Note 6 – 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.

Equity Incentive Plan

The Company has adopted and the Company’s shareholders have approved the ClearSign Combustion Corporation 2011 Equity Incentive Plan (the Plan) which permits the Company to grant to eligible participants, including officers, employees, directors, consultants and advisors, options to purchase shares of common stock, stock awards and stock bonuses. 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. At the Company's Annual Meeting held on May 8, 2019, the shareholders approved an amendment to the Plan that (i) increased the number of shares of common stock in the reserve by 1,231,593 to a total of 4,004,214 shares of common stock, representing approximately 15% of the number of shares of the Company's stock outstanding and (ii) increased the number of shares that may be issued pursuant to the evergreen provision, if any, to the lesser of 15% 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. Therefore, as of June 30, 2019, the number of shares of common stock reserved for issuance under the Plan totaled 4,004,214.

In the six months ended June 30, 2019, the Company made awards of stock options for the purchase of an aggregate 1,298,718 shares of common stock to its employees and directors from the Plan. Of these awards, options covering 159,100 shares of common stock were awarded in lieu of cash bonuses for 2018 and the expense was recorded during the year ended December 31, 2018. An option for the purchase of 258,618 shares of common stock was issued from the Plan to the Company's Chief Executive Officer as part of options for the purchase of an aggregate 600,000 shares of common stock granted to him in conjunction with his recruitment and employment, as described below. Options covering an additional 381,000 shares of common stock have been issued as payment to the Company's directors and are described below. The remaining stock options awards covering 500,000 shares of common stock have exercise prices at the grant date fair value ranging from $0.87 to $2.25 per share, contractual lives of 10 years, and vest over 2 years. The fair value of the stock options estimated on the date of grant using the Black-Scholes option valuation model was $259,000. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:


Expected life	5.75	years
Weighted average volatility	71	%
Forfeiture rate	20	%
Weighted average risk-free interest rate	2.51	%
Expected dividend rate	0	%

Outstanding stock option awards at June 30, 2019 and December 31, 2018 totaled 2,173,033 shares and 880,277 shares, respectively, with the right to purchase 1,152,607 shares and 587,962 shares being vested and exercisable at June 30, 2019 and December 31, 2018, respectively. The recognized compensation expense associated with stock option awards for the three and six months ended June 30, 2019 and 2018 totaled $92,000 and $216,000 and $61,000 and $111,000, respectively. On June 30, 2019 the number of shares reserved under the Plan but unissued totaled 1,239,302. At June 30, 2019, there was $418,000 of total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average period of 2.0 years.The intrinsic value of outstanding stock options was $71,000 at June 30, 2019.

During 2019, the Company’s directors are compensated solely in stock option awards. In addition to being paid for their services as directors, individual directors are paid for committee membership, for services as a committee chair and for services as a lead director. 381,000 options for the purchase of shares of common stock were granted to members of the Board of Directors for service during 2019. The options have an exercise price of $1 and vest in equal increments at the end of each quarter. The recognized expense associated with Board stock option awards for the three and six months ended June 30, 2019 and 2018 totaled $69,000 and $69,000, and $0 and $0, respectively. At June 30, 2019 there was $68,000 of unrecognized cost related to non-vested Board fees granted under the Plan. The following assumptions were utilized in the calculation of the fair value of the stock options:


Expected life	5.75	years
Weighted average volatility	71	%
Forfeiture rate	20	%
Weighted average risk-free interest rate	2.25	%
Expected dividend rate	0	%

Consultant Stock Plan

The Company has a Consultant Stock Plan (the Consultant Plan) which 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 awards 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 June 30, 2019 totaled 253,342 with 195,092 of those shares unissued. 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 shares of common stock to a consultant under the Consultant Plan for services performed and to be performed during the period from August 13, 2018 to August 31, 2019. The fair value of the stock at the time of grant was $1.44 per share for a total value of $14,000. The Consultant Plan expense for the three and six months ended June 30, 2019 and 2018 was $4,000 and $7,000 and $8,000 and $17,000, respectively.

Inducement Stock Options

Pursuant to the rules of The Nasdaq Stock Market, and in compliance with those rules, the Company may issue equity awards, including stock options, as an inducement to an individual to accept employment with the Company. Inducement awards need not be approved by the Company’s shareholders. During the six months ending June 30, 2019 the Company granted options to purchase 600,000 shares of common stock as an inducement to its President and Chief Executive Officer to accept the Company’s offer of employment. (See Note 7.) The stock options have exercise prices at the award date fair value ranging from $1.16 to $2.25 per share, contractual lives of 10 years, and vest over 2 years. An option to purchase 258,618 shares was issued from the Company’s 2011 Equity Incentive Plan. Non-qualified stock options covering the remaining 341,382 shares were issued from the Company’s reserve of authorized but unissued shares of common stock. The fair value of the stock options estimated on the date of grant using the Black-Scholes option valuation model was $329,000. The recognized compensation expense associated with these awards for the three and six months ended June 30, 2019 was $49,000 and $158,000, respectively. The remaining unrecognized compensation expense associated with these awards is $171,000. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:


Expected life	5.75	years
Weighted average volatility	71	%
Forfeiture rate	20	%
Weighted average risk-free interest rate	2.55	%
Expected dividend rate	0	%

Warrants

At June 30, 2019, warrants for the purchase of 80,000 shares of common stock at an exercise price of $1.80 per share were outstanding and had a remaining life of 1.64 years.

The intrinsic value of the outstanding warrants was $0 at June 30, 2019.