Clean Energy Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 14, 2021. The company designs and manufactures waste-heat recovery and energy-efficiency systems, and also reports European sales and service and legacy engineering/manufacturing operations. Financial statements are unaudited.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $135,275 | $858,816; down about 84% |
| Gross profit | $112,128 | $515,539 |
| Gross margin | About 83% | About 60% |
| Operating result | Loss of $366,938 | Profit of $39,329 |
| Net result | Profit of $1,068,584 | Loss of $313,574 |
| Cash from operations | Used $663,192 | Provided $39,493 in the financial statements |
- The reported net profit was primarily driven by a $1,749,173 gain from remeasurement of derivative liabilities, not operating performance. Interest and financing fees were $313,651.
- Revenue fell sharply, chiefly because HRS revenue declined to $66,000 from $748,750 amid pandemic-related order and contract delays. Engineering and manufacturing revenue was $30,229 versus $107,567; CETY Europe revenue increased to $39,045 from $2,499.
- At March 31, cash was $2,935,909, up from $414,885 at year-end, after $3,184,216 of financing cash inflows, including $3,584,003 of stock proceeds and $488,987 of note payments. Investing cash flow was zero.
- Total assets were $6,708,814; total liabilities were $8,947,261; and stockholders’ deficit was $2,238,447. The company reported a working-capital deficit of $3,165,663.
- Current liabilities were $7,300,461. Major reported obligations included a $1,616,433 line of credit, $2,456,136 owed to GE, $277,990 of convertible notes, and related-party notes of $603,467 current and $1,092,622 long term. Facility lease liabilities totaled $577,751.
- Common shares outstanding increased from 821,169,656 at December 31, 2020 to 896,066,487 at March 31, 2021. The filing reports 896,066,487 shares outstanding as of May 14.
Material changes, outlook and risks
- Management identifies substantial doubt about the company’s ability to continue as a going concern, citing operating cash outflow, working-capital and stockholders’ deficits, and dependence on new financing or positive operating cash flow.
- The company completed equity financings totaling $2.57 million in February and March and says it plans to continue raising equity, including a stated intention to seek an additional $6 million subject to market conditions. Further share issuance would dilute existing holders.
- The company planned to use up to $2 million for two China ventures or direct investments. It disclosed a $500,000 transfer on March 24 to MGW I, an affiliate of its majority stockholder, to hold in trust and invest in planned ventures. The MD&A says $1.5 million had been transferred by April 30 and May 5, pending definitive documents.
- On April 1, Nations Interbanc reduced accrued fees by $275,000 and lowered its accrual rate to 2.25% per 30 days; the company agreed to minimum monthly payments of $50,000.
- The company disclosed defaults relating to the GE asset-purchase obligation and $187,285 of principal and interest owed on notes payable to Cybernaut Zfounder Ventures. Management says the GE balance is disputed because it believes a purchase-price reduction is due.
- An Oberon Securities invoice for $291,767 is disputed; management recorded no liability, believing it has defenses and is more likely than not to prevail. The filing also identifies the company’s dependence on financing, COVID-related operating disruption, customer and market cyclicality, and possible dilution as risks.
- Management reported disclosure controls and procedures were ineffective as of March 31, 2021, citing no independent directors, no audit committee financial expert, and gaps in disclosure controls. No material change in internal control over financial reporting was reported.
- No quantified financial guidance is provided. Management describes plans to expand heat-to-power and clean-energy offerings, develop markets and lower manufacturing costs; it notes that results depend on demand, energy prices, regulation, incentives, and execution.
Important items to verify
- Reconcile reported earnings: the financial statements show net income of $1,068,584, while one MD&A passage gives $996,670; another MD&A passage agrees with the financial statements. The MD&A also gives operating loss figures of $365,218 and $366,938.
- Confirm liquidity figures: the filing reports a $3,165,663 working-capital deficit, while the balance-sheet current assets and current liabilities imply a different deficit. The MD&A also gives accumulated deficit of $16,654,812, versus $16,582,898 on the balance sheet.
- Assess the sustainability of earnings apart from the noncash derivative-liability gain and the company’s ability to fund operations given continuing operating cash outflows and defaults.
- Review the terms, governance, use of funds, and definitive documentation for the China ventures and related-party transfers, as well as subsequent transfer amounts.
- Evaluate potential dilution from equity financing, convertible instruments and warrants; the filing estimates outstanding convertible notes could convert into approximately 480.8 million additional shares.