Clean Energy Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 14, 2018. CETY designs and sells waste-heat-to-electricity systems, principally its Clean Cycle heat generator through Heat Recovery Solutions (HRS), and also operates an electronics assembly business. Financial statements are unaudited.
Financial performance
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|---|---|
| Revenue | $532,137 | $116,445 | $1,243,630 | $862,336 |
| Gross profit (loss) | $305,581 | $(11,720) | $684,116 | $386,546 |
| Gross margin | 57.4% | (10.1%) | 55.0% | 44.8% |
| Operating loss | $(123,297) | $(367,240) | $(687,148) | $(724,886) |
| Net loss | $(155,382) | $(595,266) | $(1,766,783) | $(1,392,770) |
| Cash used in operating activities | — | — | $(1,247,074) | $(1,260,800) |
Management attributed revenue growth mainly to HRS. Nine-month segment sales were $759,474 for HRS (up from $357,460) and $484,156 for electronics assembly (down from $504,876). The nine-month net loss widened despite improved revenue and gross profit, reflecting financing fees of $378,155, beneficial conversion expense of $290,136, and interest expense of $423,858. Third-quarter results included a $221,395 gain from remeasurement of derivative liabilities.
Financial position and liquidity
- At September 30, 2018, cash was $30,508; accounts receivable, net, $776,407; inventory, $790,065; and total assets, $2,983,280.
- Current liabilities were $7,033,108, including $3,257,727 of current notes payable, net of discount, and $503,122 of current related-party notes payable. The company reported no long-term debt. Working capital deficit was $5,436,128, and stockholders’ deficit was $4,049,828.
- Operating cash use of $1,247,074 was largely funded by $1,268,164 in financing cash flows, including $907,377 of stock proceeds and $569,946 of note proceeds, partially offset by note repayments. Cash increased by $21,090 from year-end 2017.
- Interest paid during the nine months was $215,785. Accrued interest at quarter-end was $525,205. Accrued expenses also included $972,231 payable to GE under a transition-services agreement.
Material changes, outlook, and risks
- Common shares outstanding rose to 554,698,461 at quarter-end from 210,881,122 at December 31, 2017. A February 2018 investment issued 302,462,667 restricted shares for approximately $907,377. The filing reports 555,582,656 shares outstanding as of November 14, 2018.
- The company states that it is in default on payments under its GE asset purchase agreement and is negotiating with GE, asserting that it believes a purchase-price reduction is warranted. The filing does not disclose a resolution or revised payment terms.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the nine-month net loss, accumulated deficit of $10,556,501, working-capital deficit, and dependence on new debt or equity financing and/or positive operating cash flow.
- A $291,767 invoice claim from Oberon Securities is disputed; the company recorded no liability, stating it believes it has defenses. The filing also describes a seven-year facility lease and future minimum lease payments, including $234,840 in 2019.
- Management described plans to expand sales and service support, including a CETY Europe center expected to become operational in November 2018. The filing cites 65 commissioned Clean Cycle installations in Europe. No quantitative revenue, earnings, or cash-flow guidance is provided.
- Disclosure controls were deemed ineffective at September 30, 2018, due to material weaknesses including no independent directors or audit committee financial expert and inadequate controls over financial-statement disclosures. Management reported no significant subsequent changes to internal control over financial reporting.
- Customer concentration is significant: five customers represented approximately 98% of accounts receivable. The business is also exposed to customer economics tied to energy prices, incentives and regulation, as well as product mix, component costs, and demand.
Important facts for investors to verify
- Near-term financing needs, debt maturities and defaults, including the status of GE negotiations and the ability to fund operations.
- Collection and aging of receivables, given customer concentration, and the recoverability and valuation of inventory.
- Terms and potential dilution from convertible and related-party notes, including the effect of the controlling investor’s ownership and conversion restrictions.
- Status and potential exposure from the disputed Oberon invoice and other accrued or contingent obligations.
- Several figures differ within the filing: December 2017 inventory is reported as $854,547 on the balance sheet but $913,954 in the inventory note; certain prior-period expense figures in MD&A also differ from the financial statements. Reconcile these amounts against the filed statements and supporting records.