ClearSign Technologies Corp

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – Organization and Description of Business

ClearSign Technologies Corporation (“ClearSign” or the “Company”) designs and develops products and technologies for the purpose of decarbonization and improving key performance characteristics of industrial and commercial systems, including operational performance, energy efficiency, emission reduction, safety, and overall cost-effectiveness. The Company’s patented technologies are designed to be embedded in established original equipment manufacturers (“OEM”) products as ClearSign Core™ and ClearSign Eye™ and other sensing configurations in order to enhance the performance of combustion systems and fuel safety systems in a broad range of markets. These markets include energy (upstream oil production and down-stream refining), commercial/industrial boiler, chemical, petrochemical, transport and power industries. The Company’s primary technology is its ClearSign Core technology, which achieves very low emissions without the need of selective catalytic reduction.

The Company was originally incorporated in the State of Washington in 2008. During January 2022, the Company relocated its headquarters from Seattle, Washington to Tulsa, Oklahoma. Effective June 15, 2023, the Company changed its state of incorporation to Delaware. On July 28, 2017, the Company incorporated a subsidiary, ClearSign Asia Limited, in Hong Kong to represent the Company’s business and technological interests throughout Asia. Through ClearSign Asia Limited, the Company has established a wholly foreign owned enterprise (“WFOE”) in China – ClearSign Combustion (Beijing) Environmental Technologies Co., LTD. On August 22, 2024, the Company’s Board of Directors (the “Board”) authorized management to move forward with filing for dormancy with Chinese regulators to suspend the Company’s Beijing, China operations. A dormancy filing allows the Company to keep its China legal entity in a suspended status for up tothree years. The Company can revive its China operations at any time during those three years with minimal cost impact. Based on the Company’s current project plans, it expects to file for dormancy on or near December 31, 2024.

Unless otherwise stated or the context otherwise requires, the terms “we,” “us,” “our,” “ClearSign” and the “Company” refer to ClearSign Technologies Corporation and its subsidiary, ClearSign Asia Limited.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) 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. The condensed consolidated balance sheet at December 31, 2023 has been derived from the Company’s audited consolidated financial statements as of that date.

In the opinion of management, these condensed consolidated financial statements reflect all normal recurring and other adjustments necessary for a fair presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year or any other future periods.

The accompanying unaudited condensed consolidated financial statements include the accounts of ClearSign and its subsidiary. Intercompany balances and transactions have been eliminated in consolidation.

Liquidity

The Annual Report on Form 10-K filed with the SEC on April 1, 2024, contained a “going concern” note, which raised substantial doubt about our ability to continue as a going concern. We believe that we have alleviated the substantial doubt by selling equity securities on April 23, 2024, May 15, 2024, and June 24, 2024, which resulted in aggregate gross proceeds of approximately $14.2 million and net proceeds of approximately $13.0 million, after broker discounts and related fees. Refer to “Note 7 – Equity” for further details about the offerings effectuated during the nine months ended September 30, 2024.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.

Research and Development

The cost of research and development is expensed as incurred. Research and development costs consist of salaries, benefits, share-based compensation, consumables, and consulting fees, including costs to develop and test prototype equipment and parts. Research and development costs have been offset by funds received, if any, from strategic partners in cost sharing, collaborative projects. During the three and nine months ended September 30, 2024, the Company received $28 thousand and $135 thousand, respectively, from these arrangements. During the three and nine months ended September 30, 2023, the Company received $60 thousand from these arrangements.

Foreign Operations

The accompanying unaudited condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023 include assets amounting to approximately $209 thousand and $334 thousand, respectively, relating to the operations of ClearSign Asia Limited. The Beijing registered capital requirement is $350 thousand, which is required to be paid by June 30, 2032, and of which $211 thousand has been paid as of September 30, 2024. On August 22, 2024, the Board authorized management to move forward with filing for dormancy with Chinese regulators to suspend the Company’s Beijing, China operations. A dormancy filing allows the Company to keep its China legal entity in a suspended status for up tothree years. The Company can revive its China operations at any time during those three years with minimal cost impact. Based on the Company’s current project plans, it expects to file for dormancy on or near December 31, 2024. We will incur one-time non-recurring costs related to this project for severance and related benefit costs, equipment disposal and shipment costs, and legal filing fees. During the three months ended September 30, 2024, we recorded a one-time non-recurring $394 thousand accrual estimate related to our decision to suspend our China operations.

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”). ASU 2023-07 requires expanded disclosures about reportable segments including additional information on segment expenses, expanded interim period disclosures, and an explanation of how the chief operating decision maker utilizes segment information in evaluating segment performance. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. We are currently assessing the impact that the adoption of ASU 2023-07 will have on the disclosures in our consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”). The FASB issued ASU 2023-09 to enhance the transparency and decision-making usefulness of income tax disclosures by requiring additional information on an entity's tax rate reconciliation, as well as

income taxes paid. ASU 2023-09 is effective for our reporting period beginning January 1, 2025. We are currently assessing the impact that the adoption of ASU 2023-09 will have on the disclosures in our consolidated financial statements.

Note 3 – Fixed Assets

Fixed Assets

Fixed assets are summarized as follows:

Depreciation expense for the three and nine months ended September 30, 2024 was $4 thousand and $15 thousand, respectively.

Depreciation expense for the three and nine months ended September 30, 2023 was $41 thousand and $122 thousand, respectively.

Leases

The Company leases office space in Tulsa, Oklahoma, Seattle, Washington, and Beijing, China. During the nine months ended September 30, 2024 and 2023, the Company renewed its Beijing, China lease for 13 months with monthly rent at approximately$3 thousand. As a result of these renewals, the Company increased the right-of-use (“ROU”) asset and lease liability by$32 thousand and$34 thousand during the nine months ended September 30, 2024 and 2023, respectively.

The Company exited our long term Seattle operating lease on September 30, 2023. During October 2023, the Company entered into a sub-lease agreement to rent office space in Seattle for approximately$2 thousand per month fortwelve months. We renewed the twelve month Seattle sub-lease during October 2024 with substantially the same terms. The Tulsa and Beijing leases are classified as operating leases, with remaining terms ranging from less than twelve months to approximately four years; contractual language requires renewal negotiations to occur at or near termination. These leases are normal and customary for office space, in that, contractual guarantees exist requiring the lessee return the premises to its original functional state. The Company didnot incur restoration expenses for the three and nine months ended September 30, 2024. The Company didnot incur restoration expenses for the three months ended September 30, 2023, and incurred$31 thousand for the nine months ended September 30, 2023.

The Tulsa lease contains fixed annual lease payments that increase annually by 2%. The Seattle, Tulsa, and Beijing total monthly minimum rent is approximately $10 thousand. Operating lease costs for the three and nine months ended September 30, 2024 were $25 thousand and $73 thousand, respectively. Operating lease costs for the three and nine months ended September 30, 2023 were $35 thousand and $117 thousand, respectively.

Supplemental balance sheet information related to operating leases is as follows:

Supplemental cash flow information related to operating leases is as follows:

Minimum future payments under the Company’s operating lease liabilities as of September 30, 2024 are as follows:

At September 30, 2024, $15 thousand of our future minimum lease payments represents interest.

Note 4 – Patents and Other Intangible Assets

Patents and other intangible assets are summarized as follows:

Amortization expense for the three and nine months ended September 30, 2024 was $43 thousand and $123 thousand, respectively. Amortization expense for the three and nine months ended September 30, 2023 was $32 thousand and $109 thousand, respectively.

Future amortization expense associated with issued patents and registered trademarks as of September 30, 2024 is as follows:

The amortization life for patents ranges between three tofive years, with trademark lives set atten years. The Company does not amortize patents or trademarks classified as pending.

During the three and nine months ended September 30, 2024 and 2023, the Company assessed its patent and trademark assets for impairment. The Company incurred $17 thousand impairment costs for the three and nine months ended September 30, 2024. The Company didnot incur impairment costs for the three months ended September 30, 2023, and incurred $14 thousand impairment costs for the nine months ended September 30, 2023. The Company also evaluated its strategic approach to the pursuit and protection of its intellectual property. It is the intent of the Company to continue to pursue intellectual property protection.

If the Company identifies certain assets where the intellectual property does not directly align with its core technology, the Company will impair the intangible asset and write-off the asset as an expense.

Note 5 – Revenue, Contract Assets and Contract Liabilities

The Company recognized $1,859 thousand of revenues and $1,308 thousand of cost of goods sold during the three months ended September 30, 2024. The revenue and cost of goods sold predominantly relate to the delivery of multiple

process burners to a single customer. The delivery of products constitutes performance obligations per Accounting Standards Codification (“ASC”) 606.

The Company recognized $3,006 thousand of revenues and $1,976 thousand of cost of goods sold during the nine months ended September 30,2024. The revenue and cost of goods sold predominantly relate to the Company’s process burner product line. The Company delivered multiple burners for different customers, successfully completed engineering feasibility studies including computational fluid dynamic analysis, and fulfilled multiple spare parts orders. These products and services constitute performance obligations per ASC 606.

The Company recognized $85 thousand of revenues and $61 thousand of cost of goods sold during the three months ended September 30, 2023. The revenue and cost of goods sold relate to a sale of our boiler burner product line.

The Company recognized $1,129 thousand of revenues and $870 thousand of cost of goods sold during the nine months ended September 30, 2023. The revenue and cost of goods sold predominantly relate to the Company’s process burner product line, where the Company successfully completed a burner performance customer witness test, which represented a contractual performance obligation per ASC 606.

The Company had contract assets of $149 thousand and $188 thousand at September 30, 2024 and December 31, 2023, respectively. The Company had contract liabilities of $174 thousand and $1,116 thousand at September 30, 2024 and December 31,2023, respectively. Of the$1,116 thousand contract liability balance at December 31, 2023, the Company recognized revenue of $772 thousand and $1,025 thousand during the three and nine months ended September 30, 2024, respectively.

Note 6 – Product Warranties

A summary of the Company’s warranty liability activity, which is included in accrued liabilities in the accompanying consolidated balance sheets as of September 30, 2024 and December 31, 2023, is as follows:

Note 7 – Equity

Common Stock and Preferred Stock

The Company is authorized to issue 87.5 million shares of common stock and 2.0 million shares of preferred stock. Preferences, limitations, voting powers and relative rights of any preferred stock to be issued may be determined by the Board. The Company has not issued any shares of preferred stock.

In July 2018, in connection with a private placement of the Company’s common stock pursuant to a Stock Purchase Agreement, the Company granted clirSPV LLC (“clirSPV”) a right to purchase certain new equity securities that the Company sells for purpose of raising capital on terms and conditions no different from those offered to other purchasers (the “Participation Right”), so that clirSPV could maintain a 19.99% percentage ownership of the Company’s outstanding common stock. In no event may the Participation Right be exercised to the extent it would cause clirSPV or any of its affiliates to beneficially own 20% or more of the Company’s then outstanding common stock.

In May 2022, in connection with a waiver of the Participation Right’s notice requirements and other related closing mechanics for such Participation Right (the “Waiver”) the Company and clirSPV, agreed that the Participation Right may be extended from December 31, 2023, to such date that the holders oftwo-thirds of the outstanding units of clirSPV agree to extend each such holder’s existing agreement that he/she/it will have no right to force a redemption of his/her/its interests in clirSPV (the “Redemption Right”); provided, however, that the Participation Right could not be extended to a date later than June 30, 2027. On December 30, 2023, the Company received notice from clirSPV that the holders of at leasttwo-thirds of the outstanding units of clirSPV agreed to extend the waiver of the Redemption Right until December 31, 2024. Accordingly, the Participation Right will now expire on December 31, 2024.

The Company has an At-The-Market (“ATM”) program pursuant to a Sales Agreement with Virtu Americas LLC, as sales agent, dated December 23, 2020 (the “Sales Agreement”), pursuant to which the Company may sell shares of common stock with an aggregate offering price of up to $8.7 million. On March 18, 2024, the Company filed a prospectus supplement suspending the ATM program. The Company will not make any sales of its common stock pursuant to the Sales Agreement unless and until a new prospectus supplement is filed with the SEC; however, the Sales Agreement remains in full force and effect. During the nine months ended September 30, 2024, the Company issued zero shares of its common stock from the ATM program. As of September 30, 2024, the Company has cumulatively issued approximately 1.6 million shares of common stock under the ATM program, at an average price of $3.84 per share. Gross proceeds totaled approximately $6.1 million and net cash proceeds was approximately $5.9 million.

The Company is currently subject to the SEC’s “baby shelf rules,” which prohibit companies with a public float of less than $75 million from issuing securities under a shelf registration statement in excess of one-third of such company’s public float in a 12-month period. These rules may limit future issuances of shares by the Company under our “shelf” registration statement on Form S-3, the ATM program or other securities offerings.

Equity Offerings

Public Offering

On April 23, 2024, we completed an underwritten public offering (the “Public Offering”), pursuant to which we sold approximately 4,621 thousand shares of our common stock and 4,621 thousand redeemable warrants (the “Public Warrants”) at a price of $0.91 per share of common stock and $0.01 for the accompanying Public Warrant. On May 15, 2024, Public Ventures, LLC (“Public Ventures”), the underwriter of the Public Offering, exercised its over-allotment option in full to purchase an additional 693 thousand shares of common stock and 693 thousand Public Warrants. After deducting customary professional service fees, the net proceeds from the Public Offering amounted to approximately $4,222 thousand.

Each Public Warrant has an exercise price of$1.05 per share and is exercisable for a period offive years starting from the date of its issuance. Holders of the Public Warrants are not able to exercise their warrants on a cashless basis. The exercise price and number of shares of common stock issuable upon exercise is subject to appropriate adjustment in the event of stock dividends, stock splits, reorganizations or similar events affecting the Company’s common stock. We have the option, but not the obligation, to redeem the Public Warrants anytime between issuance and expiration, at a price of$0.01 per Public Warrant, provided that the closing price of the common stock reported equals or exceeds$2.275 (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) per share for any 20 business days within a 30 consecutive business-day period.

In connection with the Public Offering, we also issued approximately 425 thousand warrants to Public Ventures (the “Underwriter Warrants”), as consideration for the services provided as underwriter for the Public Offering. The Underwriter’s Warrants are exercisable at a per share exercise price of $1.1375 commencing 180 days from April 19, 2024, and expire on their fifth year anniversary. The Underwriter’s Warrants can be exercised on a cashless basis based on a formula set forth therein and are non-redeemable.

The shares of common stock and Public Warrants issued in the Public Offering have been classified and recorded as part of stockholders’ equity. The amount allocated to such instruments were based on their relative fair value, resulting in an initial carrying value for each of those instruments to be as follows:

In determining the fair values of the Public Warrants and Underwriter Warrants, we used a Black-Scholes option pricing model with the following assumptions:

The Underwriter Warrants issued in connection with the Public Offering have been accounted for as a direct cost of the Public Offering, resulting in no net effect to the overall stockholders’ equity.

The fair value of the shares of common stock issued in the Public Offering was determined using the closing price of our common stock immediately preceding the closing date of the Public Offering.

Private Placement

On April 23, 2024, we completed a private placement (the “Private Placement”) concurrent with the Public Offering noted above. As part of the Private Placement, we sold (i) approximately 2,250 thousand shares of common stock at a price of $0.91 per share of common stock; (ii) redeemable warrants to purchase up to approximately 8,108 thousand shares of our common stock (the “Private Warrants”) at a price of $0.01 per accompanying Private Warrant; and (iii) pre-funded warrants to purchase up to approximately 3,156 thousand shares of common stock (the “Private Pre-Funded Warrants”) at a price of $0.9099 per accompanying Private Pre-Funded Warrant. After deducting customary professional service fees, the net proceeds from the Private Placement amounted to approximately $4,468 thousand.

The Private Warrants have the same terms as the Public Warrants noted above, except that they are only exercisablesix months after their issuance.

Each Private Pre-Funded Warrant has an exercise price of $0.0001 per share and expire when exercised in full. In accordance with the terms of the Private Pre-Funded Warrants, the Company is prohibited from effecting an exercise of any Private Pre-Funded Warrants to the extent that such exercise would result in the number of shares of common stock beneficially owned by the holder and its affiliates exceeding 4.99% (or 9.99% at election of the holder) of the total number of shares of common stock outstanding immediately after giving effect to the exercise, which percentage may be increased or decreased at the holder’s election not to exceed 9.99%.

In connection with the Private Placement, we issued approximately 432 thousand warrants to Public Ventures, as compensation for their services as our exclusive placement agent in the Private Placement (the “Placement Agent Warrants”). The terms of the Placement Agent Warrants are the same as the Underwriter Warrants noted above.

The shares of common stock, Private Pre-Funded Warrants and Private Warrants issued in the Private Placement have been classified and recorded as part of stockholders’ equity. The amount allocated to such instruments were based on their relative fair value, resulting in an initial carrying value for each of those instruments to be as follows:

In determining the fair values of the Private Warrants, Private Pre-Funded Warrants, and Placement Agent Warrants, we used a Black-Scholes option pricing model with the following assumptions:

The Placement Agent Warrants issued in the Private Placement have been accounted for as a direct cost of the Private Placement resulting in no net effect to the overall stockholders’ equity.

The fair value of the shares of common stock issued in the Private Placement was determined using the closing price of our common stock immediately preceding the closing date of the Private Placement.

Participation Right Exercise

On June 24, 2024, in connection with the Public Offering and concurrent Private Placement noted above, clirSPV exercised its Participation Right (the “Participation Right Exercise”) and purchased (i)3,350 thousand shares of our common stock at a price of $0.91 per share; (ii) redeemable warrants to purchase up to approximately 7,040 thousand shares of our common stock (the “Participation Right Warrants,” and together with the Public Warrants, Private Warrants, Underwriter Warrants, Placement Agent Warrants, the “Warrants”) at a price of $0.01 per accompanying Participation Right Warrant; and (iii) pre-funded warrants to purchase up to approximately 1,343 thousand shares of common stock (the “Participation Right Pre-Funded Warrants,” and together with the Private Pre-Funded Warrants, the “Pre-Funded Warrants”) at a price of $0.9099 per accompanying Participation Right Pre-Funded Warrant. After deducting customary professional service fees, the net proceeds from the Participation Right Exercise amounted to approximately $4,277 thousand.

The Participation Right Warrants have the same terms as the Private Warrants noted above.

The Participation Right Pre-Funded Warrants have the same terms as the Private Pre-Funded Warrants noted above, except that, in accordance with the terms of the Participation Right Pre-Funded Warrants, the Company is prohibited from effecting an exercise that would result in beneficial ownership exceeding 19.99%.

The shares of common stock, Participation Right Pre-Funded Warrants, and Participation Right Warrants issued in the Participation Right have been classified and recorded as part of stockholders’ equity. The amount allocated to such instruments were based on their relative fair value, resulting in an initial carrying value for each of those instruments to be as follows:

In determining the fair values of the Participation Right Warrants and Participation Right Pre-Funded Warrants, the Company used a Black-Scholes option pricing model with the following assumptions:

The fair value of the shares of common stock issued in connection with the Participation Right Exercise was determined using the closing price of the Company’s common stock immediately preceding the closing date of the Participation Right Exercise.

Warrants & Pre-Funded Warrants

The following table summarizes the Warrants (as defined above) and Pre-Funded Warrants (as defined above) activity and outstanding balance as of September 30, 2024, along with the associated weighted average exercise price and weighted average remaining life.

Equity Incentive Plan

On June 17, 2021, the Company's shareholders approved and the Company adopted the ClearSign Technologies Corporation 2021 Equity Incentive Plan (the “2021 Plan”) which permits the Company to grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and performance shares, to eligible participants, which includes employees, directors and consultants. The Board’s Human Capital and Compensation Committee (the “Compensation Committee”) is authorized to administer the 2021 Plan.

The 2021 Plan provides for an annual increase in available shares equal to the lesser of (i)10% of the aggregate number of shares of common stock issued by the Company in the prior fiscal year; or (ii) such number provided by the Compensation Committee; provided, however, that the total cumulative increase in the number of shares available for issuance pursuant to this automatic share increase shall not exceed 400 thousand shares of common stock. In 2024, the Board did not exercise their right to limit the automatic increase. Accordingly, the 2021 Plan share reserve increased by 66 thousand shares.

Ending balances for the 2021 Plan is as follows:

Stock Options

Under the terms of the 2021 Plan, incentive stock options and nonstatutory stock options must have an exercise price at or above the fair market value on the date of the grant. At the time of grant, the Company will determine the period within which the option may be exercised and will specify any conditions that must be satisfied before the option vests and may be exercised. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model.

As permitted by SEC Staff Accounting Bulletin (“SAB”) 107, 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 has been determined through the Company’s historical stock price volatility. The Company has not made an estimate of forfeitures at the time of the grant, but rather accounts for forfeitures at the time they occur. The risk-free rate for periods within the expected 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.

Equity Incentive Plan Options

Compensation expense associated with stock option awards for the three and nine months ended September 30, 2024 totaled $37 thousand and$87 thousand, respectively. Compensation expense associated with stock option awards for the three and nine months ended September 30, 2023 totaled $42 thousand and $132 thousand, respectively.

A summary of the Company’s 2011 Equity Incentive Plan and the 2021 Plan stock option activity and changes is as follows:

The estimated aggregate pretax intrinsic value of the Company’s outstanding vested stock options at September 30, 2024 is $21 thousand. 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 September 30, 2024, there was $315 thousand of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements. Vesting criteria ranges from time-based to performance-based. The Company records costs for time-based arrangements ratably across the timeframe, whereas performance-based arrangements require management to continually evaluate predetermined goals against actual circumstances.

Inducement Options

During the year ended December 31, 2023, the Company granted non-qualified stock options to its Chief Technology Officer to purchase an aggregate of 150 thousand shares of common stock with an exercise price of $0.91 as a material inducement to accept employment with the Company. These inducement options vest inthree equal installments, withone third of the option vesting on the grant date, and each remaining third vesting on the second and third anniversaries

of the grant date, subject to continued employment with the Company. The fair value of these options were estimated on the grant date using the Black-Scholes valuation model, and totaled $112 thousand. The compensation expense recognized for these awards for the three and nine months ended September 30, 2024, was $9 thousand and $28 thousand, respectively. During the three and nine months ended September 30, 2023, compensation expense for these options waszero.

During the nine months ended September 30, 2023, the Company granted non-qualified stock options to its Director of Customer Relationships and Business Development to purchase an aggregate of 150 thousand shares of common stock with an exercise price of $1.31 as a material inducement to accept employment with the Company. These inducement options vest inthree equal installments, withone third of the option vesting on the grant date, and each remaining third vesting on the second and third anniversaries of the grant date, subject to continued employment with the Company. The fair value of these options were estimated on the grant date using the Black-Scholes valuation model, which resulted in $160 thousand. The compensation expense recognized for these awards for the three and nine months ended September 30, 2023 was $62 thousand. During the three months ended December 30, 2023, two-thirds of these inducement options were forfeited upon the departure of the Director of Customer Relationships and Business Development.

These inducement options were granted outside of the 2021 Plan and in accordance with the employment inducement

exemption provided under Nasdaq Listing Rule 5635(c)(4).

Restricted Stock Units

The Company awards employees and directors restricted stock units (“RSUs”) in lieu of cash payment for compensation. These awards are granted from the 2021 Plan. Employee vesting criteria is time based, and compensation expense is recognized ratably across the timeframe. The Company pays payroll withholding taxes on behalf of the employee at vesting, and withholds shares from the employee’s award to cover the taxes payable. The Company accrued taxes for RSU share-based compensation of $38 thousand and $15 thousand for the nine months ended September 30, 2024 and 2023, respectively.

Director vesting criteria is contingent upon the occurrence of one of four future events, which the Company cannot predict or control. Therefore, compensation expense for director RSUs is not recognized until one of these four future events occur, which is in accordance with FASB ASC* Topic 718,“Compensation-Stock Compensation” *(“ASC 718”). Total unrecognized compensation expense for director services as of September 30, 2024 was $501 thousand. Director compensation is earned on a quarterly basis with the target value of compensation set at $79 thousand per quarter, assuming four directors; one lead independent director; one chair for each committee; and two committee members for each of the three committees.

A summary of the Company’s RSUs activity is as follows:

A summary of the Company’s RSU compensation expense is as follows:

Stock Awards

The Company awards employees stock in lieu of cash payment for compensation, typically to satisfy accrued bonus compensation. The awards are granted from the 2021 Plan.

For the three months ended for September 30, 2024 and 2023, the Company issued zero stock awards respectively.

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 is authorized to administer the Consultant Plan and establish the grant terms. 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 shall determine.

The Consultant Plan activity is as follows:

The Consultant Plan compensation expense is summarized as follows:

Note 8 – Net Loss per Common Share

The Company calculates net loss per common share in accordance with ASC 260 “Earnings Per Share” (“ASC 260”). Basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Under ASC 260, shares issuable for little or no cash consideration are considered outstanding common shares and included in the computation of basic net loss per share. As such, for the three and nine months ended September 30, 2024, the Company included Pre-Funded Warrants to purchase shares of common stock in its computation of net loss per share. The Pre-Funded Warrants were issued in April and June 2024 with an exercise price of $0.0001 (See "Note 7 - Equity" for additional information).

The following potentially dilutive securities have not been included in the computation of diluted net loss per share for the three and nine months ended September 30, 2024 and 2023, as the result would be anti-dilutive:

Note 9 – Commitments and Contingencies

Litigation

From time to time the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in any such matter may harm the Company’s business. As of the date of this report, the Company is not a party to any material pending legal proceedings or claims that the Company believes will have a material adverse effect on the business, financial condition or operating results.

Indemnification Agreements

The Company maintains indemnification agreements with our directors and officers that may require the Company to indemnify these individuals against liabilities that arise by reason of their status or service as directors or officers, except as prohibited by law.

Note 10 – Government Assistance

During 2022, the Company was awarded a research grant from the Department of Energy (“DOE”) for approximately $250 thousand with the completion of such grant occurring in March 2023. The purpose of the grant was to produce a research paper for a flexible fuel ultra-low NOx process burner capable of burning 100% hydrogen fuel. During 2023, the Company was awarded a Phase 2 grant from the DOE to continue developing this ultra-low NOx hydrogen burner. The Phase 2 grant amount totaled approximately $1.6 million over atwo-year period. These awards allow the Company to request reimbursements for expenditures such as labor, material, and administrative costs. During the three and nine months ended September 30, 2024, the Company recognized $116 thousand and $332 thousand in reimbursements from the DOE, respectively. During the three and nine months ended September 30, 2023, the Company recognized $26 thousand and $95 thousand in reimbursements from the DOE, respectively.

Beginning in 2021, the Company received funds relating to the Oklahoma 21 st Century Quality Jobs Act. The estimated duration of the program is up to 10 years and is designed to attract growth industries to Oklahoma. By reporting quarterly salary statistics and meeting agreed upon employment thresholds, the state remits benefit monies to the Company. During three and nine months ended September 30, 2024, the Company recognized $17 thousand and $64 thousand in government assistance from this program, respectively. During three and nine months ended September 30, 2023, the Company recognized $12 thousand and $51 thousand in government assistance from this program, respectively.

Note 11 – Subsequent Events

The Company has evaluated subsequent events as of the date of this report and has none to report.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT

This Quarterly Report on Form 10-Q (this “Form 10-Q” or “report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “hopes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “would,” “should,” “could,” “may,” “will” or other similar expressions in this report. In particular, these include statements relating to future actions; prospective products, applications, customers, and technologies; future performance or results of any products; anticipated expenses; and future financial results. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to:

Forward-looking statements may appear throughout this report, including, without limitation, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The forward-looking statements are based upon management’s beliefs and assumptions and are made as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements included in this report. You should not place undue reliance on these forward-looking statements.

Unless otherwise stated or the context otherwise requires, the terms “ClearSign,” “we,” “us,” “our” and the “Company” refer to ClearSign Technologies Corporation and its subsidiary, ClearSign Asia Limited.