Note 7 – Stockholders’ Equity

Common Stock and Preferred Stock

The Company is authorized to issue 62,500,000 shares of common stock and 2,000,000 shares of preferred stock. Preferences, limitations, voting powers and relative rights of any preferred stock to be issued may be determined by the Company’s Board of Directors. The Company has not issued any shares of preferred stock.

In February 2015, the Company completed an underwritten public offering of common stock whereby 2,990,000 shares were issued at $5.85 per share. Gross proceeds from the offering totaled $17.5 million and net cash proceeds approximated $16.3 million. Expenses of the offering approximated $1.2 million, including underwriting fees of $1,049,000, underwriter legal fees and other costs of $55,000, and other costs of $108,000.

In March 2014, the Company completed a registered direct offering of common stock whereby 812,500 shares were issued at $8.00 per share. Gross proceeds from the offering totaled $6.5 million and net cash proceeds approximated $5.8 million. Expenses of the offering approximated $0.8 million. Cash expenses included placement agent fees of $488,000, placement agent legal and other fees of $75,000, issuer legal fees of $113,000, and other costs of $44,000. Non-cash expenses consisted of a warrant to purchase 20,313 shares of the Company’s common stock at $10.00 per share exercisable until March 2019 valued at $92,000.

Equity Incentive Plan

The ClearSign Combustion Corporation 2011 Equity Incentive Plan (the Plan) provides for the granting of options to purchase shares of common stock, stock awards to purchase shares at no less than 85% of the value of the shares, and stock bonuses to officers, employees, board members, certain consultants, and advisors. The Compensation Committee of the Board of Directors is authorized to administer the Plan and establish the grant terms, including the grant price, vesting period and exercise date. As of December 31, 2015, the number of shares reserved for issuance under the Plan totaled 1,392,230 shares. The Plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 10% of any new shares issued by the Company during the quarter immediately prior to the adjustment date or such lesser amount as the Board of Directors shall determine. Activity under the Plan is as follows:

	2015	2014
Reserved but unissued shares under the Plan at January 1	242,764	249,736
Increases in the number of authorized shares under the Plan	315,225	85,705
Grants of stock options	(409,200)	(141,880)
Stock option forfeitures	116,780	24,688
Exercise of stock options	212,837	39,140
Stock grants	(23,034)	(14,625)
Stock grant forfeitures	-	-
Reserved but unissued shares under the Plan at December 31	455,372	242,764

Stock Options

In 2015, the Company granted 409,200 stock options under the Plan to certain employees and a consultant, including 300,000 stock options to its Chief Executive Officer, Stephen E. Pirnat. The stock options have exercise prices based on the grant date fair values ranging from $3.96 to $5.97 per share, a contractual life of 10 years, and vest over 1-2 years in the case of Mr. Pirnat and over four years in the case of all other stock option grants. As permitted by SAB 107, due to the Company’s insufficient history of option activity, management utilized the simplified approach to estimate the options’ expected term, which represents the period of time that options granted are expected to be outstanding. Expected volatility was determined through the Company’s historical stock price volatility. The Company estimated the forfeiture rate at the time of grant and will revise it, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company recognizes compensation costs only for those equity awards expected to vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:

Expected life	5.81 years
Weighted average volatility	72	%
Forfeiture rate	11	%
Weighted average risk-free interest rate	1.45	%
Expected dividend rate	-

The fair value of stock options granted, estimated on the date of grant using the Black-Scholes option valuation model, was $1,242,000 which includes $923,000 for Mr. Pirnat’s stock options. The recognized compensation expense associated with these grants in 2015 was $579,000.

In 2014, the Company granted 141,880 stock options under the Plan to certain employees and consultants. The stock options have exercise prices based on the grant date fair values ranging from $8.22 to $9.90 per share, a contractual life of 10 years, and vest over four years. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:

Expected life	6.25 years
Weighted average volatility	74	%
Forfeiture rate	13	%
Weighted average risk-free interest rate	1.93	%
Expected dividend rate	-

The fair value of stock options granted, estimated on the date of grant using the Black-Scholes option valuation model, was $799,000. The recognized compensation expense associated with these grants in 2015 and 2014 was $126,000 and $178,000, respectively.

A summary of the Company’s stock option activity and related information is as follows:

	2015						2014
	Options to Purchase Common Stock		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Options to Purchase Common Stock		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at January 1		643,817	$	4.46		5.67		565,765	$	3.19		8.21
Granted		409,200	$	5.39		9.22		141,880	$	9.68		7.70
Exercised		(212,837)	$	2.51		-		(39,140)	$	3.11		-
Forfeited/Expired/Exchanged		(116,780)	$	6.86		-		(24,688)	$	7.36		-
Outstanding at December 31		723,400	$	5.18		8.10		643,817	$	4.46		5.67
Exercisable at December 31		257,391	$	4.05		6.12		441,958	$	3.50		4.47

In accordance with the Plan, options for the purchase of 7,504 shares of common stock were exercised in 2014 prior to vesting and the shares of common stock purchased were issued with a declining repurchase right in favor of the Company at the exercise price of $4.88 per share. The Company may repurchase shares if, prior to December 31, 2016, the employee terminates employment or certain other designated events occur. At December 31, 2015, 4,169 shares remained subject to this repurchase right.

A summary of the status of the Company’s non-vested stock options at December 31 and changes during the year is as follows:

	2015				2014
			Weighted				Weighted
	Number of Options		Average Grant Date Fair Value		Number of Options		Average Grant Date Fair Value
Non-vested stock options at January 1		201,859	$	6.57		248,411	$	4.15
Granted		409,200	$	5.39		141,880	$	9.68
Vested		(97,367)	$	5.16		(156,240)	$	5.50
Exercised		-		-		(7,504)	$	4.88
Forfeited/Expired/Exchanged		(47,683)	$	6.88		(24,688)	$	7.36
Non-vested stock options at December 31		466,009	$	5.79		201,859	$	6.57

The estimated aggregate pretax intrinsic value of the Company’s outstanding vested stock options at December 31, 2015 is $381,000. The intrinsic value is the difference between the Company’s common stock price and the option exercise prices multiplied by the number of in-the-money options. This amount changes based on the fair value of the Company’s common stock.

At December 31, 2015, there was $910,000 of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted under the Plan. That cost is expected to be recognized in future years as follows:

2016	$	553,000
2017		260,000
2018		79,000
2019		18,000
	$	910,000

The recognized compensation cost associated with the Plan is as follows:

	2015		2014
Research and development	$	108,000	$	99,000
General and administrative		663,000		240,000
Effect on net loss	$	771,000	$	339,000
Effect on net loss per share	$	0.06	$	0.04

Stock Grants

In 2015 and 2014, the Company granted 23,034 and 14,625 shares, respectively, of common stock under the Plan to its three independent directors in accordance with agreements for board service. The fair value of the stock at the time of grant was $5.97 and $10.26 per share for a total value of $137,000 and $150,000 in 2015 and 2014, respectively, which the Company recognized in general and administrative expense.

In 2011, the Company granted 125,000 shares of common stock under the Plan to a key employee. The shares are subject to a declining repurchase right by the Company at $0.0001 per share. The Company may repurchase shares if, prior to September 30, 2016, the employee terminates employment or certain other designated events occur. The Company recognized general and administrative compensation expense of $26,000 in each of 2015 and 2014. The remaining cost at December 31, 2015 of $20,000 is reflected as a contra-equity balance against additional paid in capital and is expected to be recognized in 2016.

Consultant Stock Plan

The 2013 Consultant Stock Plan (the Consultant Plan) provides for the granting of shares of common stock to consultants who provide services related to capital raising, investor relations, and making a market in or promoting the Company’s securities. The Company’s officers, employees, and board members are not entitled to receive grants from the Consultant Plan. The Compensation Committee of the Board of Directors is authorized to administer the Consultant Plan and establish the grant terms. The number of shares reserved for issuance under the Consultant Plan on December 31, 2015 totaled 115,380 shares. The Consultant Plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 1% of any new shares issued by the Company during the quarter immediately prior to the adjustment date or such lesser amount as the Board of Directors shall determine.

The Company granted 5,000 and 7,000 shares from the Consultant Plan to consultants for services in 2015 and 2014, respectively. The fair value of the stock at the time of grant was $3.96 and $10.26 per share, respectively, for a total value of $20,000 in 2015 and $72,000 in 2014 which the Company recognized in general and administrative expense.

Activity under the Consultant Plan is as follows:

	2015		2014
Reserved but unissued shares under the Consultant Plan at January 1		65,608		64,037
Increases in the number of authorized shares under the Consultant Plan		31,522		8,571
Stock grants		(5,000)		(7,000)
Stock grant forfeitures		-		-
Reserved but unissued shares under the Consultant Plan at December 31		92,130		65,608

Warrants

In conjunction with the March 2014 registered direct offering of common stock, the Company granted a warrant to the placement agent to purchase 20,313 common stock shares at $10.00 per share exercisable until March 2019. The fair value of these warrants was estimated to be $92,000 on the date of the grant using the Black-Scholes option-pricing model. Expected volatility was determined based upon the historical prices of the Company’s common stock. The risk-free rate for periods within the contractual life of the warrants is based on the U.S. Treasury yield in effect at the time of grant. The Company has never declared or paid dividends and has no plans to do so in the foreseeable future. The following weighted-average assumptions were utilized for the calculations:

Expected life (in years)	5
Weighted average volatility	74	%
Weighted average risk-free interest rate	1.49	%
Expected dividend rate	-

A summary of the Company’s warrant activity and related information is as follows:

	2015				2014
	Warrants		Weighted Average Exercise Price		Warrants		Weighted Average Exercise Price
Outstanding at January 1		564,272	$	4.14		543,959	$	3.92
Granted		-		-		20,313	$	10.00
Exercised		-		-		-		-
Forfeited/Expired		-		-		-		-
Outstanding at December 31		564,272	$	4.14		564,272	$	4.14

The following table summarizes the number of warrants, the weighted average exercise price, and weighted average life (in years) by price for both total outstanding warrants and total exercisable warrants at December 31, 2015:

		Total Outstanding Warrants
Exercise Price		Warrants	Weighted Average Exercise Price		Life (in years)
$	1.80	80,000	$	1.80	5.13
$	2.20	118,959	$	2.20	0.36
$	5.00	345,000	$	5.00	1.32
$	10.00	20,313	$	10.00	3.18
		564,272	$	4.14