Clean Energy Technologies, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The company designs and manufactures renewable-energy and energy-efficiency systems, including heat-recovery equipment, and also operates legacy electronics manufacturing and a European sales and service business. This unaudited report covers the three months ended March 31, 2020; comparisons below are to Q1 2019 unless otherwise noted. The company filed late under the SEC COVID-19 relief order, citing pandemic-related disruption to its operations and professional advisers.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior balance-sheet date |
|---|---|---|
| Revenue | $858,816 | $224,363 |
| Gross profit | $515,539 | $75,186 |
| Gross margin | About 60% based on reported sales and gross profit; MD&A states 65% | About 34% |
| Operating income (loss) | $39,329 | $(326,692) |
| Net loss | $(313,574) | $(726,777) |
| Operating cash flow | $39,493 | $(332,012) |
| Cash at period end | $501,459 | $7,406 at Dec. 31, 2019 |
| Current assets / current liabilities | $2.46 million / $9.40 million | $2.14 million / $8.93 million at Dec. 31, 2019 |
| Total liabilities | $9.97 million | $9.56 million at Dec. 31, 2019 |
| Stockholders’ deficit | $(5.41) million | $(5.25) million at Dec. 31, 2019 |
Revenue rose about 283%, primarily as HRS shipped two units versus none in Q1 2019. HRS revenue was $748,750, compared with $25,448; engineering and manufacturing revenue declined to $107,567 from $151,633, while Cety Europe revenue fell to $2,499 from $47,282. Management attributed the European decline partly to COVID-19 in Italy. The company reported $454,560 of financing cash flow, including $125,000 from stock issuance and proceeds from notes and credit lines; it made no investing outlays. Interest paid was $75,040. No income tax was recorded.
Interest and financing expense was $244,130, and the company recorded a $130,994 loss from remeasurement of derivative liabilities and a $22,221 gain on debt settlement. The derivative liability increased to $586,749 from $320,794 at year-end. The filing reports a working-capital deficit of $6,932,492 and an accumulated deficit of $14,529,292.
Material changes, outlook and risks
- Profitability: The net loss narrowed by $413,203 year over year as higher HRS sales and gross profit more than offset higher operating expenses. The company remained unprofitable after financing costs and derivative-related expense.
- Margins: Management attributes HRS profitability to the two-unit shipment and lower material costs for inventory acquired from GE. The MD&A states a 65% gross margin, but reported gross profit divided by reported sales is about 60%; investors should reconcile this discrepancy.
- Liquidity and going concern: Management states there is substantial doubt about the company’s ability to continue as a going concern. It depends on raising debt or equity capital and/or generating positive operating cash flow. The $501,459 cash balance is small relative to current liabilities.
- Debt and defaults: The company reported a $1,692,126 line of credit, $2,400,214 owed to GE, $411,362 in net convertible notes, and $1,597,582 in related-party notes, in addition to other liabilities. It disclosed default on the GE asset-purchase obligation and $187,285 of principal and interest owed to Cybernaut Zfounder Ventures. The GE balance includes $1.2 million of note principal, accrued transition services and interest; negotiations with GE were ongoing.
- COVID-19: The company expected the pandemic to negatively affect results, but said the financial impact and duration could not be reasonably estimated. It also cited COVID-19 disruption as the reason for the late filing.
- Financing and dilution: The company said it would continue to rely on equity sales and warned of dilution. A June 8, 2020 agreement provided for up to $2 million from GHS Investments, conditional on effectiveness of a Form S-1 registration statement; the company issued 764,526 shares as an inducement fee. As of June 23, 2020, 762,895,515 common shares were outstanding.
- Other contingencies and operations: A $291,767 invoice from Oberon Securities was disputed, and no liability was recorded because management believed the company was more likely than not to prevail. A GE-acquired lease asset was expected to generate about $20,000 monthly for 120 months after planned Q3 2020 commissioning, but collection was not considered probable as of March 31.
- Controls and governance: Management concluded disclosure controls were ineffective, citing no independent directors, no audit committee financial expert, and inadequate controls to ensure all required disclosures were addressed. CFO John Bennett resigned March 9, 2020 and remained as a consultant.
- No formal financial guidance: The filing provides no quantified revenue, profit or cash-flow forecast. It cautions that forward-looking statements are uncertain and actual results may differ materially.
Most important facts for investors to verify
- Reconcile the stated 65% gross margin with the reported revenue and gross-profit figures, which imply approximately 60%.
- Confirm the status, maturity terms and remedies for the GE and Cybernaut defaults, and any outcome of GE purchase-price negotiations.
- Assess near-term liquidity, cash requirements and the likelihood and terms of additional financing, including the conditions and dilution associated with the GHS agreement.
- Review potential dilution from convertible obligations, preferred stock and warrants; the filing cites approximately 498 million potential shares from convertible notes, 8.125 million from preferred stock and 174.25 million warrants.
- Track COVID-19 effects, HRS commissioning and lease collections, and the resolution of the disputed Oberon claim.
- Monitor remediation of ineffective disclosure controls and the company’s ability to continue as a going concern.