Clean Energy Technologies, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. The company develops and sells Clean Cycle heat-recovery systems and provides electronics manufacturing services. Results include two reportable segments: Clean Energy HRS and electronics assembly.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $280,299 | $235,838 | $1,687,656 | $1,848,854 |
| Gross profit | $80,356 | $47,588 | $781,044 | $635,885 |
| Gross margin | 28.7% | 20.2% | 46.3% | 34.4% |
| Operating loss | $(502,325) | $(473,831) | $(877,800) | $(495,124) |
| Net loss | $(603,032) | $(543,210) | $(1,212,275) | $(725,083) |
For the nine months, HRS generated $831,371 in sales and $680,750 in segment income; electronics assembly generated $856,285 in sales and $100,294 in segment income. Reconciliation items, including corporate expenses, share-based compensation, derivative losses and interest, resulted in the consolidated loss.
Cash flow and liquidity: Nine-month operating cash use was $154,070, investing cash use was $89,262, and financing cash provided was $239,435. Cash fell from $4,196 at year-end 2015 to $299 at September 30, 2016. Current assets were $1.516 million versus current liabilities of $4.550 million; the company reported a $3.034 million working-capital deficit. Total liabilities were $5.350 million, including $1.499 million of current notes payable and $800,000 of long-term notes payable. Stockholders’ deficit was $2.270 million.
Changes and notable items
- Q3 revenue increased 18.9% year over year, while nine-month revenue declined 8.7%. Management attributed the nine-month decline to the operating shutdown during the facility relocation in April–June 2016; the Q3 comparison benefited from the prior-year facility shutdown and relocation.
- Nine-month gross margin improved, which management attributed primarily to HRS revenue with low cost of sales in Q1. Despite higher gross profit, operating and net losses widened year over year, with management citing relocation-related disruption and expense increases.
- The company recorded a $41,459 loss on disposal of fixed assets related to the facility move. Q3 and nine-month results also included a $96,923 loss on a derivative liability and a $40,373 favorable change in derivative liability; nine-month interest expense was $236,466.
- Five customers represented approximately 98% of Q3 sales and 80% of nine-month sales. Five customers also represented approximately 93% of accounts receivable at September 30.
Outlook, risks and contingencies
- Going concern: The filing states there is substantial doubt about the company’s ability to continue as a going concern, citing its working-capital and stockholders’ deficits and accumulated deficit of $6.087 million. Continued operations depend on obtaining debt or equity financing and/or generating positive operating cash flow.
- Management’s stated plans include expanding direct and distributor sales, pursuing lease- and energy-based HRS contracts, seeking higher-margin electronics contracts, developing financing partnerships, and pursuing licensing and OEM opportunities. No numerical forecast or formal guidance is provided; management cautions that nine-month results are not necessarily indicative of full-year results.
- Management disclosed no material existing or pending legal proceedings and no significant off-balance-sheet arrangements. The company reported that disclosure controls were ineffective at September 30, 2016, citing material weaknesses including the absence of a director qualifying as a financial expert and gaps in controls over required financial-statement disclosures.
- Convertible notes include below-market conversion-price features. After quarter-end, a $420,000 private placement of 10.5 million restricted shares was completed, and a replacement note with an $84,000 principal amount and a $0.005-per-share conversion price was disclosed. The filing also describes a potential China HRS joint venture, but no definitive agreement had been reached.
Important facts for investors to verify
- Whether the company can meet near-term obligations and secure additional financing given $299 of reported cash and the disclosed going-concern uncertainty.
- The terms, maturity schedule, security and conversion or dilution potential of outstanding notes, including the post-quarter replacement note and the completed equity placement.
- Whether facility relocation effects have ended and whether HRS sales can grow without continued customer concentration.
- The accrued-expense figures differ: the balance sheet reports $1,774,782, while Note 7 reports $1,878,199. The filing text does not explain the discrepancy.
- Share counts vary by date: 143,478,083 common shares were outstanding at September 30, while 153,978,083 were reported outstanding as of November 15, 2016. Verify subsequent issuances and potential dilution.