Clean Energy Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company sells Clean Cycle heat-recovery systems and provides electronics manufacturing services.
Financial performance and liquidity
- Revenue: $172,391, down 35.9% from $268,870 in Q1 2017. Electronics Assembly revenue was $149,515 (prior year $187,393); Clean Energy HRS revenue was $22,876 (prior year $81,477).
- Gross profit and margin: $28,677 and 16.6%, versus $62,086 and 23.1% a year earlier.
- Operating loss: $486,839, compared with $317,125. Total operating expenses were $515,516, including $91,140 of share-based expense.
- Net loss: $1,313,258, versus $616,097 in Q1 2017. Significant Q1 charges included $378,155 in financing fees, $273,178 loss from the change in derivative liability, and $168,468 interest expense. No income tax expense was reported.
- Cash flow: Operating cash use was $658,056, compared with $443,644; investing cash flow was zero; financing provided $893,854. Cash ended at $245,216, versus $9,418 at year-end 2017.
- Balance sheet and liquidity: Current assets were $1.595 million and current liabilities $6.735 million at March 31. The reported working-capital deficit was $5.140 million. Total assets were $3.011 million, total liabilities $6.735 million, and stockholders’ deficit $3.724 million.
- Debt and obligations: Current notes payable, net of discount, were reported at $3.251 million; no long-term debt was reported. Accrued expenses were $1.890 million. The company disclosed default on its GE asset-purchase payment obligations and said it was negotiating with GE; the filing does not provide a clear current amount due under that arrangement.
Changes versus the prior comparable period
- Revenue and gross profit declined, while the net loss more than doubled. Management attributed lower revenue to a transition while raising capital and establishing a sales strategy for the acquired heat-recovery business.
- Financing fees, derivative-liability losses, and interest expense increased substantially, primarily in connection with convertible notes, conversion discounts, and debt-discount amortization.
- On February 13, 2018, the company issued 302,462,667 restricted shares for approximately $907,377 and issued a $939,500 convertible note to Confections Ventures Ltd. (10% interest; February 2020 maturity; stated conversion price $0.003, subject to adjustment). The company reported that the financing resulted in a change in control. Common shares outstanding rose from 210.9 million at December 31 to 553.2 million at March 31.
Outlook, risks, and unusual items
- Going concern: Management stated there is substantial doubt about the company’s ability to continue as a going concern, citing the quarterly loss, accumulated deficit of $10.103 million, working-capital deficit, and dependence on additional financing or positive operating cash flow. No quantified financial guidance was provided.
- Management’s stated plans include expanding direct and distributor sales, pursuing lease and energy-based customer contracts, seeking higher-margin electronics manufacturing work, arranging financing partnerships, and pursuing licensing and technology opportunities. Success and financing availability are uncertain.
- The company reported ineffective disclosure controls as of March 31, citing the absence of independent directors and an audit committee financial expert, and inadequate disclosure controls. It reported no significant subsequent changes to internal control over financial reporting.
- Five customers represented approximately 97% of accounts receivable. Inventory included a $250,000 obsolescence reserve.
- An Oberon Securities invoice for $291,767 is disputed; the company recorded no liability, stating it believes it is more likely than not to prevail. The company also disclosed defaults on certain convertible notes and the GE payment obligation.
- The filing reports no material subsequent events through issuance of the financial statements and no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile reported inventory and other balance-sheet figures: the balance sheet lists December 31 inventory at $854,547, while the inventory note lists $913,954; the note’s March inventory total also differs from the balance sheet presentation before reserve.
- Reconcile cash-flow disclosures: the cash-flow statement reports a $235,798 net increase in cash, while the MD&A table labels $245,216 as the net increase; $245,216 is also the reported ending cash balance.
- Confirm financing transaction amounts and terms, including the stock proceeds reported as $907,377 in one place and $907,388 elsewhere, and the potential dilution and control effects of the convertible notes.
- Obtain current payoff, maturity, and default information for notes and GE obligations, and assess the company’s ability to fund operations and meet its lease commitments.
- Assess the disputed $291,767 claim, customer concentration, and the remediation of the disclosed material weaknesses in disclosure controls.