Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. The filing identifies the registrant as Probe Manufacturing, Inc., an electronics manufacturing services provider with facilities in California and Utah. This conflicts with the request metadata naming Clean Energy Technologies, Inc.; investors should verify the issuer and filing before relying on this summary.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales | $1.031 million | $1.023 million | $1.935 million | $1.736 million |
| Gross profit | $301,552 | $373,124 | $548,862 | $549,164 |
| Gross margin | 29.2% | 36.5% | 28.4% | 31.6% |
| Operating income (loss) | $26,569 | ($68,607) | ($8,331) | ($184,122) |
| Net income (loss) | $16,314 | ($85,076) | ($58,808) | ($231,012) |
Q2 sales rose about 0.8% year over year, while six-month sales grew about 11.4%. Gross profit was nearly flat for the half year, but gross margin declined. Lower general and administrative expense and interest expense contributed to the improvement in year-to-date losses. Six-month interest expense was $50,477, versus $102,667 a year earlier.
For the six months, operating cash flow was negative $210,520, compared with positive $4,067 in 2013. Investing cash outflow was $27,616 and financing cash inflow was $246,122. Cash increased by $7,986 to $14,735. At June 30, total assets were $1.998 million, current liabilities $1.227 million, and working capital $106,944; stockholders’ equity was $770,084. Current notes payable were $345,787; the balance sheet reports no long-term debt.
Material changes and liquidity
- Six-month gross margin fell from 31.6% to 28.4%, despite higher sales. Q2 gross margin declined more sharply, from 36.5% to 29.2%.
- Accounts receivable rose to $644,976 from $429,413 at year-end 2013; inventory was $674,724, net of a $205,000 excess/obsolete reserve.
- Management reported inventory turns of 4.28 versus 3.57, backlog of 247 days of sales versus 133, receivable days of 47 versus 62, and payable days of 82 versus 157.
- Series D preferred financing of $750,000 carries a 17.5% annual special dividend, with conversion and redemption rights. The filing describes financing from related parties and a related-party purchase-order factoring arrangement; $40,077 was owed under the latter at June 30.
Outlook, risks and unusual items
No quantified earnings or revenue guidance is provided. Management describes plans for organic growth, sales and industry diversification, vertical integration, and potential acquisitions. It states that continued operations depend on obtaining debt or equity capital and/or generating positive operating cash flow. The company reported a six-month net loss and a $1.346 million accumulated deficit, and warns that financing may not be available and future cash generation is uncertain.
Customer and program concentration, order delays or cancellations, component availability and costs, production yields, capacity use, customer financial health, and acquisition integration are cited as risks. The top five customers generated approximately 62% of six-month sales. The filing also reports two creditor claims settled through weekly cash payments of $2,000 and $3,000, respectively, plus court fees; disclosed amounts due were approximately $50,415 and $57,072. It states there was no other material litigation. No material subsequent events were reported.
Important facts to verify
- Confirm that this Probe Manufacturing filing, rather than a Clean Energy Technologies filing, is the intended document.
- Check the filing’s inconsistent dates and descriptions: the cash-flow statement heading refers to March 31 although the figures are presented as six-month results; controls are described as evaluated at March 31; and several note dates and liability amounts appear inconsistent with the main statements.
- Verify cash-flow pressure, the collectability and concentration of receivables, inventory reserve adequacy, and near-term debt and creditor settlement payments.
- Assess the cost and potential dilution or redemption burden of Series D preferred stock and related warrants, including accrued dividends.
- Confirm the reported backlog’s conversion into sales and margins, given the substantial year-over-year decline in gross margin.