Note 7– Termination of Employment Agreement

The Company and its former Chief Executive Officer, Richard F. Rutkowski, entered into an agreement in December 2014 terminating a prior employment agreement. Under this agreement, Mr. Rutkowski was paid his annual salary of $359,000 through December 31, 2016, was paid a bonus of $60,000 in 2015, received employee benefits through December 2015, and received accelerated vesting on 15,625 stock options with an exercise price of $4.88 per share and 14,219 stock options with an exercise price of $9.90 per share. The options were not exercised prior to March 2015; therefore, pursuant to the terms of the option agreements and the ClearSign Combustion Company 2011 Equity Incentive Plan, the right to exercise the options terminated.

The following weighted-average assumptions were utilized in the calculation of the fair value of the modified stock options:

Expected life		0.25 years
Weighted average volatility		68%
Forfeiture rate		46%
Weighted average risk-free interest rate		0.04%
Expected dividend rate		-

The liability incurred under this agreement totaled $943,000 which was recognized in general and administrative expense in 2014 and included a fair value of $50,000 attributable to the stock option provisions. At December 31, 2016, the remaining liability totaled $372,000 and was paid in 2016.