Clean Energy Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial statements are unaudited. The company designs and markets Clean Cycle heat-recovery systems and also provides electronics manufacturing services.
Financial performance and liquidity
| Metric | Three months 2017 | Three months 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $477,021 | $177,811 | $745,891 | $1,407,357 |
| Gross profit (loss) | $336,180 | $(20,508) | $398,266 | $700,688 |
| Gross margin | 70.5% | (11.5%) | 53.4% | 49.8% |
| Operating loss | $(40,522) | $(611,112) | $(357,647) | $(375,475) |
| Net loss | $(181,408) | $(694,667) | $(797,505) | $(609,246) |
- Q2 revenue increased year over year, which management attributed to a Clean Energy HRS unit sale in June. The six-month revenue decline reflected higher HRS sales in March 2016.
- Management said Q2 gross margin benefited from a low-cost HRS unit sale and cautioned that the unit cost was not indicative of future costs. Six-month gross profit declined with lower sales despite a higher reported margin.
- Six-month financing fees were $266,894 and interest expense was $174,191. Q2 interest expense was $110,720, versus $42,096 a year earlier; the company attributed the increase to higher notes payable and use of its receivables financing line.
- Operating cash flow was $(814,340) for the six months, versus positive $93,124 in 2016. Financing provided $815,823; cash increased by $1,483 to $7,925. No investing cash flow was reported for 2017.
- At June 30, total assets were $3.02 million and total liabilities were $5.84 million; stockholders’ deficit was $2.83 million. Current assets were $1.56 million against current liabilities of $5.84 million, and management reported a $4.29 million working-capital deficit. Cash was $7,925; accounts receivable, net, was $674,046.
- Current notes payable, net of discount, were $3.04 million, plus $5,000 of related-party current notes. The balance sheet reported no long-term debt at June 30. The filing separately lists GE note payments of $900,000 in 2017 and $300,000 in 2018; the presentation and reconciliation of these amounts to the balance sheet are not clear.
- Common shares outstanding rose from 155.2 million at December 31, 2016 to 209.6 million at June 30, 2017. The filing also cites convertible notes potentially convertible into about 136.1 million shares and shareholder approval to increase authorized common shares from 400 million to 800 million.
Outlook, risks and notable items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern, citing operating losses, cash used in operations, a working-capital deficit and stockholders’ deficit. Continued operations depend on raising debt or equity capital and/or generating positive operating cash flow; neither is assured.
- Management’s stated priorities include increasing direct and distributor sales, pursuing lease and energy-based customer contracts, securing higher-margin electronics manufacturing work, arranging financing partnerships, and pursuing licensing and co-venture opportunities. The filing provides no quantified financial guidance.
- Customer concentration is significant: the five largest customers represented approximately 95% of six-month sales, and five customers represented approximately 99% of receivables at June 30, according to the financial-statement note. The company says customer orders can be delayed, reduced or canceled.
- Convertible borrowing terms include conversion prices tied to market prices. Further equity issuance or conversions could substantially dilute existing shareholders. The company also reported a $250,000 inventory-obsolescence reserve and a $7,000 receivables allowance.
- Disclosure controls and procedures were reported ineffective as of June 30, 2017. The stated material weaknesses included no director qualifying as an audit committee financial expert and inadequate controls to ensure required disclosures were addressed in the financial statements. No material change in internal control was reported during the quarter.
- The filing reports no material pending legal proceedings and no material changes to the risk factors in the 2016 Form 10-K. It identifies no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Near-term liquidity, cash runway and the company’s ability to refinance or repay debt, including reconciling the GE note maturity schedule with balance-sheet classifications.
- Whether recent HRS sales can recur at comparable gross margins, given management’s warning that the Q2 unit cost was not representative.
- Customer and receivables concentration, subsequent collections, and the quality and realizability of inventory and other assets.
- Potential dilution from convertible notes, other financing needs, and the approved increase in authorized shares; verify the outstanding share count and conversion terms.
- Progress in remediating the disclosed weaknesses in disclosure controls and governance oversight.