CLEARSIGN COMBUSTION CORP

During the three months ended March 31, 2021 the Company issued common stock pursuant to our At-The-Market Offering Sales Agreement, dated December 23, 2020, with Virtu Americas LLC, as sales agent pursuant to which we may sell shares of common stock with an aggregate offering price of up to $15,000,000 (the “ATM”). As of March 31, 2021, we had sold 940,748 shares of our common stock under the ATM program, at an average price of $4.93 per share. Gross proceeds totaled approximately $4.6 million and net cash proceeds approximated $4.5 million. Of these amounts, 190,748 shares representing net proceeds of approximately $1.1 million were sold as of March 31, 2021, but settled during April 2021.

Outstanding stock option awards at March 31, 2021 and December 31, 2020 totaled 3,630,994 shares and 2,697,119 shares, respectively, with the right to purchase 2,780,735 shares and 2,379,752 shares being vested and exercisable at March 31, 2021 and December 31, 2020, respectively. The recognized compensation expense associated with stock option awards for the three months ended March 31, 2021 and 2020 totaled $410,000 and $126,000 respectively. On January 27, 2021 the Plan expired so there are no remaining shares available to award under this plan. At March 31, 2021, there was $234,000 of total unrecognized compensation cost related to performance incentive awards that are probable of vesting and another $1.4 million in performance incentive awards that are currently deemed as not probable of vesting related to share based compensation arrangements awarded under the Plan. The cost of the awards in which vesting was assessed as probable is expected to be recognized over a weighted average period of 1 year. Awards for which vesting was assessed as not probable will be reassessed at the end of each reporting period. The intrinsic value of outstanding stock options was $11.8 million at March 31, 2021.

The Company’s directors are currently compensated solely in stock option awards. In addition to being compensated for their services as directors, individual directors are also compensated for committee membership, for services as a committee chair and for services as a lead director. On January 22, 2021, the Company awarded from the Plan to certain directors stock options for the purchase of 62,500 shares of common stock as payment for services rendered to the Company in the first quarter of 2021.  The stock options have an exercise price based on the grant date fair value, which was $3.97. All of the options have a contractual life of 10 years.  The recognized compensation expense associated with director stock option awards for the three months ended March 31, 2021 and 2020 totaled $210,000 and $53,000, respectively. The following weighted-average assumptions were utilized in the calculation of the fair value of the stock options:

Stock Grants

The Company recognized revenue of $363,000 during the three months ended March 31, 2021 from the delivery of product under a burner contract with an infrastructure company that was delivered during the quarter and no revenue during the three months ended March 31, 2020.

During the three months ended March 31, 2021, the Company recognized cost of goods sold of $250,000 from the burner contract. Additionally, the Company recognized $18,000 in cost of goods sold on a contract that the Company anticipates will show a loss upon completion and $8,000 in residual costs associated with a contract that was completed during 2020. The recognized cost of goods sold was offset by adjustments totaling $51,000 related to the reversal of accrual for product warranties that expired on three projects that were completed during 2018.

The Company did not record any cost of goods sold for the three months ended March 31, 2020.

Operating Expenses. Operating expenses, consisting of research and development (R&D) and general and administrative (G&A) expenses, increased by approximately $196,000, or approximately 10%, to $2,159,000 for the three-month period ended March 31, 2021, as compared to $1,963,000 for the three-month period ended March 31, 2020. The Company increased our R&D expenses by $16,000, or approximately 2%, to $826,000 for the three-month period ended March 31, 2021 as compared to $810,000 for the three-month period ended March 31, 2020. The increase in R&D expenses was due primarily to field testing and laboratory related costs. G&A expenses increased by $180,000, or approximately 16% to $1,333,000 in the three-month period ended March 31, 2021 as compared to $1,153,000 in the three-month period ended March 31, 2020, resulting primarily from increases in share-based compensation offset by reduced consulting services.