Business context and reporting period
This is Probe Manufacturing, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012—not a filing identified in its text as Clean Energy Technologies, Inc. The company provides electronics manufacturing and related design and supply-chain services, primarily for medical, aerospace, automotive, industrial, and instrumentation customers.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1.603 million | $1.164 million | $2.889 million | $2.071 million |
| Gross profit | $460,000 | $343,000 | $825,000 | $584,000 |
| Operating income | $124,000 | $60,000 | $182,000 | $101,000 |
| Net income | $71,453 | $32,212 | $84,171* | $56,940 |
| Gross margin | 28.7% | 29.4% | 28.5% | 28.2% |
| Net margin | 4.5% | 2.8% | 2.9% | 2.7% |
Management attributed revenue growth to increased orders from existing accounts and three new customers. For the six-month period, general and administrative expense rose to $630,000 from $467,000, while its share of sales declined to 21.8% from 22.5%. Interest expense increased to $97,601 from $52,770, which management attributed to accounts-receivable financing. Reported earnings per share rounded to $0.00.
At June 30, 2012, cash was $29,799; current assets were $1.783 million and current liabilities $1.513 million, yielding reported working capital of $270,094 and an approximate current ratio of 1.18. Total assets were $1.948 million, total liabilities $1.513 million, and stockholders’ equity $435,516. Current liabilities included $787,165 of line-of-credit notes payable; the balance sheet reported no long-term debt. Six-month operating cash flow was negative $218,463, compared with negative $408,990 a year earlier. Investing cash use was $11,673; financing provided $241,586, primarily from increased line-of-credit advances. Cash increased by $11,450.
Material changes, outlook, risks, and unusual items
- Revenue increased approximately 38% in Q2 and 40% for the six-month period year over year. Six-month net income increased, but earnings remained small relative to sales; operating cash flow was still negative.
- Gross margin was slightly lower in Q2 year over year but higher for the six-month period. Customer concentration increased: the five largest customers represented approximately 68% of six-month sales, versus 61% in 2011; five customers represented about 74% of receivables.
- The independent accountant performed an interim review, not an audit, and noted substantial doubt about the company’s ability to continue as a going concern. Management said continued operations depend on obtaining financing and/or generating positive operating cash flow and sustaining profitability. It gave no quantified financial guidance.
- The company’s receivables-purchasing facility permits up to $750,000 of eligible receivables financing, with full recourse, a 1% discount and a funding charge at prime plus 4.75% (7% floor); the filing also describes potential inventory advances subject to limits and lender discretion. The facility may be terminated under specified terms.
- Risks include low cash, dependence on financing, customer order cancellations or delays, unsecured receivables, and inventory valuation. The company reported a $31,000 doubtful-account reserve and a $160,000 obsolete-inventory reserve. It disclosed no material litigation, no off-balance-sheet arrangements, and no subsequent events.
- Management described plans to pursue new customers, expand services and global opportunities, and consider growth through acquisitions; these are plans, not quantified guidance.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing names Probe Manufacturing, Inc., not Clean Energy Technologies, Inc.
- Reconcile net income stated as $84,171 in the statements and MD&A with $84,169 in the going-concern discussion; share-count and diluted-share figures also vary across sections.
- Check the actual outstanding balance, availability, fees, covenants, recourse exposure, and termination provisions of the receivables-financing facility against the reported $787,165 line-of-credit balance.
- Assess whether collections and working-capital changes can reverse negative operating cash flow, especially given customer concentration and 53 days of receivables outstanding versus 48 a year earlier.
- Review dilution exposure: 198,319,056 shares were outstanding at June 30, and the filing reports 2,000,000 shares accrued for issuance plus outstanding options and warrants.
*The filing contains inconsistent six-month net-income amounts: the primary statements show $84,171, while a note and MD&A also state $84,169.