CETY(CETY) - 2023 Q4 - Annual Report

Part I Business CETY provides zero-emission energy solutions across North America, Europe, and Asia, focusing on waste heat recovery, waste-to-energy, and natural gas trading - The company aims to lead the Zero Emission Revolution by providing eco-friendly green energy solutions and alternative electric power for small and mid-sized projects globally[1] - CETY's business is structured into four main segments: Waste Heat Recovery, Waste to Energy, Engineering/Consulting, and NG Trading in China[169][170][178] - The company's strategy focuses on expanding Waste Heat Recovery and Waste to Energy businesses, leveraging engineering, and acting as an independent power producer by retaining project equity[172][181] Our Principal Businesses CETY's core businesses include patented Waste Heat Recovery, Waste to Energy solutions, Engineering services, and Natural Gas trading in China with a planned pipeline joint venture - Waste Heat Recovery Solutions utilize the patented Clean Cycle™ generator to convert industrial waste heat into electricity[169] - Waste to Energy Solutions convert various industrial and agricultural wastes into electricity, renewable natural gas (RNG), hydrogen, and biochar[178] - CETY HK's China operations involve Natural Gas (NG) trading and a planned joint venture with Shenzhen Gas for pipeline facility acquisition[171] The Market for Our Products CETY operates in rapidly growing waste-to-energy and waste heat recovery markets, with China's LNG market also expanding significantly due to policy support Market Size Projections | Market Segment | Projected Value | Year | CAGR | Source Chunks | | :--- | :--- | :--- | :--- | :--- | | Waste to Energy | $50.1 billion | 2027 | 4.6% | [47] | | Waste to Energy (Alternative) | $69.94 billion | 2026 | 7.35% | [19] | | Waste Heat Recovery | $114 billion | 2028 | 9.2% | [48] | - The Asia-Pacific region, especially China, dominates the waste-to-energy market due to urbanization, government incentives, and MSW disposal challenges[19] - China is the world's largest LNG buyer, with imports soaring 18% in 2021, driven by the "Blue Skies" policy and a target of 14% natural gas in the energy mix by 2030[25][146] - U.S. government incentives, including the Investment Tax Credit (ITC) of up to 26-30% and Renewable Portfolio Standards (RPS), significantly drive waste heat recovery system adoption[32][33][197] Competition CETY faces intense competition from large, established players in waste heat recovery, waste-to-energy, and China's NG trading, but sees an advantage in product efficiency for small-to-medium projects - Key competitors in the Organic Rankine Cycle (ORC) market include ORMAT, Exergy, TAS, and Turboden, holding a dominant market share[68] - The Waste to Energy market is dominated by large international corporations like Hitachi Zosen Inova AG, Suez, Veolia, and China Everbright International Ltd[69] - In China's NG trading, CETY competes with large state-owned producers like Sinopec and smaller local firms, primarily on price and service[42] - CETY believes its waste-to-energy products offer a competitive advantage in efficiency for small and medium-sized operations[56] Intellectual Property CETY's IP portfolio includes 16 patents and 28 pending applications for magnetic turbine technology, plus exclusive licenses for ORC applications and pyrolysis systems - The company holds 16 patents in 6 countries and has 28 pending applications in 8 countries for magnetic turbine technology acquired from General Electric International[95] - CETY holds an exclusive, worldwide, royalty-free license from Calnetix for its magnetic turbine in specific Organic Rankine Cycle (ORC) applications[81] - The company has an intellectual property rights purchase and transfer agreement with ENEX for its pyrolysis system technology[82] Risk Factors CETY faces significant risks including a 'going concern' opinion, operational challenges, intense competition, technology obsolescence, China regulatory hurdles, and energy price sensitivity - Independent accountants issued a "going concern" opinion due to a $1.95 million working capital deficit, $23.0 million accumulated deficit as of Dec 31, 2023, and negative operating cash flow, indicating a need for additional financing[101][113] - Significant shareholder dilution risk exists from approximately 2.38 million common stock equivalents from outstanding convertible securities, including notes, preferred shares, and warrants[127][128] - China operations face regulatory risks, including potential delays or prevention of capital contributions due to PRC government controls on currency conversion and foreign investment[35][60] - Profitability depends on oil and natural gas prices; higher prices enhance product viability, while lower prices reduce customer incentive[77][78] - Principal shareholders, directors, and executive officers beneficially own over 50% of outstanding common stock, granting them substantial influence over shareholder approval matters[91][92] Properties CETY's properties include corporate and HRS offices in Irvine, CA, an R&D office in Turkey, and NG trading facilities in China, with increased lease expenses in 2023 - Corporate headquarters relocated to a 3,000 sq-ft office in Irvine, CA, with a lease from December 2023 to January 2027[355] - Heat Recovery Solutions (HRS) operations moved to a separate Irvine, CA facility under a sublease from December 2023 to June 2025[355] - CETY maintains an 800 sq-ft R&D office in Antalya, Turkey, and operates offices and a gas storage station in Chengdu, China[356][357] Lease Expense | Year | Lease Expense | | :--- | :--- | | 2023 | $401,293 | | 2022 | $349,610 | Legal Proceedings As of the report date, there are no material pending legal or governmental proceedings involving the company, its directors, executive officers, or affiliates - There are no material pending legal or governmental proceedings involving the Company, its directors, executive officers, or affiliates[358] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CETY's NASDAQ-listed common stock, with 42.68 million shares outstanding, experienced price volatility, has never paid dividends, and saw numerous unregistered security sales - As of April 15, 2024, the company had 42,685,248 shares of common stock outstanding, held by approximately 201 holders of record[362] - The company has never declared a cash dividend on its common stock and does not plan to in the foreseeable future[238] Quarterly Stock Price (High/Low Bid) | Quarter | 2023 High | 2023 Low | 2022 High | 2022 Low | | :--- | :--- | :--- | :--- | :--- | | First | $3.66 | $3.27 | $2.39 | $0.89 | | Second | $1.93 | $1.72 | $1.59 | $0.81 | | Third | $1.93 | $1.82 | $2.16 | $0.81 | | Fourth | $1.59 | $1.44 | $3.11 | $0.96 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) CETY reported a $5.66 million net loss in 2023 despite 467.5% revenue growth to $15.1 million, driven by NG trading, but impacted by increased expenses and a $4.78 million net cash use from operations Financial Performance Summary (2023 vs 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenue | $15,113,463 | $2,663,212 | | Gross Profit | $1,090,254 | $1,174,196 | | Net Loss from Operations | ($2,655,408) | ($989,751) | | Net Loss/Profit Attributable to CETY | ($5,659,723) | $147,395 | Consolidated Statements of Cash Flows (2023 vs 2022) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | ($4,783,077) | ($2,244,133) | | Net Cash Used In Investing Activities | ($318,602) | ($1,437,123) | | Net Cash Provided By Financing Activities | $5,096,483 | $2,798,885 | | Net Increase/(Decrease) in Cash | $25,580 | ($1,043,043) | - Revenue significantly increased due to the NG trading business, growing from $1.9 million in 2022 to $14.1 million in 2023, driven by enhanced NG allocations and joint venture consolidation[387] - The net loss widened significantly due to increased salaries ($1.67 million vs $0.78 million), SG&A expenses ($0.68 million vs $0.40 million), and interest/finance fees ($2.14 million vs $1.13 million)[393][394][428] - The company's equity position improved significantly from $1.88 million in 2022 to $5.87 million in 2023, primarily due to a public offering raising $3.9 million in gross proceeds and convertible note conversions[115][322] Financial Statements and Supplementary Data 2023 consolidated financials show total assets at $10.9 million, liabilities at $5.1 million, and equity at $5.87 million, with the auditor noting a 'going concern' and critical audit matters including revenue recognition and Shuya's business combination Consolidated Balance Sheet Highlights (As of Dec 31) | Balance Sheet Item | 2023 | 2022 | | :--- | :--- | :--- | | Total Current Assets | $6,750,728 | $3,990,136 | | Total Assets | $10,928,611 | $8,114,329 | | Total Current Liabilities | $4,801,523 | $6,236,132 | | Total Liabilities | $5,059,413 | $6,236,132 | | Total Stockholders' Equity | $5,869,198 | $1,878,196 | - The independent auditor's report expresses a "going concern" opinion due to the company's accumulated deficit, working capital deficit, and negative operating cash flows, raising substantial doubt about its continuity[540][586] - Critical Audit Matters include revenue recognition for long-term EPC contracts, accounting for the Shuya subsidiary business combination, and valuation of Series E preferred shares[544][545][549] - Effective January 1, 2023, the company began consolidating its Chinese entity, Shuya, as a Variable Interest Entity (VIE) due to a Concerted Action Agreement, a change from the 2022 equity method[305][501] - In November 2023, 2,199,387 shares of 15% Series E Convertible Preferred Stock were issued to extinguish $1,955,122 in debt, resulting in a $1,255,084 loss on extinguishment due to higher fair value[561] Controls and Procedures As of December 31, 2023, management concluded that disclosure controls and internal control over financial reporting were ineffective due to inadequate segregation of duties, insufficient accounting staff, and material weaknesses in Shuya's purchase price allocation - Management concluded that the company's disclosure controls and procedures were not effective as of December 31, 2023[732] - Internal control over financial reporting was also deemed not effective as of December 31, 2023[727] - Identified weaknesses include inadequate segregation of duties, lack of qualified in-house accounting personnel, and material weaknesses in the estimation-heavy purchase price allocation for the Shuya acquisition[728][734] Part III Directors, Executive Officers and Corporate Governance As of December 31, 2023, CETY's leadership includes CEO Kambiz Mahdi and CFO Calvin Pang, with a five-member board comprising three independent directors and established committees - The executive officers are Kambiz Mahdi (President, CEO, Director) and Calvin Pang (CFO, Director)[748] - The Board of Directors has five members, with three independent directors: Lauren Morrison, Mathew Smith, and Ted Hsu[652][748] - The Board has established an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee[635][743][769] - The company has adopted a Code of Business Conduct and Ethics applicable to all directors, employees, and consultants[762] Executive Compensation In 2023, CEO Kambiz Mahdi received $412,500 and CFO Calvin Pang $191,858 in total compensation, with both eligible for a 50% salary bonus and no equity awards granted or outstanding 2023 Executive Compensation | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Kambiz Mahdi, CEO | 2023 | $275,000 | $137,500 | $412,500 | | Calvin Pang, CFO | 2023 | $150,000 | $75,000 | $191,858 | - Both the CEO and CFO are entitled to a cash bonus equal to 50% of their annual salary[645] - No outstanding stock or option awards were held by named executive officers as of December 31, 2023[646] - CEO Kambiz Mahdi is entitled to a severance payment equal to at least one year's salary upon termination[648] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2023, CETY's ownership is highly concentrated, with MGW Investments I Limited holding 56.38% and all directors and officers collectively owning 61.82% of common stock Beneficial Ownership (as of Dec 31, 2023) | Name of Beneficial Owner | Number of Shares | Percentage | | :--- | :--- | :--- | | MGW Investments I Limited | 24,044,101 | 56.38% | | Calvin Pang (CFO, Director) | 24,044,101 | 56.38% | | Kambiz Mahdi (CEO, Director) | 2,317,541 | 5.43% | | All directors and officers as a group | 26,361,642 | 61.82% | - Ownership is highly concentrated, with all directors and officers as a group controlling nearly 62% of the company's common stock[657] Certain Relationships and Related Transactions, and Director Independence CETY engages in significant related-party transactions, including its Chinese subsidiary Shuya's dealings with Leishen, a turnkey agreement with its VRG joint venture, and purchases from a CEO-owned company - The company's consolidated VIE, Shuya, engaged in significant transactions with its 41% shareholder, Leishen, including $5.64 million in purchases in 2023[578] - Shuya has a loan agreement with Leishen to facilitate building a natural gas recycling station, which Shuya will then lease from Leishen[577][579] - CETY's renewables division has a turnkey agreement with its 49%-owned joint venture, Vermont Renewable Gas (VRG), recording $410,486 in related-party revenue in 2023[596][597] - The company purchases a small amount of electronic components ($6,187 in 2023) from Billet Electronics, a company owned by CEO Kambiz Mahdi[598] Principal Accounting Fees and Services The principal accountant billed $231,815 in 2023, a significant increase from $109,344 in 2022, with all fees in 2023 solely for pre-approved audit services Principal Accountant Fees | Service Type | 2023 Fees | 2022 Fees | | :--- | :--- | :--- | | Audit Fees | $231,815 | $86,844 | | Audit-Related Fees | $0 | $22,500 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $231,815 | $109,344 | - All audit and non-audit services provided by the independent registered public accounting firm were pre-approved by the Board of Directors[670]