Clean Energy Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. The company develops and sells Clean Cycle heat-recovery systems and provides electronics manufacturing services.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $268,870 | $1,229,546 |
| Gross profit / gross margin | $62,086 / 23.1% | $721,196 / 58.7% |
| Operating income (loss) | ($317,125) | $235,637 |
| Net income (loss) | ($616,097) | $85,421 |
| Cash used in operations | ($443,644) | ($284,301) |
| Cash at period end | $2,036 | $1,040 |
Q1 revenue fell about 78% year over year. Electronics Assembly sales were $187,393, down from $417,463; Clean Energy HRS sales were $81,477, down from $812,083. Gross margin contracted substantially. Operating expenses were $379,211. Below operating income, the company reported $187,511 in financing fees, $63,471 in interest expense, and a $47,990 change in derivative liability.
At March 31, total assets were $2.76 million and total liabilities were $5.49 million, with a stockholders’ deficit of $2.73 million. Current assets were $1.29 million, including $921,259 of inventory and $365,572 of net receivables; current liabilities were $5.24 million. The balance-sheet figures imply a working-capital deficit of approximately $3.95 million, while the filing states $3.75 million. Cash was nearly depleted, and the company used $443,644 in operating cash, partly offset by $439,238 of financing cash inflows. No investing cash was used in the quarter.
Current notes payable, net of discount, were $2.42 million; long-term debt was $254,346. The filing identifies $945,654 of GE note payments due in 2017 and $254,346 in 2018. The company also reported a $49,217 derivative liability related to convertible debt.
Changes, outlook, and risks
- Results swung from profit to loss as sales declined sharply. Management attributed the loss primarily to lower revenue. It also reported lower interest expense year over year, but Q1 2017 included financing fees and derivative-related expense.
- Management reported 119 days of sales in backlog versus 87 a year earlier, receivables outstanding of 122 days versus 85, and payables outstanding of 364 days versus 127.
- The filing expresses substantial doubt about the company’s ability to continue as a going concern, citing its operating losses, operating cash use, accumulated deficit, and working-capital deficit. Continued operations depend on raising debt or equity and/or generating positive operating cash flow.
- Management’s plans include growing direct and distributor sales, pursuing leases and energy-based contracts, seeking higher-margin electronics manufacturing work, arranging financing partnerships, and pursuing licensing and OEM opportunities. No quantified revenue or earnings guidance is provided.
- Customer concentration is significant: the top five customers represented about 98% of Q1 sales, and five customers accounted for about 98% of receivables at March 31. The company warns that orders may be canceled, delayed, or reduced.
- Equity issuance and convertible-note conversions create dilution risk. The balance sheet reports 194,578,083 common shares outstanding at March 31, while another note reports 155,178,083; the cover page reports 202,353,083 as of May 12. The filing also describes convertible notes potentially convertible into 136,081,400 shares.
- Disclosure controls were deemed ineffective at March 31 because of material weaknesses, including the absence of an audit committee financial expert and controls to ensure disclosures were fully addressed in the financial statements. The filing reports no material pending legal proceedings and no material changes to the prior annual-report risk factors.
Investor verification priorities
- Reconcile the inconsistent common-share counts and confirm the fully diluted share count, conversion terms, and remaining convertible debt.
- Clarify the reported working-capital deficit against the balance-sheet amounts and confirm near-term liquidity and financing availability.
- Review the sharp sales decline, customer concentration, backlog quality, and the timing and collectability of receivables.
- Confirm the GE debt repayment schedule, accrued obligations, and the status of Series D preferred dividends and redemption-extension discussions.
- Assess progress addressing material weaknesses in disclosure controls and the company’s stated going-concern uncertainty.