Clean Energy Technologies, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. The company designs and manufactures clean-energy products, including its Clean Cycle heat-recovery system, and also operates an electronics assembly business. The heat-recovery assets were acquired from GE in September 2015.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $1,229,546 | $796,290; up $433,256 (54%) |
| Gross profit / margin | $721,196 / 58.7% | $282,208 / 35.4% |
| Operating income (loss) | $235,637 | $(13,419) |
| Interest expense | $150,216 | $87,322 |
| Net income (loss) | $85,421 | $(100,741) |
| Operating cash flow | $(284,301) | $(198,907) |
| Cash at period end | $1,040 | $4,196 at Dec. 31, 2015 |
Q1 2016 revenue included $812,083 from Clean Energy HRS and $417,463 from electronics assembly. The filing attributes improved results primarily to the HRS acquisition and higher revenue. Cost of goods sold was 41% of revenue versus 65% in the prior-year quarter, according to management. Basic and diluted earnings per share were reported as $0.00, rounded.
At March 31, total assets were $3.77 million and total liabilities were $4.92 million, leaving a stockholders’ deficit of $1.15 million. Current assets were $2.19 million against current liabilities of $4.17 million; the resulting working-capital deficit is $1.98 million. Notes payable were $1.72 million current and $750,000 long term. The company reported a $32,354 bank overdraft. It received $279,217 in note proceeds during the quarter; financing cash flow was $311,571, while investing cash use was $30,426.
Material changes and operating risks
- Revenue and gross profit rose substantially year over year, and the company moved from a net loss to net income. However, operating cash use increased, and cash on hand remained extremely limited.
- Accounts receivable increased to $1.12 million net from $474,699 at year-end. The filing reports that five customers represented approximately 81% of receivables in the financial-statement notes, with one customer at 55%; MD&A gives a different five-customer figure of 94%. Five customers generated approximately 81% of quarterly sales.
- The accounts-receivable financing balance was $1.13 million and bears interest of 2.5% per month, according to the notes. The company also has a GE acquisition note, and its MD&A lists scheduled GE note payments of $315,218 in 2016, $630,436 in 2017, and $254,346 in 2018.
- Management states there is substantial doubt about the company’s ability to continue as a going concern, citing the working-capital and stockholders’ deficits, accumulated deficit of $4.79 million, and operating cash use. The company says it depends on additional debt or equity financing and/or positive operating cash flow; it provides no assurance that either will be achieved.
- Management’s plans include expanding direct and distributor sales, pursuing electricity sales and leasing or energy-based arrangements, and developing licensing, cogeneration, and OEM opportunities. No quantified revenue or earnings guidance is provided.
- A seven-year, two-month lease for a new 18,200-square-foot facility is scheduled to begin July 1, 2016; stated rent is $179,090 for the first 12 months. Disclosure controls were deemed ineffective due to material weaknesses, including lack of an audit committee financial expert and inadequate disclosure controls.
Important items for investors to verify
- Reconcile interest expense: the income statement reports $150,216, while MD&A elsewhere states $353,476. MD&A also contains a contradictory statement describing a net loss despite the reported $85,421 net profit.
- Confirm the working-capital deficit: the balance-sheet amounts calculate to $1,976,848, while MD&A also gives $1,926,848.
- Reconcile customer concentration disclosures: the notes report 81% of receivables attributable to the top five customers, while MD&A reports 94%.
- Verify the share count and capitalization. The cover and balance sheet report 139,846,765 common shares at or near quarter-end, but a note states 34,386,444 shares outstanding at March 31. The filing also describes 400,000 shares issued for financing fees and significant potential dilution from securities and financing arrangements.
- Assess near-term liquidity, the high-cost receivables financing, customer collection risk, and the company’s ability to fund operations and scheduled debt and lease obligations.