Clean Energy Technologies, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION FORWARD-LOOKING STATEMENTS This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements. You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms. These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements. Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Description of the Company We specialize in renewable energy & energy efficiency systems design, manufacturing and project implementation. We were incorporated in California in July 1995 under the name Probe Manufacturing Industries, Inc. We redomiciled to Nevada in April 2005 under the name Probe Manufacturing, Inc. We provided engineering and manufacturing electronics services to original equipment manufacturers (OEMs) of clean energy, industrial, automotive, semiconductor, medical, communication, military, and high technology products. With the vision to combat climate change and creating a better, cleaner and environmentally sustainable future, we formed Clean Energy HRS, LLC a wholly owned subsidiary of Clean Energy Technologies, Inc. and acquired the assets of Heat Recovery Solutions from General Electric International on September 11, 2015. In November 2015, we changed our name to Clean Energy Technologies, Inc. Our principal executive offices are located at 2990 Redhill Avenue, Costa Mesa, CA 92626. We have 12 full time employees. All employees and overhead are shared between Clean Energy Technologies, Inc. (which still provides the contract electronic manufacturing services) and Clean Energy HRS, LLC. Clean Energy Technologies, Inc. established a new company CETY Europe, SRL (CETY Europe) as a wholly owned subsidiary. CETY Europe is a Sales and Service Center in Silea (Treviso), Italy established in 2017. The service center became operational in November 2018. Their offices are located at Alzaia Sul Sile, 26D, 31057 Silea (TV) and the have 1 full time employee. Clean Energy Technologies, Inc. established a wholly owned subsidiary called CETY Capital, a financing arm of CETY to fund captive renewable energy projects producing low carbon energy. CETY Capital will add flexibility to the capacity CETY offers its customers and fund projects utilizing its products and clean energy solutions. CETY Capital retains 49% ownership interest in Vermont Renewable Gas LLC established to develop a biomass plant in Vermont utilizing CETY’s High Temperature Ablative Pyrolysis system. Clean Energy Technologies (H.K.) Limited., a wholly owned subsidiary of Clean Energy Technologies Inc. acquired 100% ownership of Leading Wave Limited a liquid natural gas trading company in China. The Company has four reportable segments: Clean Energy HRS (HRS) and CETY Europe, CETY Renewables, CETY HK and the legacy engineering and manufacturing services division. Business Overview General The Company’s business and operating results are directly affected by changes in overall customer demand, operational costs and performance and leverage of our fixed cost and selling, general and administrative (“SG&A”) infrastructure. Product sales fluctuate in response to several factors including many that are beyond the Company’s control, such as general economic conditions, interest rates, government regulations, consumer spending, labor availability, and our customers’ production rates and inventory levels. Product sales consist of demand from customers in many different markets with different levels of cyclicality and seasonality. Operating performance is dependent on the Company’s ability to manage changes in input costs for items such as raw materials, labor, and overhead operating costs. Performance is also affected by manufacturing efficiencies, including items such as on time delivery, quality, scrap, and productivity. Market factors of supply and demand can impact operating costs In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China and has spread throughout the United States and the rest of the world. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This contagious disease outbreak, which has not been contained, and is disrupting supply chains and affecting production and sales across a range of industries in United States and other companies as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak, as well as the worldwide adverse effect to workforces, economies and financial markets, leading to a global economic downturn. Therefore, the Company expects this matter to negatively impact its operating results. However, the related financial impact and duration cannot be reasonably estimated at this time. 26 Who We Are We develop renewable energy products and solutions and establish partnerships in renewable energy that make environmental and economic sense. Our mission is to be a segment leader in the Zero Emission Revolution by offering recyclable energy solutions, clean energy fuels and alternative electric power for small and mid-sized projects in North America, Europe, and Asia. We target sustainable energy solutions that are profitable for us, profitable for our customers and represent the future of global energy production. Our principal businesses Waste Heat Recovery Solutions – we recycle wasted heat produced in manufacturing, waste to energy and power generation facilities using our patented Clean Cycle TM generator to create electricity which can be recycled or sold to the grid. Waste to Energy Solutions - we convert waste products created in manufacturing, agriculture, wastewater treatment plants and other industries to electricity, renewable natural gas (“RNG”), hydrogen and bio char which are sold or used by our customers. Engineering, Consulting and Project Management Solutions – we bring a wealth of experience in developing clean energy projects for municipal and industrial customers and Engineering, Procurement and Construction (EPC) companies so they can identify, design and incorporate clean energy solutions in their projects. CETY HK Clean Energy Technologies (H.K.) Limited (“CETY HK”) consists of two business ventures in mainland China:(i) our liquefied natural gas (“LNG”) trading operations sourcing and suppling LNG to industries and municipalities. The LNG is principally used for heavy truck refueling stations and urban or industrial users in areas that do not have a connection to local LNG pipeline systems. We purchase large quantities of LNG from large wholesale LNG depots at fixed prices which are prepaid for in advance at a discount to market. We sell the LNG to our customers at prevailing daily spot prices for the duration of the contracts; and (ii) our planned joint venture with a large state-owned gas enterprise in China called Shenzhen Gas (Hong Kong) International Co. Ltd. (“Shenzhen Gas”), acquiring natural gas pipeline operator facilities, each primarily located in the southern part of Sichuan Province and portions of Yunnan Province. Our planned joint venture with Shenzhen Gas plans to acquire, with financing from Shenzhen Gas, natural gas pipeline operator facilities with the goal of aggregating and selling the facilities to Shenzhen Gas in the future. According to our Framework Agreement with Shenzhen Gas, we will be required to contribute $8 million to the joint venture. The terms of the joint venture are subject to the execution of definitive agreements. Business and Segment Information We design, produce and market clean energy products and integrated solutions focused on energy efficiency and renewable energy. Our aim is to become a leading provider of renewable and energy efficiency products and solutions by helping commercial companies and municipalities reduce energy waste and emissions, lower energy costs and generate incremental revenue by providing electricity, renewable natural gas and biochar to the grid. Segment Information Our four segments for accounting purposes are: Clean Energy Solutions - our Waste Heat Recovery Solutions, Waste to Energy Solutions, China LNG initiatives and Engineering and Consulting Services which are the core offerings of our business. CETY Europe – our subsidiary established in Italy for the purposes of servicing our customers in the EU that we are required to report as a separate accounting entity. Electronic Manufacturing Business - our legacy electronics manufacturing business that do not contribute significantly to our revenues or business plan that we are required to report as a separate accounting entity. CETY HK – which is the parent company of our LNG trading operations in China that source and supply LNG and our planned joint venture to acquire LNG distribution systems depots and transmission systems. Prior to the first quarter of 2022, the Company had three reportable segments but added the CETY HK segment to reflect its recent new businesses in China. Summary of Operating Results the three months ended September 30, 2022 Compared to the same period in 2021 Going Concern The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company had a total stockholder’s equity of $166,173 and a working capital deficit of $4,000,686 as of September 30, 2022 The company also had an accumulated deficit of $18,763,939 as of September 30, 2022 and used $1,016,545 in net cash from operating activities for the three months ended September 30, 2022. Therefore, there is substantial doubt about the ability of the Company to continue as a going concern. There can be no assurance that the Company will achieve its goals and reach profitable operations and is still dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) to generate positive cash flow from operations. 27 The three months ended September 30, 2022; we had a net loss of $540,986 compared to a net loss of $277,664 for the same period in 2021. The increase in the net loss in 2022 was mainly due to the increase in professional fees including legal & accounting due to the expenses associated with the IPO up listing to NASDAQ and lower sales in the quarter. The three months ended September 30, 2022; our revenue was $44,629 compared to $575,545 for the same period in 2021. For the three months ended September 30, 2022, our gross margin was 58% compared to 52% for the same period in 2021. For the three months ended September 30, 2022, our operating expense was $566,899 compared to $578,808 for the same period in 2021. See note 1 to the notes to the financial statements for a discussion on critical accounting policies RELATED PARTY TRANSACTIONS See note 13 to the notes to the financial statements for a discussion on related party transaction Results of the three month ended September 30, 2022, Compared to the nine month ended September 30, 2021 Net Sales Segment breakdown The three months ended September 30, 2022, our revenue from Engineering and Manufacturing was $71,298 compared to $50,040 for the same period in 2021. The three months ended September 30, 2022, our revenue from HRS was $307 compared to $513,400 for the same period in 2021. This decrease was mainly because of delay with the passing of inflation reduction act and the incentives associated with heat recovery solution and delays with supply chain. The three months ended September 30, 2022, our revenue from CETY Europe was $10,125 compared to $12,105 for the same period in 2021. The three months ended September 30, 2022, our revenue from our wholly owned subsidiary CETY HK was $0.0 due to lack of availability of natural gas during the quarter compared to $0 for the same period in 2021.This is a s a result of the acquisition of JHJ gas company made in November of 2021. We started to generate revenue from this entity in the 1 st quarter of 2022. Gross Profit The three months ended September 30 , 2022; our gross profits were $25,913 compared to $301,144 for the same period in 2021. The decrease in gross profit was due to lower revenues. Segment breakdown The three months ended September 30, 2022, our gross profit from Engineering and Manufacturing was $46,876 compared to $43,216 for the same period in 2021. The three months ended September 30, 2022, we had negative gross profit from HRS of $18,146 compared to $250,500 for the same period in 2021. The decrease from the HRS segment was mainly due to 0 revenue in the third quarter of 2022. The three months ended September 30, 2022, our gross profit from CETY Europe was $9,685 compared to $4,101 for the same period in 2021. The increase in gross profit was due higher service revenue. The three months ended September 30, 2022, our gross profit from our wholly owned subsidiary CETY HK was negative $12,158 compared to $0 for the same period in 2021. We had zero revenue from CETY HK in 2021. Selling, General and Administrative (SG&A) Expenses The three months ended September 30 , 2022; our SG&A expense was $83,162 compared to $188,817 for the same period in 2021. The decrease was a result of separating the subcontractor category from SG&A. Salaries Expense The three months ended September 30 , 2022; our Salaries expense was $197,036 compared to $228,565 for the same period in 2021. Travel Expense The three months ended September 30 , 2022; our travel expense was $38,990 compared to $26,381for the same period in 2021. The increase in the quarter ending in September 30, 2022 was due to additional site assessment surveys of multiple facilities in Europe and global commissioning. Professional fees Expense The three months ended September 30 , 2022; our Professional fees expense was $135,441 compared to $41,174 for the same period in 2021. The increase in legal fees was due to higher expenses related to a proposed IPO and up listing to NASDAQ. 28 Results of the nine month ended September 30, 2022, Compared to the nine month ended September 30, 2021 Net Sales The Company has four reportable segments: Clean Energy HRS (HRS), CETY Europe srl, Engineering and Manufacturing Business and CETY HK. Segment breakdown The nine months ended September 30, 2022, our revenue from Engineering and Manufacturing was $132,316 compared to $91,262 for the same period in 2021. The nine months ended September 30, 2022, our revenue from HRS was $461,292 compared to $602,207 for the same period in 2021. This decrease was mainly because of delay with the passing of inflation reduction act and the incentives associated with heat recovery solution. The nine months ended September 30, 2022, our revenue from CETY Europe was $48,138 compared to $173,234 for the same period in 2021. This decrease was a result of a sell of an equipment in 2021 vs. just the service revenue. The nine months ended September 30, 2022, our revenue from our wholly owned subsidiary CETY HK was $1,925,950 compared to $0 for the same period in 2021. This is a s a result of the acquisition of JHJ gas company made in November of 2021. We started to generate revenue from this entity in the 1 st quarter of 2022. Gross Profit The nine months ended September 30 , 2022; our gross profits were $1,151,903 compared to $519,683 for the same period in 2021. The increase in gross profit was due to higher revenues. Segment breakdown The nine months ended September 30, 2022, our gross profit from Engineering and Manufacturing was $85,352 compared to $72,853 for the same period in 2021. The nine months ended September 30, 2022, our gross profit from HRS was $427,219 compared to $312,118, for the same period in 2021. The increase from the HRS segment was mainly due to higher revenue in the first quarter of 2022. The nine months ended September 30, 2022, our gross profit from CETY Europe was $40,315 compared to $134,712 for the same period in 2021. The decrease in gross profit was due to revenue generated from the sale of a clean cycle waste heat recovery system. The nine months ended September 30, 2022, our gross profit from our wholly owned subsidiary CETY HK was $631,082 compared to $0 for the same period in 2021. We had zero revenue from CETY HK in 2021. Selling, General and Administrative (SG&A) Expenses The nine months ended September 30 , 2022; our SG&A expense was $284,025 compared to $529,335, for the same period in 2021. The decrease was a result of separating the subcontractor category from SG&A and lower cost of repair. Salaries Expense The nine months ended September 30 , 2022; our Salaries expense was $587,928 compared to $661,634 for the same period in 2021. The decrease in the quarter ending in September 30, 2022 was due to less number of employees. Travel Expense The nine months ended September 30 , 2022; our travel expense was $126,388 compared to $66,735 for the same period in 2021. The increase in the quarter ending in September 30, 2022 was due to additional site assessment surveys of multiple facilities in Europe and global commissioning. Professional fees Expense The nine months ended September 30 , 2022; our Professional fees expense was $359,636 compared to $123,383 for the same period in 2021. The increase in legal fees was due to higher expenses related to a proposed IPO and up listing to NASDAQ. 29 Facility Lease and Maintenance Expense The nine months ended September 30 , 2022; our Facility Lease and maintenance expense was $260,262 compared to $254,708 for the same period in 2021. Depreciation and Amortization Expense The nine months ended September 30 , 2022, our depreciation and amortization expense was $22,557 compared to $24,219 for the same period in 2021, which remained relatively unchanged. Change in Derivative Liability The nine months ended September 30, 2022; we had a gain on derivative liability of $12,980, compared to a gain of $1,734,624 for the same period in 2021. The gain in derivative liability was due to paying off several convertible notes in the six months ended June 30, 2021. Gain on debt settlement The nine months ended September 30, 2022, we recognized a gain on debt settlement in the amount of $2920 compared to $828,666 for the nine months ended September 30, 2021. Interest and Finance Fees The nine months ended September 30, 2022 interest and finance fees were $747,451 compared to $603,240 for the same period in 2021. Net Income / Loss The nine months ended September 30, 2022; our loss was $1,338,010 compared to net profit of $819,719 for the same period in 2021. The higher profits was primarily due to the gain on derivative liability in 2021. Liquidity and Capital Resources Clean Energy Technologies, Inc. Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 (unaudited) 2022 2021 Net Cash provided / (Used) In Operating Activities $ (1,929,678 ) $ (1,964,231 ) Cash Flows Used In Investing Activities (1,388,734 ) Cash Flows Provided / (used) By Financing Activities 2,545,003 3,104,503 Net (Decrease) Increase in Cash and Cash Equivalents $ (1,016,545 ) $ 1,140,272 On February 21, 2022 the Company completed public and private financing of an aggregate of $1,202,800. Capital Requirements for long-term Obligations None. Critical Accounting Policies Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. Future Financing We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund planned acquisitions and exploration activities. 30 Off-Balance Sheet Arrangements We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders. Recently Issued Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial position or results of operations upon adoption. Item 3. Quantitative and Qualitative Disclosure about Market Risk. We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.