Business context and reporting period
The filing is an audited Form 10-K for Probe Manufacturing, Inc. for the fiscal year ended December 31, 2011, with 2010 comparisons. This does not match the request metadata naming Clean Energy Technologies, Inc. or a “2011 Q4” period; the filing reports full-year results for Probe.
Probe provides electronics manufacturing services, including product design, supply-chain management, assembly, testing and repair, primarily from its Irvine, California facility and global partner locations. It reported one operating segment. Revenue is exposed to customer demand, component availability and a concentrated customer base.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $4,549,798 | $2,799,935 |
| Gross profit / margin | $1,403,320 / 31% | $795,657 / 28% |
| Operating income | $228,720 | $67,819 |
| Interest expense | $136,897 | $15,341 |
| Net income | $90,940 | $243,368 |
| Net cash from operating activities | $(378,117) | $70,396 |
| Working capital | $170,245 | $44,385 |
| Total assets | $1,598,998 | $994,964 |
| Total current liabilities | $1,260,952 | $805,857 |
| Stockholders’ equity | $338,046 | $183,175 |
Revenue increased about 62% year over year, which management attributed to higher orders from existing customers and new customer additions. Gross margin improved, while net income fell because 2010 included a reported debt-settlement gain of approximately $190,960 and 2011 interest expense rose substantially. The income statement lists 2010 other income of $190,890.
Cash used in operations was driven in part by increases in receivables and inventory. Investing activities used $25,310; financing activities provided $421,776, including $545,579 of line-of-credit proceeds. Cash at year-end was $18,349. The balance sheet reports $545,579 of line-of-credit debt, no long-term debt, and $8,664 of current notes payable; it also lists $70,000 of related-party notes payable, although the related note says that balance was zero.
Far West Capital’s receivables-purchase facility permits purchases of eligible receivables up to $750,000, with full recourse, a 1% discount, a 20% reserve and a funding charge at prime plus 4.75% (minimum 7%). A rider allows discretionary inventory advances up to $250,000, subject to borrowing-base limits.
Material changes versus the prior comparable period
- Gross margin rose from 28% to 31%; operating margin rose from about 2% to 5%. SG&A decreased as a share of revenue, from 25% to 24%.
- Net income declined from $243,368 to $90,940, despite stronger revenue and operating income, as the prior year benefited from the debt-settlement gain and 2011 interest expense was higher.
- Operating cash flow changed from $70,396 provided to $378,117 used; receivables and inventory increased.
- Working capital improved by $125,860, while total current liabilities increased to $1.26 million. The company reported no long-term debt at year-end.
- The five largest customers represented 58% of 2011 sales, down from 73% in 2010. Backlog days declined from 248 to 184, while days receivable outstanding increased from 33 to 45.
Outlook, risks and unusual items
Management’s stated priorities are organic growth, new customer sales, expansion along the supply chain, a “manufacturing foundry” model offering manufacturing rights in exchange for equity, and potential acquisitions. The filing provides no quantified earnings or revenue guidance and cautions that future financing and cash generation are uncertain.
- Going concern: The auditor’s report raises substantial doubt about Probe’s ability to continue as a going concern. The company reported an accumulated deficit of $238,483 and negative operating cash flow, and says continued operations depend on additional capital and/or positive operating cash flow. The financial statements contain no adjustments for the possible outcome of this uncertainty.
- Customer and market exposure: Five customers accounted for 58% of sales; customer orders are generally purchase orders that may be canceled or rescheduled. The filing also describes concentration in Southern California and cyclical, short-product-life-cycle end markets.
- Working capital and supply chain: Receivables are unsecured, collection days worsened, and the company identifies component shortages and reliance on suppliers without long-term agreements as risks. Inventory included a $160,000 obsolescence reserve.
- Financing and interest: The company relies on a recourse receivables facility that may be terminated and that imposes fees, reserves and repurchase obligations. Interest expense increased to $136,897.
- Other items: Probe repurchased 115,000 shares under a plan authorizing up to 5 million shares. It issued shares for employee, director and consulting services and reported 10,682,955 warrants outstanding. The filing states there were no legal proceedings and no material off-balance-sheet arrangements.
- Audit and controls: The auditor expressed an unqualified opinion on the financial statements while emphasizing going-concern uncertainty. Management stated disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal controls.
Most important facts for investors to verify
- Confirm issuer and period: the supplied filing is Probe Manufacturing’s FY2011 10-K, not a Clean Energy Technologies filing or a quarter-only report.
- Reconcile the filing’s conflicting balance-sheet disclosures: the auditor’s going-concern paragraph gives current assets of $1,460,906, while the balance sheet gives $1,431,197; verify the reported $170,245 working-capital surplus.
- Confirm the $70,000 related-party note balance: the balance sheet includes it, but the note says it was repaid and had a zero year-end balance.
- Check customer-addition and inventory-turn disclosures: the text variously says six and ten new customers, and reports inventory turns of both 5.51 and 5.1.
- Validate debt-settlement gain amounts and the 2010 comparison, given the filing’s differing references to $190,890 and $190,960.
- Assess whether operating cash flow, customer collections, facility availability and interest costs can support operations given the auditor’s going-concern warning.