Clean Energy Technologies, Inc. — Q3 2019 Form 10-Q
Business context and period. This unaudited filing covers the three and nine months ended September 30, 2019. The company operates in electronic assembly, heat recovery solutions (HRS), and CETY Europe sales and service. Management says its focus is on clean-energy products and services, while electronic assembly remains a legacy business.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $126,546 | $532,137 | $455,077 | $1,243,630 |
| Gross profit | $45,185 | $305,581 | $162,484 | $684,116 |
| Gross margin | 35.7% | 57.4% | 35.7% | 55.0% |
| Operating loss | $(552,725) | $(123,295) | $(1,371,110) | $(687,148) |
| Net loss | $(658,688) | $(155,382) | $(2,227,260) | $(1,766,783) |
- Nine-month revenue declined about 63%; management attributed the decrease principally to HRS, which shipped no generator units in 2019. HRS revenue was $46,662 versus $759,474 in the comparable period. Electronic Assembly revenue fell to $344,905 from $484,156; CETY Europe contributed $64,035 after becoming operational in late 2018.
- Nine-month operating expenses rose to $1.534 million from $1.371 million. Interest expense increased to $1.042 million from $714,000, contributing to the larger net loss. A derivative-liability gain of $185,811 partly offset expenses; the comparable-period gain was $5,058.
- Cash was $179,855 at September 30, 2019, versus $6,456 at year-end 2018. Operating activities used $1.747 million; financing activities provided $1.926 million, including $2.024 million from stock issuance. Investing activities used $6,000. Interest paid was $475,966.
- Balance-sheet current assets were $1.632 million and current liabilities $8.167 million, implying a working-capital deficit of approximately $6.534 million. Total liabilities were $8.849 million; stockholders’ deficit was $4.999 million. Current notes payable were $3.084 million, with a further $996,173 of related-party current notes. Lease liabilities totaled $879,769.
- Accounts receivable, net, was $661,425; inventory was $790,789. Five customers represented approximately 96% of receivables.
Material changes and financing
- On May 31, the company agreed to sell MGW Investment I Limited 168 million common-stock-and-warrant units for $1,999,200. The common shares were issued August 15; warrants are exercisable at $0.04 per share. The company also reported smaller private unit sales.
- Common shares outstanding increased from 555.6 million at December 31, 2018 to 748.7 million at September 30, 2019. The filing reports 748,907,656 shares outstanding as of November 14, 2019.
- The company adopted lease accounting effective January 1, 2019, recognizing a $872,817 right-of-use asset and $879,769 lease liability.
Outlook, risks, and unusual items
- Going concern: Management states there is substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on raising debt or equity capital and/or generating positive operating cash flow. No numerical financial guidance is provided.
- Defaults: The company disclosed default on $1.2 million due under its GE asset purchase agreement, amid disagreement over the purchase price and ongoing negotiations. It also reported default on $187,285 of principal and interest owed to Cybernaut Zfounder Ventures.
- Contingency: An Oberon Securities invoice for $291,767 is disputed; the company recorded no liability, stating it believes it has defenses and expects to prevail.
- Operating factors: Management cited HRS generator shipments not occurring in 2019 and a customer reconfiguring an order that had been expected to ship. It also cited increased travel and costs associated with the Marshall Islands project, CETY Europe, and business development.
- Controls: Management concluded disclosure controls were not effective at September 30, citing no independent directors, no audit committee financial expert, and deficiencies in ensuring required disclosures were addressed.
- Subsequent events: The company entered a $103,000, 12% convertible note on October 30, 2019, and reported issuance of shares related to a September private sale after quarter-end.
- Reporting inconsistencies: The filing gives differing figures in some MD&A passages, including nine-month revenue ($455,077 in the financial statements versus $455,007 in MD&A) and working-capital/current-asset figures. The balance-sheet figures above are used; the filing text does not provide a clear reconciliation.
Investor verification checklist
- Confirm the status, payment terms, and potential consequences of the GE and Cybernaut defaults, and the outcome of GE negotiations.
- Assess near-term funding needs, cash runway, and whether the company can reduce operating cash burn or secure additional capital.
- Verify expected HRS deliveries and the timing and collectability of customer orders, including the reconfigured order.
- Review dilution and control implications of the MGW financing, warrants, convertible notes, and preferred stock.
- Reconcile the filing’s inconsistent revenue, current-asset, and working-capital disclosures, and monitor remediation of the control weaknesses.