Clean Energy Technologies, Inc. — Q2 2020 Form 10-Q
Business context and period: The company designs and supplies waste-heat recovery systems, provides related sales and service through CETY Europe, and operates a legacy engineering and electronics-manufacturing business. This unaudited filing covers the three and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019.
Financial results and position
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Revenue | $155,997 | $1,014,812 |
| Gross profit / margin | $62,667 / 40.1% | $578,206 / 57% |
| Operating expenses | $491,537 | $967,747 |
| Operating loss | $(428,870) | $(389,542) |
| Net loss | $(229,502) | $(543,077) |
| Operating cash flow | Not presented quarterly | $(414,393) |
- For the six-month period, revenue was led by HRS at $749,034, versus $250,854 from engineering and manufacturing and $14,924 from CETY Europe.
- At June 30, cash was $6,907; current assets were $1,992,923 and current liabilities were $9,135,475, yielding a reported working-capital deficit of $7,142,552. Total assets were $4,034,175, total liabilities $9,660,729, and stockholders’ deficit $5,626,554.
- Current debt and financing obligations included a $1,718,760 line of credit, $2,414,194 owed to GE, $390,807 in convertible notes, $1,590,754 in related-party notes, and a $110,700 Paycheck Protection Program loan. The company reported $525,254 of long-term lease liability.
- Six-month financing cash flow was $413,894, largely offsetting operating cash use; cash declined by $499 over the period. No investing cash flow was reported.
Changes versus the prior comparable period
- Second-quarter revenue increased to $155,997 from $104,168, while net loss narrowed to $229,502 from $841,795. The six-month revenue increase to $1,014,812 from $328,531 was principally attributed to two HRS units shipped in 2020 versus none in 2019.
- Six-month gross margin increased to 57% from 36%, while operating expenses rose to $967,747 from $935,684. Management attributed improved results to higher revenue and gross profit, improved efficiency, lower interest expense, and non-operating gains.
- Six-month results included a $239,865 gain from debt settlement/write-off and a $119,359 gain from the change in derivative liability. These items, along with lower interest and financing expense, contributed to the reduced net loss.
- Engineering and manufacturing revenue increased, while CETY Europe revenue fell to $14,924 from $56,188; management cited COVID-19 impacts in Italy. Second-quarter HRS revenue was only $284, despite strong first-half HRS sales.
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, citing its working-capital and stockholders’ deficits, accumulated deficit of $14,758,795, and dependence on additional debt or equity financing or positive operating cash flow.
- COVID-19: The company expected the pandemic to negatively affect operations through disruptions to supply chains, production, sales, travel, and economic activity; it said the financial impact and duration could not be reasonably estimated.
- Defaults and disputes: The company disclosed default on the GE asset-purchase obligation, including $1.2 million of purchase-price principal, and default on $187,285 of principal and interest owed to Cybernaut Zfounder Ventures. It was negotiating with GE, asserting it believed a purchase-price reduction was due. A $291,767 Oberon Securities invoice was disputed; no liability was recorded because management believed it had a greater-than-not probability of prevailing.
- Financing and dilution: The company said it expects to continue relying on common-stock sales, which would dilute existing holders. A June agreement with GHS provided for up to $2 million after effectiveness of an S-1; the filing says the registration statement became effective July 23, 2020. Subsequent events also included new convertible-note financings in July.
- Lease asset: The company described an asset expected to generate approximately $20,000 monthly for 120 months after commissioning, targeted for Q3 2020. However, it said collection was not yet considered probable as of June 30, and no net lease investment was recognized.
- Controls: Management concluded disclosure controls were not effective at June 30, citing material weaknesses including no independent directors, no audit committee financial expert, and controls not designed to ensure all required disclosures were addressed.
Most important facts for investors to verify
- Whether the company obtained sufficient financing and improved liquidity after quarter-end, and the terms, availability, and dilution effects of the GHS facility and subsequent notes.
- The status and consequences of the GE and Cybernaut defaults, including any negotiated changes, acceleration rights, or other creditor remedies.
- Whether the HRS lease asset was commissioned and began generating the expected payments, given that collection was not considered probable at quarter-end.
- The sustainability of HRS revenue and margins, which were strongly affected by two unit shipments and inventory acquired from GE.
- Reconcile figures that appear inconsistent in the filing: common shares outstanding are reported differently in certain sections, and the segment-assets total does not match consolidated total assets. The second-quarter cost-of-goods-sold figure is also unclear in the extracted statement text.