Clean Energy Technologies, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 22, 2022. The interim statements are unaudited. CETY develops renewable-energy and energy-efficiency products and services, including waste-heat recovery, waste-to-energy, engineering and manufacturing, and China-based LNG trading. CETY HK was added as a reportable segment in 2022 following the prior-year acquisition of the gas business.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $1.748 million | $0.156 million | $2.523 million | $0.291 million |
| Gross profit | $0.612 million | $0.107 million | $1.126 million | $0.219 million |
| Gross margin | 35.0% | 68.3% | 44.6% | 75.1% |
| Operating income (loss) | $(0.044) million | $(0.496) million | $(0.028) million | $(0.863) million |
| Net income (loss) | $(0.347) million | $(0.232) million | $(0.460) million | $0.837 million |
- Six-month revenue growth was principally associated with CETY HK, which reported $1.963 million of sales in the segment table versus none in the prior-year period, and higher HRS revenue. CETY Europe sales declined, partly because the prior-year period included an equipment sale.
- Six-month operating expenses were $1.154 million, up from $1.081 million. Professional fees rose to $224,195, which management attributed largely to proposed IPO and Nasdaq-up-listing work; travel increased to $87,398, attributed to European site assessments. Salaries and general and administrative expense declined.
- Six-month 2021 profit included a $1.745 million gain from a change in derivative liability and a $368,098 debt-settlement gain. In 2022, the corresponding gains were $13,399 and $2,920. Interest and financing fees were $416,275 in the 2022 six-month period.
- Cash was $968,919 at June 30, 2022, down from $1.192 million at year-end 2021. Operating cash use was $1.234 million; investing cash use was $785,828, associated with the Heze Hongyuan natural-gas investment; financing provided $1.905 million. The company reported $1.475 million of cash proceeds from stock issuance.
- Current assets were $4.257 million and current liabilities $7.465 million, a working-capital deficit of $3.208 million. Total liabilities were $8.598 million, compared with total assets of $7.951 million; stockholders’ deficit was $646,909.
- Significant reported obligations included a $1.110 million line of credit, $2.526 million due to GE, $1.683 million of current convertible notes net of discount, and related-party notes of $723,353 current and $1.081 million long term. The line of credit bears a stated rate of 2.5% per month, with an amended accrued-fee rate of 2.25% per 30 days and a required minimum monthly payment of $50,000.
- Common shares outstanding increased from 943.6 million at December 31, 2021 to 966.7 million at June 30, 2022; 2.0 billion shares are authorized. The filing says outstanding convertible notes could convert into approximately 564.9 million additional shares; 14.375 million warrants were outstanding at June 30.
Outlook, risks and unusual items
- Going concern: Management reported substantial doubt about the company’s ability to continue as a going concern, citing its working-capital and stockholders’ deficits, accumulated deficit of $17.883 million, operating cash use, and dependence on additional debt or equity financing or positive operating cash flow. No quantified earnings or revenue guidance is provided.
- Management says it expects continued reliance on common-stock sales to fund operations and warns that additional issuance will dilute existing shareholders. It gives no assurance that further equity or debt financing will be available.
- The company was in default on its GE asset-purchase obligation and disputes the purchase price, asserting it believes it is entitled to a reduction. It also disclosed defaulted principal and interest payments of $187,285 on notes payable to Cybernaut Zfounder Ventures. Certain short-term notes were paid after quarter-end.
- Subsequent financing included a $252,928 note dated June 30, 2022, and a $159,450 note dated July 13, each at 10% interest with a 22% default rate and mandatory monthly payments. In August, the company issued convertible notes with 15% interest: $138,889 to Jefferson Street Capital and $150,000 to Firstfire, each with warrants.
- The planned Shenzhen Gas joint venture is subject to definitive agreements and would require CETY to contribute $8 million. The filing does not establish that the venture has closed or that financing for CETY’s contribution is secured. The company also reported that its Ashfield joint-venture agreement had been terminated and that it was negotiating a new agreement.
- A previously acquired lease asset was still being modified; management said collection of lease payments was not yet probable. Although the note describes expected lease receipts of approximately $20,000 per month for 120 months, it does not report that payments had commenced.
- Four customers represented approximately 98% of accounts receivable, which is primarily unsecured; accounts receivable, inventory, property and equipment, and long-term financing receivables were pledged to the line-of-credit lender. COVID-19-related disruption was identified as a potential negative operating factor, with financial impact and duration not estimable.
- Management concluded disclosure controls were ineffective as of June 30, 2022, citing a board without independent members, no audit committee financial expert, and disclosure-control weaknesses. Management reported no significant subsequent changes in internal control over financial reporting. It reported no legal proceedings believed likely to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the filing’s inconsistent CETY HK revenue disclosures: the segment table reports $1.963 million, while MD&A reports $1.983 million. Also reconcile the MD&A gross-profit figure of approximately $1.146 million with the consolidated statement’s $1.126 million.
- Review near-term liquidity, cash burn, required debt payments, covenant/default status, and whether the company has obtained financing sufficient to address its going-concern uncertainty.
- Confirm the status and terms of the GE and Cybernaut defaults, the disputed GE purchase-price obligation, and the post-quarter-end note repayments and borrowings.
- Assess dilution and conversion exposure from outstanding convertible notes, warrants, equity financing arrangements, and the substantial authorized-share capacity.
- Verify collection of concentrated receivables, progress and expected commissioning of the lease asset, and the status and funding requirements of the proposed Shenzhen Gas and Ashfield ventures.