Clean Energy Technologies, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; financial statements are unaudited. The company designs and sells Clean Cycle heat-recovery systems and also provides electronics manufacturing services. It reported separate HRS and electronics-assembly segments.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $177,811 | $816,726 | $1,407,357 | $1,613,016 |
| Gross profit (loss) | $(20,508) | $306,089 | $700,688 | $588,297 |
| Operating expenses | $590,604 | $311,963 | $1,076,163 | $607,590 |
| Operating loss | $(611,112) | $(5,874) | $(375,475) | $(19,293) |
| Net loss | $(694,667) | $(81,132) | $(609,246) | $(181,873) |
Q2 gross margin was approximately negative 11.5%; six-month gross margin was approximately 49.8%. Six-month sales declined about 13%, while gross profit increased; management attributed the latter primarily to HRS revenue with low cost of sales. Q2 sales fell about 78%, and management cited the facility relocation and associated operational shutdown. It also attributed higher operating costs and losses to the move. A $41,459 loss on disposal of fixed assets was recorded in the quarter and six-month period. Six-month interest expense rose to $192,312 from $162,580, attributed to increased line-of-credit use in Q1.
For the six months, HRS generated $824,574 of sales and $677,661 of segment income; electronics assembly generated $582,783 of sales and $23,027 of segment income. Segment income is before corporate and other reconciling items.
Cash, liquidity, and debt
- Cash was $41 at June 30, down from $4,196 at year-end 2015. Six-month operating cash flow was positive $93,124, investing cash flow was negative $13,826, and financing cash flow was negative $83,453; cash declined $4,155.
- Current assets were $1.44 million against current liabilities of $3.96 million; the company reported a $2.52 million working-capital deficit. Stockholders’ deficit was $1.81 million, and accumulated deficit was $5.48 million.
- Current notes payable totaled $1,164,931 and long-term notes payable $800,000. The current balance includes $1,134,640 owed under receivables financing, which bears interest at 2.5% monthly and is secured by company assets and personally guaranteed by the CEO. The GE acquisition note bears 2.66% interest; scheduled quarterly installments were to begin December 2016.
- Trade accounts payable increased to $891,138 from $609,407; accrued expenses were $1.55 million. The filing identifies a $816,297 estimated accrued payable to GE within accrued expenses.
Material developments, outlook, and risks
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern, citing the working-capital and stockholders’ deficits and dependence on additional debt or equity financing and/or positive operating cash flow. No assurance was given that financing or profitability would be achieved.
- Management’s stated plans included growing sales through distributors and direct sales, pursuing electricity sales in island markets, and developing licensing, cogeneration, and OEM opportunities. The filing provides no quantified financial guidance.
- Sales were highly concentrated: the top five customers represented approximately 98% of Q2 sales and 100% of six-month sales. Five customers also represented about 98% of receivables at quarter-end. Management warned that customer orders may be canceled, delayed, or reduced.
- The company signed a seven-year, two-month lease for an 18,200-square-foot facility beginning July 1, 2016; first-year rent was stated as $179,090. The prior Costa Mesa lease ended June 30, 2016. Management cited relocation and shutdown disruption as a key cause of lower sales and weaker Q2 results.
- Preferred Series D stock had a $750,000 balance. The filing describes a reduced 6% annual dividend rate and states the company notified holders it could not redeem the shares when required; an extension was to be negotiated.
- After quarter-end, the company entered a $77,500 convertible note on July 6, 2016, bearing 10% annual interest, with conversion terms based on 55% of the lowest closing bid price over a specified 20-trading-day period after a six-month restriction. It also agreed to issue 300,000 shares for a 45-day consulting engagement.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2016, due to material weaknesses, including the absence of an audit committee financial expert and disclosure controls not designed to ensure all required disclosures were addressed. The filing reported no material legal proceedings and no material changes to the prior annual-report risk factors.
Important facts for investors to verify
- Near-term liquidity and financing capacity, including repayment terms and costs of receivables financing and other notes.
- Whether the company can restore operations and sales after relocation, and whether customer concentration or delayed orders will persist.
- Cash requirements for the new lease, GE note installments, accrued liabilities, and Series D preferred obligations.
- Potential dilution from convertible notes, equity issuances, and the increased authorized share count effective July 5, 2016.
- Remediation of the disclosed control weaknesses and the collection and valuation of concentrated receivables and inventory.