Clean Energy Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; financial statements are unaudited. The company designs and markets Clean Cycle heat-recovery systems and provides electronics manufacturing services.
Key financial results
| Metric | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2017 |
|---|---|---|
| Revenue | $116,445 | $862,336 |
| Gross profit (loss) | $(11,720); margin approximately (10%) | $386,546; margin approximately 45% |
| Operating loss | $(367,240) | $(724,886) |
| Net loss | $(595,266) | $(1,392,770) |
- For the nine months, revenue fell about 49% from $1,687,656 in 2016; net loss increased from $1,212,255. Operating loss narrowed from $877,800, but financing fees of $462,511 contributed to the higher net loss.
- Q3 revenue declined about 58% year over year, and gross margin fell from about 29% to negative 10%. Management attributed the weak quarter partly to lower sales and direct labor costs relative to sales. Nine-month gross margin was approximately 45%, versus 46% in 2016.
- Cash used in operations was $1,260,800 for the nine months, versus $154,070 in 2016. Financing activities provided a reported net $1,275,771; investing activities used no cash. Ending cash was $21,412, up from $6,442 at year-end 2016.
- At September 30, current assets were $1,420,364 and current liabilities $6,264,738, a working-capital deficit of approximately $4.84 million. Total liabilities were $6,264,738, compared with $5,045,393 at December 31, 2016; stockholders’ deficit was $3,396,076.
- Current notes payable, net of discount, were $3,457,661. The company also reported $894,139 owed under receivables financing bearing 2.5% monthly interest. The GE acquisition note bears 2.66% interest; MD&A lists $900,000 due in 2017 and $300,000 in 2018.
Material changes and financing
- Common shares outstanding rose from 155,178,083 at December 31, 2016 to 210,881,122 at September 30, 2017. The company reported convertible notes potentially convertible into approximately 136.1 million shares, in addition to options and warrants, presenting substantial dilution risk.
- In June 2017, stockholders approved increasing authorized common shares from 400 million to 800 million.
- The company issued 1,233,959 common shares in September for conversion of $20,000 in accrued interest. Financing fees included a significant charge and shares issued for financing fees.
Outlook, risks and other disclosures
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing a $1.39 million nine-month loss, $4.84 million working-capital deficit, $3.40 million stockholders’ deficit and operating cash use. Continued operations depend on additional debt or equity financing and/or positive operating cash flow; no assurance of either is given.
- Management’s stated plans include expanding sales through direct and distributor channels, pursuing lease and energy-based contracts, seeking higher-margin electronics manufacturing work, and arranging financing partnerships. The filing provides no quantified revenue or earnings guidance.
- Revenue and receivables are concentrated: the top five customers accounted for about 95% of nine-month sales, and five customers represented about 99% of receivables at September 30. The filing notes customers can cancel, delay or reduce orders.
- Disclosure controls were deemed ineffective due to material weaknesses, including the absence of an audit committee financial expert and inadequate controls to ensure required disclosures were addressed in the financial statements. Management reported no material changes in internal control during the quarter.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. The company reported no significant off-balance-sheet arrangements.
Investor verification points
- Verify revenue comparisons: the financial statements show Q3 revenue of $116,445 versus $280,299 and nine-month revenue of $862,336 versus $1,687,656, while parts of MD&A state inconsistent revenue changes and periods.
- Reconcile the cash-flow statement’s financing line items and its reported $1,275,771 of net financing cash with the underlying note repayments and borrowings; the presentation is not clear in the filing text.
- Confirm debt balances, maturities and repayment capacity, including the GE note schedule and high-cost receivables financing.
- Assess funding needs, going-concern assumptions, share dilution from convertible notes, and the concentration and collectability of customer receivables.
- Review remediation of the disclosed disclosure-control weaknesses and the accuracy of the filing’s financial and narrative disclosures.