Business context and reporting period
Entity discrepancy: The supplied filing identifies the registrant as Probe Manufacturing, Inc., not Clean Energy Technologies, Inc. The summary below reflects the filing’s stated registrant. It is a Form 10-Q for the quarter ended March 31, 2015; financial comparisons are with the three months ended March 31, 2014 unless noted.
Probe describes itself as an engineering, product-development and contract electronics manufacturer serving cleantech, medical, aerospace, instrumentation and other markets. It reports one operating segment.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Prior comparable / December 31, 2014 |
|---|---|---|
| Revenue | $796,290 | $903,344 |
| Gross profit | $282,208; approximately 35.4% of revenue based on the statements | $247,310; approximately 27.4% |
| Operating loss | $13,419 | $28,819 |
| Interest expense | $87,322 | $40,222 |
| Net loss | $100,741; reported loss per share of $0.00 | $69,041; reported loss per share of $0.00 |
| Net cash used in operating activities | $198,907 | $97,770 |
| Cash | $5,192 | $27,241 |
| Current assets / current liabilities | $966,694 / $1,609,142 | $905,298 / $1,491,078 |
| Working capital deficit | $642,448 | $585,780 |
| Total liabilities | $1,628,215 | $1,529,225 |
| Stockholders’ deficit | $106,874 | $59,332 |
Gross margin shown above is calculated from the statement amounts; MD&A describes Q1 2015 gross margin as 34%, which does not exactly match that calculation. The current ratio was approximately 0.60 at quarter-end. Notes payable were $710,802 current and $19,073 long-term on the balance sheet. Cash flow was supported by $146,306 of advances/line-of-credit financing and $46,000 of common-stock proceeds, among other financing activity.
Material changes versus the prior comparable period
- Revenue decreased approximately 11.9%, while gross profit rose approximately 14.1% and the calculated gross margin improved. Operating loss narrowed, but higher interest expense more than offset that improvement; net loss increased approximately 45.9%.
- Operating cash use more than doubled. Receivables increased to $432,799 net from $306,540 at year-end, while inventory fell to $494,432 from $557,382.
- Interest expense rose to $87,322 from $40,222. The filing identifies receivables financing bearing 2.5% monthly interest in the notes, and separately describes an agreement with a 2% monthly cost-of-funds fee in MD&A.
- Five customers represented approximately 85% of Q1 sales, up from 64% in Q1 2014. The same five represented approximately 85% of quarter-end receivables.
- Common shares outstanding increased to 33,061,445 from 30,676,445 at December 31, 2014. The company reported issuing shares for cash and services during the quarter.
Outlook, risks, contingencies and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, citing the quarter’s loss and operating cash use, a $642,448 working-capital deficit, a $106,874 stockholders’ deficit and a $2,405,944 accumulated deficit. Continued operations depend on obtaining debt or equity financing and/or generating positive operating cash flow.
- Management’s plans: The filing cites organic growth in targeted accounts, cleantech manufacturing and equity opportunities, and potential expansion through acquisitions. It provides no quantified revenue, earnings or cash-flow guidance and cautions that results for the quarter are not necessarily indicative of full-year results.
- Financing and preferred stock: Series D preferred stock carries a stated 17.5% annual special dividend, with conversion and redemption rights; the filing also describes a later reduction to 13% for one related-party tranche. Potential unpaid dividends, redemption demands and financing costs may pressure liquidity.
- Operations: The company says its Irvine facility lease moved to month-to-month after March 31, 2015. A subsequent sublease of Trident’s Utah facility began April 1, 2015, with management expecting substantial savings and consolidating most Utah manufacturing requirements in Irvine.
- Commercial agreement: The company terminated its S-Ray OEM and distribution agreements on April 7, 2015, stating satisfactory technical information had not been received.
- Legal matters: Two creditor claims, each approximately $10,000 due as of March 31, were settled, with weekly cash-payment arrangements of $2,000 and $3,000, respectively, plus court fees.
- Controls: The CEO and CFO concluded disclosure controls and procedures were not effective as of March 31, 2015. No material change in internal control over financial reporting during the quarter was reported.
- Other risks: Management identifies customer order cancellations or delays, concentration, customer financial condition and product-market acceptance, component availability, capacity utilization, and production yields as factors that could affect results.
Important facts for investors to verify
- Confirm the issuer identity: the filing names Probe Manufacturing, Inc., contrary to the request metadata naming Clean Energy Technologies, Inc.
- Reconcile the filing’s gross-margin presentation: MD&A reports 34%, while statement amounts imply approximately 35.4%.
- Reconcile notes-payable totals: balance-sheet current and long-term amounts sum to $729,875, while the MD&A table reports $729,825.
- Confirm the applicable receivables-financing lender, balance, and pricing, given the different lender names and monthly rates stated in the filing.
- Assess near-term liquidity, operating cash burn, access to financing, Series D dividend/redemption obligations, and the company’s going-concern plan.
- Review customer concentration, subsequent facility consolidation and savings, creditor settlement payments, and remediation of ineffective disclosure controls.