Clean Energy Technologies, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
The company designs and sells Clean Cycle heat-recovery systems and provides electronics manufacturing services. This unaudited report covers the quarter and six months ended June 30, 2018; the comparable periods are 2017. Its shares trade on the OTC Pink Open Market as CETY.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $539,102 | $477,021 | $711,493 | $745,891 |
| Gross profit | $349,858 | $336,180 | $378,535 | $398,266 |
| Gross margin | 64.9% | 70.5% | 53.2% | 53.4% |
| Operating loss | $73,602 | $40,522 | $560,441 | $357,647 |
| Net loss | $298,142 | $181,408 | $1,611,400 | $797,505 |
At June 30, 2018, cash was $196,010, current assets $1.55 million, current liabilities $6.85 million, and working capital deficit $5.29 million. Total assets were $2.95 million and stockholders’ deficit was $3.89 million. All reported debt was current: notes payable, net, totaled $3.08 million, plus $403,122 of current related-party notes. No long-term debt was reported.
For the first six months, operating cash outflow was $932,759; financing provided $1.12 million, including $907,377 from common-stock issuance and $418,855 of note proceeds. Investing cash flow was zero. Cash increased from $9,418 to $196,010.
Changes versus the prior comparable period
- Q2 revenue rose about 13%, which management attributed mainly to higher HRS sales. First-half revenue declined about 5%, primarily because HRS sales were higher in Q1 2017.
- First-half segment sales were $392,094 for HRS, up from $320,638, and $319,399 for electronics assembly, down from $425,253.
- Despite higher Q2 revenue, gross margin fell year over year. First-half net loss roughly doubled, reflecting higher operating expenses, financing fees, derivative-liability losses, beneficial-conversion expense, and interest expense.
- Common shares outstanding increased from 210.9 million at December 31, 2017 to 553.2 million at June 30, 2018. The February financing issued 302.5 million restricted shares for approximately $907,377.
Outlook, risks, contingencies and unusual items
- Going concern: Management states there is substantial doubt about the company’s ability to continue as a going concern. It depends on raising additional debt or equity and/or generating positive operating cash flow; no assurance is given that funding or profitability will be achieved.
- Management’s plans include increasing sales through distributors and direct channels, pursuing lease and energy-based contracts, seeking higher-margin manufacturing work and financing partnerships, and pursuing licensing and technology opportunities. No quantified revenue or earnings guidance is provided.
- The company says it is in default on amounts owed under the GE heat-recovery asset purchase agreement and is negotiating with GE, including over a claimed purchase-price reduction.
- An Oberon Securities invoice for $291,767 is disputed; the company recorded no liability, stating it believes it has a greater-than-not chance of prevailing. The filing also describes a seven-year facility lease and future minimum payments, including $114,000 for the remainder of 2018.
- Convertible financing generated a $460,833 derivative liability at June 30, up from $244,496 at year-end. A February CVL note had $939,500 principal, 10% interest, a February 2020 maturity, and a stated $0.003 conversion price; a June MGW note had $250,000 principal, 8% interest, and a June 2019 maturity.
- Management disclosed ineffective disclosure controls due to material weaknesses, including no independent directors or audit committee financial expert and deficiencies in controls over required financial-statement disclosures.
- Customer concentration is notable: five customers represented approximately 97% of accounts receivable. The European sales and service center was expected to become operational in August 2018, supporting 65 installed European units; the filing provides no quantified forecast for its contribution.
Important facts for investors to verify
- Confirm the company’s near-term funding needs, available financing, debt maturities and status of negotiations or default with GE.
- Review the conversion, redemption and potential dilution terms of the CVL and MGW notes, and confirm the current ownership and voting position of MGW-related holders.
- Reconcile share-capital disclosures: the balance sheet lists 400 million authorized common shares despite 553.2 million issued and outstanding, while the notes state authorization of 800 million shares.
- Check inventory disclosures: the balance sheet reports $874,432 at June 30, while the inventory note’s component presentation contains apparent inconsistencies.
- Assess customer concentration and collection risk, progress at the European service center, and remediation of the disclosed control weaknesses.