Note 9 – 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 January 2017, the Company completed a rights offering as described in Note 14 whereby 2,395,471 shares of common stock and 2,395,471 warrants to purchase an equal number of shares of common stock at $4.00 per share were issued, for net cash proceeds of approximately $8.7 million.

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.

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, 2016, the number of shares reserved for issuance under the Plan totaled 1,407,269 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:

	2016			2015
Reserved but unissued shares under the Plan, beginning of year		455,372			242,764
Increases in the number of authorized shares under the Plan		15,039			315,225
Grants of stock options		(171,900	)		(409,200	)
Stock option forfeitures		12,485			116,780
Exercise of stock options		-			212,837
Stock grants		(44,112	)		(23,034	)
Reserved but unissued shares under the Plan, end of year		266,884			455,372

Stock Options

In 2016, the Company granted 171,900 stock options under the Plan to certain employees. The stock options have exercise prices based on the grant date fair values ranging from $4.21 to $4.85 per share with a weighted average of $4.22 per share, a contractual life of 10 years, and vest over four years. As permitted by SAB 107, due to the Company’s insufficient history of option activity, management utilized the simplified approach to estimate the expected term of the options, 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	6.25		years
Weighted average volatility		73	%
Forfeiture rate		12	%
Weighted average risk-free interest rate		1.56	%
Expected dividend rate		0	%

The fair value of stock options granted, estimated on the date of grant using the Black-Scholes option valuation model, was $419,000. The recognized compensation expense associated with these grants in 2016 was $78,000.

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 with a weighted average of $5.39 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 options. 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	0	%

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 2016 and 2015 was $397,000 and $579,000, respectively.

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

	2016							2015
	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		723,400		$	5.18		8.10		643,817		$	4.46		5.67
Granted		171,900		$	4.22		9.26		409,200		$	5.39		9.22
Exercised		-			-		-		(212,837	)	$	2.51		-
Forfeited/Expired/Exchanged		(12,485	)	$	6.17		-		(116,780	)	$	6.86		-
Outstanding at December 31		882,815		$	4.98		7.51		723,400		$	5.18		8.10
Exercisable at December 31		547,532		$	4.91		6.85		257,391		$	4.05		6.12

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

	Number of Options			Weighted Average Grant Date Fair Value		Number of Options			Weighted Average Grant Date Fair Value

Non-vested stock options at January 1		466,009		$	5.79		201,859		$	6.57
Granted		171,900		$	4.22		409,200		$	5.39
Vested		(290,141	)	$	5.67		(97,367	)	$	5.16
Exercised		-			-		-			-
Forfeited/Expired/Exchanged		(12,485	)	$	6.17		(47,683	)	$	6.88
Non-vested stock options at December 31		335,283		$	5.09		466,009		$	5.79

The estimated aggregate pretax intrinsic value of the Company’s outstanding vested stock options at December 31, 2016 is $173,000. 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, 2016, there was $675,000 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:

2017	$	352,000
2018		177,000
2019		120,000
2020		26,000
	$	675,000

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

	2016		2015
Research and development	$	112,000	$	108,000
General and administrative		513,000		663,000
Effect on net loss	$	625,000	$	771,000
Effect on net loss per share	$	0.05	$	0.06

Stock Grants

In 2016 and 2015, the Company granted 44,112 and 23,034 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 $3.40 and $5.97 per share for a total value of $150,000 and $137,000 respectively in each of 2016 and 2015, 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 which were subject to a declining repurchase right by the Company at $0.0001 per share through September 30, 2016 if the employee terminates employment or certain other designated events occur. The Company recognized general and administrative compensation expense of $20,000 and $26,000 in 2016 and 2015, respectively, related to this stock grant.

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, 2016 totaled 116,883 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 10,000 and 5,000 shares from the Consultant Plan to consultants for services in 2016 and 2015, respectively. The fair value of the stock at the time of grant was $4.85 and $3.96 per share, respectively, for a total value of $44,000 in 2016 and $20,000 in 2015 which the Company recognized in general and administrative expense.

Activity under the Consultant Plan is as follows:

	2016			2015
Reserved but unissued shares under the Consultant Plan at January 1		92,130			65,608
Increases in the number of authorized shares under the Consultant Plan		1,503			31,522
Stock grants		(10,000	)		(5,000	)
Reserved but unissued shares under the Consultant Plan at December 31		83,633			92,130

Warrants

In conjunction with the January 2017 rights offering as described in Note 14, the Company issued 2,395,471 warrants to purchase an equal number of shares of common stock at $4.00 per share.

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

				2016		2015
	Warrants			Weighted Average Exercise Price		Warrants		Weighted Average Exercise Price
Outstanding at January 1		564,272		$	4.14		564,272	$	4.14
Granted		-			-		-		-
Exercised		(118,959	)	$	2.20		-		-
Forfeited/Expired		-			-		-		-
Outstanding at December 31		445,313		$	4.65		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, 2016:

			Total Outstanding Warrants
Exercise Price		Warrants		Weighted Average Exercise Price		Life (in years)
$	1.80		80,000	$	1.80		4.13
$	5.00		345,000	$	5.00		0.32
$	10.00		20,313	$	10.00		2.18
			445,313	$	4.65