Clean Energy Technologies, Inc. — 2013 Q1 filing summary
Filing identity: The supplied 10-Q identifies the registrant as Probe Manufacturing, Inc., not Clean Energy Technologies, Inc. This summary reflects the filing text; verify the company and filing before relying on it.
Business context and reporting period
The filing covers the three months ended March 31, 2013, with balance-sheet comparisons to December 31, 2012. Probe describes its business as electronics manufacturing services (EMS) for medical, aerospace, automotive, industrial, and instrumentation customers. The interim financial statements are unaudited and were reviewed, not audited.
Financial performance and liquidity
- Revenue: $712,657, down 44.6% from $1,285,868 in Q1 2012. Management attributed the decline to weaker economic conditions and lower defense spending, saying customer orders slowed rather than customers being lost.
- Profitability: Gross profit was $176,040, with a 24.7% gross margin versus $449,956 and 35.0% a year earlier. Operating loss was $115,515 versus operating income of $57,053; net loss was $145,936 versus net income of $12,717. Basic and diluted loss per share was $0.01.
- Expenses: General and administrative expense declined to $289,431 from $389,603, but rose to 41% of sales from 30% as revenue contracted. Cost of goods sold increased to 75% of sales from 65%; management cited higher direct labor and overtime as a share of sales. Interest expense was $30,421 versus $44,336.
- Cash flow: Operating activities provided $4,067, compared with $278,639 used in Q1 2012. Investing activities used $33,665, mainly for property and equipment; financing activities provided $12,062. Cash declined by $17,536 to $1,724.
- Liquidity and debt: Working capital was negative $238,927, versus positive $131,010 at year-end. Current assets were $1,305,343 and current liabilities were $1,544,270. Current liabilities included a $723,041 line of credit and $36,708 of current notes; long-term notes were $120,000. Total liabilities were $1,664,270, and stockholders’ equity was $298,375.
- Other metrics: Total assets were $1,962,645. Accounts receivable, net, was $672,428; inventory, net, was $631,191, including a $200,000 obsolescence reserve. The filing reports inventory turns of 3.41 versus 4.87, days sales in backlog of 126 versus 153, days receivable outstanding of 84 versus 59, and days payable outstanding of 106 versus 69.
Material changes and management commentary
- On March 20, 2013, Probe acquired all of Trident Manufacturing for 1,600,000 restricted shares. Trident operates an EMS facility in Salt Lake City. Probe recorded $420,673 of goodwill; the acquisition’s reported net assets acquired were negative $262,978.
- Management said backlog and orders within existing accounts were increasing and that five new customers were added in Q1. The top five customers generated approximately 63% of sales, down from 73% a year earlier.
- Management’s stated priorities include new sales and organic growth, expanding services, pursuing global opportunities, and using acquisitions to expand capabilities. No quantified revenue or earnings guidance is provided.
- After quarter-end, as of May 20, the company said it had exceeded its borrowing capacity under the Far West Capital financing arrangement and was paying increased interest rates. It said liquidity and operations would remain adversely affected until it found alternative financing or reduced borrowings.
Risks, contingencies, and unusual items
- The auditor’s review report highlights substantial doubt about Probe’s ability to continue as a going concern. The company cites its Q1 loss, working-capital deficit, accumulated deficit of $782,191, and dependence on additional financing or positive operating cash flow. The filing says the statements include no adjustments for the possible outcome of this uncertainty.
- The receivables financing arrangement is with recourse, carries a rate based on prime plus 4.75% with a 7% floor, and gives the lender specified rights to require receivables repurchase. Management disclosed exceeding the borrowing capacity after quarter-end.
- Five customers accounted for approximately 55% of receivables; no single customer exceeded 18%. Receivables are unsecured. Customer orders may be reduced, delayed, or canceled.
- The company issued a $120,000 convertible note in February 2013, bearing 10% simple interest, convertible at $0.10 per share, and due February 15, 2015. The Trident acquisition and other share issuances increased the share count; a one-for-ten reverse split took effect January 22, 2013.
- The filing reports no material litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors beyond the financing and going-concern concerns described.
Important facts for investors to verify
- Whether this filing belongs to the intended company: its cover page names Probe Manufacturing, Inc., not Clean Energy Technologies, Inc.
- The borrowing-capacity breach, increased financing costs, lender terms, and availability of replacement financing after May 20, 2013.
- The company’s ability to address negative working capital, near-minimal cash, recurring losses, and the auditor’s going-concern warning.
- The Trident acquisition accounting, including the share consideration, negative net assets acquired, and recorded goodwill.
- Internal inconsistencies in the filing: the risk-factor discussion cites shareholder surplus of $398,375, while the balance sheet reports equity of $298,375; the supplemental cash-flow disclosure reports $44,174 of interest paid, compared with $30,421 of interest expense on the income statement.