Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis here and throughout this report contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not limited to, the risks described in the section titled “Risk Factors.”
Overview
We design and develop technologies for the purpose of decarbonization and improving key performance characteristics of industrial and commercial combustion systems, including emission and operational performance, energy efficiency and overall cost-effectiveness. Our ClearSign Core™ technology has been proven in full scale industrial test furnaces and boilers and first customer installations are currently operating in normal commercial applications. Our revenues to date have not been sufficient enough to meet operating expenses.
We have incurred losses since inception totaling $104.5 million and we expect to experience operating losses and negative cash flow for the foreseeable future. We have historically financed our operations primarily through issuances of equity securities. As of December 31, 2025, we have raised approximately $105.3 million in gross proceeds through the sale of our equity securities. We may need to raise additional capital in the future, however, the significant volatility in the capital markets may negatively affect our ability to raise this additional capital.
In order to generate meaningful revenues, our technologies must gain market recognition and acceptance to develop sufficient recurring sales. In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through co-development agreements, strategic partnering agreements, or equity or debt financing to support commercialization of our research and development efforts, protect intellectual property, form relationships with strategic partners and provide for working capital and general corporate purposes. There can be no assurance that we will be successful in achieving our long-term plans, or that such plans, if consummated, will result in profitable operations or enable us to continue in the long-term as a going concern .
Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for prototype development and manufacture, costs associated with development activities including materials, sub-contractors, travel and administration, legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly traded technology company. We currently have 15 full-time employees. Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur ongoing consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current level of activities.
The amount that we spend for any specific purpose may vary significantly, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our sales and marketing strategies.
Research, development, and commercial acceptance of new technologies are, by their nature, unpredictable. Although we undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology to the extent needed to create sufficient future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.
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We cannot assure that our technologies will be accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, we have no committed source of financing, and we cannot assure that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our development by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations.
Recent Developments
Board Compensation Change
On December 22, 2025, the Board, upon recommendation of the Human Capital and Compensation Committee of the Board, approved an updated director compensation policy, effective as of January 1, 2026 (the “Director Compensation Policy”). The Director Compensation Policy provides for an annual cash compensation of $60 thousand will be payable to the Company’s non-employee directors in equal quarterly installments, payable in arrears on the last day of each fiscal quarter in which the service occurred, with the amount pro-rated if a non-employee director started during a quarter. Additionally, each non-employee director may elect to receive all or a portion of his or her cash compensation in the form of RSUs, which RSUs’ fair market value will be based on the closing price of our common stock as reported on Nasdaq on the date of grant. Further, our non-employee directors will be eligible to receive non-statutory stock options grants with an aggregate fair market value of $40 thousand annually. The non-statutory stock option grants will be issued in quarterly installments, in arrears, on the last day of each fiscal quarter in which the service occurred. The RSUs and non-statutory stock options each non-employee director may receive under this Director Compensation Policy will be issued under our 2021 Plan.
Reverse Stock Split
On February 26, 2026, at our special meeting of stockholders, our stockholders approved a certificate of amendment to our certificate of incorporation (the “Charter Amendment”) to effect a reverse stock split of our outstanding shares of common stock at a ratio to be determined by the Board. On March 6, 2026, we filed the Charter Amendment with the Secretary of State of Delaware which effected a 1-for-10 reverse stock split of our outstanding shares of common stock as of 12:01 a.m. Eastern Time on March 16, 2026. As a result of the reverse stock split, every ten shares of common stock were combined into one issued and outstanding share of common stock, with no change in the $0.0001 par value per share. Holders of fractional shares received, in lieu of any fractional share, the number of shares rounded up to the next whole number at the participant level with the Depository Trust Company. All equity awards outstanding and common stock reserved for issuance under our equity incentive plans and warrants outstanding immediately prior to the reverse stock split were proportionately adjusted, and any exercise prices were proportionately increased, to reflect the reverse stock split.
Compliance with Nasdaq Minimum Bid Price Requirement
We received written confirmation from Nasdaq notifying us that we have regained compliance with Nasdaq Listing Rule 5550(a)(2) on March 30, 2026.
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations. These policies and estimates require the application of significant judgment by management. These estimates can be materially affected by changes from period to period as economic factors and conditions outside of our control change. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. See “Note 2 – Summary of Significant Accounting Policies” to our consolidated financial statements included elsewhere in this report for a more complete description of our significant accounting policies.
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Revenue Recognition and Cost of Goods Sold.
The Company recognizes revenue and related cost of goods sold in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers . Revenues and cost of goods sold are recognized once the goods or services are delivered to the customer’s control or non-refundable performance obligations are satisfied. The Company’s contracts with customers generally have performance obligations and a schedule of non-refundable cancellation obligations. The contracts generally will be fully performed upon delivery of certain documents or equipment. Revenue related to the contracts is recognized following the completion of non-refundable performance obligations as defined in the contract.
The Company’s contracts generally include progress payments from customers upon completion of defined milestones. As these payments are received, they are recorded as a contract liability. Upon completion of the performance obligations and collectability is determined, revenue can be recorded. The Company records cost of goods sold based on allocated costs assigned to performance obligations. Allocations can occur based on overall estimated contract profit or readily identifiable cost assignments. For any contract in connection with which the Company is expected to incur costs in excess of the contract price, the Company accrues the estimated loss in the period such determination is made.
Deferred Costs and Cost of Sales
We recognize an asset for deferred costs incurred to fulfill a contract when those costs meet all of the following criteria: (a) the costs relate directly to a contract or to an anticipated contract that we can specifically identify; (b) the costs generate or enhance our resources that will be used in satisfying performance obligations in the future; and, (c) the costs are expected to be recovered. We capitalize contractual costs incurred for direct labor, overhead allocations, supplier costs and subcontractor costs. Costs capitalized are amortized to costs of goods sold at a point in time upon completion of contractual performance obligations based on allocated costs assigned to such performance obligations. For any contract expected to incur costs in excess of the total contractual value, we accrue the estimated loss in full in the period such determination is made.
Impairment of Long-Lived Assets
The Company tests long-lived assets, consisting of fixed assets, patents, and other intangible 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 from the use and eventual disposition of the assets. In the event an asset in not fully recoverable a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Fair value is determined based on the present value of estimated expected cash flows using a discount rate commensurate with the risks involved, quoted market prices, or appraised values depending upon the nature of the assets. Losses on long-lived assets to be disposed of are determined in a similar manner, except those fair values are reduced for the cost of disposal.
Product Warranties
The Company warrants all installed products against defects in materials and workmanship, and shortcomings in performance compared to contractual guarantees for a period specified in each contract. Accruals for product warranties are based on expected warranty experience and current product performance trends which are recorded as a component of cost of goods sold at the time revenue is recognized. The warranty liabilities are reduced by material and labor costs during the warranty period in the periods in which the costs are incurred. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary, and such adjustments could be material if estimates differ significantly from actual warranty expense. The warranty liabilities are included in accounts payable and accrued liabilities in the consolidated balance sheets.
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, computer modeling costs and consulting fees, including costs to develop and test prototype equipment and parts. Research and development costs are offset by any funds received from strategic partners in cost sharing, collaborative projects. During the years ended December 31, 2025 and 2024, the Company received zero and $145 thousand, respectively, from such arrangements.
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Share-Based Compensation
The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the audited, condensed consolidated 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, or in the case of performance options, expense is recognized over the remaining service period when the Company has determined it is probable that the performance condition will be achieved. Share-based compensation for stock grants 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.
Results of Operations
Comparison of the Years Ended December 31, 2025 and 2024
Highlights of our annual financial performance are as follows:
For the Year Ended
(in thousands, except per share data)
December 31,
2025
2024
$ Change
% Change
Revenues
$
5,234
$
3,596
$
1,638
45.6
%
Cost of goods sold
3,810
2,478
$
1,332
53.8
%
Gross profit
1,424
1,118
$
306
27.4
%
Research and development
1,422
1,471
$
(49)
(3.3)
%
General and administrative
6,673
6,135
$
538
8.8
%
Operating expenses
8,095
7,606
$
489
6.5
%
Other income, net
1,175
1,189
$
(14)
(1.2)
%
Net loss
$
(5,496)
$
(5,299)
$
(197)
(3.8)
%
Basic and diluted net loss per common share
$
(0.99)
$
(1.08)
$
0.09
8.3
%
Revenues and Gross Profit
Consolidated revenues for the years ended December 31, 2025 and 2024 were $5,234 thousand and $3,596 thousand, respectively. Revenues increased by $1,638 thousand, or 45.6%, during the year ended December 31, 2025, compared to the same period in 2024. Revenues for the year ended December 31, 2025 were generated from orders related to our process burners, midstream burners, flares, engineering services and spare part offerings. During the year ended 2025, our revenues were predominantly generated from our process burner offerings. Typically, our process burner contracts include three to four different performance obligations by which we can recognize revenue, which include design engineering, customer witness tests and burner shipment, with a CFD study as an optional fourth performance obligation. We allocate revenue to these performance obligations in the following order of importance: burner shipment, customer witness test, CFD study and engineering design. The difference in revenues from the year ended December 31, 2025, to the same period in 2024, is primarily due to an increase in performance obligations related to CFD studies, customer witness tests, flare shipments and spare part deliveries, which was slightly offset by a decrease in boiler burner deliveries. During the year ended December 31, 2024, our revenues were predominantly generated from orders related to our process burner, boiler burner, and spare part offerings.
Gross profit increased by $306 thousand, or 27.4%, for the year ended December 31, 2025, compared to the same period in 2024. The favorable increase in gross profit for the year ended December 31, 2025, was predominantly due to higher revenues, which was offset by an additional warranty accrual recognized during the year ended December 31, 2025. Specifically, during the three months ended December 31, 2025, gross profit was impacted by $447 thousand for the additional warranty accrual recorded as part of our year-end financial reporting processes (see “Note 7 – Product Warranties” for more information). We assessed the adequacy of our accrued warranty balance and determined an adjustment was necessary for potential in-field burner modifications related to certain completed jobs. The year-over-year gross profit decreased due to additional warranty expenses, which was partially offset by a year-over-year increase in spare parts and engineering service orders, which typically contain a favorable profit margin profile compared to our other service and product offerings.
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Operating Expenses
Operating expenses consist of research and development (“R&D”) and general and administrative (“G&A”) expenses. These are addressed separately below.
Research and Development
R&D expenses for the year ended December 31, 2025 remained relatively consistent year-over-year compared to the same period in 2024, and the decreases and increases in this expense category were not unexpected. See “Note 2 – Summary of Significant Accounting Policies - Research and Development, and Government Assistance” for more information about the type of costs included within R&D expenses.
General and Administrative
G&A expenses for the year ended December 31, 2025 increased by $538 thousand, or 8.8%, compared to the same period in 2024. This unfavorable increase in G&A expenses was primarily due to an increase of approximately $746 thousand in legal fees, including (i) approximately $131 thousand in legal fees pertaining to work performed in connection with a regulatory inquiry by the SEC into the trading of our securities in 2020; (ii) approximately $435 thousand in legal fees pertaining to work performed for the former Special Committee; and (iii) an accrual of approximately $180 thousand related to an advancement claim filed by three former directors (refer to “Item 3. Legal Proceedings” for further details). We also incurred an increase in legal and audit costs of approximately $205 thousand related to services provided for the preparation and filing of our “shelf” registration statement on Form S-3 (the “Form S-3”) and work performed in connection with our At-the-Market (“ATM”) program with H.C. Wainwright & Co., LLC (“Wainwright”). In addition, non-cash expenses increased approximately $469 thousand year-over-year related to the vesting of RSUs in connection with the departure of three directors from the Board. Increases in G&A expenses for the year ended December 31, 2025 were partially offset by an expense decrease of approximately $394 thousand related to our China dormancy cost accrual that occurred during the year ended December 31, 2024, which did not occur during the same period in 2025. G&A expense increases were further partially offset by a decrease of $154 thousand in costs related to certain incentive compensation to our employees and executive officers for which the performance target metrics were not achieved, and year-over-year increase in deferred costs due to labor and overhead cost capitalizations of $268 thousand during the year ended December 31, 2025.
Other Income
Other income for the year ended December 31, 2025 remained relatively consistent year-over-year compared to the same period in 2024, and the decreases and increases in other income were not unexpected. See “Consolidated Statements of Operations and Comprehensive Loss” for more information about the various types of income and expense included within this line item.
Liquidity and Capital Resources
At December 31, 2025, our cash and cash equivalents balance totaled $9,178 thousand compared to $14,035 thousand at December 31, 2024, a decrease of $4,857 thousand. The decrease in cash and cash equivalents is primarily attributable to our net loss of $5,496 thousand and an increase in our accounts receivables of $1,195 thousand, which was partially offset by our non-cash expenses of $1,238 thousand.
At December 31, 2025, our current assets were in excess of current liabilities resulting in working capital of $8,642 thousand as compared to $12,809 thousand at December 31, 2024. We believe we have sufficient cash and expected cash collections to fund current operating expenses for over twelve months. We have no contractual debt obligations and to the extent we may require additional funds beyond twelve months from the date hereof, and customer cash collections cannot fund our needs, we may utilize equity offerings. Historically, we have funded operations predominantly through equity offerings. Until the growth of revenue increases to a level that covers operating expenses, we intend to continue to fund operations in this manner, although the volatility in the capital markets may negatively affect our ability to do so. As of December 31, 2025, approximately 2.1 million shares (or 21.3 million on a pre-reverse stock split basis) of our common stock are issuable upon exercise of our outstanding warrants, which number excludes the shares of common stock issuable upon exercise of our outstanding pre-funded warrants, and we may receive up to $22.4 million in aggregate gross proceeds from the cash exercises thereof, subject to certain beneficial ownership limitations set forth therein. Our outstanding warrants require the warrant holder to tender cash upon exercise, with the exception of the outstanding underwriter’s warrants and placement agent warrants, which allows the holder of such warrants to exercise cashless if they so desire.
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These equity financial instruments may from time-to-time fund future cash needs, but the volatility of our common stock price and the risk tolerance of warrant holders will determine the extent in which we will be able to raise funds in this manner. Additionally, under our ATM program with Wainwright, acting as sales agent, we are able to offer and sell shares of our common stock from time to time for an aggregate offering price of up to $10.39 million pursuant to our Form S-3 (see “Note 9 – Equity” for more information).
Operating activities for the year ended December 31, 2025, resulted in cash outflows of $4,736 thousand, primarily due to the net loss of $5,496 thousand and an increase in our accounts receivables of $1,195 thousand during such period, which was partially offset by net non-cash expenses of $1,238 thousand. The increase in accounts receivables was predominately driven by a shipment of twenty-six process burners and completion of multiple CFD studies during the month of December 2025.
Operating activities for the year ended December 31, 2024, resulted in cash outflows of $4,373 thousand, primarily due to the net loss of $5,299 thousand and a decrease in contract liabilities of $1,408 thousand during such period, which was partially offset by net non-cash expenses of $846 thousand, and an increase in accounts payable, accrued liabilities and lease liabilities of $816 thousand. The increase in accounts payable, accrued liabilities and lease liabilities was predominately driven by our decision to suspend our China operations during the year ended December 31, 2024. The change in contract liabilities during the year ended December 31, 2024, was predominantly impacted by our shipment of process burners during the year ended December 31, 2024 (see “Note 5 – Revenue, Contract Assets and Contract Liabilities” and “Note 6 – Deferred Costs” below for additional information).
Investing activities for the year ended December 31, 2025, resulted in cash outflows of $101 thousand, which is primarily attributable to $97 thousand of disbursements for patents and other intangible assets.
Investing activities for the year ended December 31, 2024, resulted in cash outflows of $218 thousand, which is primarily attributable to $179 thousand of disbursements for patents and other intangible assets.
Financing activities for the year ended December 31, 2025, resulted in cash outflows of $21 thousand, which is primarily attributable to $45 thousand of disbursements related to taxes paid for the vesting of certain employee RSUs and stock awards, partially offset by $24 thousand in net proceeds received from the exercise of our outstanding warrants.
Financing activities for the year ended December 31, 2024, resulted in cash inflows of $12,946 thousand, which is primarily attributable to the net proceeds received of $12,967 thousand from the issuance of securities in connection with our equity offerings during 2024.
Off-Balance Sheet Transactions
We do not have any off-balance sheet transactions.