Mail Stop 3561
November 4, 2005
Kambiz Mahdi
Probe Manufacturing, Inc.
3050 Pullman Street
Costa Mesa, CA 92626
Re: Probe Manufacturing, Inc.
Amendments No. 4 and 5 to Form SB-2
File No. 333-125678
Filed October 14, 2005 and October 26, 2005
Dear Mr. Mahdi:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
* * * * *
1. We note certain terms, such as "Selling Stockholders,"
"Prospectus," "Products," and "Outside Design Manufacturing," are
still unnecessarily capitalized. Please revise to avoid
capitalizing
any commonly understood terms.
2. Please avoid using all-capitalized text in your prospectus,
particular in the subheadings in the Risk Factors section.
The Offering, page 5
3. Revise the last sentence of the first paragraph on page 6 to
clarify that you are not registering for resale the common stock
underlying the warrants.
Summary Financial Information, page 7
4. Please refer to the response to prior comment 13. The net loss
per share and weighted average number of common stock outstanding
presented on page 7 for fiscal year 2004 does not agree with the
information presented in the financial statements on pages F-2 and
F-
3. Please revise as necessary.
Our ODM products currently compete with current and prospective
products..., page 13
5. We note your statement that "OEMs are aware that they are
financing future competition but they have no choice if they are
to
compete in today`s existing market." Provide supplemental support
for this assertion; otherwise, delete the statement.
Selling Security Holders, page 18
6. You continue to disclose the number of shares beneficially
owned
by the selling security holders without taking into account any
shares issuable pursuant to the conversion or exercise of another
security. In this regard, we note from your original filing that
many of the selling shareholders also hold warrants to purchase
shares of your common stock or preferred stock that is convertible
into shares of your common stock. In accordance with Rule 13d-3
of
the Exchange Act, your calculation of each individual`s beneficial
ownership should include shares underlying the warrants that are
exercisable and preferred stock that is convertible now or within
60
days, regardless of whether you are registering the overlying
securities pursuant to the registration statement. As a result,
please revise the "Number of Shares Beneficially Owned..." columns
in
the selling shareholder table to comply with Rule 13d-3, as
requested
in prior comment 33. Also revise the beneficial ownership table
beginning on page 28, including the inaccurate statement made in
note
(1) to the table.
7. We note your response to prior comment 34. In your response
letter, please tell us if any consideration was given to those
shareholders who returned their shares to Probe.
8. Please clarify what the company means by "Material Requirement
Planning." Is this a defined term? Why is it capitalized?
Directors, Executive Officers, Significant Employees, and Control
Persons, page 27
9. We note your response to prior comment 44. Please refer to
Item
401 of Regulation S-B, which requires disclosure of a director`s
business experience for the past five years, and include the
disclosure requested in our prior comment (i.e., the specific
positions, and corresponding dates, held by Mr. Benner for the
past
five years).
Management`s Discussion and Analysis, page 39
10. We note your response to our prior comment 55 and, in
particular,
the revised Overview section. Note that your Overview section
should
focus on discussing the most important matters that management
considers when evaluating the company`s financial condition and
operating performance. As suggested in Release No. 33-8350,
consider
identifying and discussing key performance indicators, including
non-
financial performance indicators, that management uses to manage
its
business and that would be material to investors. The Overview
section should also focus on discussing the key challenges or
trends
that management foresees. Please revise to provide the
information
described above.
11. We note the statement that you will increase revenue by
"making
sure we bill for everything of value we do." In your response
letter, please expand the meaning of this statement. Has the
company
historically encountered problems with its billing and collection?
How does the company intend to "mak[e] sure" it bills for
"everything
of value [it] do[es]."
Results of Operations, page 44
12. Please expand your explanation of the nature of the "pricing
pressures from Newport corporation and Celerity" and how these
pressures resulted in the decrease in gross profits.
Financial Statements
Independent Auditors` Report, page F-1
13. Please refer to the response to prior comment 77. Please
convey
our request to your prior auditors, Michael Johnson & Company,
LLC,
to revise their report to make reference to the Standards of the
Public Company Accounting Oversight Board in accordance with
auditing
standard no. 1 of the PCAOB.
Revenue recognition
14. We note your response to prior comment 85. Since your
shipping
terms are FOB destination, the title and risk and rewards of the
product are not transferred to the customer until delivery.
Please
revise your revenue recognition policy and financial statements to
recognize revenue when the product is delivered to the customer or
explain why your current method is appropriate.
Note 9. Capital stock
Preferred stock
15. We note that the Series A and Series B convertible stock have
conversion prices based on the market value of your common stock
or
the number of shares outstanding at the conversion date. Tell us
how
you applied the guidance in EITF 98-5 and EITF 00-27 in evaluating
whether your preferred stock has a beneficial conversion option.
Warrants
16. Disclose the terms of the 1,800,000 warrants granted during
2003
and include the agreement as an exhibit to the registration
statement. We may have additional comments.
17. You disclose a one-time warranty cost adjustment of $50,000 in
the overview of MD&A. Identify for us the warrants that you
adjusted
and tell us how you are accounting for these warrants.
18. We note that your Series A convertible preferred stock has a
feature whereby it converts into 0.1% of your outstanding common
shares on the date of conversion. It appears this feature allows
for
an indeterminate amount of shares to be issued, since there is no
cap
on the potential number of shares to be issued upon conversion and
the amount of shares issuable upon conversion varies based on the
number of common shares outstanding. Paragraph 20 of EITF 00-19
states that "if the number of shares that could be required to be
delivered to net-share settle the contract is indeterminate, a
company will be unable to conclude that it has sufficient
available
authorized and unissued shares, and therefore net-share settlement
is
not within the control of the company." Since net-share
settlement
is not within the control of the company, the contract would be
accounted for as a liability at fair value, pursuant to EITF 00-
19,
with changes in fair value recorded through earnings. It does not
appear that the conversion feature embedded within the Series A
convertible preferred stock would qualify for bifurcation under
paragraph 12 of SFAS 133 due to the failure of paragraph 6(c) of
SFAS
133. However, as a result of the conversion feature in your
Series A
convertible preferred stock, it appears that you may be unable to
conclude that you have sufficient authorized and unissued shares
outstanding to settle any contracts that are within the scope of
EITF
00-19 and that are to be settled in shares, including any
outstanding
warrants or other convertible securities that are subject to EITF
00-
19.
As a result of the above, please tell us how you concluded that
the
warrants qualify for equity classification. In this regard, we
note
that paragraph 24 of EITF 00-19 states that if you have a contract
that does not have a limit on the number of shares that could be
delivered upon net settlement (Series A preferred stock), you
would
be precluded from concluding that you have sufficient shares
authorized and unissued to net-share other contracts subject to
EITF
00-19 as a result of the absence of a cap in another contract
Item 27. Exhibits
19. We are unable to find each listed exhibit on EDGAR where you
indicate that such exhibit has been "filed herewith." Please
clearly
indicate the date and the location of each exhibit filed. Please
refer to Item 601(a)(2) of Regulation S-B for additional guidance.
* * * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Gopal Dharia at (202) 551-3353 or Terry
French
at (202) 551-3828 if you have questions regarding comments on the
financial statements and related matters. Please contact Ted Yu
at
(202) 551-3372, Michele M. Anderson, Legal Branch Chief, at (202)
551-3833, or me at (202) 551-3810 with any other questions.
Sincerely,
Assistant Director
Larry Spirgel
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Kambiz Mahdi
Probe Manufacturing, Inc.
November 4, 2005
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