Clean Energy Technologies, Inc. quarterly report, Q2 FY2011

Business context and reporting period

This is an unaudited Form 10-Q for the quarter and six months ended June 30, 2011, filed August 15, 2011. The filing identifies the registrant as Probe Manufacturing, Inc., an electronics manufacturing services provider—not Clean Energy Technologies, Inc., as specified in the request.

An independent accountant performed an interim review, not an audit. The reviewer noted substantial doubt about the company’s ability to continue as a going concern.

Key financial metrics

*The statement of operations reports six-month operating income of $100,793; MD&A elsewhere gives $100,973. Six-month gross margin was approximately 28.2% versus 27.2% in 2010; operating margin was approximately 4.9% versus 3.3%. The lower 2011 net income chiefly reflects 2010’s one-time $190,960 gain on a CIT lease settlement. Six-month revenue increased approximately 67% year over year, which management attributed to higher orders from existing accounts and six new customers.

At June 30, cash was $29,990; current assets were $1,276,280 and current liabilities $1,172,765, yielding working capital of $103,515. Total assets were $1,477,780 and stockholders’ equity $305,015. Current liabilities included $561,482 outstanding under the receivables financing arrangement. The balance sheet shows no net long-term debt.

Six-month cash from operations was $152,492, investing cash flow was zero, and financing cash outflow was $122,502; cash increased by $29,990. The operating cash-flow calculation includes the $561,482 increase in the financing line, while receivables and inventory growth used cash.

Material changes and notable items

• Six-month gross profit rose to $583,542 from $337,856, and operating income rose to $100,793 from $41,032. Net income declined from $230,530 to $56,940 because the prior-year period included the settlement gain.
• Accounts receivable rose to $691,045 from $403,109 at year-end 2010; inventory rose to $555,245 from $447,133. The company reported 48 days’ receivables outstanding versus 28, and backlog of 226 days’ sales versus 140.
• On February 18, 2011, the company entered a recourse receivables-purchase facility with a stated maximum of $750,000. The disclosed financing charge is prime plus 4.75%, with a 7% floor; the purchaser retains 20% of receivables proceeds. The agreement also permits eligible-inventory advances up to $250,000, subject to conditions.
• Common shares outstanding increased from 184,638,320 at December 31, 2010 to 195,888,320 at June 30, 2011. The company issued shares for consulting, legal, executive compensation, and director services; it also issued 3 million warrants at a $0.05 exercise price.

Outlook, risks and contingencies

Management cited global sourcing, customer-focused program management, strategic partnerships, expansion into cable, plastics and sheet metal, and possible mergers and acquisitions as plans to support growth. No quantified financial guidance was provided. Management said future success depends on profitable growth and obtaining additional capital; financing availability and sustained positive cash flow are uncertain.

The company disclosed substantial doubt about its ability to continue as a going concern, despite six-month profitability and positive working capital. It reported an accumulated deficit of $272,482 and warned that inability to obtain financing, maintain profitability, or meet debt obligations could force it to curtail operations. Five customers represented approximately 63% of receivables, with one customer at 32%; the five largest customers generated approximately 66% of second-quarter sales. The receivables facility is full recourse and may be terminated under specified circumstances. The filing reported no material litigation, no off-balance-sheet arrangements, and no material change to internal controls; management concluded disclosure controls were effective.

Important facts for investors to verify

• Confirm the filing belongs to the requested issuer: the document names Probe Manufacturing, Inc., not Clean Energy Technologies, Inc.
• Reconcile the MD&A’s $100,973 operating-income figure with the financial statement’s $100,793 figure.
• Review the going-concern warning, cash availability, debt-service needs, and the terms and recourse exposure of the Far West Capital facility.
• Assess customer concentration, the marked increase in days receivable and backlog, and whether backlog converts to sales and collections.
• Evaluate dilution from the share issuances and outstanding warrants and options; the filing reports 195,888,320 common shares outstanding at June 30.