Clean Energy Technologies, Inc. — 10-Q summary
Important filing-identity note: The supplied filing is for Probe Manufacturing, Inc., a Nevada electronics manufacturing services company—not Clean Energy Technologies, Inc. Verify the issuer before relying on this summary.
Business context and reporting period
This unaudited quarterly report covers the three and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods. Probe provides engineering, manufacturing, and supply-chain services to electronics OEMs serving medical, aerospace, automotive, industrial, and instrumentation markets. The independent accountant performed an interim review, not an audit, and highlighted substantial doubt about the company’s ability to continue as a going concern.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $1.23 million | $0.76 million | $3.30 million | $2.01 million |
| Gross profit | $400,934 | $226,859 | $1,050,671 | $579,657 |
| Gross margin | 32.6% | 29.7% | 31.9% | 28.9% |
| Operating income | $92,820 | $19,333 | $200,530 | $60,204 |
| Net income | $39,638 | $12,683 | $96,579 | $243,214* |
Balance sheet at September 30: Cash was $29,275; current assets $1.48 million; current liabilities $1.33 million; working capital $156,508; total assets $1.68 million; and stockholders’ equity $355,549. The company reported $618,372 outstanding under its receivables financing arrangement, classified as current. No net long-term debt was reported.
Cash flows for nine months: Operating activities provided $174,003, investing activities used $22,226, and financing activities used $122,502, leaving $29,275 in cash. The operating cash figure included a $618,372 increase in advances under the receivables financing arrangement; meanwhile, receivables and inventory increased by $358,474 and $243,796, respectively.
Changes versus the prior comparable periods
- Q3 sales increased about 61% year over year; nine-month sales increased about 64%. Management attributed the growth to higher orders from existing customers and six new customers.
- Nine-month gross margin improved to 31.9% from 28.9%. Management cited lower relative production costs compared with 2010, when overtime was higher.
- Nine-month operating income rose to $200,530 from $60,204. Net income nevertheless declined from the 2010 reported figure, which included a one-time $190,960 CIT lease settlement gain.
- Nine-month interest expense rose substantially to $91,313 from $7,950, which management attributed to the receivables financing line.
- Accounts receivable days increased to 44 from 29, while days payable outstanding fell to 29 from 50. Inventory turns improved to 5.03 from 4.72; backlog coverage was 171 days versus 170.
Outlook, risks, contingencies, and unusual items
- Going concern and financing: Despite nine-month profit and positive working capital, management says continued operations depend on obtaining additional debt or equity financing and sustaining positive operating cash flow and profitability. The accountant’s review also cites substantial doubt. Management warns that financing may be unavailable or insufficient and that operations could be curtailed.
- Receivables facility: Far West Capital may purchase eligible receivables up to $750,000, with full recourse, a 1% discount, a funding charge at prime plus 4.75% (7% floor), and a 20% reserve. A separate inventory-advance provision allows up to $250,000, subject to conditions and caps. The company reported $618,372 outstanding at quarter-end.
- Customer and working-capital concentration: The five largest customers represented about 62% of Q3 sales. Five customers made up approximately 67% of receivables, including one customer at 29%. Receivables are unsecured, and customer orders may be delayed, reduced, or canceled.
- Other risks and commitments: Inventory included a $170,000 obsolescence reserve; receivables had a $26,000 allowance. The company leases its Irvine facility under a five-year lease amended in 2011. It reported no material litigation and no off-balance-sheet arrangements.
- Capital and dilution: Common shares outstanding were reported as 196,909,320 at September 30; the cover reports 198,159,056 as of November 14. The company also had 16,647,330 warrants outstanding and disclosed stock-based and stock-for-services issuances. No quantitative earnings or revenue guidance was provided; management described growth initiatives but cautioned that their success and funding are uncertain.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Probe Manufacturing, Inc., not Clean Energy Technologies, Inc.
- Reconcile the nine-month 2010 net-income figures: the financial statements show $243,214, while MD&A states $243,514; MD&A also identifies the $190,960 settlement gain.
- Reconcile the quarter-end share count of 196,909,320 with the note’s 196,909,056 and the cover’s November 14 figure of 198,159,056.
- Review the terms, availability, recourse exposure, borrowing-base limits, and renewal or termination risks of the Far West Capital facility, as well as the company’s near-term funding needs.
- Assess whether earnings and operating cash generation can be sustained given customer concentration, rising receivables days, low cash, and the stated going-concern uncertainty.
*The statements of operations report nine-month 2010 net income of $243,214; the MD&A contains a conflicting figure of $243,514.