Clean Energy Technologies, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed April 17, 2017. This is an annual report, not a standalone fourth-quarter report. The company designs and sells Clean Cycle organic Rankine Cycle (ORC) waste-heat-to-power systems and also provides electronics manufacturing services.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $2,047,333 | $2,355,021 |
| Gross profit / margin | $764,322 / 37% | $668,905 / 28% |
| Operating loss | $1,276,795 | $1,752,603 |
| Net loss | $1,699,726 | $2,569,927 |
| Cash used in operating activities | $513,186 | $703,003 in the audited cash flow statement |
| Cash at year end | $6,442 | $4,196 |
| Total assets | $2,777,139 | $3,248,878 |
| Current liabilities | $4,595,393 | $4,990,643 |
| Working capital deficit | $3,307,374 | $2,012,417 |
| Stockholders’ deficit | $2,268,254 | $1,249,843 |
Revenue fell about 13% year over year. Management attributed the decline mainly to the move to a new facility, several months of non-operational activity, and implementation of a new sales strategy for the acquired HRS business. Gross margin improved, which management attributed primarily to lower material costs as a share of sales. The net loss narrowed, partly because 2015 included a $420,673 Trident goodwill impairment and higher operating expenses; 2016 also included a $141,611 gain from reducing the warranty liability.
2016 revenue comprised $1,222,856 from electronics assembly and $824,477 from Clean Energy HRS. Reported segment income before corporate reconciliations was $145,858 for electronics assembly and $618,464 for HRS. These segment figures do not represent consolidated operating profit.
Operating cash use remained substantial and was largely funded through financing activities. The filing reports $590,868 of financing cash inflows in 2016 and $75,436 of investing cash outflows. Liquidity was extremely limited: year-end cash was $6,442, against current liabilities of $4.60 million. Total liabilities were $5,045,393, including $450,000 of long-term notes and $1,716,483 of current notes payable, net of discount. The filing lists GE note payments of $945,654 in 2017 and $254,346 in 2018.
Changes, outlook, and principal risks
- Business and operations: The company continued integrating the HRS assets acquired from GE in 2015 and moved its headquarters and operations in 2016. It closed the Trident Utah facility in January 2016 and recorded the related $420,673 goodwill impairment in 2015.
- Financing and dilution: The company raised $420,000 in an October 2016 private placement and issued shares for debt conversions and fees. Convertible notes included conversion terms tied to substantial discounts to recent market prices; the filing describes subsequent conversions and refinancing arrangements. It stated that it expected to continue relying on equity sales and acknowledged resulting dilution risk.
- Going concern: Management and the independent auditor reported substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, limited cash, working-capital and stockholders’ deficits, and dependence on financing or positive operating cash flow. The auditor nevertheless issued an unmodified opinion on the financial statements, with a going-concern explanatory paragraph.
- Commercial outlook: Management planned to pursue direct and distributor sales, leases and energy-based contracts, island and remote-market projects, higher-margin electronics manufacturing work, licensing, OEM and cogeneration opportunities, and financing partnerships. The filing provides no quantified revenue, earnings, or cash-flow guidance and gives no assurance that financing or positive cash flow will be achieved.
- Concentration and execution: The five largest customers generated approximately 77% of 2016 sales, and five customers represented about 96% of year-end receivables. The company reported no long-term customer agreements; typical purchase orders last 30–360 days. Risks also include competition, component-supply constraints, technology changes, regulatory and utility interconnection barriers, and the ability to scale production and sales.
- Other disclosures: Management concluded disclosure controls and internal control over financial reporting were not effective at December 31, 2016. The filing reports no material pending legal proceedings. It also discloses related-party supply dealings and $5,000 advanced by the board chair.
Important facts for investors to verify
- Reconcile the audited 2015 balance sheet: reported total assets are $3,248,878, while reported total liabilities of $5,790,643 plus stockholders’ deficit of $1,249,843 imply a different total. The 2016 balance sheet totals do reconcile.
- Reconcile 2015 operating cash use: the audited cash flow statement reports $703,003, while the MD&A summary table reports $617,553.
- Confirm current cash availability, near-term obligations, and the terms, repayment status, and dilution exposure of convertible notes and replacement financing. The filing describes post-year-end note payments and conversions that should be checked against subsequent filings.
- Assess whether customer concentration, backlog, receivable collection, and HRS sales conversion improved after year-end; reported backlog days fell to 101 from 349, while receivable days rose to 75 from 61.
- Review remediation of ineffective disclosure controls and internal controls, and monitor the going-concern position and access to financing.