UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007.
[ ]
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission file number 333-125678
PROBE MANUFACTURING, INC.
(Exact name of issuer as specified in its charter)
NEVADA 20-2675800
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25242 Arctic Ocean Drive, Lake Forest, CA 92630
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 206-6868
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE.
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
o
o
Non-accelerated filer
Smaller reporting company
o
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 29, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing sale prices of the registrant’s common shares as reported by the New York Stock Exchange on such date: $2,009,804.
The number of shares outstanding of each of the registrant’s classes of common stock, as of March 27, 2008 was as 10,556,477.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31, 2007 are incorporated by reference into Part II of this Form 10-K.
Table of Contents Financial Statements
PROBE MANUFACTURING, INC.
10-K
TABLE OF CONTENTS
Part I
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| Page |
Item 1. | 4 | |
Item 1A. | 10 | |
Item 1B. | 13 | |
Item 2. | 14 | |
Item 3. | 14 | |
Item 4. | 15 |
Part II
Item 5. | 15 | |
Item 6. | 19 | |
Item 7. | Managements discussion and Analysis of Financial Condition and Results of Operation | 20 |
Item 7A. | 30 | |
Item 8. | 31 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 50 |
Item 9A | 50 | |
Item 9B | 50 |
Part III
Item 10 | 51 | |
Item 11 | 52 | |
Item 12 | Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters | 53 |
Item 13 | Certain Relationships And Related Transactions, and Director Independence | 54 |
Item 14 | 56 | |
Item 15 | 57 | |
| 61 |
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995. On April 21, 2005, the Company was re-domiciled from California to Nevada, and changed its name to Probe Manufacturing, Inc. We provide a range of engineering, manufacturing and integrated supply chain services at affordable prices to companies who design and market electronic products, Original Equipment Manufacturers (OEM). Currently, our revenue is generated from sales of our services primarily to customers in the medical devise, aerospace, alternative fuel and industrial products manufacturers. The Company provides OEMs with lowest cost of ownership, flexibility, and quality that improves their competitive advantage. The services that we provide are commonly referred to as Electronics Manufacturing Services (EMS). Probe's EMS offerings include new product introduction, collaborative design, procurement and materials management, product manufacturing, product warranty repair, and end-of-life su pport. We offer our customers comprehensive and integrated design and manufacturing services, from initial product design to production and direct order fulfillment. Our engineering services include product design, printed circuit board layout, prototyping, and test development. Our supply chain management solutions include purchasing, management of materials, and order fulfillment. Our manufacturing services include surface mount and through-hole assembly, cable assembly, mechanical assembly, and fully integrated box build systems for high complexity electronics.
For example, Probe builds an Engine Control Unit (ECU) for a customer which is used in alternative fuel engines. We have supported this customer from the inception of its product. Our services started with full design review for manufacturability and testability of the product. Once the design review and recommendations were completed we source the materials and procure the components. Then we take responsibility for assembling the components on to the boards, assembling the mechanical parts, installing the product inside the enclosure, and finally we perform a full functional test. Then the finished good product is shipped to the customer, who integrates it in to their final fuel delivery system and it’s then delivered to the end customer.
The majority of our revenue is driven from manufacturing a mix of complex Printed Circuit Board Assemblies (PCBA), and box build assemblies. Some of the examples of our customer’s finished goods products includes Medical devices such as ventilators, electronic control units that help vehicles run on natural gas or hydrogen, electronic control units for welding equipment, control units for electric-hybrid drives, portable ultrasound and electro-simulation therapy equipment, fluid control units for airliners, and hailing devices for defense industry.
We believe that the EMS industry will continue to grow, driven largely by the needs of OEMs to respond to rapidly changing markets and technologies and to reduce product costs. Additionally, we believe that there are significant opportunities for EMS providers to win additional business from OEMs in certain markets or industry segments that have yet to substantially utilize EMS providers.
EMS companies are the principal beneficiaries of the increased use of outsourced manufacturing services by the electronics and other industries. Outsourced manufacturing refers to OEMs’ use of EMS companies, rather than internal manufacturing capabilities, to manufacture their products. Historically, EMS companies only manufactured components or sub assemblies. As the EMS industry has evolved, OEMs have increased their reliance on EMS companies for additional, more complex manufacturing services, including collaborative product design services, supply chain management and full box manufacturing. EMS companies now often participate in designing, manufacturing and testing of complete systems and manage the entire supply chains of their OEM customers. Industry leading EMS companies offer end-to-end services, including product design and engineering, volume manufacturing, final system assembly and testing, direct order fulfillment, after-sale product service and sup port and global supply chain management. Outsourcing demand for advanced manufacturing capabilities, design and engineering services and after-market services continues to grow rapidly. This demand continues to increase for several reasons, including the intensely competitive nature of the electronics industry, the continually increasing complexity and sophistication of electronics products, pressure on OEMs to reduce product costs, and shorter product life cycles. As a result, the number of OEMs that utilize EMS providers as part of their business and manufacturing strategies continues to increase. Utilizing EMS providers allows OEMs to take advantage of the global design, manufacturing and supply chain management expertise of EMS providers, and enables OEMs to concentrate on product research, development, marketing and sales. We believe that OEMs realize the following benefits through their strategic relationships with EMS providers:
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• Reduce Operating Costs and Capital Investment.In the competitive global market, OEMs are under significant pressure to reduce manufacturing costs and capital expenditures. EMS companies can provide OEMs with flexible, cost-efficient manufacturing services. In addition, as OEM products have become more technologically advanced, the manufacturing and system test processes have become increasingly automated and complex, requiring significant capital investments. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures.
• Focus on Core Competencies.The electronics industry is highly competitive and subject to rapid technological change. As a result, OEMs increasingly are focusing their resources on activities and technologies in which they expect to add the greatest value. By offering comprehensive manufacturing services and supply chain management, EMS companies enable OEMs to focus on their core competencies, including next generation product design and development as well as marketing and sales.
• Access Leading Design and Engineering Capabilities.The design and engineering of electronics products has become more complex and sophisticated and in an effort to become more competitive, OEMs are increasingly relying on EMS companies to provide product design and engineering support services. EMS companies’ design and engineering services can provide OEMs with improvements in the performance, cost and time required to bring products to market. EMS companies are providing more sophisticated design and engineering services to OEMs, including the design and engineering of complete products following an OEM’s development of a product concept.
• Improve Inventory and Purchasing Power.OEMs face challenges in planning, procuring and managing their inventories efficiently due to fluctuations in customer demand, product design changes, short product life cycles and component price fluctuations. EMS companies employ sophisticated production management systems to manage their procurement and manufacturing processes in an efficient and cost-effective manner so that, where possible, components arrive on a just-in-time; as-and-when needed basis. EMS companies are significant purchasers of electronic components and other raw materials, and can capitalize on the economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. EMS companies’ expertise in supply chain management and their relationships with suppliers across the supply chain enable them to help OEMs redu ce their cost of goods sold and inventory exposure.
• Access Global Manufacturing Services.OEMs seek to reduce their manufacturing costs by having EMS companies manufacture their products in the lowest cost locations that are appropriate for their products and end customers. OEMs also are increasingly requiring particular products to be manufactured simultaneously in multiple locations, often near end users, to bring products to market more quickly, reduce shipping and logistics costs and meet local product content requirements. Global EMS companies are able to satisfy these requirements by capitalizing on their geographically dispersed manufacturing facilities, including those in lower cost regions.
• Accelerate Time to Market.OEMs face increasingly short product life cycles due to increased competition and rapid technological changes. As a result, OEMs need to reduce the time required to bring their products to market. OEMs can bring a product to market faster by using EMS companies’ expertise in new product introduction, including manufacturing design, engineering support and prototype production. OEMs can more quickly achieve volume production of their products by capitalizing on EMS companies’ manufacturing expertise and global presence and infrastructure.
OUR PRODUCTS AND SERVICES
Engineering. Our approach is to coordinate and integrate our design, prototype and other engineering capabilities. Through this approach, we provide a broad range of engineering services and, in some cases, dedicated production lines for prototypes. These services strengthen our relationships with manufacturing customers and attract new customers requiring specialized engineering services. To assist customers with initial design, we offer computer assisted engineering, computer assisted design, engineering for manufacturability, circuit board layout and test development. We also coordinate industrial design and tooling for product manufacturing. After product design, we offer quick-turn prototyping, which means a rapid process of prototyping. During this process, we assist with the transition to production. By participating in product design and prototype development, we can reduce manufacturing costs and accelerate the cycle fro m product introduction to production.
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Supply Chain Management. Supply chain management consists of the planning, purchasing, expediting and warehousing of components and materials. Our inventory management and volume procurement capabilities contribute to cost reductions and reduce total cycle time.
Assembly and Manufacturing. Our manufacturing operations include printed circuit board assembly, subsystem assembly, box build and systems integration, the process of integrating sub-systems and downloading software before producing a fully configured product. We purchase the printed circuit boards used in our assembly operations from third parties. We employ various inventory management techniques, such as just-in-time, ship-to-stock and auto-replenish, which are programs designed to ensure timely, convenient and efficient delivery of assembled products to our customers. As OEMs seek to provide greater functionality in smaller products, they increasingly require more sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and our experience in innovative packaging and interconnect technologies enable us to offer a variety of advanced manufacturing solutions.
Testing. We offer computer-aided, in-circuit testing of assembled printed circuit boards, which contributes significantly to our ability to deliver high-quality products on a consistent basis. We work with our customers to develop product-specific test strategies. Our test capabilities include manufacturing defect analysis, in-circuit tests to test the circuitry of the board and functional tests to confirm that the board or assembly operates in accordance with its final design and manufacturing specifications. We either custom design test equipment and software ourselves or use test equipment and software provided by our customers. In addition, we provide environmental stress tests of assemblies of boards or systems.
Final System Assembly and Test. We provide final system assembly and test assemblies and modules in which they are combined to form complete, finished products. We integrate printed circuit board assemblies manufactured by us with enclosures, electronic and mechanical sub-assemblies, cables and memory modules. We assemble systems to a specific customer order and we also build to standard configurations. The complex, finished products that we produce typically require extensive test protocols. Our test services include in-circuit testing, functional and environmental tests. We also test products for conformity to applicable industry, product integrity and regulatory standards. Our test engineering expertise enables us to design functional test processes that assess critical performance elements, including hardware, software and reliability. By incorporating rigorous test processes into the manufacturing process, we can help to assure customers that their products will function as designed. We provide direct order fulfillment services shipping completed systems directly to the end consumer.
Distribution. We offer our customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with customers' inventory and consumption requirements. We have the ability to ship products directly into customers' distribution channels or directly to the end-user. We believe that this service can provide our customers with a more comprehensive solution and enable them to be more responsive to market demands.
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STRATEGIC RELATIONSHIPS AND ALLIANCES
Customers
We do not have any long term agreements with our customers, and our principal customers may not continue to purchase services from us. The duration of a purchase order is usually from 90 to 360 days. These purchase orders could be cancelled or rescheduled at any time. The part number, quantity, price, workmanship standards, and scheduled delivery dates of the products to be manufactured are determined by written purchase orders given by our customers and accepted or confirmed by us in writing or via email. We agree to deliver products manufactured pursuant to each purchase order in accordance with the terms and conditions set forth in the purchase order. Probe manufactures hundreds of different types of assemblies on an ongoing basis and each product has a purchase order associated with it.
We currently only focus on attracting and servicing customers in Southern California.
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SALES AND MARKETING
Sales and marketing efforts are divided into segments as follows:
·
Medical Device Manufacturing
·
Aerospace-Defense
·
Alternative fuel-Automotive
·
Industrial
Our divisional and executive management teams are an integral part of our sales and marketing teams. We may enter into Manufacturing Services Agreements with our customers. These agreements, similar to purchase orders, generally govern the conduct of business between our customer and the company relating to, among other things, the manufacture of products which in many cases were previously produced by the customer itself. Such arrangements generally identify the specific products to be manufactured, quality and production requirements, product pricing and materials management. There can be no assurance that at any time these agreements will remain in effect or be renewed.
Our customer accounts are managed by a dedicated customer focused team, including a program manager directly responsible for account management. The program manager coordinates activities across divisions to effectively satisfy customer requirements and have direct access to our executive management to quickly address customer concerns. In addition, our executive management, including our chief executive officer is heavily involved in customer relations and devotes significant attention to broadening existing, and developing new customer relationships.
Partnership Approach
Our partnership strategy is to convince potential customers to engage Probe as a total solution to their product life cycle and inventory management. To do this, we review our customer designs for manufacturability and test, and make recommendations for technology, quality, delivery and cost improvements. We use our customers forecast only for planning and execute production only upon consumption. This will maintain inventory at its lowest value point. We also review our customer’s processes to identify value added processes, and reduce redundancies. This process has been effective way of integrating our process to customer’s needs; and has resulted in improving our customer’s performance.
SUPPLIERS
We currently procure our materials from a limited number of distributors, thus if a shortage of various components were to occur we would be forced to seek other distributors and our cost of goods could impact our revenues. Our main suppliers of materials include:
Arrow Electronics, Inc. is one of the world's largest distributors of electronic components and computer products and a leading provider of services to the electronics industry, with 2004 sales of $10.7 billion. Headquartered in Melville, New York, Arrow serves as a supply channel partner for more than 600 suppliers and 175,000 original equipment manufacturers, contract manufacturers, and value-added resellers through more than 200 sales facilities and 23 distribution centers in 40 countries and territories.
Future Electronics is the world’s largest distributor specializing in passive, interconnect, and electromechanical components used in commercial and military applications, and they hold the top market share for most of our product lines. Headquartered in Fort Worth, Texas, TTI has 47 locations around the globe: 33 in North America, 11 in Europe and, most recently, 3 in Asia. From these facilities, they provide local service to customers around the world.
We currently do not have long-term agreements with our major suppliers; however, we enter into purchase order agreements. Purchase orders are placed with suppliers based on our material requirement planning (MRP) operating system. When we enter a sales order in our operating system Manex, it generates a list of materials for procurement to satisfy that order. We then issue purchase orders to our suppliers with scheduled deliveries which acts as the only contractual agreements between us and our suppliers. Our major suppliers often carry inventory for us and will ship upon Auto Release mechanism.
COMPETITION
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The electronic manufacturing services industry is large, competitive and diverse, and is serviced by many companies, including several that have achieved significant market share We compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Pemstar, Inc.; Plexus Corp.; Sanmina-SCI Corporation; CTS Electronics; Solectron Corporation; SMS Technologies, Inc.; Express Manufacturing, Inc., and others. Because of our market’s size and diversity, we do not typically compete for contracts with a discreet group of competitors. We compete with different companies depending on the type of service or geographic area. Certain of our competitors may have greater manufacturing, financial, research and development and marketing resources. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.
COMPETITIVE POSITIONING
We believe our primary competitive advantages are integrated services which includes design, manufacturing, testing and supply chain management capabilities. We offer our customers flexible manufacturing solutions through out the life cycle of their products. These solutions provide accelerated time-to-market, time-to-volume production, and reduced production and inventory costs. As a result of working closely with our customers and responding promptly to their needs, we have become an integral part of their operations. In addition, our business processes are continually being improved for systemic optimization.
STRATEGY
Our strategy is to continue our growth and enhance profitability by using market-focused expertise and capabilities; and to offer the most competitive vertically-integrated EMS services to our customers. To achieve this goal, we are enhancing our core EMS engineering, manufacturing and procurement/inventory management services with industry-specific expertise. To ensure long term sustainability, and growth of the company we have initiated research and development activities towards growth markets of the future such as renewable energy technologies. While we continue to operate our Electronics Manufacturing business, we are now directing more resources towards developing technologies in the renewable energy industry.
·
Market Focused Approach. We intend to continue to invest in growing our market-focused expertise and capabilities in Medical Device, Aerospace-Defense and renewable energy industries. By focusing our resources on serving specific markets, we are able to better understand complex market dynamics and anticipate trends that impact our OEM customers’ businesses, and we can help improve their market positioning by effectively adjusting product plans and roadmaps to deliver low-cost, high quality products, and meet their time-to-market requirements.
·
Expand our Vertically-Integrated Service Offering. One of our core strategies is to continue to expand our vertically-integrated services. We actively pursue acquisitions, or internal development to strengthen our vertically-integrated capabilities.
·
Expand Our Design and Engineering Capabilities. We have expanded our design and engineering resources as part of our strategy to offer services that help our OEM customers achieve time-to-market, cost containment and savings for their products. We intend to continue to expand our design and engineering capabilities by increasing our research and development capabilities, expanding our internal design and engineering resources, and by developing, licensing and acquiring technologies.
·
Streamline Business Processes through Continual process improvement. We use a systemic approach to our business processes where, systems and processes are responsible for the outcomes, and not just the individuals. As a company, we are committed to improve our systems and processes as fast and as often as we can.
·
Focus on long term sustainability. As part of our long term sustainability and growth strategy, we are committed to allocate some of our resources into research and development of technologies and products in the renewable energy field. We leverage our expertise in new product introduction, procurement and manufacturing to help commercialize new propriety product line. Our renewable energy research and development is focused on the renewable energy industry as defined by the Energy Policy Act of 1992 (EPAct) including ethanol, natural gas, propane, hydrogen, bio-diesel, electricity and methanol.
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SOCIAL RESPONSIBILITY
Our corporate commitment to social responsibility practices includes global community and the environment. We intend to achieve that by embracing renewable energy field for our long term growth and sustainability strategy; and to adhere to the highest ethical standards of practice with our customers, suppliers, partners, employees, communities and investors as well as with respect to our corporate governance policies and procedures, and by providing a safe and quality work environment for our employees.
PERSONNEL
We presently employ approximately 60 employees, including production team, program management team, material management team, engineering, sales team and quality staff and administrative and management personnel. We have never experienced work stoppages, and are not a party to any collective bargaining agreement.
REGULATORY RESTRICTIONS ON OUR BUSINESS
Our operations, and the operations of businesses that we may acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, and health and safety matters. We believe we operate in substantial compliance with all applicable requirements. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements. Material cost may rise due to additional manufacturing cost of raw or made parts with the application of new regulations. Our liabilities may also increase due to additional regulations imposed by foreign, federal, state and local regulatory requirements relating to environmental, waste management, and health and safety matters. In addition, our past, current and future operations, and those of businesses we acquire, may give rise to claims of exposure by employees or the public or to other claims or liabilities relating to environm ental, waste management or health and safety concerns.
ITEM 1A. RISK FACTORS
RISKS ABOUT OUR BUSINESS
OUR INDEPENDENT ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION AND IF WE CANNOT OBTAIN ADDITIONAL FINANCING AND/OR REDUCE OUR OPERATING COSTS SUFFICIENTLY, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO EXIST.
The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. Although, the Company had a net profit of $374,896, generated $668,293 in net cash from operations and improved their total stockholders deficit by $472,433 for the year ended December 31, 2007; however, we still had a working capital deficit of $(174,657) and a shareholder deficit of $(273,030) as of December 31, 2007. Therefore the ability of the Company to operate as a going concern is still dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) to continue generating positive cash flow from operations.
WE HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES; THEREFORE WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NEEDED FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND TO MEET OUR DEBT SERVICE OBLIGATIONS.
As of December 31, 2007, we had current liabilities of $1,860,002. Our debt could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of an economic downturn.
We may not be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with covenants in our revolving lines of credit, we will be in default.
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WE FACE INTENSE COMPETITION, WHICH MAY REDUCE OUR SALES, OPERATING PROFITS, OR BOTH.
The market segments in which we compete are rapidly evolving and intensely competitive.The electronic manufacturing service or “EMS” industry is extremely competitive and includes hundreds of companies, several of which have achieved substantial market share. We compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Pemstar, Inc.; Plexus Corp.; Sanmina-SCI Corporation; CTS Electronics; Solectron Corporation; SMS Technologies, Inc.; Express Manufacturing, Inc. and others. Current and prospective customers also evaluate our capabilities against the merits of internal production. Some of our competitors may have greater design, manufacturing, financial or other resources than us. Additionally, we face competition from Taiwanese ODM suppliers, who have a substantial share of the global market for information technology hardware production, primarily related to notebook and desktop computers and personal computer motherboards, as well as provide consumer products and other technology manufacturing services.
In recent years, many participants in the industry, including us, have substantially expanded their manufacturing capacity. The overall demand for electronics manufacturing services has decreased, resulting in increased capacity and substantial pricing pressures, which has harmed our operating results. Certain sectors of the EMS industry are currently experiencing increased price competition, and if this increased level of competition should continue, our revenues and gross margin may continue to be adversely affected.
WE MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS. IN ADDITION, WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO PROCURE OUR PARTS FOR PRODUCTION WHICH IF AVAILABILITY OF PRODUCTS BECOMES COMPROMISED IT COULD ADD TO OUR COST OF GOODS SOLD AND AFFECT OUR REVENUE GROWTH.
At various times, there have been shortages of some of the electronic components that we use, as a result of strong demand for those components or problems experienced by suppliers. These unanticipated component shortages have resulted in curtailed production or delays in production, which prevented us from making scheduled shipments to customers in the past and may do so in the future. Our inability to make scheduled shipments could cause us to experience a reduction in our sales and an increase in our costs and could adversely affect our relationship with existing customers as well as prospective customers. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. As a result, component shortages could adversely affect our operating results for a particular period due to the resulting revenue shortfall and increased manufacturing or component costs. In addition, we depend upon a number of major suppliers for our products. We do not have long-term agreements with our major suppliers, except for our purchase orders. There is an inherent risk that certain products will be unavailable for prompt delivery or, in some cases, discontinued. We will have only limited control over any third-party manufacturer as to quality controls, timeliness of production and deliveries and various other factors. Lack of long-term agreement with our major suppliers could also impact material availability and could delay shipments. Should the availability of products be compromised, it could also force us to develop alternative products, which could add to the cost of goods sold and compromise delivery commitments.
OUR PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS , IN THE AGGREGATE, BENEFICIALLY OWN MORE THAN 50% OF OUR OUTSTANDING COMMON STOCK AND THESE SHAREHOLDERS, IF ACTING TOGETHER, WILL BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER ALL MATTERS REQUIRING APPROVAL OF OUR SHAREHOLDERS.
Our principal shareholders, directors and executive officers in the aggregate, beneficially own more than 50%our outstanding common stock on a fully diluted basis. These shareholders, if acting together, will be able to exert substantial influence over all matters requiring approval of our shareholders, including amendments to our Articles of Incorporation, fundamental corporate transactions such as mergers, acquisitions, the sale of the company, and other matters involving the direction of our business and affairs and specifically the ability to determine the members of our board of directors. (See: “Principal Shareholders”)
WE CURRENTLY SERVICE AND ATTEMPT TO OBTAIN THE MAJORITY OF OUR CUSTOMERS IN THE LIMITED GEOGRAPHIC OF SOUTHERN CALIFORNIA WHICH IS A SMALL ADDRESSABLE MARKET
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AND COULD BE SUBJECT TO ECONOMIC HARDSHIP OR SLOWDOWN, AS A RESULT OUR GROWTH COULD BE LIMITED AND ADVERSELY AFFECT OUR PROJECTED SALES AND OPERATING INCOME.
We currently service, attempt to solicit new, and direct majority of our marketing efforts to customers in the Southern California region. This is a very small addressable market which ultimately limits the amount of growth we could experience. In addition, this region could experience an economic recession or other market contraction which would cause our current customers and any potential customers to also contract their businesses as well and cease outsourcing any current products that we currently service and would attempt to obtain. Both the size of the market and any potential economic hardship affecting this small regional market could adversely affect our project sales and operating incomer. If we are forced to expand our marketing efforts outside this region we could also incur significant costs in an attempt to penetrate other regional or national markets.
WE DEPEND ON LOW TO MEDIUM VOLUME HIGH MIX TECHNOLOGY PRODUCTS THAT ARE BUILT DOMESTICALLY. THESE APPLICATIONS INCLUDE INDUSTRIAL INSTRUMENTATION, MEDICAL DEVICES, AEROSPACE-DEFENSE, ALTERNATIVE FUEL TECHNOLOGIES, SCIENTIFIC COMMUNICATION, SEMICONDUCTOR AND AUTOMOTIVE PRODUCTS, WHICH CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS COULD HARM OUR BUSINESS.
During the twelve months ended December 3 2007, we derived approximately 36% of our revenue from customers in the Medical Device Manufacturing, 22% Industrial Products, 14% from customers in the Semiconductor industry, 14% from customers in Alternative Fuel, and 14% from customers in aerospace/Defense industries.
Factors affecting these industries in general could seriously harm our customers and, as a result, us. These factors include:
·
Rapid changes in technology, which result in short product life cycles, often reduce the volume and market share for our customers and ultimately us. It will lead to the loss of previous design wins and frequent new product introductions and substantial development costs. This could result in loss of revenue and it could adversely affect our operating income.
·
Seasonality of demand for our customers’ products would force our customers to manage their inventories for seasonal variations and inventory management and excess build ups. Customers could dramatically increase their request for production quantities, which could cause lead time problems with getting the components or we may not be able to build enough products which could have loss of revenue for our customers. As a result we could lose these customers and it would adversely affect our projected sales. If the projected sales will not materialize, we will have loss of revenue and reduced margins. Any cancellation or delay in production would also have the same adverse effect on our sales projections and profitability.
·
The inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; could effect their long term business plans and sales. Our success depends upon the ability of our customers to successfully market their products and if they fail, it could result in cancellations or rescheduling orders lower sales volume and operating income.
·
Recessionary periods in our customers’ markets will affect both our customers and our overall business output. It would require dramatic changes to the overall business model, layoffs and major adjustments to the business overhead. If we fail to adjust to new recessionary environment, our business would be adversely affected and we may not be able to compete successfully against other companies in our industry and achieve profitability.
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THE MAJORITY OF OUR SALES COME FROM A SMALL NUMBER OF CUSTOMERS WITH WHOM WE DO NOT HAVE LONG TERM CONTRACTS; IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES COULD DECLINE SIGNIFICANTLY.
Sales to our five largest customers have represented a significant percentage of our net sales in recent periods. Our five largest customers accounted for approximately 64% of net sales during the twelve months ended December 31, 2007.
Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, would seriously harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues could be harmed.
The part number, quantity, price, workmanship standards, and scheduled delivery dates of the products to be Manufactured are determined by written purchase orders given by our customers and accepted or confirmed by us in writing or via email. We agree to deliver the products manufactured pursuant to each purchase order in accordance with the terms and conditions set forth in the purchase order. Probe manufactures hundreds of different types of assemblies on an ongoing basis and each product has a purchase order associated with it. Please see attcahed filing of several samples of these purchase orders.
We do not have any long term agreements with our customers, and our principal customers may not continue to purchase services from us. The duration of a purchase order is usually from 30 to 360 days. These purchase orders could be cancelled or rescheduled at any time. Significant reductions in sales to any of these customers would reduce our projected sales, adversely affect our profits, and seriously harm our business.
IF WE LOSE KEY SENIOR MANAGEMENT PERSONNEL OUR BUSINESS COULD BE NEGATIVELY AFFECTED. FURTHER, WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL SKILLED MANAGEMENT PERSONNEL AND IF WE ARE NOT ABLE TO DO SO, OUR BUSINESS AND OUR ABILITY TO CONTINUE TO GROW COULD BE HARMED.
Our success depends to a large extent upon the continued services of our executive officers. Generally our employees are not bound by employment or non-competition agreements, and we cannot assure that we will retain our executive officers and other key employees. We could be seriously harmed by the loss of any of our executive officers. In order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to grow could be harmed. Although a number of companies in our industry have implemented workforce reductions, there remains substantial competition for highly skilled employees.
WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS AND UNEXPECTED COSTS THAT WE MAY INCUR WITH RESPECT TO ENVIRONMENTAL MATTERS MAY RESULT IN ADDITIONAL LOSS CONTINGENCIES, THE QUANTIFICATION OF WHICH CANNOT BE DETERMINED AT THIS TIME.
We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances, we may be subject to additional remediation liability. Further, additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. Currently unexpected costs that we may incur with respect to environmental matters may result in additional loss contingencies, the quantification of which cannot be determined at this time.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. DESCRIPTION OF PROPERTY.
Facilities
From January 1st to March 10, 2006 the Company leased its office and warehouse facilities in Costa Mesa, California from stockholders under an operating lease that required minimum monthly payments of $19,790. The building was sold on March 10, 2006. From March 10, 2006 through September 10, 2006 a new rental agreement was signed with Mitchell-Fitch, LLC which was a month to month (for a maximum of six months) at a monthly rate of $30,580. This consisted of Base rent of $24,068 and additional operating expenses of $6,512. The rental agreement expired on September 10, 2006.
On September 11, 2006 we entered into a sublease agreement for 10,000 sq ft. manufacturing space which includes office space with Quantum Fuel System Technologies Worldwide, Inc. The initial lease is for two years with an option to renew for three years at $8,027 per month. The new facility is located at 25242 Arctic Ocean Drive, Lake Forest, CA 92630
ITEM 3. LEGAL PROCEDINGS.
The Company may be involved from time to time in various claims, lawsuits, and disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business.
As of December 31, 2007 we have the following legal proceedings and legal settlements:
1. Cadence has a judgment against us for $98,000 which was entered by the Superior Court Santa Clara County, California in September 2, 2003. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use its Alegro software program. Due to economic conditions after September 11th the market for the use of this product disappeared and Probe was not able to resell the services. Consequently, Probe was not able to generate any revenues from reselling of the software and was unable pay Cadence. On August 9th 2004 we entered into a payment agreement with the Cadence in which we pay them $2,500 a month until such time the debt is paid off. As of December 31, 2006 the balance due to Cadence under the agreement was $8,853. This was paid in full in April 2007.
We believed this settlement was paid in full; however on March 13, 2008 a Notice of Levy was filed against the Company for $26,840 claimed by Cadence Design Systems, Inc. The Company, however, believes the Notice of Levy was not filed in good faith since the Company and Cadence entered into a settlement agreement on November 29, 2004 and Probe has paid in full the balance due under the settlement agreement. Probe is currently in the process of seeking resolution to this matter, however, no favorable resolution can be guaranteed. Management believes that their claim is without merit.
2. We currently owe the Internal Revenue Service $56,152 for past tax liabilities. We negotiated a settlement with the IRS and have entered into a payment plan with them in which we pay the IRS $3,000 per month. All payments to date are current. The balance is included in other long-term debt, with $36,000 included in the current portion of long-term debt.
While we are currently able to service any and all payment obligation to the creditors, if we are unable in the future to service any payments, anyone of the creditors may instigate foreclosure proceedings against us. If we are unable to satisfy our obligations, we could be forced into bankruptcy.
We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders held on December 17, 2007, stockholders elected four directors to serve until the 2008 annual meeting and until their successors are duly elected and qualified. Stockholders of record held 10,398,944 shares of common stock. The votes for each director are as follows:
| For | Against | Withheld |
Reza Zarif | 10,398,944 | 0 | 0 |
Kambiz Mahdi | 8,218,447 | 0 | 2,180,497 |
Jeffrey Conrad | 10,398,944 | 0 | 0 |
Barrett Evans | 10,398,944 | 0 | 0 |
At the Annual Meeting of Stockholders held on December 17, 2007, stockholders elected to retain Jaspers and Hall as the independent registered public accounting firm, until the 2008 annual meeting. Stockholders of record held 10,398,944 shares of common stock.
| For | Against | Withheld |
Jaspers & Hall | 10,398,944 | 0 | 0 |
At the Annual Meeting of Stockholders held on December 17, 2007 the company did not receive a majority of votes to approve the Board of Directors compensation package.
| For | Against | Withheld |
Board of Directors Compensation Plan | 3,939,715 | 2,180,497 | 0 |
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Bid and ask quotations for our common shares are routinely submitted by registered broker dealers who are members of the National Association of Securities Dealers on the NASD Over-the-Counter Electronic Bulletin Board. These quotations reflect inner-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The high and low bid information for our shares for each quarter for the last two years, so far as information is reported, through the quarter ended December 31, 2007, as reported by the Bloomberg Financial Network, are as follows:
2006 FISCAL YEAR |
| High |
| Low |
First Quarter* |
| $0.00 |
| $0.00 |
Second Quarter |
| $0.99 |
| $0.10 |
Third Quarter |
| $0.90 |
| $0.65 |
Fourth Quarter |
| $0.65 |
| $0.40 |
2007 FISCAL YEAR |
| High |
| Low |
First Quarter* |
| $0.66 |
| $0.50 |
Second Quarter |
| $0.52 |
| $0.40 |
Third Quarter |
| $0.45 |
| $0.40 |
Fourth Quarter |
| $0.41 |
| $0.12 |
* Company was not trading in the public market during the first quarter of 2006.
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DIVIDEND POLICY
We have never declared a cash dividend on our common stock and our Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion
of our board of directors and will depend upon our financial condition, operating results, capital requirements, restrictions contained in our agreements and other factors which our Board of Directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table summarizes securities authorized for issuance under equity compensation plans:
| Equity Compensation Plan Information | ||
Plan Category | Number of shares of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
| (a) | (b) | (c ) |
Qualified Equity compensation plans approved by security holders | 205,505 | $0.52 | 40,315 |
Non-Qualified Equity compensation plans approved by security holders | 250,000 | $0.52 | 0 |
Total | 455,505 | $0.52 | 40,315 |
On November 5th, 2007 the company entered into a consulting services agreement with Global Capital Management (GCM), to provide investment banking services, for one year. As a result we issued 425,000 warrants to purchase 425,000 shares of common stock at a price of .40 per share. As a result we recognized share based compensation expense in the amount of $16,607 for the year ended December, 31, 2007
RECENT SALES OF UNREGISTERED SECURITIES
1)
In February 2006 the company issued 13,438 shares of common stock, in lieu of interest payments at $.80 per share for a total of $10,751.
2)
In May 2006 the company issued 16,336 shares of common stock, in lieu of interest payments at $.80 per share for a total of $13,094.
3)
On May 25, 2006, The Company issued 500,000 shares of common stock at .10 cents (Market value of shares on that date), for a total of $50,000, to compensate its directors for services through a stock grant pursuant to Form S-8 in the following amounts:
Name | Common stock Issued |
Kambiz Mahdi | 100,000 |
Reza Zarif | 100,000 |
Barrett Evans | 100,000 |
Jeffrey Conrad | 100,000 |
Dennis Benner | 100,000 |
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4)
In August 2006 the company issued 30,254 shares of common stock, in lieu of interest payments at $.80 per share for a total of $24,205.
5)
In August 2006 the company issued 11,678 shares of common stock, in lieu of interest payments at $.80 per share for a total of $9,343.
6)
In August 2006 the company issued 4,205 shares of common stock for officer compensation at $.80 per share for a total of $3,365.
7)
In August 2006 the company accrued 47,260 shares of common stock for officer compensation at $.10 per share (fair market value at time of accrual) for a total of $4,726. These shares had been classified as issued in quarterly filings.
8)
In September 2006 the company accrued 29,083 shares of common stock for officer compensation at $ .65 per share (fair market value at time of accrual) for a total of $18,904.
9)
In December 2006 the company accrued 34,370 shares of common stock for officer compensation at $.55 per share (fair market value at time of accrual) for a total of $18,904
10)
In July 2006 the company converted 12,500 shares from Preferred B to 14,040 shares of Preferred C.
11)
In August 2006 the holders of Preferred Series C elected to convert their 14,040 shares into 1,755,000 shares of common stock.
12)
On August 14, 2006 the holders, converted 440 shares of the Preferred Series A for 4,472,424 shares of the Company’s common stock.
13)
On March 30, 2007 the company issued 110,713 of its common stock, for officer compensation for 2006 which was previously accrued (see lines 7,8,9 above).
14)
On June 30, 2007, the company issued 78,363 shares of its common stock, for officer compensation for the 1st and 2nd quarter of 2007, for a total of $37,808.
15)
On October 15, 2007, the company issued 47,260 shares of its common stock, for officer compensation for the 3rd quarter of 2007, for a total of $18,904.
16)
On December 31, 2007, the company accrued 157,533 shares of its common stock, for officer compensation for the 4th quarter of 2007, for a total of $18,904. These shares were issue subsequently on February 11, 2008.
17)
On November 5th, 2007 the company entered into a consulting services agreement with Global Capital Management (GCM), to provide investment banking services, for one year. As a result we issued 425,000 warrants to purchase 425,000 shares of common stock at a price of .40 per share. As a result we recognized share based compensation expense in the amount of $16,607 for the year ended December, 31, 2007
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ITEM 6 - SELECTED FINANCIAL DATA
The following selected historical financial information of Probe Manufacturing, Inc. has been derived from the historical results are not necessarily indicative of the results to be expected in the future. The following table is qualified by reference to and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”
Statement of operations:
Probe Manufacturing, Inc. |
|
| ||
Statement of Operations |
|
| ||
for the years ended December 31 |
|
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| 2007 | 2006 | 2005 | 2004 |
|
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Sales | $ 6,882,302 | $ 9,310,464 | $ 6,351,362 | $ 6,204,957 |
Cost Of Goods Sold | 5,108,824 | 7,019,402 | 4,953,672 | 4,988,538 |
Gross Profit | 1,773,478 | 2,291,062 | 1,397,690 | 1,216,419 |
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General And Administrative | 1,336,290 | 1,875,295 | 1,822,024 | 1,965,125 |
Share Based Compensation | 97,537 | 95,898 | - | - |
Research and Development | 138,552 | - | - | - |
Net Profit From Operations | 201,099 | 415,767 | (424,334) | (748,706) |
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Other Income / (Expenses) | 325,815 | (37,408) | (53,768) | 275,228 |
Interest Expense | (152,018) | (227,465) | (156,003) | (445,112) |
Net Profit Before Income Taxes | 374,896 | 150,894 | (634,105) | (918,590) |
Income Tax Expense | - | - | - | - |
Net Profit | $ 374,896 | $ 150,894 | $ (634,105) | $ (918,590) |
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Per Share Information: |
|
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Basic weighted average number |
|
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|
of common shares outstanding | 10,334,576 | 6,222,272 | 3,193,981 | 4,152,149 |
|
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Net Profit per common share | $ 0.036 | $ 0.024 | $ (0.199) | $ (0.221) |
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Per Share Information: |
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Diluted, weighted average number |
|
|
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of common shares outstanding | 14,973,733 | 9,250,330 | 3,193,981 | 4,152,149 |
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Diluted, Net Profit per common share | $ 0.025 | $ 0.016 | $ (0.199) | $ (0.221) |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION.
You should read this section together with our consolidated financial statements and related notes thereto included elsewhere in this report.
We intend that our forward-looking statements be subject to the safe harbors created by the Exchange Act. The forward-looking statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect” and other similar words and statements and variations or negatives of these words. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect, including those discussed under the heading “Risk Factors” in this report filed with the Securities and Exchange Commission. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from our anticipated outcomes. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. The inclusion of forward-looking information should not be regarded as a representation by our company or any other person that the future events, plans or expectations contemplated by Probe Manufacturing, Inc. will be achieved. We disclaim any intention or obligation to update or revise any forward-looking statements contained in the documents incorporated by reference herein, whether as a result of new information, future events or otherwise.
Overview
Probe Manufacturing, Inc. was founded in 1995, and is one of Southern California's highest quality Electronics Manufacturing Services (EMS) companies. We provide a range of quality manufacturing and integrated supply chain services at affordable prices to companies who design and market electronic products, Original Equipment Manufacturers (OEM). Currently, our revenue is generated from sales of our services primarily to customers in the medical devise, aerospace, alternative fuel and industrial products manufacturers. The Company provides OEMs with lowest cost of ownership, flexibility, and quality that improves their competitive advantage. Probe's EMS offerings include new product introduction, collaborative design, materials management, product manufacturing, product warranty repair, and end-of-life support. Because our core business is a service company, we’re impacted by our customer’s ability to appropriately predict market demand for their products. While we work with our customers to understand their demand needs, we are removed from the actual end-market served by our customers. Consequently to determine future trends and estimates of activity can be very difficult. To provide for long term sustainability, the Company is in the process of leveraging its manufacturing and commercializing competencies combined with product knowledge to develop its own propriety products for alternative energy technologies to enable vehicles and generators to operate on clean alternative fuels. Probe Manufacturing's headquarters are located in Lake Forest, California.
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Plan of Operations:
Company had a net profit of $374,896, generated $668,293 in net cash from operations and improved their total stockholders deficit by $472,433 for the year ended December 31, 2007. However, they still had a working capital deficit of $(174,657) and a total shareholder deficit of $(273,030) as of December 31, 2007. Therefore the ability of the Company to operate as a going concern is still dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) to continue generating positive cash flow from operations.
Management is taking the following steps to address this situation: (a) to continue improving operational efficiencies by: (i) re-negotiating direct material cost with all of our suppliers, (ii) by setting up Managed inventory Solutions, such as bonded inventory levels and auto-release programs with our major suppliers, whereby they maintain stock at their facilities and deliver “Just-in-Time”. This will improve the utilization of our line of credits with suppliers and maintains inventory at its lowest value point; however from time to time inventory levels may increase temporarily, due to scheduling issues and acquisition of new customers and/or products; (iii) by improving all systems and processes across operations and streamlining production lines; (b) we have refinanced our lines of credit with agreement(s) that have more attractive terms, as well as increased our credit lines with suppliers; (c) To increase revenue; (i ) we are acquiring new customers that are a better fit for us, (ii) and we are growing the business with our existing customers with offering more value added; and finally (iii) we’re focusing on more stable customer base such as medical device, aerospace, and alternative fuel industries that have a better chance of maintaining their manufacturing in Southern California instead of moving it to low cost and offshore regions; (e) to ensure long term sustainability of the Company, we’re allocating more resources to develop propriety technology within the alternative energy industry while continuing to operate our EMS business.
The future success of the Company is likely dependent on its ability to attain additional capital to support growth and ultimately, upon its ability to continue profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will continue to generate sufficient positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its business plans. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Summary of Results:
For the year ended December 31, 2007 we generated a net profit of $374,896 compared to net profits of $150,894 for the same period in 2006, net losses of ($634,105) for the same period in 2005, and net losses of ($918,590) for the same period in 2004.
For the year ended December 31, 2007 our revenue decreased by 26% to $6,882,302 compared to $9,310,464 in the same period in 2006, and an increase of 8%, and 11% compared to the same period in 2005 and 2004 respectively.
For the year ended December 31, 2007 our cost of goods sold was reduced to 74% from 75%, 78% and 80% in the same period in 2006, 2005 and 2004 respectively.
In the twelve month period ended December 31, 2007 our gross margins increased to 26% from 25%, 22% and 20% in the same period in 2006, 2005 and 2004 respectively.
For the year ended December 31, 2007 our SG&A cost was 19%, compared to 20% in 2006 for the same period, and was reduced to from 29% and 32% for the same period in 2005 and 2004 respectively.
As of December 31, 2007 we had a working capital deficit of ($174,657) compared to a deficit of ($132,686), ($501,461) and ($564,310) for the same period in 2006, 2005 and 2004 respectively. As of December 31 2007, our total stockholders equity improved by $472,433, $776,619, and $739,498 from December 31, 2006, 2005 and 2004 respectively.
Although our revenue decrease by 26% in 2007, our gross margins and net profits remained consistent compared to 2006, and improved compared to, 2005 and 2004. Our improvements in performance for the year ended December 31, 2007 were primarily due to continuation of process improvement and system optimization.
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Key performance indicators:
| Twelve month period ended December 31 | |||
| 2007 | 2006 | 2005 | 2004 |
Inventory Turns | 3.51 | 4.34 | 3.32 | 6.33 |
Days Sales in Backlog | 239 | 159 | 80 | 125 |
Days Receivables Outstanding | 43 | 39 | 44 | 29 |
Days Payables Outstanding | 66 | 46 | 48 | 57 |
Inventory turns: are calculated as the ratio of cost of material compared to the average inventory for the quarter. Despite substantial increase in revenues, the twelve month period ended December 31, 2007 our inventory turns were 3.51 compared to 4.34 and 3.32 and 6.33 in 2006, 2005 and 2004 respectively.
Days Sales in Backlog is calculated based on our back log divided by average daily sales during the quarter. For the year ended December 31, 2006 Days Sales in Backlog increased to 239 days compared to 159, 80 and 125 days in the same period in 2006, 2005 and 2004 respectively.
Days Receivables Outstanding is calculated as the ratio of average accounts payable during the fiscal year compared to average daily sales for the same period, this has improved as a result in improved collection efforts.
Days Payable Outstanding, is calculated as the ratio of average accounts payable during the fiscal year compared to daily cost of sales for the same period.
Critical Accounting Policies
The Company follows United States generally accepted accounting principles. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to the Company’s reviewed financial statements.
Cash and Cash Equivalents
The Company maintains the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000 per commercial bank. For purposes of the statement of cash flows, the Company considers all cash and highly liquid investments with initial maturities of one year or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets, the collectibility of accounts receivable and valuation of inventory and reserves.
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Accounts Receivable
The Company grants credit to its customers within the United States of America, and does not require collateral. The Company’s ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by the Company.
Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts. As of December 31 2007, the Company had a reserve for potentially un-collectable accounts of $35,212.
Five (5) customers accounted for approximately 73% of accounts receivable at December 31 2007. The Company’s trade accounts primarily represent unsecured receivables. Historically, the Company’s bad debt write-offs related to these trade accounts have been insignificant.
Inventory
Inventories are valued at the lower of weighted average cost or market value. Our industry experiences changes in technology, changes in market value and availability of the raw materials, as well as changing customer demand. The Company makes provisions for estimated excess and obsolete inventories based on regular audits and cycle counts of our on-hand inventory levels and forecasted customer demands and at times additional provisions are made. Any inventory write offs are charged to the reserve account. As of December 31, 2007, the Company had a reserve for potentially obsolete inventory of $300,491.
Property and Equipment
Property and equipment are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The Company follows the practice of capitalizing property and equipment purchased over $5000. The cost of ordinary maintenance and repairs is charged to operations. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets are as follows:
Furniture and fixtures
3 to 7 years
Equipment
7 to 10 years
Leasehold improvements
2 years (life of the lease)
Long –Lived Assets
The Company’s management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long lived asset impairment if any, is measured based on fair value and is charged to operations in the period in which long lived assets impairment is determined by management. There can be no assurance however, that market conditions will not change or demand for the Company’s services will continue, which could result in impairment of long-lived assets in the future.
Revenue Recognition
Revenue from product and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances. Terms are generally FOB Origination with the right of inspection and acceptance. The company has not experienced a material amount of rejected or damaged product.
Fair Value of Financial Instruments
The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.
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Segment Information
The Corporation operates primarily in a single operating segment, providing printed circuit boards and electronic assemblies.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, which requires the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when differences are expected to reverse. The net profit for the year ended, December 31, 2007 of $396,816 is offset by previous losses. As of December 31, 2007 the Company had a net operating loss carry forward of $(483,693). The Company has not booked any deferred tax asset as a result.
Research and Development:
To ensure long term sustainability and growth of the company we have started research and development towards growth markets of the future by investing in alternative energy technologies. While we continue to operate our Electronics Manufacturing business, we are now directing more resources towards developing technologies in the alternative energy industry. Our alternative energy research and development is focused on the alternative fuel industry as defined by the Energy Policy Act of 1992 (EPAct) including ethanol, natural gas, propane, hydrogen, bio-diesel, electricity and methanol. These fuels are being used worldwide in a variety of vehicle and power generator applications. We believe three independent market factors; economics, energy security/independence and environmental concerns are driving the growth of alternative energy technologies today and will in the foreseeable future.
Research and Development Costs incurred in association with the alternative fuels technology development (which include salaries and equipment) are expensed as incurred. We expensed $138,552 in R&D during the twelve months ended December 30 2007. We acquired a 125 kW natural gas distributed power generator and are currently converting it to run on Hydrogen fuel. Once the conversion is completed, we are planning on validation testing for performance; and later for emission. Emission testing will require additional funding. This distributed power generator will have near zero carbon based emission and very low NOx emissions. When completed, thishydrogen-fueled internal combustion engine will address two major needs: power and near-zero emissions. These engines serve as replacement engines for the industrial user who has been dependent upon a manufacturer of traditional gasoline or diesel-fueled industrial engines.
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Stock Based Compensation
The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. This Statement requires an entity to measure the cost of employee services received in exchange for an award of an equity instruments, which includes grants of stock options and stock warrants, based on the fair value of the award, measured at the grant date, (with limited exceptions). Under this standard, the fair value of each award is estimated on the grant date, using an option-pricing model that meets certain requirements. We use the Black- Scholes option-pricing model to estimate the fair value of our equity awards, including stock options and warrant s. The Black-Scholes model meets the requirements of SFAS No. 123R; however the fair values generated may not reflect their actual fair values, as it does not consider certain factors, such as vesting requirements, employee attrition and transferability limitations. The Black-Scholes model valuation is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical Volatility; however, due to the thinly traded nature of our stock, we have chosen to use an average of the annual volatility of like companies in our industry. For the “risk-free interest rate”, we use the Constant Maturity Treasury rate on 90 day government securities. The term is equal to the time until the option expires. The dividend yield is not applicable, as the company has not paid any dividends, nor do we anticipate paying them in the foreseeable future. The fair value of our restricted stock is based on the market value of our free trading common stock, on the grant date calculated using a 20 trading day average. At the time of grant, the share based-compensation expense is recognized in our financial statements based on awards that are ultimately expected to vest using historical employee attrition rates and the expense is reduced accordingly. It is also adjusted to account for the restricted and thinly traded nature of the shares. The expense is reviewed and adjusted in subsequent periods if actual attrition differs from those estimates. We re-evaluate the assumptions used to value our share-based awards on a quarterly basis and if changes warrant different assumptions, the share-based compensation expense could vary significantly from the amount expensed in the past. We may be required to adjust any remaining share-based compensation expense, based on any additions, cancellations or adjustments to the share based awar ds. The expense is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. For the year ended December 31, 2007 we recognized $97,537 of share based compensation which included $21,920 of expense, due to the issuance of our options and warrants, we also had $24,770 in non-vested expense to be recognized over the next three years.
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Result of operations:
The following table summarizes certain items in the statements of operations as a percentage of net sales. The financial information and discussion below should be read in conjunction with the accompanying financial statements and notes thereto.
Probe Manufacturing, Inc. | ||||
Statement of Operations (Percentage Based) | ||||
for the years ended December 31 | ||||
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| 2007 | 2006 | 2005 | 2004 |
Sales | 100.0% | 100.0% | 100.0% | 100.0% |
Cost Of Goods Sold | 74.2% | 75.4% | 78.0% | 80.4% |
Gross Profit | 25.8% | 24.6% | 22.0% | 19.6% |
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General And Administrative | 19.4% | 20.1% | 28.7% | 31.7% |
Share Based Compensation | 1.4% | 1.0% | 0.0% | 0.0% |
Research and Development | 2.0% | 0.0% | 0.0% | 0.0% |
Net Profit From Operations | 4.3% | 4.5% | -6.7% | -12.1% |
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Other Income / (Expenses) | 4.7% | -0.4% | -0.8% | 4.4% |
Interest Expense | -2.2% | -2.4% | -2.5% | -7.2% |
Net Profit Before Income Taxes | 5.4% | 1.6% | -10.0% | -14.8% |
Income Tax Expense | 0.0% | 0.0% | 0.0% | 0.0% |
Net Profit | 5.4% | 1.6% | -10.0% | -14.8% |
Net Sales
For the year ended December 31, 2007 our revenue decreased by 26% to $6,882,302 compared to $9,310,464 in the same period in 2006. The decrease in revenue was the result of disengaging some of our old customers and acquiring new ones. We expect higher revenues as our new customer base becomes fully engaged and grows its business with us.
Major Customers
Our top 5 customers accounted for approximately 64% of our net sales for the year ended December 31 2007 compared to 86%, 85%, and 88% for the same period in 2006, 2005 and 2004 respectively. In addition, the top 3 customer concentration was reduced to 49% for the year ended December 31, 2007 compared to 69%, 78% and 79% in the same period in 2006, 2005 and 2004 respectively. Over the last couple of years, we have changed our customer base from primarily semiconductor, industrial, and communication industries to medical device manufacturing, aero-space/defense and clean energy industries. We believe that our ability to grow our core business depends on increasing sales to existing customers, and on successfully attracting new customers. Customer contracts can be canceled and volume levels can be changed or delayed based on our customer’s performance and the end users’ markets which we have no control over. The timely replacement of delayed, canceled o r reduced orders with new business cannot be ensured. In addition, we cannot assume that any of our current customers will continue to utilize our services. Consequently, our results of operations may be materially adversely affected.
Gross Profit
For the year ended December 31, 2007 our gross profits increased to 26% from 25%, 22% and 20% in the same period in 2006, 2005 and 2004 respectively. This improvement is primarily due to improved operational efficiencies. Our gross profits could vary from period to period and is affected by a number of factors, including product mix, production efficiencies, component availability and costs, pricing, competition, customer requirements and unanticipated restructuring or inventory charges.
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Selling, General and Administrative (SG&A) Expenses
For the year ended December 31, 2007 our SG&A expenses was 19% consistent when compared to 20% for the same period in 2006, and improved from 29% and 32% for the same period in 2005 and 2004 respectively. Albeit lower revenue in 2007, we were able to make necessary adjustments to contain SG&A cost consistent as a percentage of our revenue compared to 2006.
In May 2006, we issued 500,000 shares of common stock, valued at $.10 ($50,000) to our Board of Directors for services; in March 2007, we paid a one time charge of $37K in late fees and payments to terminate our lease from Costa Mesa facility. Both of these expenses were booked under SG&A expense.
Net Income/ (Loss) from operations
For the year ended December 31, 2007, our net income from operations was 3% compared to 4% in 2006, and net losses of (7%) and (12%) for the same period ending 2005 and 2004 respectively.
For the year ended December 31 2007, we reduced our interest expense to $152,018 from $227,465 for the same period in 2006.
Liquidity and Capital Resources: |
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PROBE MANUFACTURING, INC. |
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Condensed Statements of Cash Flows |
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for the years ended December 31, 2006 |
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| 2007 | 2006 | 2005 | 2004 |
Net Cash provided / (Used) In Operating Activities | $ 668,293 | $ 608,028 | $ (969,076) | $ (1,613,540) |
Cash Flows Used In Investing Activities | (131,790) | (214,025) | (7,082) | (13,945) |
Cash Flows Provided / (used) By Financing Activities | (549,593) | (351,423) | 935,756 | 1,667,887 |
Net (Decrease) Increase in Cash and Cash Equivalents | $ 29,490 | $ 42,580 | $ (40,402) | $ 40,402 |
We generated net cash from our operating activities of $668,293 for the year ended December 31 2007 compared to $608,028 for the year ended December 31, 2006; and compared to cash used in operating activities of ($969,076) and ($1,613,540) for the years ended December 31, 2005 and 2004 respectively.
We reduced debt by $874,077 for the year ended December 31 2007 compared to $351,423 for the year ended December 31 2006; and compared to borrowing of $935,756, and 1,667,887 for the years ended December 31 2005 and 2004 respectively. Of our debt reduction in 2007 $324,484 resulted from gains in renegotiating our lease obligation with CIT.
The following is a summary of certain obligations and commitments as of December 31, 2007 for continuing operations:
Capital Requirements for long-term Obligations | 2008 | 2009 | 2010 | 2011 |
Notes Payable | $ - | $ - | - | - |
Other Long term debt | (969,076) |
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Capital Lease Settlement Obligations | 90,000 | 90,000 | 90,000 | 90,000 |
Total | $ (879,076) | $ 90,000 | $ 90,000 | $ 90,000 |
We reduced our interest rate from 20% to 12% in August 2006 by refinancing our lines of credit into term notes.
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On July 9, 1997 and December 21, 1997, the Company entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004 the Company had outstanding balances of $457,604 and $556,293 on the two leases and was unable to make the monthly lease payments. As a result, the Company entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:
The CIT Group would release the Company and its guarantors if one of the following payments were made, less the total of all monthly payments made to that date:
$375,000 if paid by October 25 , 2004
$425,000 if paid by December 25, 2004
$500,000 if paid by June 25, 2005
$550,000 if paid by December 25, 2005
$600,000 if paid by June 25, 2006
$650,000 if paid by December 25, 2006
$700,000 if paid by June 25, 2007
On June 1, 2007 an amended forbearance agreement was entered into:
1)
In consideration of CIT entering into this Addendum, Probe will pay CIT the sum of $7,500 on or before June 25, 2007, which was paid.
2)
Recital B is amended to state that as of June 25, 2007 Probe’s payment obligation to CIT totals $457,500.
3)
Section 2.3 of the Forbearance Agreement is amended to state that probe will pay CIT the amount of $457,500 in sixty-one (61) monthly installments of $7,500 each, commencing on July 25, 2007 and ending on July 25, 2012. If at any time Probe elects to pay in full the remaining balance, upon 30 day written notice, CIT will provide a payoff figure for the remaining balance using a present value rate of 7.0%.
4)
The Company imputed interest at 7% over the term of the payments, which resulted in a present value of $384,025 at June 30, 2007.
5)
This resulted in a gain of $324,330 which had an effect on Net profit per common share of $.031 and Diluted Net Profit per common share of $.022.
6)
As of December 31, 2007 the outstanding balance was $352,002.
We have a balloon payment of $707,716 in notes payables due on April 15 2008. We are currently exploring venues to convert to equity; or extend the notes payable term by 18 to 36 month.
Off-balance Sheet Arrangement
We currently have no off-balance sheet arrangements.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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ITEM 8. FINANCIAL STATEMENTS.
PROBE MANUFACTURING, INC.
10-QSB
TABLE OF CONTENTS
Item 8. | FINANCIAL INFORMATION | Page |
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JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
9175 E Kenyon Avenue
Denver, CO 80237
303-796-0099
Board of Directors
Probe Manufacturing, Inc.
Lake Forest,California
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheets of Probe Manufacturing, Inc. as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Probe Manufacturing, Inc., as of December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company’s accumulated deficit from operations and its difficulties in maintaining sufficient working capital raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Jaspers + Hall, PC
Denver, Colorado
March 25, 2008
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PROBE MANUFACTURING, INC. | |||
Balance Sheet | |||
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| December 31, 2007 | December 31, 2006 |
Assets |
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Current Assets: |
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| Cash | $ 29,490 | $ 42,580 |
| Accounts receivable - trade - net | 702,052 | 902,767 |
| Inventory | 953,803 | 1,022,931 |
| Total Current Assets | 1,685,345 | 1,968,278 |
Property And Equipment - Net | 211,782 | 317,843 | |
Total Assets | $ 1,897,127 | $ 2,286,121 | |
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Liabilities And Stockholders' Deficit |
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Current Liabilities: |
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| Accounts payable - trade | $ 600,405 | $ 629,598 |
| Customer Deposits | 34,829 |
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| Accrued Expenses | 280,501 | 273,487 |
| Notes payable - Related Party | - | 23,496 |
| Current Portion of Long Term Debt | 944,267 | 1,174,383 |
| Total Current Liabilities | 1,860,002 | 2,100,964 |
Long-Term Debt: |
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| Other long-term debt | 420,261 | 561,338 |
| Notes payable - Related Party | 482,159 | 785,257 |
| Capital lease settlement obligations | 352,002 | 758,408 |
| Less Current portion of Long Term Debt | (944,267) | (1,174,383) |
| Net Long-Term Debt | 310,155 | 930,620 |
Total Liabilities | 2,170,157 | 3,031,584 | |
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Stockholders' Deficit: |
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| Common Stock to issue, 157,533 shares and 110, 713 respectively | 18,904 | 42,533 |
| Common stock, $.001 par value; 200,000,000 shares authorized; 10,398,944 and 10,162,608 shares issued and outstanding respectively | 10,399 | 10,162 |
| Additional paid-in capital | 181,360 | 60,431 |
| Accumulated deficit | (483,693) | (858,589) |
| Total Stockholders' Deficit | (273,030) | (745,463) |
Total Liabilities And Stockholders' Deficit | $ 1,897,127 | $ 2,286,121 | |
The accompanying footnotes are an integral part of these financial statements
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Probe Manufacturing, Inc. | ||
Statement of Operations | ||
for the years ended December 31 | ||
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| 2007 | 2006 |
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Sales | $ 6,882,302 | $ 9,310,464 |
Cost Of Goods Sold | 5,108,824 | 7,019,402 |
Gross Profit | 1,773,478 | 2,291,062 |
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General And Administrative | 1,336,290 | 1,875,295 |
Share Based Compensation | 97,537 | 95,898 |
Research and Development | 138,552 | - |
Net Profit From Operations | 201,099 | 415,767 |
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Other Income / (Expenses) | 325,815 | (37,408) |
Interest Expense | (152,018) | (227,465) |
Net Profit Before Income Taxes | 374,896 | 150,894 |
Income Tax Expense | - | - |
Net Profit | $ 374,896 | $ 150,894 |
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Per Share Information: |
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Basic weighted average number |
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of common shares outstanding | 10,334,576 | 6,222,272 |
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Net Profit per common share | $ 0.036 | $ 0.024 |
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Per Share Information: |
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Diluted, weighted average number |
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of common shares outstanding | 14,907,363 | 9,250,330 |
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Diluted, Net Profit per common share | $ 0.025 | $ 0.016 |
The accompanying footnotes are an integral part of these financial statements
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PROBE MANUFACTURING, INC. | ||||
Statements of Cash Flows | ||||
for the year ended December 31, 2007 | ||||
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| Unaudited | Unaudited |
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| 2007 | 2006 |
Cash Flows from Operating Activities: |
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| Net Income | $ 374,896 | $ 150,894 | |
| Adjustments to reconcile net loss to net cash |
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| Depreciation and amortization | 237,851 | 234,071 |
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| Gain on debt settlement | (324,484) | - |
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| Stock issued for Interest | - | 57,394 |
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| Share Based Compensation | 97,536 | 95,898 |
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| Changes in assets and liabilities: |
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| (Increase) decrease in accounts receivable | 200,715 | (210,555) |
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| (Increase) decrease in inventory | 69,128 | 273,455 |
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| (Increase) decrease in other assets | - | 77,983 |
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| (Decrease) increase in accounts payable | (29,193) | (62,096) |
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| (Decrease) increase in accounts payable | 34,829 | - |
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| Other (Decrease) increase in accrued expenses | 7,015 | (9,016) |
Net Cash provided from Operating Activities | 668,293 | 608,028 | ||
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Cash Flows from Investing Activities |
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| Purchase of property and equipment | (131,790) | (214,025) | |
Cash Flows Used In Investing Activities | (131,790) | (214,025) | ||
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Cash Flows from Financing Activities |
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| Bank Overdraft / (Repayment) | - | (154,596) | |
| Borrowings / (Payments) under line of credit, net | - | (732,838) | |
| Payments on capital lease settlement obligations | (81,922) | (112,507) | |
| Proceeds / (Payments) on notes payable | (467,671) | 648,518 | |
Cash Flows Provided / (used) By Financing Activities | (549,593) | (351,423) | ||
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Net (Decrease) Increase in Cash and Cash Equivalents | (13,090) | 42,580 | ||
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Cash and Cash Equivalents at Beginning of Period | 42,580 | - | ||
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Cash and Cash Equivalents at End of Period | $ 29,490 | $ 42,580 | ||
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Supplemental Information: |
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| Interest Paid | $ 152,833 | $ 143,894 | |
| Income Taxes Paid | $ - | $ - | |
| Current Lines of credit converted to Long tern Notes Payable |
| $ 705,000 | |
The accompanying footnotes are an integral part of these financial statements
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Probe Manufacturing, Inc. | |||||||||||||
Statement of Stockholders Equity | |||||||||||||
for the Year ended December 31, 2007 | |||||||||||||
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| Preferred Stock A $1,000 Stated Value | Preferred Stock B $100 Stated Value | Preferred Stock C No Par | Common Stock .001 Par | Shares to be Issued | Additional Paid in Capital | Accumulated Deficit | Stockholders' Deficit Totals | |||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||
Balance, December 31, 2004 | 440 | $ 440,000 | 12,500 | $1,250,000 | - | $ - | 2,613,125 | $ 2,613 |
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| $(2,329,673) | $ (375,378) | $(1,012,438) |
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Stock issued for cash |
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| 715,000 | 715 |
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| 571,285 |
| 572,000 |
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Stock issued in lieu of Interest payments |
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| 31,118 | 31 |
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| 24,863 |
| 24,894 |
Net Loss |
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| (634,105) | (634,105) |
Balance 12/31/05 | 440 | 440,000 | 12,500 | 1,250,000 | - | - | 3,359,243 | 3,359 |
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| (1,733,525) | (1,009,483) | (1,049,649) |
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Stock Issued in lieu of Interest Payments |
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| 71,736 | 72 | - | - | 57,322 | - | 57,394 |
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Stock Issued for Compensation |
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| 4,205 | 4 | 110,713 | 42,533 | 3,361 | - | 45,898 |
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Stock issued for Services |
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| 500,000 | 500 |
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Stock Converted from Prefered B to Preferred C |
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| (12,500) | (1,250,000) | 14,040 | 1,404,000 |
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| (154,000) | - | - |
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| ; - |
Series C Conversion @ .80 |
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| (14,040) | (1,404,000) | 1,755,000 | 1,755 |
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| 1,402,245 |
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| ; - |
Series A Conversion shares @ 44% | -440 | (440,000) |
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| 4,472,424 | 4,472 |
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| 435,528 |
| - |
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Net Income |
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2006 |
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| 150,894 | 150,894 |
Balance 12/31/06 | - | - | - | - | - | - | 10,162,608 | 10,162 | 110,713 | 42,533 | 60,431 | (858,589) | (745,463) |
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Stock issued Compensation |
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| 110,713 | 111 | -110713 | -42533 | 42422 |
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Stock to be issued for Compensation |
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| 36354 | 18904 |
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| 18,904 |
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Stock to be issued for Compensation |
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| - | 0 | 42009 | 18904 |
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| 18,904 |
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Stock to be issued for Compensation .40 |
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| 47,260 | 18,904 |
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| 18,904 |
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| ; - |
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Stock to be issued for Compensation .40 |
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| - |
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| 78,363 | 78 | (78,363) | (37,808) | 37,730 |
| 0 |
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| 47,260 | 47 | (47,260) | (18,904) | 18,857 |
| 0 |
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| 157,533 | 18,904 |
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| 18,904 |
Share Based Compensation |
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| 21,920 |
| 21,920 |
Net Profit 2007 |
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| 374,896 | 374,896 |
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| ; - |
Balance 12/31/2007 | - | $ - | - | $ - | - | $ - | 10,398,944 | $ 10,399 | 157,533 | $ 18,904 | $ 181,360 | $ (483,693) | $ (273,030) |
The accompanying footnotes are an integral part of these financial statements
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PROBE MANUFACTURING, INC.
Notes to Financial Statements
Notes 1- GENERAL
The Company
Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995. On April 21, 2005, the Company was re-domiciled from California to Nevada, and changed its name to Probe Manufacturing, Inc. Probe Manufacturing, Inc. (the “Company” or “Probe”) is a leading provider of advanced electronics manufacturing services, or EMS, to original equipment manufacturers, or OEMs, primarily in the medical device, aerospace, industrial, instrumentation and alternative fuel, segments. This includes end-to-end manufacturing solutions ranging from engineering to manufacturing of printed circuit card assembly, cable assembly, enclosures, complete system integration and testing, as well as global order fulfillment.
Going Concern
The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company had a net profit of $374,896, generated $668,293 in net cash from operations and improved their total stockholders deficit by $(472,433) for the year ended, December 31, 2007. However, they still had a working capital deficit of $174,657 and a shareholder deficit of $(273,030) as of December 31, 2007. Therefore the ability of the Company to operate as a going concern is still dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) to continue generating positive cash flow from operations.
Management is taking the following steps to address this situation: (a) to continue improving operational efficiencies by: (i) re-negotiating direct material cost with all of our suppliers, (ii) by setting up Managed inventory Solutions, such as bonded inventory levels and auto-release programs with our major suppliers, whereby they maintain stock at their facilities and deliver “Just-in-Time”. This will improve the utilization of our line of credits with suppliers and maintains inventory at its lowest value point; however from time to time inventory levels may increase temporarily, due to scheduling issues and acquisition of new customers and/or products; (iii) by improving all systems and processes across operations and streamlining production lines; (b) we have refinanced our lines of credit with agreement(s) that have more attractive terms, as well as increased our credit lines with suppliers; (c) To increase revenue; (i ) we are acquiring new customers that are a better fit for us, (ii) and we are growing the business with our existing customers with offering more value added; and finally (iii) we’re focusing on more stable customer base such as medical device, aerospace, and alternative fuel industries that have a better chance of maintaining their manufacturing in Southern California instead of moving it to low cost and offshore regions; (e) to ensure long term sustainability of the Company, we’re allocating more resources to develop propriety technology within the alternative energy industry while continuing to operate our EMS business.
The future success of the Company is likely dependent on its ability to attain additional capital to support growth and ultimately, upon its ability to continue profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will continue to generate sufficient positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, the Company will have sufficient funds to execute its business plans. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company follows United States Generally Accepted Accounting Principles. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to the Company’s reviewed financial statements.
Cash and Cash Equivalents
The Company maintains the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000 per commercial bank. For purposes of the statement of cash flows the Company considers all cash and highly liquid investments with initial maturities of one year or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets, the collection of accounts receivable and valuation of inventory and reserves.
Accounts Receivable
The Company grants credit to its customers located within the United States of America; and does not require collateral. The Company’s ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by the Company.
Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts. Although the Company expects to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2007, the Company had a reserve for potentially un-collectable accounts of $35,212.
Five (5) customers accounted for approximately 72% of accounts receivable at December 31 2007. The Company’s trade accounts primarily represent unsecured receivables. Historically, the Company’s bad debt write-offs related to these trade accounts have been insignificant.
Inventory
Inventories are valued at the lower of weighted average cost or market value. Our industry experiences changes in technology, changes in market value and availability of the raw materials, as well as changing customer demand. The Company makes provisions for estimated excess and obsolete inventories based on regular audits and cycle counts of our on-hand inventory levels and forecasted customer demands and at times additional provisions are made. Any inventory write offs are charged to the reserve account. As of December 31, 2007 the Company had a reserve for potentially obsolete inventory of $300,491.
Property and Equipment
Property and equipment are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. The Company follows the practice of capitalizing property and equipment purchased over $5,000. The cost of ordinary maintenance and repairs is charged to operations. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets:
Furniture and fixtures
3 to 7 years
Equipment
7 to 10 years
Leasehold improvements
2 years (life of the lease)
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Long –Lived Assets
The Company’s management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long lived asset impairment if any, is measured based on fair value and is charged to operations in the period in which long lived assets impairment is determined by management. There can be no assurance however, that market conditions will not change or demand for the Company’s services will continue, which could result in impairment of long-lived assets in the future.
Revenue Recognition
Revenue from product and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances. Terms are generally FOB Origination with the right of inspection and acceptance. The Company has not experienced a material amount of rejected or damaged product.
Fair Value of Financial Instruments
The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.
Other Comprehensive Income
The Company has no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.
Net Profit / (Loss) per Common Share
Basic profit / (loss) per share is computed on the basis of the weighted average number of common shares outstanding. At December 31, 2007 the Company had outstanding common shares of 10,398,944, and 157,533 shares to be issued for officer compensation, for a total of 10,556,477 used in the calculation of basic earnings per share. Basic Weighted average common shares and equivalents at December 31, 2007 were 10,334,576. As of December 31, 2007 the Company had outstanding warrants to purchase 4,601,250 additional common shares and options to purchase 417,664 additional common shares, which may dilute future earnings per share. Fully diluted weighted average common shares and equivalents at December 31, 2007 were 14,907,733.
Research and Development:
To ensure long term sustainability and growth of the company we have started research and development towards growth markets of the future by investing in alternative energy technologies. While we continue to operate our Electronics Manufacturing business, we are now directing more resources towards developing technologies in the alternative energy industry. Our alternative energy research and development is focused on the alternative fuel industry as defined by the Energy Policy Act of 1992 (EPAct) including ethanol, natural gas, propane, hydrogen, bio-diesel, electricity and methanol. These fuels are being used worldwide in a variety of vehicle and power generator applications. We believe three independent market factors;economics, energy security/independence and environmental concerns are driving the growth of alternative energy technologies today and will in the foreseeable future.
Research and Development Costs incurred in association with the alternative fuels technology development (which include salaries and equipment) are expensed as incurred. We expensed $138,552 in R&D during the twelve months ended December 30 2007. We acquired a 125 kW natural gas distributed power generator and are currently converting it to run on Hydrogen fuel. Once the conversion is completed, we are planning on validation testing for performance; and later for emission. Emission testing will require additional funding. This distributed power generator will have near zero carbon based emission and very low NOx emissions. When completed, thishydrogen-fueled internal combustion engine will address two major needs: power and near-zero emissions. These engines serve as replacement engines for the industrial user who has been dependent upon a manufacturer of traditional gasoline or diesel-fueled industrial engines. O ur second research and development project involves an Engine Control Unit (ECU) to help convert gasoline cars to run on natural gas. The Solaris project is in prototype stages, and will be 100% Probe’s proprietary technology. Once completed this functionally advanced Electronics Controller Units (ECU) can operate under the hood, and will be appropriately priced for different vehicle type and markets.
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Segment Information
Except as identified above in the research and development section, we operate primarily in a single operating segment providing printed circuit boards and electronic assemblies.
Stock Based Compensation
The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. This Statement requires an entity to measure the cost of employee services received in exchange for an award of an equity instruments, which includes grants of stock options and stock warrants, based on the fair value of the award, measured at the grant date, (with limited exceptions). Under this standard, the fair value of each award is estimated on the grant date, using an option-pricing model that meets certain requirements. We use the Black- Scholes option-pricing model to estimate the fair value of our equity awards, including stock options and warrant s. The Black-Scholes model meets the requirements of SFAS No. 123R; however the fair values generated may not reflect their actual fair values, as it does not consider certain factors, such as vesting requirements, employee attrition and transferability limitations. The Black-Scholes model valuation is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical Volatility; however, due to the thinly traded nature of our stock, we have chosen to use an average of the annual volatility of like companies in our industry. For the “risk-free interest rate”, we use the Constant Maturity Treasury rate on 90 day government securities. The term is equal to the time until the option expires. The dividend yield is not applicable, as the company has not paid any dividends, nor do we anticipate paying them in the foreseeable future. The fair value of our restricted stock is based on the market value of our free trading common stock, on the grant date calculated using a 20 trading day average. At the time of grant, the share based-compensation expense is recognized in our financial statements based on awards that are ultimately expected to vest using historical employee attrition rates and the expense is reduced accordingly. It is also adjusted to account for the restricted and thinly traded nature of the shares. The expense is reviewed and adjusted in subsequent periods if actual attrition differs from those estimates. We re-evaluate the assumptions used to value our share-based awards on a quarterly basis and if changes warrant different assumptions, the share-based compensation expense could vary significantly from the amount expensed in the past. We may be required to adjust any remaining share-based compensation expense, based on any additions, cancellations or adjustments to the share based awar ds. The expense is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. For the year ended December 31, 2007 we recognized 97,537 of share based compensation which included 21,920 of expense, due to the issuance of our options and warrants, we also had $24,770 in non-vested expense to be recognized over the next three years.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, which requires the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when differences are expected to reverse. The net profit for the year ended, December 31, 2007 of $396,816 is offset by previous losses. As of December 31, 2007 the Company had a net operating loss carry forward of $(483,693). The Company has not booked any deferred tax asset as a result.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (“FASB’) issued Interpretation (“FIN”) No. 48,“Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We believe that FIN No. 48 should not have a material impact on our financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157,“Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This statement
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applies under other accounting pronouncements that require or permit fair value measurement where the FASB has previously determined that under those pronouncements fair value is the appropriate measurement. This statement does not require any new fair value measurements but may require companies to change current practice. This statement is effective for those fiscal years beginning after November 15, 2007 and to the interim periods within those fiscal years. We believe that SFAS No. 157 should not have a material impact on our financial position or results of operations
In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, recognize changes in that funded status in the year in which the changes occur through comprehensive income and measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year. The provisions of SFAS No. 158 are effective for fiscal years ending after December 15, 2006. We believe that SFAS No. 158 should not have a material impact on our financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statements and related financial statement disclosure using both the rollover approach and the iron curtain approach. The requirements of SAB 108 are effective for annual financial statements covering the first fiscal year ending after November 15, 2006. SFAS No. 158 has not had a material impact on our financial position or results of operations.
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NOTE 3 – INVENTORY
Inventories at December 31, 2007 by major classification were comprised of the following:
| 2007 | 2006 |
Raw Material | $ 994,922 | $ 972,511 |
Work in Process | 253,969 | 379,497 |
Finished Goods | 5,403 | 6,681 |
Total | 1,254,294 | 1,358,689 |
Less Reserve for excess or obsolete inventory | (300,491) | (335,759) |
Total Inventory | $ 953,803 | $ 1,022,930 |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment were comprised of the following at December 31, 2007:
| 2007 | 2006 |
Furniture and fixtures | $ 57,044 | $ 547,604 |
Equipment | 2,397,325 | 2,671,444 |
Leasehold improvements | 210,403 | 197,144 |
Total | 2,664,773 | 3,416,193 |
Less accumulated depreciation and amortization | (2,452,991) | (3,498,450) |
Net Fixed Assets | $ 211,782 | $ 317,844 |
NOTE 5 – ACCRUED EXPENSES
As of December 31, 2007, the Company had the following accrued expenses:
| 2007 | 2006 |
Sales Tax Payable | $ 151 | 298 |
Property Tax accrual | 6,693 | 13,133 |
Accrued Wages | 77,326 | 53,850 |
Accrued Interest | 5,342 | 6,157 |
Accrued Professional Fees | 50,500 | 53,000 |
Accrued Utilities and other rents | 59,317 | 50,108 |
Accrued Vacation | 81,173 | 96,941 |
Total Accrued Expenses | $ 280,502 | $ 273,487 |
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NOTE 7 - CAPITAL LEASE SETTLEMENT OBLIGATIONS
On July 9, 1997 and December 21, 1997, the Company entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004 the Company had outstanding balances of $457,604 and $556,293 on the two leases and was unable to make the monthly lease payments. As a result, the Company entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:
The CIT Group would release the Company and its guarantors if one of the following payments were made, less the total of all monthly payments made to that date:
$375,000 if paid by October 25, 2004
$425,000 if paid by December 25, 2004
$500,000 if paid by June 25, 2005
$550,000 if paid by December 25, 2005
$600,000 if paid by June 25, 2006
$650,000 if paid by December 25, 2006
$700,000 if paid by June 25, 2007
On June 1, 2007 an amended forbearance agreement was entered into:
1)
In consideration of CIT entering into this Addendum, Probe will pay CIT the sum of $7,500 on or before June 25, 2007, which was paid.
2)
Recital B is amended to state that as of June 25, 2007 Probe’s payment obligation to CIT totals $457,500.
3)
Section 2.3 of the Forbearance Agreement is amended to state that probe will pay CIT the amount of $457,500 in sixty-one (61) monthly installments of $7,500 each, commencing on July 25, 2007 and ending on July 25, 2012. If at any time Probe elects to pay in full the remaining balance, upon 30 day written notice, CIT will provide a payoff figure for the remaining balance using a present value rate of 7.0%.
4)
The Company imputed interest at 7% over the term of the payments, which resulted in a present value of $384,025 at June 30, 2007.
5)
This resulted in a gain of $324,330 which had an effect on Net profit per common share of $.031 and Diluted Net Profit per common share of $.022.
6)
As of December 31, 2007 the outstanding balance was $352,002.
NOTE 8 – NOTES PAYABLE
Note Payable – secured by deed of trust, 12% interest, originally due on September 2006 to Ashford Capital Transition Fund I, LP, and was subsequently extended to March 2006. The balance of $456,000 was paid in full on March 10, 2006.
Note Payable - dated March 10, 2006 – special use, line of credit in the amount of $90,000, unsecured, 12% interest paid in cash due May 10, 2007, payable to Ashford Capital, LLC. This note was converted to a term note payable, with an effective date of June 30, 2006, unsecured, 12% interest rate, with a 36 month amortization, payments of $1,997 and a balloon payment of $33,068 on April 15, 2008. As of December 31, 2007 the outstanding balance was $37,650.
Note Payable – This Note was an operating line of credit, secured by the assets of the Company, borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to Ed Lassiter. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $ $4,650 and a balloon payment of $77,014 on April 15, 2008. As of December 31, 2007 the outstanding balance was $87,685.
Note Payable -- This Note was an operating line of credit, secured by the assets of the Company, borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to William Duncan. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. As of December 31, 2007 the outstanding balance was $31,316.
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Note Payable – This Note was an operating line of credit, secured by the assets of the Company, borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to Benner Exemption Trust. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, payments of $4,650 and a balloon payment of $77,014 on April 15, 2008. As of December 31, 2007 the outstanding balance was $87,685.
Note Payable – This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to Ashford Capital, LLC . This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $3,321 and a balloon payment of $55,010 on April 15, 2008. As of December 31, 2007 the outstanding balance was $62,632.
Note Payable – This Note was an operating line of credit, secured by the assets of the Company, Borrowings under this line of credit were at an interest rate of 15% per annum, payable to Hoa Mai. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. As of December 31, 2007 the outstanding balance was $31,316.
Note Payable – Term note payable, with an effective date of April 23, 2006, secured by assets of the Company, Payable to Hoa Mai at 15% interest rate, with a 12 month amortization, monthly payments of $ 2,166. As of December 31, 2007 the outstanding balance was $8,400.65.
Related Party – Notes payable
Note Payable - dated March 10, 2006 – related party, un-secured, 12% interest and ten monthly payments in the amount of $3,650 plus accrued interest. The 1st payment was due on April 10, 2006. The note is payable to Kambiz Mahdi. As of December 31, 2007 the balance was $ 0.
Note Payable - dated March 10, 2006 – related party, un-secured, 12% interest, and ten monthly payments in the amount of $3,650 plus accrued interest. The 1st payment was due on April 10, 2006. The note is payable to Reza Zarif. As of December 31, 2007 the balance was $ 0.
Note Payable - dated March 10, 2006 – related party, un-secured, 12% interest and ten monthly payments in the amount of $3,650 plus accrued interest. The 1st payment was due on April 10, 2006. The note is payable to Kambiz Mahdi. As of December 31, 2007 the balance was $ 0.
Note Payable - dated March 10, 2006 – related party, un-secured, 12% interest, and ten monthly payments in the amount of $3,650 plus accrued interest. The 1st payment was due on April 10, 2006. The note is payable to Reza Zarif. As of December 31, 2007 the balance was $ 0.
Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Kambiz Mahdi. As of December 31, 2007 the outstanding balance was $18,887.
Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. As of December 31, 2007, the outstanding balance was $18,887.
M) Note Payable – related party, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock) due on May 10, 2007, Payable to Kambiz Mahdi. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, At 12% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. As of December 31, 2007 the outstanding balance was $148,429.
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Note Payable – related party, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. As of December 31, 2007 the outstanding balance was $148,429.
Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $41,257 on April 15, 2008. As of December 31, 2007 the outstanding balance was $46,974.
Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. As of December 31, 2007 the outstanding balance was $93,948.
Note Payable – related party. This is a term note payable, secured by the assets of the Company. Borrowings under this term note were at an interest rate of 15%, with 12 months amortization, monthly payments of $2,256 payable to Rufina Paniego. As of December 31, 2007 the outstanding balance was $6,603.
Other Long-Term Debt
Other long-term debt consists of, a settlements reached with I-Source, a supplier, with monthly payments of $2,500. As of December 31, 2007 their balance was $11,925. Payments continue through May, 2008.
NOTE 9 – COMMITMENTS AND CONTIGENCIES
Operating Rental Leases
On September 11, 2006 we entered into a sublease agreement for 10,000 sq ft. of manufacturing space which includes office space with Quantum Fuel System Technologies Worldwide, Inc. The initial lease which ends on May 31, 2008 has an option to renew for three years, contingent upon Quantum, renewing their master lease. The new facility is located at 25242 Arctic Ocean Drive, Lake Forest, CA 92630. Quantum has extended their master lease agreement and we are currently negotiating the terms of our sub-lease agreement.
Litigation
The Company may be involved from time to time in various claims, lawsuits, and disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business.
As of December 31, 2007 we have the following legal proceedings and legal settlements:
1. Cadence has a judgment against us for $98,000 which was entered by the Superior Court Santa Clara County, California in September 2, 2003. The judgment was due to lack of payment by Probe to Cadence after Probe purchased the license to use its Alegro software program. Due to economic conditions after September 11th the market for the use of this product disappeared and Probe was not able to resell the services. Consequently, Probe was not able to generate any revenues from reselling of the software and was unable pay Cadence. On August 9th 2004 we entered into a payment agreement with the Cadence in which we pay them $2,500 a month until such time the debt is paid off. As of December 31, 2006 the balance due to Cadence under the agreement was $8,853. This was paid in full in April 2007.
We believed this settlement was paid in full; however on March 13, 2008 a Notice of Levy was filed against the Company for $26,840 claimed by Cadence Design Systems, Inc. The Company, however, believes the Notice of Levy was not filed in good faith since the Company and Cadence entered into a settlement agreement on November 29, 2004 and Probe has paid in full the balance due under the settlement agreement. Probe is currently in the process of seeking resolution to this matter, however, no favorable resolution can be guaranteed. Management believes that their claim is without merit.
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2. We currently owe the Internal Revenue Service $56,152 for past tax liabilities. We negotiated a settlement with the IRS and have entered into a payment plan with them in which we pay the IRS $3,000 per month. All payments to date are current. The balance is included in other long-term debt.
We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.
While we are currently able to service any and all payment obligation to the creditors, if we are unable in the future to service any payments, anyone of the creditors may instigate foreclosure proceedings against us. If we are unable to satisfy our obligations, we could be forced into bankruptcy.
We believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.
NOTE 10 – CAPITAL STOCK TRANSACTIONS
On April 21, 2005, the Company’s Board of Directors and shareholders approved the following capital stock transactions:
The Company re-domiciled in the state of Nevada, whereby increasing the number of authorized common shares to 200,000,000 and designating a par value of $.001 per share.
On May 25, 2006, the Company’s Board of Directors and shareholders approved the following capital stock transactions:
An amendment to the Articles of Incorporation of the Company authorizing a new series of Preferred stock, which shall be designated as Series C, and shall consist of 15,000 shares.
Common Stock transactions:
From June 16, 2004 to April 1, 2005 the Company sold 2,221,250 shares of common stock Private Placement Memorandum at $.80 per Share to 49 individuals generating net proceeds of $1,777,000, of which 715,000 shares were sold in 2005, generating net proceeds of $572,000.
During 2005 the Company issued 31,118 shares of common stock, in lieu of interest payments at $.80 per share for a total of $24,894.
In February 2006 the Company issued 13,438 shares of common stock, in lieu of interest payments at $.80 per share for a total of $10,751.
In May 2006 the Company issued 16,336 shares of common stock, in lieu of interest payments at $.80 per share for a total of $13,094.
On May 25, 2006, The Company issued 500,000 shares of common stock at .10 cents (Market value of shares on that date), for a total of $50,000, to compensate its directors for services through a stock grant pursuant to Form S-8 in the following amounts:
Name | Amount of Common Stock issued |
Kambiz Mahdi | 100,000 |
Reza Zarif | 100,000 |
Barrett Evans | 100,000 |
Jeffrey Conrad | 100,000 |
Dennis Benner | 100,000 |
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In August 2006 the Company issued 30,254 shares of common stock, in lieu of interest payments at $.80 per share for a total of $24,205.
In August 2006 the Company issued 11,678 shares of common stock, in lieu of interest payments at $.80 per share for a total of $9,343.
In August 2006 the Company issued 4,205 shares of common stock for officer compensation at $.80 per share for a total of $3,365.
In August 2006 the Company accrued 47,260 shares of common stock for officer compensation at $.10 per share (fair market value at time of accrual) for a total of $4,726. These shares had been classified as issued in quarterly filings.
In September 2006 the Company accrued 29,083 shares of common stock for officer compensation at $ .65 per share (fair market value at time of accrual) for a total of $18,904.
In December 2006 the Company accrued 34,370 shares of common stock for officer compensation at $.55 per share (fair market value at time of accrual) for a total of $18,904.
In July 2006 the Company converted 12,500 shares from Preferred B to Preferred C, 14,040 shares.
In August 2006 the holders of preferred series C elected to convert 14,040 shares into 1,755,000 shares of common stock.
On August 14, 2006 the holders converted 440 shares of the Preferred Series A for 4,544,188 shares of the Company’s common stock.
On March 30, 2007, the Company issued 110,713 shares of common stock for officer compensation which were accrued but un-issued as of December 31, 2006, .
On June 30, 2007, the company issued 78,363 shares of common stock for officer compensation for the first and second quarter of 2007.
On October 15, 2007, the company issued 47,260 shares of common stock for officer compensation for the 3rd quarter of 2007.
For the quarter ended December 31, 2007 the company accrued 157,533 shares of common stock for officer compensation, which were un-issued, as of December 31, 2007
On November 5th, 2007 the company entered into a consulting services agreement with Global Capital Management (GCM), to provide investment banking services, for one year. As a result we issued 425,000 warrants to purchase 425,000 shares of common stock at a price of .40 per share. As a result we recognized share based compensation expense in the amount of $16,607 for the year ended December, 31, 2007
COMMON STOCK
Our Articles of Incorporation authorize us to issue 200,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2007 and December 31, 2006 there were 10,398,944 and 10,162,608 shares of common stock issued and outstanding, respectively. We also had 157,533 shares to be issued, for officer compensation which were accrued and un-issued as of December 31, 2007. All outstanding shares of common stock are, and the common stock to be issued will be, fully paid and non-assessable. Each share of our common stock has identical rights and privileges in every respect. The holders of our common stock are entitled to vote upon all matters submitted to a vote of our shareholders and are entitled to one vote for each share of common stock held. There are no cumulative voting rights.
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The holders of our common stock are entitled to share equally in dividends and other distributions that our Board of Directors may declare from time to time out of funds legally available for that purpose, if any, after the satisfaction of any prior rights and preferences of any outstanding preferred stock. If we liquidate, dissolve or wind up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and our obligations to holders of our outstanding preferred stock.
PREFERRED STOCK
Our Articles of Incorporation authorize us to issue 10,000,000 shares of preferred stock. We authorized 440 shares of Series A Convertible Preferred Stock and 20,000 shares of Series B Convertible Preferred Stock. On May 25th, 2006 the Articles of Incorporation were amended authorizing 15,000 shares Series C Convertible Preferred Stock.
Preferred Series A
Previously, there were 440 shares of Convertible A Preferred Stock outstanding, with a stated value of $1,000. Each share is convertible into 0.1% percent of the shares of our common stock outstanding at the date of conversion, which shall convert upon election of the holder. The holders of series A Preferred stock have the right to vote with the holders of common stock on any matter to which the common stock holders are entitled to vote and they are entitled to vote number of shares of common stock into which the series A Preferred Stock is convertible. If we are liquidated, distribute our assets, dissolve or wind-up, the holders of Convertible A Preferred Stock shall receive the greater of (i) $2,500 per share of Convertible A Preferred Stock they hold at the time of such liquidation, or (ii) their pro rata share of the total value of our assets and funds to be distributed, assuming the Convertible A preferred stock is converted to common stock. On Augu st 14, 2006 the holders converted 440 shares of the Preferred Series A for 4,544,188 shares of the Company’s common stock.
Preferred Series B
Previously there were 12,500 shares of Series B Convertible stock outstanding, with a stated value of $100. Each share of Series B Stock shall be converted into a number of shares of common stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. The minimum conversion price which Series B shareholders shall convert their Series B shares to common stock shall be $0.10.
Exchange of Preferred Series B to Preferred Series C
On May 25, 2007 the Board of Directors approved the exchange of Series B Convertible Preferred Stock for Series C No-Par, Convertible Preferred Stock for its Series B stockholders. After the exchange took place Series B Convertible Preferred Stock was cancelled. The Series C Convertible Preferred Stock carries the same rights as Series B Convertible Preferred Stock except that Series C Convertible Preferred Stock can be redeemed by the Company. At any time, the Company may, in its sole discretion, redeem some or all of the outstanding shares of Series C Stock at a “Redemption Price” equal to the greater of $120.00 per share for the first year from the date of this certificate and after which the redemption price shall increase by twelve percent (12%) per year until all outstanding shares of Series C have been redeemed. To redeem Series C Stock, the Company, at least five (5) days prior to the date on which it desires to redeem such st ock (the “Redemption Date”), shall send the applicable holder of Series C Stock a notice of the redemption provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series C Stock. Such notice shall state: (i) the redemption date; (ii) the redemption price; and (iii) the number of shares of Series C Stock to be redeemed. Furthermore, the holders of Series C Convertible Preferred Stock shall receive one A Warrant and one B Warrant for every Ten (10) shares of common stock received from converting a share of Series C Convertible Preferred stock of the Company. This series A and B Warrants are pursuant to the terms and conditions of the Company’s Series A and B warrant agreement as amended.
Preferred Series C
Previously there were 14,040 shares of Convertible C Preferred Stock outstanding. Originally as filed on May 25, 2006 each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, which ever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series C, whichever is greater. However, on August 07, 2006 the terms of Series C were amended as follows: Each share of Series C stock shall be converted into a number of shares of Common Stock that is equal to each share divided $0.80 multiplied by 100 (1 divided by $0.80, multiplied by 100).
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On August 14, 2006, the holders of Preferred Series C elected to convert their shares into common stock. As a result 14,040 shares of Preferred Series C were converted into 1,755,000 shares of common stock.
Our Board of Directors has the authority to issue additional shares of preferred stock in one or more series, and fix for each series, the designation of and number of shares to be included in each such series. Our Board of Directors is also authorized to set the powers, privileges, preferences, and relative participating, optional or other rights, if any, of the shares of each such series and the qualifications, limitations or restrictions of the shares of each such series.
Unless our Board of Directors provides otherwise, the shares of all series of preferred stock will rank on parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Any issuance by us of shares of our preferred stock may have the effect of delaying, deferring or preventing a change of our control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock.
Warrants
Series A - Common Stock Warrants:
We currently have 407,625 Series A Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock (2,038,125 total shares) at $1.00 per share. The Series A Warrants expire on November 15, 2007.
Series B - Common Stock Warrants
We currently have 407,625 Series B Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock (2,038,125 total shares) at $1.50 per share. The Series B Warrants will expire on May 15, 2008.
Series C – Common Stock Warrants
We currently have 200,000 Series C Warrants issued and outstanding. Each warrant gives the holder the right to purchase 1 shares of common stock (200,000 total shares) at $.80 per share. The Series C Warrants expire on November 5, 2010.
Series D – Common Stock warrants
We currently have 200,000 Series D Warrants issued and outstanding. Each warrant gives the holder the right to purchase 1 shares of common stock (200,000 total shares) at $.40 per share. The Series D Warrants expire on November 5, 2010.
For the year ended December 31, 2007, we recognized $16,607 of expense as a result of the issuance of Series D Warrants.
Warrants Activity for the Period and Summary of Outstanding Warrants
From June 16, 2004 to April 1, 2005 the Company sold 222,125 common stock units pursuant to a private placement memorandum at $8.00 per unit to 49 individuals generating net proceeds of $1,777,000. Each Unit consists of ten (10) shares of common stock. In addition, each unit entitles the holder to purchase a total of 10 shares of Probe Common Stock through the exercise of Warrants as follows: series A Warrants, for 5 shares at a price of $1.00 per share which would expire on November 16, 2005, which has been subsequently extended to November 15, 2008 and series B Warrants, for 5 shares at a price of $1.50 per share which would expire on May 16, 2005, which was subsequently extended to May 15, 2009. As of June 30, 2007 no warrants were exercised.
On August 14, 2006, the holders of Preferred Series C elected to convert their shares into common stock. As a result 14, 040 shares of Preferred Series C were converted into 1,755,000 shares of common stock. Furthermore, the holders of Series C Convertible Preferred Stock shall receive one A Warrant and one B warrant for every Ten (10) shares of common stock received from converting a share of Series C convertible Preferred stock of the Company.
On December 31, 2004, the company issued 100,000 shares of its common stock for services. Each share of stock issued included two warrants, for a total of 200,000 common share equivalents, which were replaced with series C warrants created, approved and issued on November 5, 2007 by the board of directors.
On November 5th, 2007 the company entered into a consulting services agreement with Global Capital Management (GCM), to provide investment banking services, for one year. As a result we issued 425,000 warrants to purchase 425,000 shares of common stock at a price of .40 per share. As a result we recognized share based compensation expense in the amount of $16,607 for the year ended December, 31, 2007
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A summary of warrant activity for the periods is as follows:
|
| Warrants - Common Share Equivalents | Weighted Average Exercise price |
| Warrants exercisable - Common Share Equivalents | Weighted Average Exercise price |
Outstanding December 31, 2003 | - |
|
| - |
| |
| Granted | 1,706,250 | $1.20 |
| 1,706,250 | $1.20 |
| Exercised | - |
|
| - |
|
Outstanding December 31, 2004 | 1,706,250 | $1.20 |
| 1,706,250 | $1.20 | |
| Granted | 715,000 | $1.25 |
| 715,000 | $1.25 |
| Exercised | - |
|
| - |
|
Outstanding December 31, 2005 | 2,421,250 | $1.21 |
| 2,421,250 | $1.21 | |
| Granted | 1,755,000 | $1.25 |
| 1,755,000 | $1.25 |
| Exercised | - |
|
| - |
|
Outstanding December 31, 2006 | 4,176,250 | $1.23 |
| 4,176,250 | $1.23 | |
| Granted | 425,000 | $0.40 |
| 425,000 | $0.40 |
| Exercised | - |
|
| - |
|
Outstanding December 31, 2007 | 4,601,250 | $1.15 |
| 4,601,250 | $1.15 | |
Note: The weighted average exercise price has been adjusted retroactively due to price decreases in the warrant strike prices.
| Warrants Outstanding |
| Warrants Exercisable | |||
Range of Warrant Exercise Price | Warrants - Common Share Equivalents | Weighted Average Exercise price | Weighted Average Remaining Contractual life |
| Warrants - Common Share Equivalents | Weighted Average Exercise price |
$1.00 | 1,988,125 | $1.00 | 0.12 |
| 1,988,125 | $1.00 |
$1.50 | 1,988,125 | $1.50 | 0.63 |
| 1,988,125 | $1.50 |
$0.80 | 200,000 | $0.80 | 2.25 |
| 200,000 | $0.80 |
$0.40 | 425,000 | $0.40 | 4.833 |
| 425,000 | $0.40 |
Total | 4,601,250 | $1.15 |
|
| 4,601,250 | $1.15 |
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STOCK OPTIONS
On February 8, 2007, pursuant to the Company’s 2006 Qualified Incentive Option Plan which was adopted by the Company’s Board of Directors granted Company employees an incentive stock option to purchase up to 205,505 shares of common stock in the Company. These options were granted at $.52 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017.
On February 8, 2007, the Company granted stock options to its key employees, to purchase up to 250,000 shares of the Company’s common stock, which was approved by the company’s Board of Directors. These options were granted at $.52 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As of December 31, 2007 we had a reduction in the outstanding stock options of 37,841 as a result of employee termination and forfeiture of the options. As a result the company recognized share-based compensation expense in the amount of $5,313 for the Year ended December 31, 2007.
Stock to be issued under option and warrant plans
Any shares issued under the existing option or warrant plans will come from the companies authorized but un-issued, un-registered shares.
NOTE 11 – RELATED PARTY TRANSACTIONS
Jeffrey Conrad provides legal services for the Company and receives a monthly retainer of $2,500 and is one of the Company directors. Jeffrey Conrad is also a venture partner of eFund Capital Partners, LLC. Jeffrey Conrad does not have an equity stake in eFund Capital Partners, LLC. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004. Total payments for thetwelvemonths ended December 31, 2007 were$17,000.
On May 25, 2006 the holders of Series B Convertible Preferred Stock exchanged their stock for Series C Convertible Preferred Stock. Pursuant to the exchange Reza Zarif, our CEO, received 4,500 shares of Series C; Kambiz Mahdi received 4,500 shares of series C; and eFund Capital Partners, LLC received 5,040 shares of series C. As originally filed on May 25, 2006 each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, which ever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series C, whichever is greater. However, on August 07, 2006 the terms of Series C were amended as follows: Each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided $0.80 multiplied by 100 (1 divided by $0.80 , multiplied by 100).
For the 1st quarter of 2006, the Company leased its 35,000 sq/ft facility for $19,700 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi was the former Chief Executive Officer and a Director of the company. Reza Zarif is the Chief Executive Officer and a Director of the company. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of the company from July 2004 to December 2004; however, he is no longer a member of the Board of Directors. Total payments made for the year ended December 31, 2006 were $59,100. This lease was terminated on March 7, 2006
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Annual Report on Form 10-KSB, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii ) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management's assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance that the control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system's objectives will be met.
CHANGES IN INTERNAL CONTROLS
There was no change in our internal control over financial reporting that occurred during the fourth quarter covered by this Annual Report on Form 10-KSB that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth the name, age, positions, and offices or employments for the past five years as of March 24, 2007, of our executive officers and directors. Members of the board are elected and serve for one year
NAME
AGE
POSITION
Kambiz Mahdi
45
Director
Reza Zarif
50
Chief Executive Officer, Director
Barrett Evans
36
Director
Jeffrey Conrad
34
Director
BIOGRAPHIES OF OFFICERS AND DIRECTORS
Set forth below is a brief description of the background of our officers and directors based on information provided by them to us.
KAMBIZ MAHDI is a co-founder and a member of our board of directors.. Mr. Mahdi was the Technical Sales Manager for six years with Future Electronics, a billion dollar electronics distributor. While at Future Electronics, Mr. Mahdi developed technical management leadership and management tools for their highest technology customers and applications. Mr. Mahdi has a BS degree in Electrical Engineering.
REZA ZARIF is a co-founder, director and our chief executive officer since 2005. Mr. Zarif is responsible for all operational activities as well as developing and guiding the company's vision and cultural values. Prior to Probe, Mr. Zarif was at Graphtec Incorporated of Japan for 7 years where he was responsible for transferring manufacturing and associated technologies from Japan to the United States. Mr. Zarif has a BA and MA in Cultural Anthropology and earned the status of "Summa Cum Laude" at the University of California, Irvine.
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BARRETT EVANS has been our director since July 15, 2004. Mr. Evans is eFund Capital Partner's Managing Partner. In 1990, Mr. Evans started his career with Cruttenden Roth, a regional emerging growth focused investment bank. At Cruttenden, Mr. Evans developed significant relationships with institutional investors. Additionally, Mr. Evans was engaged in all facets of investment banking from private debt and equity financing to Initial Public Offerings, retail brokerage and institutional trading, Mezzanine financing and bridge capital. Mr. Evans founded BRE Investments & Consulting, LLC. in 1996. BRE Investments & Consulting evolved into what is now eFund Capital Partners in 1999. At eFund Capital Partners, Mr. Evans has utilized his institutional contacts to help fund numerous start-up companies and has advised these companies on a wide range of issues including raising capital, securing management and overall business strategy. Mr. Evans received his Bachelor's degree from the University of California, Santa Barbara. He also serves as a director for Abviva, Inc. and RAPTechnologies, Inc..
JEFFREY CONRADhas been our director since July 15, 2004 and currently serves as the Secretary of the Company and as corporate counsel to the Company. Mr. Conrad is a securities attorney and partner in eFund Capital Management, LLC and is venture partner of eFund Capital Partners, LLC. He has accumulated successful experience in all facets of investment banking including portfolio management, mergers and acquisitions, financial analysis, and legal analysis. He was formerly with Gibson, Dunn and Crutcher and Universal Pictures. Mr. Conrad is a graduate of the University of California, Los Angeles and received his Juris Doctorate degree from Loyola Law School. Mr. Conrad is an active member of the State Bar of California. Mr. Conrad also serves as a director to Abviva, Inc.
BOARD OF DIRECTORS
We currently have four members of our Board of Directors, who are elected to annual terms and until their successors are elected and qualified. Executive officers are appointed by the Board of Directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees. On April 13, 2006, Mr. Dennis Benner our director and chairman of the board of directors resigned from the board of directors to pursue other interest.
AUDIT COMMITTEE
We do not have a separate Audit Committee. Our full Board of Directors performs the functions usually designated to an Audit Committee. Mr. Evans, a Director, qualifies as an "audit committee financial expert" as defined in Item 401(e)(2) of Regulation S-B.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have filed our Code of Ethics as a Report on Form 10-KSB for the year ended December 31, 2005 as Exhibit 14.1. Our Code of Ethics is available upon request at no charge to any shareholder.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table presents a summary of the compensation paid to our Chief Executive Officer and Chief Operating Officer. No other executive officer received compensation in excess of$100,000 during 2005.Except as listed below, there are no bonuses, other annual compensation, restricted stock awards or stock options/SARs or any other compensation paid to the executive officers.
|
| Executive Compensation |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| &nbs p; |
|
|
|
| Annual compensation |
| Long-term Compensation | |||||
Name | Position | Year | Salary | Bonus | Other | Share Based |
| Restricted Stock Awards | Options / SARs | LTIP |
Kambiz Mahdi | Director | 2003 | $174,632 | $ - | $ - | $ - |
| $ - | $ - | $ - |
|
| 2004 | 175,000 | - | - | - |
| - | - | - |
|
| 2005 | 175,000 | - | - | - |
| - | - | - |
|
|
|
|
|
|
|
|
| &nbs p; |
|
Reza Zarif | Chief Executive Officer and Director | 2003 | 175,000 | - | - | - |
| - | - | - |
|
| 2004 | 175,000 | - | - | - |
| - | - | - |
|
| 2005 | 175,000 | - | - | - |
| - | - | - |
|
| 2006 | 175,000 | - | - | 45,898 |
| - | - | - |
|
| 2007 | 175,000 | - | - | 75,000 |
| - | - | - |
|
|
|
|
|
|
|
|
| &nbs p; |
|
John Bennett | Chief Financial Officer | 2005 | 78,000 | - | - | - |
| - | - | - |
|
| 2006 | 90,000 | - | - | - |
| - | - | - |
|
| 2007 | 110,000 | - | - | �� - |
| - | 7,600 | - |
In the fiscal year 2005 we did not have any of our executives or officers under employments contracts. However, Kambiz Mahdi, our former chief executive officer and Reza Zarif, our former chief operations officer, and current chief executive officer orally agreed to accept $167,000 per annum as compensation for his services for the ended December 31, 2005.
On September 15, 2005 our board of directors replaced our chief executive officer, Kambiz Mahdi, with Reza Zarif, our former chief operations officer. In November of 2005, Mr. Mahdi decided to leave the Company to pursue other interests.
Effective June 7, 2006 the Company entered into a two year employment contract whereby the Company shall pay its Chief Executive Officer, Reza Zarif a monthly salary of $20,833, which is equivalent to $250,000 on an annualized basis. Mr. Zarif’s salary will be payable pursuant to the Company’s standard payroll practices, which currently consist of twenty-six (26) payroll periods per year. The difference between Mr. Zarif’s current salary of $175,000 and the proposed $250,000 can be paid in stock at the Company’s Board of Director’s option. The price of the shares pursuant to the stock grant shall be set at the closing market price of the Company’s common stock on the date of the grant. The stock grants will take place on the final day of each fiscal quarter.
On December 15, 2006, our controller, John Bennett was promoted to Chief Financial Officer which took effect January 1, 2007. His new employment package includes $110,000 base salary plus a 100,000 stock option package that vests over five years with one year fully vested upon execution. On February 28, 2008 the company entered into an amended employment contract with Mr. Bennett whereby he will receive 140,000 per year as a base salary and received options to purchase the Company’s common stock at $0.10 per share.
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DIRECTOR COMPENSATION
We currently have four members of our board of directors, who are elected to annual terms and until their successors are elected and qualified. Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees.
We currently reimburse directors for travel expenses associated with their work for the company but our directors currently to not receive any other compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information concerning the beneficial ownership of our outstanding classes of stock as of December 31, 2007, by each person known by us to (i) own beneficially more than 5% of each class, (ii) by each of our Directors and Executive Officers and (iii) by all Directors and Executive Officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law.
The number of shares of common stock issued and outstanding on December 31, 2007 was 10,398,944 shares. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on December 31, 2007, plus shares of common stock subject to options / warrants held by such person on December 31, 2007 and exercisable within 60 days thereafter.
Name of Beneficial Owner | Number of Shares Beneficially Owned | Percentage of Ownership (1) |
Reza Zarif (2) | 2,900,530 | 18.96% |
Kambiz Mahdi (3) | 2,502,456 | 16.35% |
eFund Capital Partners, LLC (5) | 2,242,259 | 14.65% |
Ashford Capital, LLC (6) | 841,637 | 5.50% |
Barrett Evans (5) | 100,000 | 0.65% |
Jeffrey Conrad (4) | 100,000 | 0.65% |
Total | 8,686,882 | 55.77% |
|
|
|
Total of All officers and directors | 7,845,245 | 50.37% |
(1)
The percentage of ownership includes shares underlying other classes of securities held by the individuals, Series A, Series B, Series C and Series D Warrants which can be converted into common stock within 60 days of this offering.
(2)
Reza Zarif is our chief executive officer and a director of ours. Mr. Zarif has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership. Mr. Zarif acquired his shares as a founder of Probe.
(3)
Kambiz Mahdi is one of our founders and a director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership. Mr. Mahdi acquired his shares as a founder of Probe.
(4)
Jeffrey Conrad is a director of ours and also serves as corporate secretary and legal counsel. He acquired the shares through a stock award to our directors for compensation as a member of our board of directors. Mr. Conrad has been a director of ours since May 2004.
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(5)
The managing member of eFund Capital Partners, LLC is Barrett Evans. Mr. Evans has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Evans may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Evans does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and they disclaim any beneficial ownership of such shares of common stock. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004. Mr. Evans has been directors of ours since May 2004. He acquired 100,000 shares through a stock award to our directors for compensation as a member of our board of directors.
(6)
The Managing Member of Ashford Capital, LLC is Frank Kavanaugh. Mr. Kavanaugh has authority regarding the portfolio management decisions with respect to the shares of common stock owned by the selling security holder. Mr. Kavanaugh may be deemed to have dispositive and voting power over the shares of the common stock owned by the selling security holder. However, Mr. Kavanaugh does not have the right to receive dividends from or the proceeds from the sale of such common stock by the selling shareholder and disclaims any beneficial ownership of such shares of common stock. Ashford Capital, LLC received these shares pursuant to an assignment agreement with eFund Capital Partners, LLC. Ashford Capital, LLC and eFund Capital Partners, LLC have no affiliation. Mr. Kavanaugh was a director of ours from May 2004 until December 2004.
The number of shares of common stock issued and outstanding on December 31, 2006 was 10,398,944 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the 1st quarter of 2006, the Company leased its 35,000 sq/ft facility for $19,700 per month from Kambiz Mahdi, Reza Zarif and Pacific Sail Bay Trust. Kambiz Mahdi was the former Chief Executive Officer and a Director of the company. Reza Zarif is the Chief Executive Officer and a Director of the company. Pacific Sail Bay Trust is managed by Frank Kavanaugh. Frank Kavanaugh is also the managing member of Ashford Capital, LLC, and the managing partner of Ashford Transition Fund, L.P. Furthermore, Mr. Kavanaugh was a director of the company from July 2004 to December 2004; however, he is no longer a member of the Board of Directors. Total payments made for the year ended December 31, 2006 were $59,100. This lease was terminated on March 7, 2006
Jeffrey Conrad provides legal services for the company and receives a monthly retainer of $2,500 and is one of the company directors. Jeffrey Conrad is also a venture partner of eFund Capital Partners, LLC. Jeffrey Conrad does not have an equity stake in eFund Capital Partners, LLC. eFund Capital Partners, LLC received their shares pursuant to an investment agreement with us in April of 2004. Total payments through December 31, 2006 and 2007 respectively were $16,500 and $17,000.
South Coast Marketing, LLC is associated with eFund Capital Partners and administrates SB-2 filing fees. Total payments made for the year ended, December 31, 2006 and 2007 respectively were $5,000 and $0.
On May 25, 2006, The Company issued 500,000 shares of common stock at .10 cents (Market value of shares on that date), for a total of $50,000, to compensate its directors for their service through a stock grant pursuant to Form S-8 in the following amounts:
Name
Common Stock issued
Kambiz Mahdi 100,000
Reza Zarif 100,000
Barrett Evans 100,000
Jeffrey Conrad
100,000
Dennis Benner
100,000
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On May 25, 2006 the holders of Series B Convertible Preferred Stock exchanged their stock for Series C Convertible Preferred Stock. Pursuant to the exchange Reza Zarif, our CEO, received 4,500 shares of Series C; Kambiz Mahdi received 4,500 shares of Series C; and eFund Capital Partners, LLC received 5,040 shares of Series C. Original as filed on May 25, 2006 each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, which ever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series C, whichever is greater. However, on August 07, 2006 the terms of Series C were amended as follows: Each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided $0.80 multiplied by 100 (1 divided by $0.80, multip lied by 100).
On January 1, 2005, the Company entered into a credit line agreement with eFund Capital Partners, LLC for $150,000. This is an interest only line of credit. There are no scheduled principal payments due other than on March 22, 2007, when the entire outstanding balance plus any accrued and unpaid interest will be due and payable in full. Interest will accrue at the rate of 20% per annum payable as follows: (a) 12% will be paid on a monthly basis in US dollars based on the average outstanding balance of the previous month and (b) 8% will be paid in common stock of the company at the end of each quarter based on the average outstanding balance for the previous quarter. The interest due will be converted to our common stock at the price of $0.80 per share. This transaction is no less favorable than if the Company had entered into it on an arms length basis with an unrelated third party because the Company was not aware of any other c reditors willing to provide a loan for 20% or less interest. Total payments made during the twelve months ended December 31, 2006 consisted of $0 in principal and $7,395 in interest paid in cash and $2,958 in interest paid in common stock with accrued interest payable of $697 at December 31, 2006. This note was converted to a term note payable, with an effective date of June 30, 2006, unsecured, at 12% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,515 on April 15, 2008. Interest paid for June and July of 2006 was paid at the original rate. As of December 31, 2006, the outstanding balance was $139,449. On August 14, 2006, the holders of Preferred Series C elected to convert their shares into common stock. As a result 14, 040 shares of Preferred Series C were converted into 1,755,000 shares of common stock.
Related Party – Notes payable
Note Payable - dated March 10, 2006 – related party, un-secured, 12% interest and ten monthly payments in the amount of $3,650 plus accrued interest. The 1st payment was due on April 10, 2006. The note is payable to Kambiz Mahdi. As of December 31, 2007 the balance was $ 0.
Note Payable - dated March 10, 2006 – related party, un-secured, 12% interest, and ten monthly payments in the amount of $3,650 plus accrued interest. The 1st payment was due on April 10, 2006. The note is payable to Reza Zarif. As of December 31, 2007 the balance was $ 0.
Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Kambiz Mahdi. As of December 31, 2007 the outstanding balance was $18,887.
Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. As of December 31, 2007, the outstanding balance was $18,887.
Note Payable – related party, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock) due on May 10, 2007, Payable to Kambiz Mahdi. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, At 12% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. As of December 31, 2007 the outstanding balance was $148,429.
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Note Payable – related party, unsecured, 20% interest (10% paid in Cash and 10% paid in Company stock) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, At 12% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. As of December 31, 2007 the outstanding balance was $148,429.
Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $41,257 on April 15, 2008. As of December 31, 2007 the outstanding balance was $46,974.
Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20% (12% paid in cash and 8% paid in common stock in the Company) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. As of December 31, 2007 the outstanding balance was $93,948.
Note Payable – related party. This is a term note payable, secured by the assets of the Company. Borrowings under this term note were at an interest rate of 15%, with 12 months amortization, monthly payments of $2,256 payable to Rufina Paniego. As of December 31, 2007 the outstanding balance was $6,603.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
AUDIT FEES
Jaspers + Hall, PC were our auditors for the fiscal year ended December 31, 2006 and December 31, 2007 and for the three quarters ended September 30, 2007.
For their review of our Quarterly Reports on Form 10-Q for the fiscal year 2007, Jaspers + Hall, PC billed us $9,000. We have contracted Jaspers + Hall, PC to complete the 2007 year end audit for $15,000.
AUDIT RELATED FEES
None.
TAX FEES
None.
ALL OTHER FEES
None.
THE BOARD OF DIRECTORS PRE-APPROVAL POLICY AND PROCEDURES
We do not have a separate Audit Committee. Our full Board of Directors performs the functions of an Audit Committee. During fiscal year 2006, the Board of Directors adopted policies and procedures for the pre-approval of audit and non-audit services for the purpose of maintaining the independence of our independent auditors. We may not engage our independent auditors to render any audit or non-audit service unless either the service is approved in advance by the Board of Directors or the engagement to render the service is entered into pursuant to the Board of Director's pre-approval policies and procedures. On an annual basis, the Board of Directors may pre-approve services that are expected to be provided to us by the independent auditors during the following 12 months. At the time such pre-approval is granted, the Board of Directors must (1 ) identify the particular pre-approved services in a sufficient level of detail so that management will not be called upon to make judgment as to whether a proposed service fits within the pre-approved services and (2) establish a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy.
The Board has considered whether the provision of the services described above under the caption "All Other Fees" is compatible with maintaining the auditor's independence.
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ITEM 15. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation (included as exhibit 3.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
3.2 Bylaws (included as exhibit 3.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
4.1 Certificate of Designation for Series A Convertible Preferred Stock, dated May 20, 2004 (included as exhibit 4.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
4.2 Certificate of Designation for Series B Convertible Preferred Stock dated December 31, 2004 (included as exhibit 4.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
4.3 Sample Series A Warrant Purchase Agreement (included as exhibit 4.3 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
4.4 Sample Series B Warrant Purchase Agreement (included as exhibit 4.4 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
4.5 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 4.5 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).
4.6 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 4.6 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).
4.7. Certificate of Designation of Series C Convertible Preferred Stock dated May 25, 2006 (included as exhibit 4.1 to the Form 8-K filed on June 14, 2006 and incorporated herein by reference).
4.8 Amended Certificate of Designation of Series C Convertible Preferred Stock dated May 25, 2006 (included as exhibit 4.1 to the Form 8-K filed on August 14, 2006 and incorporated herein by reference).
4.9 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 10.1 to the Form 8-k filed on November 15, 2006 and incorporated herein by reference).
4.10 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 10.2 to the Form 8-k filed on November 15, 2006 and incorporated herein by reference).
10.1 Lease Agreement between Probe Manufacturing, Inc. (F.K.A. Probe Manufacturing Industries, Inc. and Reza Zarif and Kambiz Mahdi, dated May 2, 1997 (included as exhibit 10.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.2 Consulting Agreement between Probe Manufacturing Industries and Anthony Reed dated December 31, 2004 (included as exhibit 10.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.3 Legal retainer agreement between Probe Manufacturing, Inc. and Jeffrey Conrad dated (included as exhibit 10.3 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.4 Line of Credit agreement between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated January 1, 2005 (included as exhibit 10.4 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
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10.5 Line of Credit agreement between Probe Manufacturing, Inc. and Ashford Capital, LLC dated January 1, 2005 (included as exhibit 10.5 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.6 Line of Credit agreement between Probe Manufacturing, Inc. and Benner Exemption Trust dated March 8, 2005 (included as exhibit 10.6 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.7 Line of Credit agreement between Probe Manufacturing, Inc. and Edward Lassiter dated March 22, 2005 (included as exhibit 10.7 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.8 Line of Credit agreement between Probe Manufacturing, Inc. and Rufina V. Paniego dated January 1, 2004 (included as exhibit 10.8 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.9 Promissory Note between Probe Manufacturing, Inc and Ashford Transitional Fund, L.P. dated September 20, 2004 (included as exhibit 10.9 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.10 Engagement Letter between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated May 20, 2004 (included as exhibit 10.10 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.11 Series A Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated May 20, 2004 (included as exhibit 10.11 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.12 Series A Convertible Preferred Stock Purchase Agreement with Reza Zarif dated May 20, 2004 (included as exhibit 10.12 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.13 Series A Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated May 20, 2004. (included as exhibit 10.13 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.14 Series B Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated December 31, 2004 (included as exhibit 10.14 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10. 15 Series B Convertible Preferred Stock Purchase Agreement with Reza Zarif dated December 31, 2004 (included as exhibit 10.15 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.16 Series B Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated December 31, 2004 (included as exhibit 10.16 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.17 Agreement to Cancel and Return shares of common stock between Probe and eFund Capital Partners, LLC, Ashford Capital, LLC, Reza Zarif, Kambiz Mahdi, dated December 31, 2004 (included as exhibit 10.17 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.18 Promissory note with eFund Capital Partners, LLC dated October 12, 2004 (included as exhibit 10.18 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.19 Promissory note with Rufina V. Paniego dated July 1, 2004 (included as exhibit 10.19 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).
10.20 Sample purchase order agreement with Celerity, Inc (included as exhibit 10.20 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.21 Sample purchase order agreement with Newport Corporation (included as exhibit 10.21 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.22 Sample purchase order agreement with Asymtek Corporation (included as exhibit 10.22 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
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10.23 Sample purchase order agreement with Jetline Engineering Corporation (included as exhibit 10.23 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.24 Sample purchase order agreement with our supplier Future Active, Inc (included as exhibit 10.24 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.25 Sample purchase order agreement with our supplier Arrow Electronics, Inc. (included as exhibit 10.25 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).
10.26 Lease Agreement between Probe Manufacturing, Inc. and Mitchell Fitch, LLC, dated November 15, 2005 (included as exhibit 10.26 to the Form 10-KSB on April 5, 2007 and incorporated herein by reference).
10.27 Employment Agreement with Reza Zarif, Chief Executive Officer of Probe Manufacturing, Inc. (included as exhibit 10.1 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).
10.27 Series C Convertible Preferred Exchange Agreement with eFund Capital Partners, LLC (included as exhibit 10.2 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).
10.28 Series C Convertible Preferred Exchange Agreement with Reza Zarif (included as exhibit 10.3 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).
10.29 Series C Convertible Preferred Exchange Agreement with Kambiz Mahdi (included as exhibit 10.4 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).
10.30 Amended Series C Convertible Preferred Exchange Agreement with eFund Capital Partners, LLC (included as exhibit 10.1 to Form 8-K filed on August 14, 2006 and incorporated herein by reference).
10.31 Amended Series C Convertible Preferred Exchange Agreement with Reza Zarif (included as exhibit 10.2 to Form 8-K filed on August 14, 2006 and incorporated herein by reference).
10.32 Amended Series C Convertible Preferred Exchange Agreement with Kambiz Mahdi (included as exhibit 10.3 to Form 8-K filed on August 14, 2006 and incorporated herein by reference).
10.33 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Kambiz Mahdi dated August 10, 2006 (included as exhibit 10.1 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.34 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Reza Zarif dated August 10, 2006 (included as exhibit 10.2 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.35 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Frank Kavanaugh dated August 10, 2006 (included as exhibit 10.3 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.36 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Kambiz Mahdi dated August 10, 2006 (included as exhibit 10.4 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.37 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Reza Zarif dated August 10, 2006 (included as exhibit 10.5 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.38 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Rufina Paniego dated August 10, 2006 (included as exhibit 10.6 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.39 Amended Line of Credit agreement between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated August 10, 2006 (included as exhibit 10.7 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.40 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Benner Exemption Trust dated August 10, 2006 (included as exhibit 10.8 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
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10.41 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Ed Lassiter dated August 10, 2006 (included as exhibit 10.9 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.42 Amended Line of Credit agreement between Probe Manufacturing, Inc. and William Duncan dated August 10, 2006 (included as exhibit 10.10 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.43 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Hoa Mai dated August 10, 2006 (included as exhibit 10.11 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.44 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Ashford Transition Fund dated August 10, 2006 (included as exhibit 10.12 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.45 Employee Profit Sharing Plan (included as exhibit 10.13 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.46 Probe Manufacturing 2006 Employee Incentive Stock Option Plan (included as exhibit 10.14 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).
10.47 Employment offer to John Bennett, the Company’s Chief Financial Officer (included as exhibit 10.1 to Form 8-K filed March 26, 2008).
14.1 Code of Ethics (included as exhibit 14.1 to the Form 10-KSB on April 5, 2007 and incorporated herein by reference).
21.1 List of Subsidiaries (included as Exhibit 21.1 to the Form 10-KSB filed herewith).
23.1 Consent of Jaspers + Hall, PC - Independent Auditors to the Form 10-K filed March 25, 2007, and filed herewith.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Costa Mesa, State of California on the 27th day of March 2007.
PROBE MANUFACTURING, INC.
______________________________
REGISTRANT
/s/ Reza Zarif
___________________
By: Reza Zarif
Director and Chief Executive Officer
/s/ John Bennett
___________________
By:
John Bennett
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Reza Zarif
Chief Executive Officer and Director
March 27, 2007
_______________________
Reza Zarif
/s/ John Bennett
Chief Financial Officer
March 27, 2007
_______________________
John Bennett
/s/ Barrett Evans
_______________________
Director
March 27, 2007
Barrett Evans
/s/ Kambiz Mahdi
Director
March 27, 2007
_______________________
Kambiz Mahdi
/s/ Jeffrey Conrad
Director
March 27, 2007
_______________________
Jeffrey Conrad
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