Clean Energy Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The company designs and sells waste-heat-to-power and biomass energy products, including Clean Cycle generators, and provides related services. Its newly established CETY Europe center supports European installations and sales.
Financial performance
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $224,363 | $172,391 |
| Gross profit | $75,186 | $28,677 |
| Gross margin | 33.5% | 16.6% |
| Operating loss | $(326,692) | $(486,839) |
| Net loss | $(726,777) | $(1,313,258) |
| Operating cash flow | $(332,012) | $(658,056) |
| Cash at period end | $1,032 | $6,456 at Dec. 31, 2018 |
| Current assets / liabilities | $1,751,991 / $8,637,622 | $1,443,195 / $7,613,813 at Dec. 31, 2018 |
| Working capital | Deficit of $6,885,631 | Deficit of $6,170,618 at Dec. 31, 2018 |
| Total liabilities | $9,381,894 | $7,613,813 at Dec. 31, 2018 |
| Stockholders’ deficit | $(5,522,472) | $(4,795,694) at Dec. 31, 2018 |
Revenue rose about 30% year over year, which management attributed mainly to CETY Europe. Gross profit and margin improved, while net loss narrowed. General and administrative expense fell to $116,541 from $159,335, and there was no share-based expense versus $91,140 a year earlier. Interest expense increased to $240,352 from $168,468. Financing fees were nil versus $378,155 in Q1 2018.
Financing provided $326,588 in cash, primarily from $326,215 of note proceeds; there was no investing cash flow. Current notes payable totaled approximately $4.20 million, including $1.24 million owed to a related party. The balance sheet also reported $744,272 of long-term lease liability. The derivative liability increased to $543,721 from $245,988 at year-end.
Changes, outlook and risks
- The company adopted lease accounting Topic 842 on January 1, 2019, recording right-of-use assets and lease liabilities of $972,123 in total.
- Management states there is substantial doubt about the company’s ability to continue as a going concern, citing its losses, $6.89 million working-capital deficit, and dependence on additional debt or equity financing and/or positive operating cash flow. No quantified forecast or formal financial guidance is provided.
- The company disclosed it is in default on amounts payable under its GE asset purchase agreement and is negotiating with GE; it believes it may be entitled to a purchase-price reduction.
- A $291,767 Oberon Securities invoice is disputed. The company recorded no liability, stating it believes it has defenses and expects to prevail.
- Five customers represented about 94% of accounts receivable at March 31, 2019, creating collection and concentration risk. Cash was only $1,032.
- Disclosure controls were deemed ineffective due to material weaknesses, including no independent directors or audit committee financial expert and controls not ensuring all required disclosures were initially addressed in the financial statements.
- On April 9, 2019, the company issued a $53,000 convertible note. On April 30, its board approved an increase in authorized common shares from 800 million to 2 billion, still subject to shareholder approval and effectiveness procedures.
- Common shares outstanding were 575,582,656 at March 31 and 575,657,656 as of May 14. The company’s convertible financing and proposed increase in authorized shares could result in dilution.
Investor facts to verify
- Reconcile the filing’s inconsistent 2018 revenue figures: the financial statements report $172,391, while MD&A states $174,391 in one passage and $172,391 in another.
- Confirm the status, amounts due, maturity terms and negotiations concerning the GE default and other notes, including related-party obligations.
- Assess the company’s near-term funding plan and its ability to meet obligations given minimal cash, recurring losses and the stated going-concern uncertainty.
- Review collection quality for concentrated receivables, the disputed Oberon claim, and potential dilution from convertible notes and the proposed share authorization.
- Track remediation of the disclosed material weaknesses in disclosure controls.