Clean Energy Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited consolidated financial statements. CETY operates in heat recovery, waste-to-energy, engineering and manufacturing, and natural gas trading. Natural gas trading in China was the largest business in the first half.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4.80 million | $1.75 million | $7.70 million | $2.52 million |
| Gross profit | $514,000 | $612,000 | $674,000 | $1.13 million |
| Gross margin | 10.7% | 35.0% | 8.8% | 44.6% |
| Operating loss | $377,000 | $44,000 | $979,000 | $28,000 |
| Net loss | $758,000 | $347,000 | $1.79 million | $460,000 |
| Net loss per share, basic and diluted | $0.02 | $0.02 | $0.05 | $0.02 |
For the six months, CETY generated $7.22 million of sales from CETY HK natural gas trading, about 94% of consolidated revenue. Waste-to-energy revenue was $413,000, HRS revenue $28,000, and engineering/manufacturing revenue $36,000. The filing attributes lower gross profit and margins mainly to lower natural-gas margins; waste-to-energy gross profit increased to $385,000.
Cash, liquidity and debt
- Cash was $733,000 at June 30, up from $149,000 at December 31, 2022. Operating activities used $2.62 million of cash in the first half, compared with $1.23 million used a year earlier. Financing activities provided $3.16 million, including $3.09 million of stock proceeds and $353,000 from warrant exercises.
- Working capital was $2.12 million. Current assets were $7.04 million and current liabilities $4.92 million. Total liabilities were $5.06 million; stockholders’ equity, including non-controlling interest, was $5.74 million.
- Current debt included $2.56 million of convertible notes, net of discount; a $713,000 line of credit; and $33,000 of related-party notes. Current and long-term facility lease liabilities were approximately $330,000 combined. First-half interest and financing fees were $1.35 million, up from $416,000 in 2022.
- Accounts receivable included $831,000 due from a related party. Seven customers represented about 98% of receivables; receivables, inventory, property and equipment, and certain financing receivables were pledged to the line-of-credit lender.
Material changes and unusual items
- Six-month sales increased 205% year over year, but gross profit fell 40% and net loss widened. The filing links sales growth primarily to greater natural-gas trading volume; management says gas-price volatility and lower margins weighed on profitability.
- CETY began consolidating Shuya, a natural-gas business, effective January 1, 2023 after a voting agreement gave CETY’s subsidiary control. This changed the consolidation perimeter and added non-controlling interest.
- CETY completed a Nasdaq uplisting offering in March, reporting $3.09 million in net proceeds. Common shares outstanding increased from 37.17 million at year-end to 38.76 million at June 30; convertible notes and warrants may create further dilution.
- First-half results included a $326,000 gain from changes in derivative liabilities and a $130,000 gain on debt settlement/write-down. Derivative liabilities were zero at June 30, following note repayments.
- A Vermont Renewable Gas LLC turnkey project with CETY’s 49%-owned venture generated $413,000 of related-party revenue in Q2. The venture is accounted for as an equity-method investment.
Outlook, risks and contingencies
- Management expects growth across segments and anticipates more contribution from higher-margin HRS, waste-to-energy and EPC work in the latter part of 2023. It cited progress on the Vermont project, planned HRS unit sales after securing long-lead materials, and China cross-selling. The filing provides no quantified revenue or earnings guidance.
- The company states there is substantial doubt about its ability to continue as a going concern, citing its $19.11 million accumulated deficit and $2.62 million first-half operating cash use. Management says it expects to restructure debt and obtain additional financing, but notes no assurance of financing; it expects to continue relying on equity issuance, which may dilute shareholders.
- A planned Shenzhen Gas joint venture could require an $8 million contribution from CETY; definitive agreements remain outstanding, and the filing says the venture expects to raise funds in future rounds.
- A performance contingency related to the LWL acquisition could require issuance of 20 million shares if LWL reaches $5 million in revenue or $1 million in net profit by December 31, 2023; the filing says the targets had not been met as of filing.
- Management reported disclosure controls were ineffective at June 30 due to no independent directors or audit committee financial expert and controls that did not ensure all required disclosures were initially addressed. Management reported no significant subsequent changes to internal control over financial reporting.
- On July 20, 2023, after quarter-end, CETY issued Mast Hill a $556,000 convertible note for $500,400 cash proceeds, bearing 15% annual interest, due July 2024, convertible at $6 per share subject to terms, and prepayable before default at a 150% premium.
Important facts for investors to verify
- Whether CETY can reduce operating cash burn, manage near-term debt payments and secure financing without substantial additional dilution.
- Collectability and concentration of receivables, including related-party balances, and the extent to which pledged assets support the line of credit.
- Whether natural-gas trading can sustain sales while improving margins, and whether higher-margin HRS, waste-to-energy and EPC revenue materializes as management anticipates.
- The terms, funding requirements and status of the proposed Shenzhen Gas venture, and the potential LWL contingent share issuance.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls and board/audit committee oversight.