Business context and reporting period
Entity discrepancy: The supplied filing is for Probe Manufacturing, Inc., not Clean Energy Technologies, Inc. It is a Form 10-Q for the quarter ended September 30, 2013, with unaudited results for the three and nine months ended that date. The interim statements received an accountant’s review, not an audit. Probe provides electronics design and manufacturing services. It acquired Trident Manufacturing on March 20, 2013, expanding operations to a Salt Lake City facility.
Financial performance and condition
| Metric | Q3 2013 | Nine months 2013 | Comparable 2012 |
|---|---|---|---|
| Sales | $1,049,732 | $2,785,727 | $1,079,931 Q3; $3,969,084 nine months |
| Gross profit | $349,441* | $898,605* | $331,506 Q3; $1,239,610 nine months |
| Net income (loss) | $(87,276) | $(318,288) | $(71,848) Q3; $12,322 nine months |
| Operating cash flow | Not presented for quarter | $(305,307) | $(230,212) |
| Cash at period end | $3,398 | $24,294 at September 30, 2012 |
*The statements of operations report these gross-profit figures; MD&A gives conflicting figures (see below). Nine-month sales declined approximately 30% year over year. The statements show nine-month gross margin of approximately 32% versus 31% in 2012; MD&A instead reports $848,605 and 30% for 2013. Q3 operating loss was $34,448, and interest expense was $52,828. Nine-month interest expense was $155,495 versus $132,870.
At September 30, 2013, current assets were $1,476,244 and current liabilities $1,151,865, giving reported working capital of $324,379. Total assets were $2,106,193, total liabilities $1,151,865, and stockholders’ equity $954,328. Current financing included a $229,789 line of credit and $78,690 of current notes payable; the balance sheet reports no long-term debt. Cash was very limited, and the company reported a $41,124 bank overdraft. Financing activities provided $351,916 during the nine months, including $750,000 from Series D preferred stock; operating and investing activities used cash.
Material changes and notable items
- Trident was acquired for 1.6 million restricted common shares. The filing reports $420,673 of goodwill and acquired net liabilities of approximately $262,978.
- Probe issued $750,000 of Series D preferred stock to two related parties. The preferred stock carries a 17.5% annual special dividend, conversion rights after one year, and holder redemption rights after one year, subject to the offering terms. The filing says the offering could raise up to $1 million plus a $500,000 over-allotment.
- The company terminated its accounts-receivable financing agreement with Far West Capital in August; the agreement was to terminate 90 days after notice. The filing cites financing fees as the reason. Nine-month interest expense increased year over year.
- Customer concentration remained significant: the top five customers accounted for about 62% of nine-month sales. Six customers represented about 71% of receivables. Days receivable outstanding rose to 71 from 52, while days sales in backlog rose to 174 from 89.
- Common shares outstanding were 23,251,945 at September 30, 2013. The company also reported 800,000 outstanding warrants and Series D conversion rights that may result in dilution.
Outlook, risks and contingencies
The auditor’s review report and management disclosures state that substantial doubt exists about Probe’s ability to continue as a going concern. Management says continued operations depend on obtaining debt or equity financing and/or generating positive operating cash flow. The company reported a nine-month net loss and accumulated deficit of $954,544. Management’s stated plans include organic growth, sales and industry diversification, vertical integration, and acquisitions; no quantified financial guidance is provided.
Key risks include weak operating cash generation, limited cash, customer concentration and order cancellations or delays, customer credit risk, component availability, inventory valuation, and integration of acquisitions. The Series D dividend and redemption provisions could add to funding needs. The filing reports no material litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors other than the going-concern financing risk.
Important facts for investors to verify
- Confirm the issuer: the filing identifies Probe Manufacturing, Inc., not Clean Energy Technologies, Inc.
- Reconcile the statements of operations with MD&A: for Q3, COGS is shown as both $700,291 and $750,291, gross profit as $349,441 and $299,441, and general and administrative expense as $383,889 and $333,889. For nine months, COGS is shown as $1,887,122 and $1,937,122, gross profit as $898,605 and $848,605, and general and administrative expense as $1,115,051 and $1,065,051.
- Check the inconsistent inventory-turn figures: the KPI table lists 3.33 for 2013, while MD&A text says 2.8.
- Review the Series D preferred stock’s dividend, redemption, conversion, related-party participation, and warrant terms, and assess resulting cash obligations and dilution.
- Assess available liquidity after termination of the receivables financing facility, the very low reported cash balance, and the auditor’s going-concern warning.