact with numerous customers in the in the Houston, Texas area he's got ongoing activity with a large number of customers.

But I can't tell you Rick, what day or week he’s going to get an order and the customers themselves and I know you appreciate this, I wouldn't want to comment on who it is because I don't really want to give away too much competitive advantage..

All right, thank you for the update..

And this concludes the question-and-answer session. I would like to turn the conference back over to Steve Pirnat for any closing remarks..

Ladies and gentlemen, this concludes today's teleconference. Since there are no further questions, I'd like to thank everyone once again for attending today and for your ongoing support and enthusiasm. Good afternoon..

And ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may not disconnect..