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<p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 1 – Organization and Description of Business</b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">ClearSign Combustion Corporation (ClearSign or the Company) is a development stage company located in Seattle, Washington and incorporated in the state of Washington on January 23, 2008. The Company was formed to design, develop and market technologies that improve both the energy efficiency and emission control characteristics of combustion systems. The Company’s technology introduces a computer-controlled electric field into the combustion region which may better control gas-phase chemical reactions and improve system performance and cost-effectiveness.</p>
<p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 2 – Summary of Significant Accounting Policies</b></p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Basis of Presentation and Going Concern</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The accompanying unaudited condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair presentation. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Because of our historic net losses and negative working capital position, our independent auditors in their report on our financial statements for the year ended December 31, 2011 expressed substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States (US GAAP) which contemplate continuation of the Company as a going concern. However, the Company is subject to the risks and uncertainties associated with a new business, has no established source of revenue, and has incurred significant losses from operations since inception. The Company’s operations are dependent upon it raising additional capital.  These matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">As disclosed in Note 7, subsequent to March 31, 2012 the Company raised approximately $_________ through an initial public offering.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Development Stage Enterprise</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company is a development stage company as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 915, <i>Development Stage Entities</i>. The Company is devoting substantially all of its present efforts to design and develop new technologies in combustion systems and its planned principal operations have not yet commenced. The Company has not generated any revenues from operations and has no assurance of any future revenues. All losses accumulated since January 23, 2008 have been considered as part of the Company's development stage activities.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Use of Estimates</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The preparation of financial statements in conformity with US GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Reclassifications</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Certain 2011 amounts have been reclassified to conform with 2012 presentation.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">  </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Cash and Cash Equivalents</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Highly liquid investments purchased with an original maturity of three months or less are considered cash equivalents. Cash is maintained with a commercial bank where accounts are generally guaranteed by the Federal Deposit Insurance Corporation up to $250,000. Our deposits exceed this limit.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Fixed Assets</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Fixed assets are recorded at cost.  Depreciation is computed using the straight-line method over the
estimated lives of the respective assets. Leasehold improvements are depreciated over the life of the lease or their useful life, whichever is shorter. All other fixed assets are depreciated over three to four years. Maintenance and repairs are expensed as incurred.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Patents and Trademarks</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Patents and trademarks are recorded at cost. Amortization is computed using the straight-line method over the estimated useful lives of the assets once they are awarded, which has not yet occurred.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Impairment of Long-Lived Assets</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company tests long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. As of March 31, 2012 and December 31, 2011, the Company determined that there was no impairment.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Fair Value of Financial Instruments</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company's financial instruments primarily consist of cash, accounts payable and accrued expenses. As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheets. This is primarily attributed to the short maturities of these instruments. The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Research and Development</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The cost of research and development is expensed as incurred.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Deferred Rent</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Operating lease agreements which contain provisions for future rent increases or periods in which rent payments are reduced or abated are recorded in monthly rent expense in the amount of the total payments over the lease term divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent which is reflected on the accompanying balance sheet.</p><p style="text-align: left; margin-top: 0pt; font: 10pt times new roman, times, serif; margin-bottom: 0pt;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Income Taxes</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Tax benefits from an uncertain tax position are recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times,
serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Stock-Based Compensation</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the financial statements based on the estimated fair value of the awards on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Stock Issuance Costs</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Stock issuance costs are recorded as a reduction of the related proceeds through a charge to stockholders’ equity.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Common Stock</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company records common stock issuances when all of the legal requirements for the issuance of such common stock have been satisfied.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Net Loss per Common Share</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include additional common shares available upon exercise of stock options and warrants using the treasury stock method, except for periods for which no common share equivalents are included because their effect would be anti-dilutive. Potentially dilutive shares outstanding amounted to 575,743 at March 31, 2012 and December 31, 201, respectively.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Recently Issued Accounting Pronouncements</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Management does not believe that any recently issued, but not yet effective standards, if adopted, will have a material effect on the financial statements.</p>
<p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 3 – Fixed Assets</b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b> </b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Fixed assets are summarized as follows:</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif; color: red;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif; color: red;"></p><table align="center" style="width: 80%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="vertical-align: bottom;"><td style="font-size: 10pt;"> </td><td style="font-size: 10pt;"> </td><td style="text-align: center; font-size: 10pt;" colspan="2">March 31,</td><td style="font-size: 10pt;"> </td><td style="font-size: 10pt;"> </td><td style="text-align: center; font-size: 10pt;" colspan="2">December 31,</td><td style="font-size: 10pt;"> </td></tr><tr style="vertical-align: bottom;"><td style="font-size: 10pt;"> </td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-size: 10pt;" colspan="2">2012</td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: center; font-size: 10pt;" colspan="2">2011</td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; width: 70%; font-size: 10pt;">Machinery and equipment</td><td style="width: 1%; font-size: 10pt;"> </td><td style="text-align: left; width: 1%; font-size: 10pt;">$</td><td style="text-align: right; width: 12%; font-size: 10pt;">148,187</td><td style="text-align: left; width: 1%; font-size: 10pt;"> </td><td style="width: 1%; font-size: 10pt;"> </td><td style="text-align: left; width: 1%; font-size: 10pt;">$</td><td style="text-align: right; width: 12%; font-size: 10pt;">142,045</td><td style="text-align: left; width: 1%; font-size: 10pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; font-size: 10pt;">Office furniture and equipment</td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">27,057</td><td style="text-align: left; font-size: 10pt;"> </td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">25,195</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; font-size: 10pt;">Leasehold improvements</td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">7,917</td><td style="text-align: left; font-size: 10pt;"> </td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">7,917</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;">Accumulated depreciation</td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: right; font-size: 10pt;">(71,648</td><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;">)</td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: right; font-size: 10pt;">(58,249</td><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;">)</td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="font-size: 10pt;"> </td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">111,513</td><td style="text-align: left; font-size: 10pt;"> </td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">116,908</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;">Construction in progress</td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: right; font-size: 10pt;">63,912</td><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;"> </td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: right; font-size: 10pt;">45,265</td><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="padding-bottom: 2.5pt; font-size: 10pt;"> </td><td style="padding-bottom: 2.5pt; font-size: 10pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left; font-size: 10pt;">$</td><td style="border-bottom: black 2.5pt double; text-align: right; font-size: 10pt;">175,425</td><td style="text-align: left; padding-bottom: 2.5pt; font-size: 10pt;"> </td><td style="padding-bottom: 2.5pt; font-size: 10pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left; font-size: 10pt;">$</td><td style="border-bottom: black 2.5pt double; text-align: right; font-size: 10pt;">162,173</td><td style="text-align: left; padding-bottom: 2.5pt; font-size: 10pt;"> </td></tr></table>
<p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 4 – Promissory Note</b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b> </b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In December 2011, the Company executed a $47,509 promissory note with a vendor to extend the terms of an account payable. The fully amortizing note bears interest at 8% per annum and is payable in equal monthly payments of $4,491 through its maturity in November 2012. The note is unsecured and may be prepaid at any time without penalty. The principle balances, including accrued interest, at March 31, 2012 and December 31, 2011 totaled $35,017 and $47,667, respectively.</p>
<p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 5 – Stockholders’ Equity</b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Common Stock</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In December 2011, the Company affected a 1.25-for-one common stock split to shareholders of record as of December 22, 2011 and correspondingly increased the amount of authorized common shares. All share and per share information has been retroactively adjusted to reflect the stock split.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In February 2011, the Company amended its articles of incorporation. Previously, the Company was authorized to issue 8,000,000 shares of common stock and 4,000,000 shares of Class B common stock. By amendment, authorized common stock was increased to 50,000,000 shares and Class B common stock was eliminated.  Prior to the amendment, the holders of the Class B common stock voluntarily converted the 860,000 outstanding shares to 1,075,000 common stock shares. In December 2011, the Company amended its articles of incorporation to increase the authorized common stock to 62,500,000 shares as part of the 1.25-for-one stock split.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">From March to May 2011, the Company completed the sale of 1,363,364 shares of common stock at $2.20 per share to raise $2,999,374. In conjunction with this sale, the placement agent, MDB Capital Group LLC (MDB), earned a fee of $300,000 which it elected to receive in the form of 136,364 common stock shares valued at $2.20 per share. MDB also received warrants to purchase 136,368 common stock shares at $2.20 per share with a weighted average grant-date fair value of these warrants of approximately $64,174. The Company’s legal counsel and others were paid with 127,273 common stock shares at $2.20 per share.  The Company incurred $807,210 of issuance costs which is recorded against additional paid-in capital in 2011, of which $644,173 was paid with common stock. In addition, MDB provided consulting services to the Company in 2011 where it earned a fee of $1,000,000 which MDB elected to receive in the form of 454,547 common stock shares valued at $2.20 per share. This fee is included in general and administrative expense. The grants of common stock are reflected in the Statement of Stockholders’ Equity under shares issued for services at $2.20 per share. MDB is a related party due to its significant ownership of the Company’s common stock and warrants.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Preferred Stock</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company is authorized to issue 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.</p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Equity Incentive Plan</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In January 2011, the Company adopted an Equity Incentive Plan (the Plan) providing 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, consultants, and advisors. The Company originally reserved 625,000 shares of common stock for issuance under the Plan. The Plan provides for periodic increases in the number of authorized shares available for issuance under the Plan on the first day of each of the Company’s fiscal quarters beginning October 1, 2011. The quarterly increases are equal to the lesser of 10% of any new shares subsequently issued by the Company or such lesser amount as the Board of Directors shall determine. Effective March 31, 2012, the number of shares reserved for issuance under the Plan total 625,555 shares. 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.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Outstanding stock option grants at March 31, 2012 and December 31, 2011 total 359,375 with 125,000 being vested and exercisable. Stock grants made to date through March 31, 2012 and December 31, 2011 total 125,000, all of which are subject to declining repurchase rights by the Company at $0.0001 per share through June 30, 2015. The recognized compensation expense associated with these grants for the three months ended March 31, 2012 and 2011 totaled $47,648 and $0, respectively. At March 31, 2012, the number of shares reserved under the Plan but unissued total 141,180.</p><p style="text-align: left; margin-top: 0pt; font: 10pt times new roman, times, serif; margin-bottom: 0pt;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><u>Warrants</u></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In conjunction with the issuance of common stock from March to May 2011, the Company granted warrants to MDB to purchase 136,368 common stock shares at the fair value of $2.20 per share. In 2009, the Company granted warrants to purchase a total of 80,000 shares of common stock of
the Company to technical advisors at the fair value of $1.80 per share.</p>
<p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 6 – Commitments and Contingencies</b></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company has a triple net lease for office and laboratory space for the period November 2011 to February 2017. Under the terms of the lease, the Company paid no rent for the period November 2011 to February 2012. Rent payments commenced in March 2012 and will escalate annually by 3%. The Company records monthly rent expense equal to the total of the payments over the lease term divided by the number of months of the lease term. Therefore, rent expense of $17,503 was accrued during the three months ended March 31, 2012 and $34,978 was accrued since the lease inception in November 2011. Under the terms of the lease, the Company also pays monthly triple net operating costs. Minimum future payments under these leases at March 31, 2012 are as follows:</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif; color: red;"></p><table align="center" style="width: 40%; border-collapse: collapse; font: 10pt times new roman, times, serif;" cellspacing="0" cellpadding="0"><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; width: 57%; font-size: 10pt;">2012</td><td style="width: 1%; font-size: 10pt;"> </td><td style="text-align: left; width: 1%; font-size: 10pt;">$</td><td style="text-align: right; width: 40%; font-size: 10pt;">79,000</td><td style="text-align: left; width: 1%; font-size: 10pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; font-size: 10pt;">2013</td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">108,000</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; font-size: 10pt;">2014</td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">111,000</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; font-size: 10pt;">2015</td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">115,000</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="text-align: left; font-size: 10pt;">2016</td><td style="font-size: 10pt;"> </td><td style="text-align: left; font-size: 10pt;"> </td><td style="text-align: right; font-size: 10pt;">118,000</td><td style="text-align: left; font-size: 10pt;"> </td></tr><tr style="background-color: white; vertical-align: bottom;"><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;">Thereafter</td><td style="padding-bottom: 1pt; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: left; font-size: 10pt;"> </td><td style="border-bottom: black 1pt solid; text-align: right; font-size: 10pt;">20,000</td><td style="text-align: left; padding-bottom: 1pt; font-size: 10pt;"> </td></tr><tr style="background-color: #ccffcc; vertical-align: bottom;"><td style="padding-bottom: 2.5pt; font-size: 10pt;"> </td><td style="padding-bottom: 2.5pt; font-size: 10pt;"> </td><td style="border-bottom: black 2.5pt double; text-align: left; font-size: 10pt;">$</td><td style="border-bottom: black 2.5pt double; text-align: right; font-size: 10pt;">551,000</td><td style="text-align: left; padding-bottom: 2.5pt; font-size: 10pt;"> </td></tr></table><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif; color: red;"></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif; color: red;"></p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">For the three months ended March 31, 2012 and 2011, rent expense amounted to $36,210 and $7,254, respectively.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">In December 2011, the Company entered into an Employment Agreement (the Agreement) with Richard Rutkowski, its Chief Executive Officer, effective on January 1, 2012. Unless earlier terminated, the Agreement will continue for a term of three years. Compensation includes an annual salary of $350,000 with annual cost-of-living adjustments, annual cash and equity bonuses based on performance standards established by the Compensation Committee of the Board of Directors, medical and dental benefits for Mr. Rutkowski and his family, disability insurance, and term life insurance for the benefit of his dependents. The Agreement may be terminated by the Company without cause under certain circumstances, as defined in the Agreement whereby a severance payment would be due in the amount of compensation that would have been due had employment not been terminated or one year of the current annual compensation, whichever is greater.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">The Company has agreements with its three independent directors to compensate them annually after the Company’s common stock commences trading publicly. The obligation totals $300,000 per year of which $150,000 is to be paid with the Company’s common stock at fair value.</p><p style="text-align: justify; margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p><p style="margin: 0pt 27pt 0pt 0.5in; font: 10pt times new roman, times, serif;">Our former legal advisors, Perkins Coie LLP, contacted us on March 26, 2012 to advise us that they believe TWB Investment Partnership II, L.P., a party related to Perkins Coie LLP, has the right to acquire 25,250 shares of our common stock at $0.02 per share pursuant to an engagement letter dated December 4, 2007. We have initially denied the claim since, among other defenses, we believe we entered
into a full settlement of all amounts owed to Perkins Coie LLP in November 2011, but we continue to review this claim. Perkins Coie LLP currently owns 3,555 shares of our common stock which we issued in conjunction with the November 2011 settlement.</p>
<p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;"><b>Note 7 – Subsequent Events</b></p>
<p style="margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;"> </p>
<p style="text-align: justify; margin: 0pt 0px 0pt 0.5in; font: 10pt times new roman, times, serif;">In April and May 2012, the Company completed an initial public offering (IPO) whereby 3,450,000 shares of common stock were issued at $4.00 per share, which included the exercise of the overallotment allowance by the underwriter, MDB Capital Group LLC. Gross proceeds from the IPO totaled $13.8 million and net proceeds approximated $10.9 million. Expenses of the offering approximated $2.9 million, including underwriter fees of $1.2 million paid to MDB Capital Group LLC along with 345,000 warrants to purchase ClearSign’s common stock at $5.00 per share exercisable from April 2013 to April 2017, qualified independent underwriter fees of $110,000, underwriter legal fees of $125,000, underwriter expenses of $35,000, and issuer legal fees of $850,000, which includes 110,000 shares of common stock issued in April 2012 to the Company’s law firm at $4.00 per share.</p>
-4490238
18000
18000
0
0
0
4500
0
4