Clean Energy Technologies, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a quarterly filing. Clean Energy Technologies designs and sells Clean Cycle organic Rankine cycle systems that convert waste heat into electricity, and also provides electronics manufacturing services. The filing was signed in April 2018.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $957,633 | $2,047,333 |
| Gross profit / margin | $412,881 / 43% | $764,322 / 37% |
| Operating expenses | $1,616,735 | $2,041,117 |
| Operating loss | $1,203,854 | $1,276,795 |
| Net loss | $2,214,854 | $1,699,726 |
| Cash used in operations | $1,495,470 | $513,186 |
| Cash at year-end | $9,418 | $6,442 |
| Total assets | $2,775,516 | $2,777,139 |
| Total liabilities | $6,888,698 | $5,045,393 |
| Stockholders’ deficit | $4,113,182 | $2,268,254 |
Revenue declined about 53%, which management attributed to a transition while raising capital and establishing a sales strategy for the acquired HRS business. Electronics Assembly revenue was $581,191, down from $1,222,856; Clean Energy HRS revenue was $376,442, down from $824,477. Gross margin improved six percentage points, and operating expenses fell, but net loss increased about 30%, principally due to higher financing fees and interest expense. Financing fees were $708,714 (versus $122,397) and interest expense was $444,612 (versus $318,133).
Working capital deficit was $5,547,652, compared with $3,307,374 in 2016. Current liabilities included $3,692,233 of current notes payable, net of discount; the company reported no long-term debt at year-end. Financing provided $1,498,446 of cash, broadly offsetting operating cash use. Inventory of $854,547 was pledged to the Nations Interbanc line of credit; its outstanding balance was $1,145,801. The filing reports a 12% interest rate on that facility.
Changes, outlook, risks and unusual items
- Going concern: The auditor and management disclosed substantial doubt about the company’s ability to continue as a going concern, citing losses, operating cash outflow, accumulated deficit of $8,789,718, and working-capital and stockholders’ deficits. The auditor’s opinion on the financial statements was unqualified, but highlighted the going-concern uncertainty.
- Debt defaults and disputes: The company disclosed default on payments under the GE asset purchase agreement and default on notes payable to Cybernaut Zfounder Ventures; negotiations were ongoing. It also disputed an Oberon Securities invoice for $291,767 and recorded no liability, stating it believed it had defenses.
- Financing and dilution: Management said it would continue to rely on equity sales and other financing, with no assurance funding would be available. During 2017, shares were issued in conversions of debt and accrued interest. After year-end, a February 2018 stock purchase agreement provided for $907,388 in exchange for 302,462,667 restricted shares; a separate $939,500 convertible note was issued at 10% interest, convertible at $0.003 per share. The filing describes the financing as resulting in a change in control.
- Business plans: Management aims to expand sales through distributors and direct channels, pursue leases and energy-based contracts, seek electronics manufacturing work, financing partners, licensing and OEM opportunities. No quantified revenue, earnings, or cash-flow guidance is provided.
- Concentration and execution risks: Five customers generated approximately 74% of 2017 sales, and five customers represented about 97% of year-end receivables. Customer orders generally run 30–360 days, with no long-term customer agreements. Management also cites competition, component availability, energy prices, regulation, and access to skilled personnel as risks.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2017. Several directors resigned in February 2018 in connection with the financing; the filing’s descriptions of board composition and subsequent appointments should be read alongside later filings.
- Additional items: The company reported no R&D expense in 2017 or 2016. The 2017 share price was thinly traded on OTC markets. The company reported no material pending litigation apart from the disputed invoice described above.
Key investor verification points
- Confirm current cash, debt balances, defaults, collateral, and the status and terms of negotiations with GE and Cybernaut; the 10-K reports only $9,418 of year-end cash.
- Review subsequent financing documents and share-count disclosures. The filing reports 554,773,461 shares outstanding on March 31, 2018, but also presents a beneficial-ownership table with a different total share figure; reconcile issued, outstanding, and potentially issuable shares and the reported change in control.
- Assess the company’s ability to fund operations and meet obligations, including whether subsequent financing proceeds were received and how much additional capital is required.
- Verify whether the steep revenue decline and customer concentration have improved, and whether HRS projects and the stated sales strategy are generating repeatable orders and cash flow.
- Examine the unresolved $291,767 Oberon claim and the company’s basis for recording no liability, along with remediation of ineffective financial reporting controls.