Clean Energy Technologies, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The company designs and manufactures renewable-energy and energy-efficiency systems, including heat-recovery products, and provides engineering and electronics manufacturing services. This unaudited report covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Its reportable segments are Clean Energy HRS (HRS), CETY Europe, and legacy engineering and manufacturing.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Revenue | $215,318 vs. $126,546 in 2019 | $1,230,131 vs. $455,077 in 2019 |
| Gross profit (margin) | $103,030 (about 48%) vs. $45,185 (about 36%) | $681,236 (about 55%) vs. $162,484 (about 36%) |
| Operating expenses | $502,651 vs. $597,910 | $1,470,403 vs. $1,533,594 |
| Net loss | $512,889 vs. $656,688 | $1,055,970 vs. $2,227,260 |
| Operating cash flow | Nine-month use of $986,361 vs. $1,746,737 in 2019 |
- Balance sheet at September 30: cash was $27,630; current assets were $2.04 million and current liabilities were $9.43 million, producing a working-capital deficit of $7.39 million. Total assets were $4.02 million, total liabilities $9.90 million, and stockholders’ deficit $5.88 million.
- Debt and liquidity: current liabilities included a $1.71 million line of credit, $2.43 million owed to GE, $588,004 in convertible notes (net), $1.66 million in related-party notes (net), and a $110,700 Paycheck Protection Program loan. Financing activities provided $1.01 million during the first nine months, including $345,524 from stock issuance; cash increased by $20,224 from year-end to $27,630.
Material changes and drivers
- Nine-month revenue growth was led by HRS, which reported $823,928 versus $46,662 in 2019; management attributed the increase primarily to two units shipped in 2020 versus none in 2019. HRS gross profit also benefited from lower-than-normal material costs associated with GE-acquired inventory and purchase-price allocation.
- Engineering and manufacturing revenue was $361,697 for the nine months, compared with $344,905. CETY Europe revenue fell to $44,506 from $64,035, which management attributed to lower service revenue amid COVID-19.
- Management attributed lower net losses to higher revenue and gross profit, improved efficiencies, lower interest and financing expense, gains on derivative-liability remeasurement, and gains from debt write-offs. The nine-month debt-settlement gain was $431,698; the Q3 gain was $191,833. These gains are not recurring operating revenue.
- Common shares outstanding increased from 753.9 million at December 31, 2019 to 777.0 million at September 30, 2020; the filing reports 782.6 million outstanding as of November 19, 2020.
Outlook, risks, contingencies, and unusual items
- Going concern: management states that substantial doubt exists about the company’s ability to continue as a going concern. It depends on raising debt or equity and/or generating positive operating cash flow. No specific earnings or revenue guidance is provided.
- COVID-19: management expects the pandemic to negatively affect operations but says the financial impact and duration cannot be reasonably estimated.
- Defaults: the company reports default on its GE asset-purchase obligations, including $1.2 million of purchase price, and states it is negotiating with GE over the balance and a potential price reduction. It also reports default on $187,285 of principal and interest owed on notes payable to Cybernaut Zfounder Ventures. The Nations Interbanc line of credit bears interest at 2.5% per month and is secured by company assets; the CEO personally guarantees it.
- Dilution and financing: management expects continued reliance on common-stock sales, which will dilute existing holders. The filing says outstanding convertible notes and related-party convertible notes could convert into approximately 544.4 million additional common shares; warrants and preferred shares also carry potential dilution.
- Other exposures: a $291,767 Oberon Securities invoice is disputed and no liability was recorded; the company believes it will prevail. The GE lease asset is not yet producing recognized lease investment because collection was not considered probable; management says the lease is expected to be commissioned in Q1 2021 and generate approximately $20,000 monthly for 120 months.
- Controls: disclosure controls were deemed ineffective due to material weaknesses, including no independent directors or audit-committee financial expert and inadequate controls to ensure required disclosures were addressed.
Important facts for investors to verify
- Confirm the reported operating-loss figures: the financial statements show losses of $399,621 for Q3 and $789,167 for the nine months, while MD&A gives $396,140 and $785,681, respectively.
- Review the company’s near-term funding needs, debt maturities and defaults, including the status of GE negotiations and the Cybernaut obligation.
- Assess potential dilution from convertible securities, preferred stock, warrants, and ongoing equity financing; reconcile the share counts reported at quarter-end and in November.
- Track HRS project shipments, commissioning of the GE-acquired lease asset, customer collections, and the effects of COVID-19 on European service activity.
- Evaluate the disputed Oberon claim, the going-concern disclosure, and progress in addressing the disclosed internal-control weaknesses.