Clean Energy Technologies, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; filed August 19, 2019. The company designs and supplies industrial waste-heat recovery power systems, electronics assembly, and related services. Its reported segments are Electronics Assembly, Clean Energy HRS, and CETY Europe.
Financial performance and position
| Metric | Q2 2019 | Six months 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $104,168 | $328,531 | Q2: $539,102; six months: $711,493 |
| Gross profit | $42,113 | $117,299 | Q2: $349,858; six months: $378,535 |
| Gross margin | 40.4% | 35.7% | Q2: 64.9%; six months: 53.2% |
| Operating loss | $491,693 | $818,385 | Q2: $73,602; six months: $560,441 |
| Net loss | $841,795 | $1,568,572 | Q2: $298,142; six months: $1,611,400 |
| Cash used in operations | Not separately provided | $1,045,965 | $932,759 used |
- Six-month interest expense was $645,257, versus $460,511 in 2018. The filing attributes the increase to higher notes and lines of credit. No income tax expense was reported.
- At June 30, cash was $960,328, current assets $2,602,211, and current liabilities $8,308,674, resulting in a $5,706,463 working-capital deficit. Total assets were $4,642,854, total liabilities $8,997,920, and stockholders’ deficit $4,355,066.
- Current notes payable were $3,053,265, with a further $919,934 of current related-party notes payable. Lease liabilities totaled $917,097, split between current and long-term portions. Cash interest paid during the six months was $217,878.
- Financing activities provided $1,999,837, principally reflecting a $1,999,200 subscription from MGW Investment I Limited. Cash increased from $6,456 at year-end 2018 to $960,328. There was no investing cash flow.
Changes versus comparable periods
- Six-month revenue fell 53.8%; Q2 revenue fell 80.7%. Management attributed the decline primarily to lower HRS sales after a customer reconfigured an order and deferred shipment.
- Six-month gross profit declined 69.0%. Six-month operating loss increased from $560,441 to $818,385, while net loss narrowed slightly from $1,611,400 to $1,568,572. Q2 net loss increased from $298,142 to $841,795.
- Six-month salaries rose to $407,867 from $348,725, and travel expense increased to $86,107 from $25,634. Management linked increases to the CETY Europe startup, added procurement staff, and travel for commissioning the Marshall Islands project. General and administrative expense fell to $208,173 from $246,094.
- Operating cash use increased to $1,045,965 from $932,759. Financing cash provided increased to $1,999,837 from $1,119,351.
Outlook, risks, contingencies, and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern, citing the working-capital and stockholders’ deficits and six-month net loss. The company depends on raising debt or equity capital and/or generating positive operating cash flow. No specific financial guidance is provided.
- Defaults: The company reports default on $1.2 million owed under its GE International asset purchase agreement and on $187,285 of principal and interest payable to Cybernaut Zfounder Ventures. It says it is negotiating with GE and believes it may be entitled to a purchase-price reduction.
- Disputed claim: An Oberon Securities invoice for $291,767 is disputed; the company recorded no liability, stating it believes it has defenses and expects to prevail.
- Equity financing and dilution: The May 2019 MGW subscription covered 168 million units for $1,999,200, each with a common share and a warrant exercisable at $0.04. The shares were issued August 15, 2019 after the authorized-share increase became effective; the warrants expire after one year. The filing reports 168.5 million warrants issued by June 30, and approximately 613 million potential shares from convertible notes and preferred stock, excluded from diluted EPS as anti-dilutive.
- Other risks: Five customers represented approximately 96% of accounts receivable at June 30, and trade receivables are primarily unsecured. The company also carries a $250,000 inventory obsolescence reserve. Convertible-note derivative liability, measured using Level 3 inputs, rose to $544,522 from $245,988.
- Controls: Management concluded disclosure controls were not effective at June 30, citing material weaknesses including no independent directors, no audit committee financial expert, and insufficiently designed disclosure controls. Management reported no significant subsequent changes to internal control over financial reporting.
- Lease accounting: The company adopted ASC 842 on January 1, 2019 and recorded a $917,097 right-of-use asset and corresponding lease liability.
Important facts for investors to verify
- Assess the company’s ability to fund ongoing operations and address the GE and Cybernaut defaults, given recurring operating cash use and the stated going-concern uncertainty.
- Confirm shipment timing and collection of deferred HRS orders, and evaluate customer concentration and receivable recoverability.
- Review the dilution implications of the MGW share-and-warrant issuance, outstanding convertible instruments, and preferred-stock rights.
- Reconcile the balance-sheet total assets of $4,642,854 with the MD&A working-capital table, which lists total assets of $4,617,062.
- Review the status and accounting treatment of the disputed Oberon claim and GE purchase-price negotiations, and monitor remediation of the disclosed control weaknesses.