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 using 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 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 manufactured electronics and provided services to original equipment manufacturers (OEMs) of industrial, automotive, semiconductor, medical, communication, military, and high technology products. On September 11, 2015, Clean Energy HRS, or “CE HRS”, our wholly owned subsidiary acquired the assets of Heat Recovery Solutions from General Electric International. 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. Our telephone number is (949) 273-4990. Our common stock is listed on the NASDAQ Markets under the symbol “CETY.” Our internet website address is www.cetyinc.com the information contained on our website are not incorporated by reference into this document, and you should not consider any information contained on, or that can be accessed through, our website as part of this document. The Company has four reportable segments: Clean Energy HRS, the engineering & manufacturing services, CETY Renewables waste to energy solutions, and CETY HK natural gas trading business. 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 15 full-time employees. All employees and overheads are shared between Clean Energy Technologies, Inc. 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 they 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. 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. 32 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 waste 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 biochar 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 natural gas (“NG”) trading operations sourcing and suppling NG to industries and municipalities. Natural Gas is principally used for heavy truck refueling stations and urban or industrial users. We purchase large quantities of NG from large wholesale NG depots at fixed prices which are prepaid for in advance at a discount to the market. We sell the NG to our customers at fixed prices or 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, primarily located in the southwestern part of China. 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 which plans to raise in future rounds of financing. 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 HRS & CETY Europe – Our Waste Heat Recovery Solutions, converting thermal energy to zero emission electricity. CETY Renewables Waste to Energy Solutions – Providing Waste to Energy technologies and solutions. Engineering & Manufacturing Services – providing customers with comprehensive design, manufacturing, and project management solutions. 33 CETY HK – The parent company of our NG trading operations in China, as well as our planned joint venture to acquire NG 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 nine months ended September 30, 2023 compared to the same period in 2022. 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 $5,389,051 and a working capital of $1,755,468 as of September 30, 2023 the company also had an accumulated deficit of $19,829,422 as of September 30, 2023 and used $3,842,232 in net cash from operating activities for the nine months ended September 30, 2023. CETY has a clear strategy in place and has the capability to successfully restructure its existing debt and secure additional financing. With its current strategic approach and diversification of its products and solutions, the management has created a favorable environment for the company to transition towards profitability. For the nine months ended September 30, 2023, our total revenue amounted to $11,701,118, a substantial increase from the $2,567,596 recorded during the same period in 2022, reflecting a remarkable revenue growth of 356%. This also represents a remarkable 339% growth over our total revenue in 2022. This impressive increase can be attributed to the success of the Vermont Renewable Gas Biomass project in Lyndon and the substantial anticipated growth in Natural Gas (NG) trading from CETY HK. For the nine months ending on September 30, 2023, our gross profit amounted to $1,427,629, as compared to $1,151,903 for the corresponding period in 2022. The substantial fluctuations in natural gas (NG) prices during both the winter and summer seasons had a notable impact on our profit margins. Nevertheless, the sale of CETY’s waste-to-energy and waste-heat to power systems significantly bolstered our profit margins. For the nine months ending on September 30, 2023, our operating expenses totaled $2,709,963, compared to $1,724,727 for the corresponding period in 2022. This increase can be attributed to CETY’s expansion in 2023, along with additional costs related to marketing and business development, professional fees for legal and accounting services, increased expenses for investor relations, higher salaries for the new executives and directors, and additional consulting engineering expenses. For the nine months ended September 30, 2023, we incurred a net loss of $2,460,489, as compared to $1,322,861 for the corresponding period in 2022. This increase in net loss can be attributed to the rise in operating expenses stemming from our recent expansion, as well as interest and financing fees amounting to $1,707,690, which includes financing fees and debt discount calculations associated with the warrant. For the period ending September 30, 2023, the stockholder’s equity amounted to $5,389,051, representing a significant increase from the $1,878,196 reported on December 31, 2022. This substantial growth is attributable to the offering associated with the Nasdaq up-listing, along with debt conversions and write-offs. CETY has successfully repositioned itself and created 4 different business segments to create a larger, more stable, and more diversified revenue stream that could scale up. The 4 segments are Clean Energy HRS (Heat Recovery), Waste-to-Energy (Pyrolysis Plant), Engineering Procurement and Consulting (EPC), and CETY HK (NG trading and acquisitions). The revenue in the CETY HK fuel segment is expected to continue to scale up which will help establish CETY as a player in the Asian market and allows cross-selling of CETY products and solutions. CETY expects larger revenue contribution from Waste-to-Energy, and EPC in the latter of this year which are higher gross margin segments. Our pilot Waste-to-Energy plant in Vermont, which integrates all of CETY’s technologies and expertise into a single solution, is progressing steadily with updates coming soon. There is a growing market for Heat Recovery in the U.S. and Europe, and CETY HK has begun cross-selling Heat Recovery products in China. CETY is also gearing up for the EPC segment to implement holistic self-generation solutions globally. 34 Management believes this 4-segment strategy has created many operational synergies and cross-selling opportunities across different markets. The breakneck revenue growth that was demonstrated this quarter is a direct result of this strategy as we have exceeded the revenues for the entire year of 2022. CETY believes that it will continue to deliver growth in all segments this year due to our belief that there is an optimistic industry macro backdrop. The main macro factor benefiting us is the global commitment to push renewable energy to the forefront from governments across the world. This is evidenced by the Paris Agreement and COP26. The Inflation Reduction Act passed by Congress in August 2022 had specific provisions that can take advantage of CETY’s products and solutions. Another catalyst that will potentially help our Company, is a continuously improving global supply chain as U.S. and European markets have begun to return normal levels post COVID and China has reopened its borders. The European energy crisis has given rise to the opportunity for CETY to sell more of its products and solutions as customers are in search of self-generation capabilities in renewable energy. And lastly, as China ends its draconian COVID lockdown policies, CETY was able to resume its growing business in that region. CETY reached a momentous milestone in its corporate history on March 23, 2023 when the company was able to meet all the Nasdaq listing standards and began trading on Nasdaq. Nasdaq trading status increases CETY’s reputation greatly and benefits CETY’s sales plans globally. This also improves the company’s ability to access capital with better terms. CETY expects to and will continue to execute its corporate strategy to build sustained and profitable growth by providing end to end fully integrated solutions and technologies, expand our global sales and marketing, production, research & development, as well as search for synergistic acquisition opportunities. 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 nine-month ended September 30, 2023 compared to the nine-month ended September 30, 2022 Net Sales For the nine months ended September 30, 2023 our total revenue was $11,701,118 compared to $2,567,596 for the same period in 2022. The Company has four reportable segments: Clean Energy HRS (HRS), CETY Renewables waste to energy solutions, the engineering and manufacturing services, and CETY HK Natural gas trading business. Segment breakdown The nine months ended September 30, 2023 our revenue from Engineering and Manufacturing was $59,877 compared to $132,316 for the same period in 2022. Our engineering team was in transition to establish the innovation center in Europe and has executed a master services agreement with RPG to support its fortune 500 customers with its sustainability goals. Additionally, our engineering team has started work on the Vermont projects in the second quarter of 2023. We expect continued growth from this segment with the revenue being recognized within the waste to energy business segment. 35 The nine months ended September 30, 2023 our revenue from HRS was $399,136 compared to $509,330 for the same period in 2022. The revenue from this segment in 2023 was from service fees vs. Equipment sale in 2022. We are in the process of securing long lead materials to complete several units over the next few months and be able to recognize unit sales by the end of the year. The nine months ended September 30, 2023 our revenue from our wholly owned subsidiary CETY HK was $10,462,385 compared to $1,925,950 for the same period in 2022. The increase was as a result of the ability to secure larger amounts of gas and growth from the newly formed joint venture. The nine months ended September 30, 2023 our revenue from our wholly owned subsidiary CETY Renewables Waste to Energy was $779,720, this was as a result of commencement of the design, sourcing and permitting of the Vermont Renewable Gas project. Gross Profit The nine months ended September 30, 2023; our gross profits were $1,427,629 compared to $1,151,903 for the same period in 2022. The lower gross profit percentage was due to lower margins from the NG business offset by higher revenue from the HRS and Engineering services. Segment breakdown The nine months ended September 30, 2023 our gross profit from Engineering and Manufacturing was $16,528 compared to $85,352 for the same period in 2022. This was as a result of higher revenue in this segment. The nine months ended September 30, 2023 our gross profit from HRS was $148,706 compared to $467,534 for the same period in 2022. The higher revenue from the same period in 2022 was a result of more unit sales and higher margin product sale. The nine months ended September 30, 2023 our gross profit from CETY HK was $524,152 compared to $631,082 for the same period in 2022. The lower margin was due to lower gas prices in winter and spring and higher volume. In the nine months ending September 30, 2023, our gross profit from our waste-to-energy solutions amounted to $738,243, in contrast to no revenue for the same period in 2022. The improved margins were primarily driven by increased sales and the launch of the Vermont Renewable Gas project. Selling, General and Administrative (SG&A) Expenses In September 30, 2023, after nine months, our SG&A expense amounted to $476,078, marking a significant increase from the $284,025 recorded for the corresponding period in 2022. This uptick can be attributed to heightened expenditures in several areas, including Media and Investor Relations activities, marketing, sales efforts, subscription services, and IT-related expenses. Salaries Expense For the nine months concluding on September 30, 2023, our salaries expense totaled $1,040,431, reflecting a substantial rise from the $587,928 incurred during the equivalent period in 2022. This increase in 2023 was primarily attributable to the addition of new executive hires. Travel Expense The nine months ended September 30, 2023; our travel expense was $328,104 compared to $126,388 for the same period in 2022. The increase was due to travel expenses related to Europe for the MSA development and increased site visits due to an increase in the sales opportunities and commissioning, and customer visits in China related to the LNG trading business. Professional fees legal and accounting In the nine-month period ending on September 30, 2023, our professional fees expense amounted to $259,476, as opposed to $359,636 for the corresponding period in 2022. This reduction in legal and accounting fees can be attributed to a decreased workload associated with the registration and uplisting process to NASDAQ. Facility Lease and Maintenance Expense For the nine-month period ending on September 30, 2023, our Facility Lease and maintenance expense amounted to $347,529, showing an increase compared to the $260,262 spent during the same period in 2022. This rise can be attributed to the inclusion of Shuya’s new facility in Chengdu, China. Depreciation and Amortization Expense For the nine months ending on September 30, 2023, our depreciation and amortization expense amounted to $13,805, compared to $22,557 for the corresponding period in 2022, showing a relatively unchanged figure. Change in Derivative Liability The nine months ended September 30, 2023; we had a gain on derivative liability of $326,539 compared to a gain of $(12,980) for the same period in 2022. The gain in derivative liability was from a favorable derivative calculations and payoffs from several convertible notes in the nine months ended September 30, 2023. 36 Interest and Finance Fees The nine months ended September 30, 2023 interest and finance fees were $1,707,690 compared to $747,451 for the same period in 2022. The increase was due to several new notes to assist with the uplist to Nasdaq. Net Loss For the nine months ending on September 30, 2023, our loss amounted to $2,460,489, which is an increase compared to a loss of $1,322,861 for the same period in 2022. This increase can be primarily attributed to $1,707,690 in financing fees. We incurred these additional financing fees due to our commitment to paying more for financing in order to safeguard our investors, thereby preventing dilution at a lower valuation. Liquidity and Capital Resources Clean Energy Technologies, Inc. Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 (unaudited) 2023 2022 Net Cash used in operating activities $ (3,842,232 ) $ (1,929,678 ) Cash Flows provided by/ (used in) investing activities 14,111 (1,388,734 ) Cash Flows Provided by financing activities 3,906,498 2,545,003 Net Increase (decrease) in Cash and Cash Equivalents $ 114,542 $ (1,016,545 ) 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 to continue to fund our business operations. Issuance 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. 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. 37 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.