Business context and reporting period
The filing covers the quarter and six months ended June 30, 2013. The document identifies the registrant as Probe Manufacturing, Inc., an electronics manufacturing services provider—not Clean Energy Technologies, Inc. The company acquired Trident Manufacturing on March 20, 2013, adding a Salt Lake City facility and operations serving industrial, aerospace, military, instrumentation, and medical markets.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $1.023 million | $1.603 million | $1.736 million | $2.889 million |
| Gross profit | $373,124 | $459,753 | $549,164 | $824,505 |
| Gross margin | 36.5% | 28.7% | 31.6% | 28.5% |
| Operating income (loss) | $(68,607) | $124,487 | $(184,122) | $181,542 |
| Net income (loss) | $(85,076) | $71,453 | $(231,012) | $84,171 |
Six-month sales declined about 40% year over year; Q2 sales declined about 36%. Despite the sales contraction, six-month gross margin improved, which management attributed primarily to a more favorable product mix. Q2 net loss included $55,777 of other income; the filing text does not clearly explain its source. Interest expense was $102,667 for the first half, versus $97,601 a year earlier. No income tax expense was reported.
For the six months, operating cash flow was $(129,232), investing cash flow was $(33,665), and financing cash flow was $483,709, resulting in a $320,812 increase in cash. Cash at June 30 was $340,072, compared with $19,260 at December 31, 2012. Working capital was $182,128. Current liabilities were $1.459 million, including $698,699 of line-of-credit borrowings and $32,698 of current notes payable; no long-term debt was reported. Total stockholders’ equity was $791,604.
Changes, financing, and management commentary
- Trident was acquired for 1.6 million restricted common shares. The company recorded $420,673 of goodwill; the acquired business’s reported net assets were negative $262,978.
- Management cited investment in certification programs and technical personnel as drivers of higher general and administrative costs. The operations statement reports Q2 G&A of $441,731 versus $325,266; first-half G&A was $731,162 versus $629,663.
- The company received $500,000 in a June tranche of a Series D preferred financing. The filing reports an August 7, 2013 initial closing totaling $750,000, including that tranche, after the reporting date. The offering permits up to $1 million plus a $500,000 over-allotment.
- Series D carries a 17.5% annual special dividend, may be converted after a one-year holding period under a market-price-based formula subject to an $0.08 floor, and may be redeemable after one year. Related warrants are also part of the offering.
- Management’s stated priorities include organic sales growth, expanding services, using its manufacturing platform to support innovators, and pursuing acquisitions. The filing provides no quantified revenue or earnings guidance.
Liquidity, risks, and unusual items
The independent accountant’s interim review was not an audit and expressed no audit opinion. The reviewer noted conditions raising substantial doubt about the company’s ability to continue as a going concern. The company reported a first-half loss and accumulated deficit of $867,268 and said its continued operation depends on obtaining capital and/or generating positive operating cash flow. Management also warned that financing may not be available and that failure to meet debt service or preferred-dividend obligations could adversely affect the business.
The company relies on a receivables-purchasing facility of up to $750,000, with full recourse, a 1% discount and a funding charge at prime plus 4.75% (7% minimum); the provider may terminate under stated conditions. Customer demand, order cancellations or delays, component availability, customer concentration, and integrating acquired operations are additional disclosed risks. The five largest customers generated approximately 62% of first-half sales. Six customers represented about 53% of receivables at June 30.
Management concluded disclosure controls were effective as of June 30, 2013; it reported no material change in internal control over financial reporting. No material litigation was reported. The filing states there were no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity: this supplied 10-Q is for Probe Manufacturing, Inc., notwithstanding the request metadata naming Clean Energy Technologies, Inc.
- Review the going-concern warning, cash burn, current liabilities, availability and terms of receivables financing, and the company’s ability to fund operations.
- Assess the Series D financing’s 17.5% dividend, conversion and redemption terms, related-party participation, and potential dilution.
- Verify the source and nonrecurring nature, if any, of the $55,777 of other income and reconcile the reported G&A figures with management’s narrative, which appears to mislabel the period for the $731,162 amount.
- Reconcile share counts: the filing reports 23,251,945 shares outstanding at June 30, while its cover reports 23,451,945 shares as of August 1.
- Evaluate the Trident acquisition’s integration, acquired liabilities, goodwill, and contribution to subsequent revenue and cash flow.