Clean Energy Technologies, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company was formerly Probe Manufacturing, Inc.; it changed its name on November 13, 2015. Financial statements are unaudited. The 2014 comparison was restated for additional rent expense.
Business context
The company combined electronics manufacturing and engineering services with a new clean-energy focus. In September, its subsidiary acquired GE International’s heat recovery solutions assets, including Clean Cycle turbine technology and related intellectual property and equipment, to manufacture and commercialize Organic Rankine Cycle power systems. The filing says the company had one reportable segment—electronics manufacturing services—as of September 30.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $235,838 | $1,032,307 | $1,848,854 | $2,966,948 |
| Gross profit | $47,588 | $269,589 | $635,885 | $818,263 |
| Gross margin | 20% | 26% | 34.4% | 27.6% |
| Net loss | $543,210 | $92,968 | $725,083 | $201,749 |
| Loss per common share | $0.02 | $0.00 | $0.02 | $0.01 |
- Q3 sales fell about 77% year over year; management attributed the decline mainly to relocation and a temporary shutdown. Nine-month sales fell about 38%.
- Nine-month operating expenses were $1.131 million, including $73,450 of share-based expense; interest expense was $229,959.
- Operating cash flow was negative $1.094 million for the nine months; investing cash flow was negative $676,000 and financing cash flow was positive $1.744 million. Cash declined to $559 from $27,241 at year-end 2014.
- At September 30, current assets were $1.743 million and current liabilities were $2.690 million, producing a $946,509 working-capital deficit. Total liabilities were $3.590 million; stockholders’ deficit was $639,966.
- Notes payable totaled $2.316 million: $1.416 million current and $900,000 long-term. The GE asset acquisition included a $1.4 million, three-year note and an assumed $100,000 pension liability. The filing’s note describes scheduled repayments, but the stated current/long-term debt balances warrant reconciliation.
Changes, outlook, and risks
- Inventory rose to $1.313 million net from $557,382 at year-end, while cash remained extremely limited. The filing reports inventory turns of 0.81 versus 5.03, receivables outstanding of 80 versus 44 days, and payables outstanding of 259 versus 82 days.
- Management reported substantial doubt about the company’s ability to continue as a going concern, citing losses, operating cash use, working-capital and stockholders’ deficits, and dependence on additional capital or positive operating cash flow.
- Management’s plan was to grow through the acquired heat-recovery business, serve existing customers, emphasize clean technology, and pursue acquisitions. It provided no quantified revenue, profit, or cash-flow guidance and cautioned that financing and execution were uncertain.
- Customer concentration and order timing are risks: the top five customers represented about 80% of Q3 sales and 85% of receivables at quarter-end. Management also cited customer cancellations or delays and uncertainty in replacing lost orders.
- After quarter-end, ETI Partners’ financing arrangement contemplated up to $5 million. The initial $500,000 financing occurred after quarter-end, and the company issued ETI 100,910,321 shares, described as 70% of fully diluted common stock. The filing also reports a separate issuance of 4 million shares to an investor. These transactions materially changed ownership and dilution; the November 13 share count was 139,446,765.
- Disclosure controls and procedures were found ineffective as of September 30, 2015. The filing reported no material pending legal proceedings and no defaults upon senior securities.
Important facts for investors to verify
- Reconcile post-quarter financing terms, cash actually received, the 100.9 million-share issuance, the separate 4 million-share issuance, and resulting ownership and fully diluted share counts.
- Confirm the GE note’s repayment schedule and how it reconciles to current and long-term notes payable on the balance sheet.
- Assess available liquidity, obligations under the accounts-receivable financing and Series D preferred stock, and the company’s ability to fund operations and debt service.
- Evaluate the acquired HRS assets’ commercialization prospects, customer demand, and whether the reported backlog can convert into sales and cash collections.
- Review the restated 2014 comparison, ineffective disclosure controls, and the filing’s inconsistent references to the company’s business and segment reporting.