Clean Energy Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company operates in heat recovery, waste-to-energy, engineering and manufacturing, and natural-gas trading. Results are unaudited and in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $4.00 million | $44,629 | $11.70 million | $2.57 million |
| Gross profit | $753,383 | $25,913 | $1.43 million | $1.15 million |
| Gross margin | 18.8% | 58.1% | 12.2% | 44.9% |
| Operating expenses | $1.06 million | $566,899 | $2.71 million | $1.72 million |
| Operating loss | $302,840 | $540,986 | $1.28 million | $572,824 |
| Net loss | $667,136 | $861,415 | $2.46 million | $1.32 million |
Nine-month sales rose 356%, led by CETY HK natural-gas trading ($10.46 million versus $1.93 million) and new waste-to-energy revenue of $779,720. Despite higher gross profit in dollars, the gross margin declined, reflecting lower natural-gas margins and a change in revenue mix. Interest and financing fees increased to $1.71 million from $747,451, contributing to the larger nine-month net loss. Q3 net loss attributable to CETY was $721,395; the consolidated net loss was $667,136, reflecting the non-controlling interest allocation.
Cash flow, liquidity and capitalization
- Nine-month operating cash use was $3.84 million, versus $1.93 million in 2022. Investing activities provided $14,111; financing activities provided $3.91 million. Cash increased $114,542 to $263,814.
- At September 30, cash was $263,814; current assets were $7.40 million and current liabilities $5.63 million. The balance sheet therefore implies working capital of approximately $1.78 million, while management reports $1.76 million.
- Total liabilities were $5.71 million. Current debt included $3.11 million of convertible notes, net of discount, and a $648,369 line of credit. Convertible notes had $3.03 million principal and $342,485 accrued interest before the debt discount. The line of credit is secured by company assets; receivables, inventory and property and equipment are pledged.
- Stockholders’ equity was $5.39 million, up from $1.88 million at December 31, 2022. Shares outstanding increased from 37.17 million to 38.97 million; the company reported 38,968,955 shares outstanding as of November 14, 2023.
Material changes and business developments
- Effective January 1, 2023, CETY began consolidating Shuya, a Chinese natural-gas business, after a voting agreement gave its subsidiary control. The company holds a 49% direct and indirect interest; the remaining ownership is reported as non-controlling interest.
- CETY attributes the revenue increase principally to larger natural-gas volumes and the newly consolidated business. Management says gas-price fluctuations affected margins. CETY HK represented approximately 89% of nine-month revenue, making results concentrated in the China trading business.
- Waste-to-energy revenue reflects design, sourcing and permitting work for the Vermont Renewable Gas project. CETY invoiced the related-party venture $779,720 through September, including $367,038 in Q3. HRS revenue declined to $399,136 from $509,330, and engineering/manufacturing revenue declined to $59,877 from $132,316.
- The company completed a Nasdaq listing in March 2023 and raised $3.15 million in net proceeds from an offering. It also funded operations through notes, warrant exercises and other equity transactions.
Outlook, risks and unusual items
- Going concern: Management and the notes state there is substantial doubt about the company’s ability to continue as a going concern, citing accumulated deficit of $19.83 million and nine-month operating cash use of $3.84 million. Management says it intends to restructure debt and secure additional financing; there is no assurance it can do so.
- Outlook: No quantified revenue, earnings or cash-flow guidance is provided. Management expects continued growth across segments, anticipates higher-margin waste-to-energy and EPC contributions, and describes the Vermont pilot plant as progressing. These are forward-looking expectations, not firm guidance.
- Financing and dilution: The company says it expects to continue relying on equity sales. At September 30, convertible notes were convertible into approximately 2.61 million shares; 253,602 warrants were outstanding. Subsequent to quarter-end, the company established a $25 million at-the-market common-stock sales program and issued Series E preferred stock. On November 8, 2023, it agreed to exchange approximately $1.96 million of Mast Hill notes for 2,199,387 Series E preferred shares. Series E carries a 15% dividend and is convertible into common stock at $1 per share, subject to stated terms and ownership limits.
- Other commitments: A planned Shenzhen Gas joint venture is subject to definitive agreements and would require an $8 million company contribution. A separate LWL acquisition performance condition could require issuing 20 million shares if specified revenue or profit targets are met by December 31, 2023; the filing says the conditions had not been met as of filing.
- Concentration and related parties: Seven customers accounted for approximately 98% of accounts receivable. Shuya has material supplier, lease and financing arrangements with Leishen, a 41% Shuya shareholder. The filing also reports related-party sales to Vermont Renewable Gas.
- Controls and legal matters: Management concluded disclosure controls were ineffective, citing no independent directors, no audit committee financial expert, and gaps in disclosure controls. The company reported no legal proceedings it believes likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Investor facts to verify
- Reconcile the reported working-capital figure with current assets less current liabilities, and assess the company’s near-term cash needs and ability to obtain financing.
- Review the collectability and timing of receivables, including customer concentration, related-party balances, and the substantial supplier prepayments.
- Assess the sustainability and margins of natural-gas trading revenue, which dominates reported sales, and confirm the economics and control arrangements of consolidated Shuya.
- Review the full terms, repayment or conversion risks, and potential dilution from convertible notes, warrants, the ATM program and Series E preferred stock.
- Track progress, funding requirements and contract milestones for the Vermont project, HRS equipment sales, the proposed Shenzhen Gas venture and the LWL performance contingency.
- Monitor remediation of the disclosed control weaknesses and changes in board independence and financial oversight.