Clean Energy Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 16, 2022. CETY develops and implements clean-energy and energy-efficiency solutions, including waste-heat recovery, waste-to-energy, project services and LNG trading in China. It also operates legacy electronics manufacturing and CETY Europe businesses. The filing’s descriptions of its reportable segments are inconsistent across sections.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior balance-sheet date |
|---|---|---|
| Revenue | $775,266 | $135,274 |
| Gross profit / margin | $514,193 / approximately 66% | $112,128 / approximately 83% |
| Operating income (loss) | $15,169 | $(366,938) in the statements of operations; MD&A gives a different loss figure of $(336,938) |
| Net income (loss) | $(112,589) | $1,068,584 |
| Operating cash flow | $(538,065) | $(663,192) |
| Cash | $1,221,219 | $1,192,316 at Dec. 31, 2021 |
| Current assets / current liabilities | $3,208,277 / $7,051,388 | $2,605,504 / $6,865,123 at Dec. 31, 2021 |
| Total liabilities | $8,288,659 | $8,153,986 at Dec. 31, 2021 |
| Stockholders’ deficit | $(507,830) | $(1,721,712) at Dec. 31, 2021 |
Revenue increased substantially, chiefly from HRS ($441,193 versus $66,000) and new LNG trading revenue ($267,966 versus none). CETY Europe revenue declined to $33,827 from $39,045; engineering and manufacturing revenue was $32,280 versus $30,229. Gross profit rose with sales, while the gross margin declined. Operating expenses increased to $499,023 from $479,066.
The prior-year net profit reflected a $1,749,173 gain from a change in derivative liability, compared with a $16,014 gain in Q1 2022. Interest and financing fees were $132,470 versus $313,651. These non-operating items help explain the swing from prior-year profit to a current-quarter loss.
Operating cash use was partly offset by $1,368,157 of financing cash flow, including stock issuance and borrowing. Investing cash use was $805,751, associated with a convertible note receivable. Cash increased by $28,903 during the quarter. The company reported a working-capital deficit of $3,843,110 and said it had substantial doubt about its ability to continue as a going concern.
Financing, contingencies and outlook
- Management says operations depend on obtaining additional debt or equity financing and/or generating positive operating cash flow. It expects to continue relying on common-stock sales; future issuance would dilute existing holders. No quantitative earnings or revenue guidance is provided.
- The company reported default on amounts associated with its General Electric asset purchase agreement and stated it believes it is entitled to a purchase-price reduction. Part II separately describes a $1.2 million GE-related payment default and defaulted principal and interest of $187,285 on notes payable to Cybernaut Zfounder Ventures.
- The Nations Interbanc line of credit was $1,153,956 and bears a stated rate of 2.5% per month; an amendment provides for a 2.25% accrual rate and minimum monthly payments of $50,000. Receivables, inventory, long-term financing receivables and property and equipment are pledged as collateral.
- Convertible notes and other borrowing create additional obligations and potential dilution. As of March 31, the company disclosed convertible notes potentially convertible into approximately 480.8 million additional shares. Common shares outstanding rose from 943.6 million at year-end to 961.8 million at quarter-end; 966.7 million were reported outstanding as of May 15.
- Subsequent events: in April, CETY issued shares under its GHS financing arrangement for $153,324 net proceeds. On May 6, it issued Mast Hill a $750,000 convertible note for a $675,000 purchase price, with 15% annual interest and a warrant for 9,375,000 shares.
- Management cited COVID-19-related supply-chain, production and sales disruption as a risk, with financial impact and duration not reasonably estimable. The filing also disclosed ineffective disclosure controls due to board independence, absence of an audit committee financial expert, and disclosure-process weaknesses. Management reported no significant subsequent changes in internal control over financial reporting.
- A lease asset expected to generate approximately $20,000 monthly for 120 months was not yet commissioned; the filing said collection was not considered probable as of March 31. A potential 20 million-share contingent issuance tied to LWL performance had not been triggered as of the filing date.
Key investor verification points
- Confirm the operating-loss discrepancy between the statements of operations and MD&A, and reconcile the filing’s differing segment descriptions.
- Review near-term cash needs, debt maturities, payment defaults, collateral, line-of-credit terms and the company’s ability to obtain financing given the going-concern warning.
- Assess the terms and dilution potential of outstanding convertible notes, equity financing arrangements, warrants and subsequent financing.
- Validate collectability and timing for receivables and the uncommissioned lease asset, and monitor customer concentration: four customers represented approximately 98% of accounts receivable.
- Track progress on HRS projects, LNG trading economics and the LWL performance contingency, and evaluate the disclosed control weaknesses and remediation.