10-K 1 probe10k2011_10k.htm PROBE 10K____________________________________________________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________________________________________________

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

R

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2011

 

 

or

 

 

£

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ____________________ to ____________________

 

Commission File Number: 333-125678

 

PROBE MANUFACTURING, INC.

 (Exact name of registrant as specified in its charter)

 

Nevada

20-2675800

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

17475 Gillette Avenue, Irvine, California

92614

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (949) 273-4990

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Common Stock

OTCQB

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(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. o Yes  þ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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.                                                                                                           þ Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                    þ Yes o No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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

  

o

  

Accelerated filer

  

o

Non-accelerated filer

  

o (Do not check if a smaller reporting company)

  

Smaller reporting company

  

þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o Yes  þ No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity as of June 30, 2011: $1,058,919 based on the average of the bid and asked price of $0.0085 per share.

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of March 30, 2012: 197,659,056 shares of common stock, $.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 



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PROBE MANUFACTURING, INC.

10-K

 

TABLE OF CONTENTS

 

Part I

 

 

Page

Item 1.

Business

4

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

15

Item 3.

Legal Proceedings

15

Item 4.

[Removed and Reserved]

15

 

 

Part II

Item 5.

Market for Registrant’s Common Equity, related Shareholder Matters and Issuer Purchases of Equity Securities

16

Item 6.

Selected Financial Data

18

Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operation

19

Item 7A.

Quantitative and Qualitative Disclosure about Market Risk

28

Item 8.

Financial Statements and Supplementary Data

29

Item 9.

Changes and Disagreements  with Accountants on Accounting and Financial Disclosure

58

Item 9A

Controls and Procedures

58

Item 9B

Other Information

59

 

 

Part III

Item 10

Directors, Executive Officers and Corporate Governance

59

Item 11

Executive Compensation

59

Item 12

Security Ownership of Certain Beneficial Owners, management and Related Stockholder Matters

59

 

Item 13

Certain Relationships and Related Transactions and Director Independence

59

Item 14

Principal Accounting Fees and Services

59

Item 15

Exhibits

59

 

Signatures

61



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PART I

 

Item 1.  Business.

 

Our 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. (the “Company,” “Probe,” or “PMI”) We provide global design and manufacturing services to original electronic equipment manufacturers from our 23000 sq-ft facility in Irvine, California and strategic locations worldwide. Our revenue is generated from sales of our services primarily to customers in the medical device, aerospace, automotive, industrial and instrumentation product manufacturers. We provide our domestic customers with low cost, low risk, flexible and high quality manufacturing services. We utilize global partnerships to secure the best cost and materials available by providing our customers with onshore, scalable manufacturing solutions. The services that we provide are commonly referred to as Electronics Manufacturing Services (EMS). Our EMS offerings include new product introduction, collaborative design, procurement and materials management, product manufacturing, product warranty repair, and end-of-life support. 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.

 

The majority of our revenue is driven from manufacturing a mix of complex printed circuit board assemblies (PCBA), and box build assemblies.  Some examples of our customer’s finished goods products includes medical devices such as, electronic control units that help vehicles run on natural gas or hydrogen, electronic control units for laser welding equipment, control units for electric-hybrid drives, portable ultrasound and electro-stimulation therapy equipment, PCB’s for landing gear systems and flap controllers, fluid control units for airliners, and devices for defense industry.

 

Our strategy is to build and pursue global opportunities leveraging core competencies and to expand our manufacturing foundry platform for innovative start-ups in return for manufacturing rights and equity.

 

As innovation, cost, and time to market become hyper competitive, domestic OEM’s are now compelled to use EMS partners with easy onshore access, providing local program management during product conceptualization, development, and integration.  Many of the mid-tier OEMs in industries such as military/aerospace, medical, industrial/instrumentation, and green-tech products tend to be too small for $1 billion-plus revenue EMS companies. Most of these OEMs value close proximity and the ability to provide complex manufacturing and personal customer service, which often favors regional providers that truly value and foster their relationships.

 

Furthermore, with the recent cost increases in labor, currency movements and freight concerns, the ability to also provide near-shore manufacturing is expected to generate increased interest. The low to medium EMS market compared to high volume has proved to be a higher margin with higher gross profits and sustained growth momentum. Our target accounts are mid-tier, U.S. based OEMs with annual sales from $15 million to $500 million.

 

We believe that the combination of: (i) our management expertise; (ii) low overhead and cost structure; (iii) sophisticated management system developed internally to oversee operational systems; (iv) high technology onshore and managed offshore manufacturing; and (v) global relationships and domestic customer centric program management team, PMI is well positioned to take advantage of the projected increase in outsourced onshore manufacturing.

 


Plan of Operation

Management is taking the following steps to sustain profitability and growth: (i) To build and pursue global opportunities leveraging core competencies; (ii) organic growth, new sales and expansion of services along the supply chain line; (iii) manufacturing rights and equity through our manufacturing foundry platform; (iv) expansion of capabilities and competencies through mergers & acquisitions providing scale, cost synergies and revenue opportunities.



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Our future success is likely dependent on our ability to sustain profitable growth and attain additional capital to support growth. There can be no assurance that we will be successful in obtaining any such financing, or that it will be able 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, we 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 we be unable to continue as a going concern.  

 

Our Products and Services

 

Engineering.  Our global engineering team supports technology customers and innovative start-ups with a broad range of electrical, mechanical and software engineering services. PMI has assembled a team of experts from around the globe to assist customers at any point in the design cycle.  These services include design processes from electrical, software, mechanical, Industrial and PCB design. Utilization of PMI’s design services will enable rapid market entry for our customers. It provides flexibility by becoming the extension of their engineering and allowing customers to focus on their business strategy.

Supply Chain Management.  PMI’s supply chain solution provides maximum flexibility and responsiveness through a collaborative and strategic approach with our customers. PMI can assume supply chain responsibility from component sourcing through delivery of finished product. PMI’s supply chain focus is on building internal and external systems and relationships, which allow us to capitalize on our expertise to align with our customer’s objectives and integrate with their processes today and in the future.

Manufacturing.  Flexibility, responsiveness, communication, global supply chain management and speed are key values in what we offer our customers. We establish clear communication about our customer needs and requirements enabling a seamless integration with their objectives and processes. PMI’s manufacturing capability supports high and low-mix assemblies for prototypes, to medium-volume quantities in California and high-volume production in Asia. Our manufacturing operations include printed circuit board assembly and testing; cable and harness assembly; mechanical assembly; and complex system integration.

 

Sales and Marketing

 

Our marketing approach is to position PMI as a domestic US based electronics manufacturing company providing low cost, low risk, and flexible manufacturing solutions to customers by providing product development and manufacturing services through our factory in U.S. as well as factories worldwide.

 

The Majority of our clients are in the Aerospace, Industrial, Instrumentation, Medical and Automotive Industries. However our product development division works with clients in many other areas such as telecommunication, commercial, consumer, entertainment and energy products.  We utilize both direct sales force and sales representatives with expertise in supply chain management and manufacturing services. We have also expanded our services along the supply chain line to cable and harness, sheet metal, PCB fabrication and plastics in order to support organic growth by cross selling and identifying new opportunities with prospect customers.

 

In order to support our manufacturing foundry vision we’re targeting innovators and start ups through investment communities by offering investment opportunities in their products and in return obtaining manufacturing rights and exclusivity. This strategy can support scale as the products can have very high potential in telecomm, consumer, energy and commercial markets.

 

Once the relationships are established, programs are managed through our customer centric program management teams.

We support our clients through early supplier involvement, which results in improved return on investment.

Program Managers are responsible for managing the global supply chain, reducing material acquisition time and cost. They’re also responsible for the profitability of the programs and ultimately the customer satisfaction index, including on-time delivery, quality, communication and technology.

 

We sustain and grow our relationships by continuous delivery of high quality parts, on time and at the lowest possible cost.

 



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Competition

 

The EMS 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. We do not compete with first tier EMS companies such as Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Foxconn; Jabil Circuit, Inc.; Plexus Corp.; Sanmina-SCI Corporation. CTS Electronics. We mostly compete with second and third tier EMS companies, whereby we compete with different companies depending on the type of service and/or geographic area. 

 

Competitive Positioning

 

Probe’s competitive advantage is in its ability to provide domestic clients with global electronic design, manufacturing and business services versus its domestic rivals offering only local manufacturing services. This advantage enables PMI to offer its customers the best of both worlds with low risk, low cost, flexible, and high quality manufacturing services.  Probe’s internally developed management systems provide for an efficient and robust operation and a much lower cost compared to its competitors. Probe’s horizontal growth of supply chain services and utilization of global suppliers has also created a turn-key, cost competitive solution for its customers. In addition, Probe’s new product introduction services that provide scalability and cost reductions are creating the foundation for the company’s manufacturing foundry for innovative start-ups.

 

Strategy

 

Our strategy is to pursue and build global opportunities by leveraging core competency and to create a manufacturing foundry for innovative start-ups in return for manufacturing rights and equity. We are also planning the expansion of our capabilities and competencies through mergers & acquisitions. The rational behind this strategy is to provide scale, cost synergies, revenue opportunities and a larger domestic footprint.

 

Personnel

 

We presently have approximately 38 employees, including production, program management, materials management, engineering, sales, quality, 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 environmental, 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. The Company had a net profit of $90,940; total stockholder’s equity of $338,046; and a working capital surplus of $170,245; however, we still had an accumulated deficit of $238,483 as of December 31, 2011 and used $378,117 in net cash from operations for the year ended December 31, 2011. Therefore, the ability of the Company to operate as a going concern is still dependent upon its ability (1) to obtain



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sufficient debt and/or equity capital and/or (2) to generate positive cash flow from operations.  On February 18, 2011 we entered into an Accounts Receivable Purchasing Agreement (the “ARPA”) with DSCH Capital Partners, LLC d/b/a Far West Capital (“FWC”), an unaffiliated third party.  Pursuant to the ARPA, FWC may purchase, in its sole discretion, eligible accounts receivable of our company on a revolving basis up to a maximum of $750,000.  Under the terms of the ARPA, FWC may purchase eligible receivables from us with full recourse for the face amount of such eligible receivables less a discount of 1.0%.  In addition, we are required to pay FWC a monthly cost of funds fee equal to the net funds employed by FWC at a rate equal to the Wall Street Journal Prime Lending Rate plus 4.75%, with a floor of 7.00%.  FWC will retain 20% of the purchase price of the receivables as a reserve amount.

 

The ARPA also provides that FWC has the right to require us to repurchase any purchased accounts receivable: (a) if there is a dispute as to the validity of such receivable by the account debtor, (b) if certain covenants, warranties or representations made by us with respect to such receivables are breached, (c) upon and during the continuance of an event of default under the ARPA or upon the termination of the ARPA, or (d) if such receivable remains unpaid 90 days after the invoice date.  The ARPA has an initial term of one year with automatic renewals for successive one-year periods. Notwithstanding that, FWC may terminate the ARPA at any time upon 90days prior written notice or without notice upon and during the continuance of an event of default.

 

Additionally, provided there does not exist an event of default under the ARPA or the rider thereto (the “Rider”), FWC may make advances to or for the benefit of the company  in an aggregate amount up to and not to exceed  $250,000.00 from time to time during the term of the Rider and upon our request therefore, which advances shall be subject to all of the terms and conditions of the ARPA and shall be revolving consisting of advances against our  eligible inventory as defined in the Rider as follows: (i) the advances against eligible inventory, at FWC’s discretion, will be in amounts up to the sum 50% of all eligible inventory; provided, however, the advances against eligible inventory shall at no time exceed 33% of the net outstanding purchased accounts under the ARPA plus the outstanding amount due, or net funds employed, from advances made on eligible inventory within conditions contained within the rider. The balance cap percentage shall be 25% after 120 days from date of the Rider.  Eligible inventory will be valued at the lower of cost or market value.

 

There can be no assurances that this financing will be sufficient to sustain profitable growth and attain additional capital to support growth. There can be no assurance that we will be successful in obtaining any such additional financing, or that we will be able 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, we 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 we be unable to continue as a going concern.  

 

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, 2011, we had current liabilities of $1,260,952. 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. 

 

WE FACE INTENSE COMPETITION, WHICH MAY REDUCE OUR SALES, OPERATING PROFITS, OR BOTH.

 

The EMS industry is large, competitive and diverse, and is serviced by many companies, including several that have achieved significant market share, whereby we compete with numerous domestic and foreign EMS firms. We do not compete with first tier EMS companies such as Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Foxconn; Jabil Circuit, Inc.; Plexus Corp.; Sanmina-SCI Corporation. CTS Electronics. We mostly compete with second and third tier EMS companies. We compete with different companies depending on the type of service and/or geographic area. 



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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 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.

 



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During the twelve months ended December 31, 2011, we derived approximately 6% of our revenue from customers in the medical device manufacturing, 29% industrial products, 1% from customers in the semiconductor industry, 4% from customers in alternative fuel and green technologies, 8% from customers in the instrumentation industry,  8% from customers in the military industry,  9% from customers in the telecommunications industry, 1% from customers in the automotive industry, and 34% 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 affect 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.

 

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 58% of net sales during the twelve months ended December 31, 2011.

     

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.

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.

 



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Our success depends to a large extent upon the continued services of our executive officers. 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.

 

RISKS ABOUT OUR STOCK

 

SHARES OF OUR COMMON STOCK ARE SUBJECT TO THE PENNY STOCK RESTRICTIONS WHICH CREATES A LACK OF LIQUIDITY AND MAKE TRADING DIFFICULT OR IMPOSSIBLE.

 

Until our shares of common stock are traded be in the over-the-counter markets which are commonly referred to as the OTCQB. As a result, an investor may find it difficult to dispose of, or to obtain accurate quotations as to the price of our securities.

 

The United States Securities and Exchange Commission, or the SEC, has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Penny stocks (generally) are equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. Prior to a transaction in a penny stock, a broker-dealer is required to:

 

·         Deliver a standardized risk disclosure document prepared by the SEC;

·         Provide the customer with current bid and offer quotations for the penny stock;

·         Explain the compensation of the broker-dealer and its salesperson in the transaction;

·         Provide monthly account statements showing the market value of each penny stock held in the customer's account;

·         Make a special written determination that the penny stock is a suitable investment for the purchaser; and

·         Provide a written agreement to the transaction.

 

These requirements may have the effect of reducing the level of trading activity in the secondary market for our stock. Because our shares are subject to the penny stock rules, you may find it more difficult to sell your shares. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities.

 

 

OUR SECURITIES ARE THINLY TRADED WHICH DOES NOT PROVIDE LIQUIDITY FOR OUR INVESTORS.

 

Our securities are quoted on the Over-the-Counter QB level. The OTCQB is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Stock Market or national or regional exchanges. Securities traded on the OTCQB are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The



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Securities and Exchange Commission's order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the OTCQB. Quotes for stocks included on the OTCQB are not listed in newspapers. Therefore, prices for securities traded solely on the OTCQB may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.

 

Investors must contact a broker-dealer to trade over-the-counter bulletin board securities. As a result, you may not be able to buy or sell our securities at the times that you may wish. Furthermore, when investors place market orders to buy or sell a specific number of shares at the current market price it is possible for the price of a stock to go up or down significantly during the lapse of time between placing a market order and its execution.

 

WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE; THEREFORE, YOU MAY NEVER SEE A RETURN ON YOUR INVESTMENT.

 

We do not anticipate the payment of cash dividends on our common stock in the foreseeable future. We anticipate that any profits from our operations will be devoted to our future operations. Any decision to pay dividends will depend upon our profitability at the time, cash available and other factors.

 

Item 1B.  Unresolved Staff Comments.

 

None.

  

Item 2.  Properties.


On October 14, 2009 we entered into a 5 year lease with Bernard family trust, with a commencement date of December 31, 2009. The facility is approximately 19,701 square feet and located at 17475 Gillette, Irvine CA, 92614.

 

On March 28, 2011 we signed an amendment to our facility lease with an increase of 1,600 square feet. The increase in the lease commenced on April 1, 2011 and continues through year five.  The amended lease has the following payments:

 

 

Original Lease

Amended lease

Year

Monthly Rent

Monthly Rent

1

7,880

7,880

2

9,850

10,650

3

10,835

11,715

4

11,820

12,780

5

12,805

13,845

 

 

Item 3. Legal Proceedings.

 

None.

 

Item 4.  [Removed And Reserved.]

 



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PART II

 

Item  5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

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, 2011, as reported by the Bloomberg Financial Network, are as follows:

 

2011 FISCAL YEAR

 

High

 

Low

First Quarter

 

$0.01

 

$0.0036

Second Quarter

 

$0.01

 

$0.0075

Third Quarter

 

$0.0095

 

$0.0045

Fourth Quarter

 

$0.01

 

$0.005

  

2010 FISCAL YEAR

 

High

 

Low

First Quarter

 

$0.01

 

$0.005

Second Quarter

 

$0.015

 

$0.0034

Third Quarter

 

$0.034

 

$0.0025

Fourth Quarter

 

$0.034

 

$0.0025

 

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

                          203,861

$0.17

                       3,488,905

Non-Qualified Equity compensation plans approved by security holders

                          900,000

$0.13

                                         -  

Total

                       1,112,735

$0.14

                       3,488,905

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Recent Sales of Unregistered Securities

 

For the years ended December 31, 2011 and 2010, we issued the following securities without registration under the Securities Act of 1933, as amended. These securities were issued on the reliance of an exemption provided by Section 4(2) of the Securities Act.

 

On June 29, 2011, we issued 1,000,000 shares to our Chief Financial Officer for service and employment with the company during the year ended December 31, 2010.  These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.

On June 29, 2011, we issued 1,000,000 shares to our Vice-President of Quality for service and employment with the company during the year ended December 31, 2010. These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.

 

On June 29, 2011, we issued 1,250,000 shares for business consulting services performed on behalf of the company during the year ended December 31, 2010.  These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.


On June 29, 2011, we issued 500,000 shares for to a board of directors’ advisor for advisory services performed on behalf of the company during the year ended December 31, 2010.  These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.

 

On June 29, 2011, we issued 500,000 shares to our independent director for his board service during the year ended December 31, 2010. These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.

 

On September 1, 2011, we issued 1,000,000 shares as an initial tranche for website design consulting services performed during the first three quarters of 2011. In addition, on October 2, 2011, we issued another 1,000,000 said services to be performed for the remainder of 2011.

 

On October 4, 2011 we issued 500,000 shares for business consulting services performed on behalf of the company during the first three quarters of 2011.

 

On December 1, 2011, we issued 2,000,000 shares for website optimization consulting services.

 



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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” and the notes thereto.

  

Probe Manufacturing, Inc.

Statement of Operations

for the years ended December 31,

 

 

 

 

2011

2010

 

 

 

Sales

 $        4,549,798

 $        2,799,935

Cost of Goods Sold

           3,146,478

           2,004,278

Gross Profit

           1,403,320

              795,657

 

 

 

General And Administrative

           1,133,836

              701,144

Share Based Expense

                40,764

                26,694

Net Profit / (Loss) From Operations

              228,720

                67,819

 

 

 

Other Income / (Expenses)

                13,755

              190,890

Interest Expense

            (136,897)

              (15,341)

Net Profit / (Loss) Before Income Taxes

              105,578

              243,368

Income Tax Expense

                14,638

                          -

Net Profit / (Loss)

 $             90,940

 $           243,368

 

 

 

Probe Manufacturing, Inc.

Balance sheet

as of December 31,

 

 

 

 

2011

2010

 

 

 

 

 

 

Working Capital

   $           170,245

   $              44,385

Total Assets

             1,598,998

                 994,964

Long term Debt

                              -

                     5,932

Stockholder Equity

   $           338,046

   $           183,175

 

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

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 Securities and Exchange Act of 1934, as amended. 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



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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 United States Securities and Exchange Commission or the SEC. 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 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. (the “Company,” “Probe,” or “PMI”) We provide global design and manufacturing services to original electronic equipment manufacturers from our 23000 sq-ft facility in Irvine, California and strategic locations worldwide. Our revenue is generated from sales of our services primarily to customers in the medical device, aerospace, automotive, industrial and instrumentation product manufacturers. We provide our domestic customers with low cost, low risk, flexible and high quality manufacturing services. We utilize global partnerships to secure the best cost and materials available by providing our customers with onshore, scalable manufacturing solutions. The services that we provide are commonly referred to as Electronics Manufacturing Services (EMS). Our EMS offerings include new product introduction, collaborative design, procurement and materials management, product manufacturing, product warranty repair, and end-of-life support. 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.

 

The majority of our revenue is driven from manufacturing a mix of complex printed circuit board assemblies (PCBA), and box build assemblies.  Some examples of our customer’s finished goods products includes medical devices such as, electronic control units that help vehicles run on natural gas or hydrogen, electronic control units for laser welding equipment, control units for electric-hybrid drives, portable ultrasound and electro-stimulation therapy equipment, PCB’s for landing gear systems and flap controllers, fluid control units for airliners, and devices for defense industry.

 

Our strategy is to build and pursue global opportunities leveraging core competencies and to expand our manufacturing foundry platform for innovative start-ups in return for manufacturing rights and equity.

 

As innovation, cost, and time to market become hyper competitive, domestic OEM’s are now compelled to use EMS partners with easy onshore access, providing local program management during product conceptualization, development, and integration.  Many of the mid-tier OEMs in industries such as military/aerospace, medical, industrial/instrumentation, and green-tech products tend to be too small for $1 billion-plus revenue EMS companies. Most of these OEMs value close proximity and the ability to provide complex manufacturing and personal customer service, which often favors regional providers that truly value and foster their relationships.

 

Furthermore, with the recent cost increases in labor, currency movements and freight concerns, the ability to also provide near-shore manufacturing is expected to generate increased interest. The low to medium EMS market compared to high volume has proved to be a higher margin with higher gross profits and sustained growth momentum. Our target accounts are mid-tier, U.S. based OEMs with annual sales from $15 million to $500 million.

 

We believe that the combination of: (i) our management expertise; (ii) low overhead and cost structure; (iii) sophisticated management system developed internally to oversee operational systems; (iv) high technology onshore and managed offshore manufacturing; and (v) global relationships and domestic customer centric program management team, PMI is well positioned to take advantage of the projected increase in outsourced onshore manufacturing.

 

 

Plan of Operation



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Management is taking the following steps to sustain profitability and growth: (i) To build and pursue global opportunities leveraging core competencies; (ii) organic growth, new sales and expansion of services along the supply chain line; (iii) manufacturing rights and equity through our manufacturing foundry platform; (iv) expansion of capabilities and competencies through mergers & acquisitions providing scale, cost synergies and revenue opportunities.

Our future success is likely dependent on our ability to sustain profitable growth and attain additional capital to support growth. There can be no assurance that we will be successful in obtaining any such financing, or that it will be able 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, we 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 we be unable to continue as a going concern.  

 

Our Products and Services

 

Engineering.  Our global engineering team supports technology customers and innovative start-ups with a broad range of electrical, mechanical and software engineering services. PMI has assembled a team of experts from around the globe to assist customers at any point in the design cycle.  These services include design processes from electrical, software, mechanical, Industrial and PCB design. Utilization of PMI’s design services will enable rapid market entry for our customers. It provides flexibility by becoming the extension of their engineering and allowing customers to focus on their business strategy.

Supply Chain Management.  PMI’s supply chain solution provides maximum flexibility and responsiveness through a collaborative and strategic approach with our customers. PMI can assume supply chain responsibility from component sourcing through delivery of finished product. PMI’s supply chain focus is on building internal and external systems and relationships, which allow us to capitalize on our expertise to align with our customer’s objectives and integrate with their processes today and in the future.

Manufacturing.  Flexibility, responsiveness, communication, global supply chain management and speed are key values in what we offer our customers. We establish clear communication about our customer needs and requirements enabling a seamless integration with their objectives and processes. PMI’s manufacturing capability supports high and low-mix assemblies for prototypes, to medium-volume quantities in California and high-volume production in Asia. Our manufacturing operations include printed circuit board assembly and testing; cable and harness assembly; mechanical assembly; and complex system integration.

 

Plan of Operation

Management is taking the following steps to sustain profitability and growth: (i) to build and pursue global opportunities leveraging core competencies; (ii) organic growth, new sales and expansion of services along the supply chain line; (iii) manufacturing rights and equity through our manufacturing foundry platform; (iv) expansion of capabilities and competencies through mergers and acquisitions providing scale, cost synergies and revenue opportunities.

On February 18, 2011 we entered into an Accounts Receivable Purchasing Agreement (the “ARPA”) with DSCH Capital Partners, LLC d/b/a Far West Capital (“FWC”), an unaffiliated third party.  Pursuant to the ARPA, FWC may purchase, in its sole discretion, eligible accounts receivable of our company on a revolving basis up to a maximum of $750,000.  Under the terms of the ARPA, FWC may purchase eligible receivables from us with full recourse for the face amount of such eligible receivables less a discount of 1.0%.  In addition, we are required to pay FWC a monthly cost of funds fee equal to the net funds employed by FWC at a rate equal to the Wall Street Journal Prime Lending Rate plus 4.75%, with a floor of 7.00%.  FWC will retain 20% of the purchase price of the receivables as a reserve amount.

 

The ARPA also provides that FWC has the right to require us to repurchase any purchased accounts receivable: (a) if there is a dispute as to the validity of such receivable by the account debtor, (b) if certain covenants, warranties or representations made by us with respect to such receivables are breached, (c) upon and during the continuance of an event of default under the ARPA or upon the termination of the ARPA, or (d) if such receivable remains unpaid 90 days after the invoice date.  The ARPA has an initial term of one year with automatic renewals for successive one-year periods. Notwithstanding that, FWC



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may terminate the ARPA at any time upon 90days prior written notice or without notice upon and during the continuance of an event of default.

 

Additionally, provided there does not exist an event of default under the ARPA or the rider thereto (the “Rider”), FWC may make advances to or for the benefit of the company  in an aggregate amount up to and not to exceed  $250,000.00 from time to time during the term of the Rider and upon our request therefore, which advances shall be subject to all of the terms and conditions of the ARPA and shall be revolving consisting of advances against our  eligible inventory as defined in the Rider as follows: (i) the advances against eligible inventory, at FWC’s discretion, will be in amounts up to the sum 50% of all eligible inventory; provided, however, the advances against eligible inventory shall at no time exceed 33% of the net outstanding purchased accounts under the ARPA plus the outstanding amount due, or net funds employed, from advances made on eligible inventory within conditions contained within the Rider. The balance cap percentage shall be 25% after 120 days from date of the Rider.  Eligible inventory will be valued at the lower of cost or market value.

 

There can be no assurances that this financing will be sufficient to sustain profitable growth and attain additional capital to support growth. There can be no assurance that we will be successful in obtaining any such additional financing, or that we will be able 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, we 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 we be unable to continue as a going concern.  

 

Summary of Results

 

For the year ended December 31, 2011, we had a net profit of $90,940 compared to a net profit of $243,368, for the same period in 2010. The increased net profit in 2010 was mainly due to a gain on debt settlement of $190,890. 

For the year ended December 31, 2011, our revenue was $4,549,798 compared to $2,799,935 for the same period in 2010, due to increased orders within existing accounts and we added 6 new customers in 2011.

For the year ended December 31, 2011, our cost of goods sold was 69% compared to 72% for the same period in 2010, mainly due to the decrease in direct labor as a percent of sales. 

For the twelve months ended December 31, 2011, our gross margin was 31% compared to 28% for the same period in 2010. 

For the twelve months ended December 31, 2011, our SG&A cost was 24% compared to 25% for the same period in 2010. 

For the year ended December 31, 2011, we had a net profit of $90,940 and a working capital surplus of $170,245.  Our total stockholder’s equity increased by $154,871, resulting in shareholder surplus of $338,046 as of December 31, 2011.

As of December 31, 2011, we had a working capital surplus of $170,245, compared to working capital surplus of $44,385 as of December 31, 2010, an increase of $125,860. 

 

Key performance indicators for the year ended December 31, 2011 and 2010:

 

Key performance indicators:

 

 

 

 

 

2011

2010

Inventory Turns

5.51

4.7

Days Sales in Backlog

184

248

Days Receivables Outstanding

45

33

Days Payables Outstanding

51

52

 

Inventory turns

 

Inventory turns are calculated as the ratio of cost of material compared to the average inventory for that period. For the year ended December 31, 2011, our inventory turns were 5.1 compared to 4.7 for the same period in 2010.



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Days sales in backlog are calculated based on our back log divided by average daily sales during that period.  For the year ended December 31, 2011, Days Sales in Backlog was 184 days compared to 248 days for the same period in 2010. 

 

Days receivables outstanding is calculated as the ratio of average accounts receivable during that period compared to average daily sales for the same period, this has worsened as a result of our customers stretching out payments and the economy in general.  For the year ended December 31, 2011, days receivables outstanding was 45 days compared to 33 days for the same period in 2010. 

 

Days payable outstanding is calculated as the ratio of average accounts payable during that period compared to average daily sales for the same period. For the year ended December 31, 2011, day’s payable outstanding was 51 days compared to 52days for the same period in 2010. 

 

Critical Accounting Policies and basis of presentation

 

The accompanying financial statements of the Company have been prepared in accordance with the instructions to Form 10-K for the fiscal year ending December 31, 2011.

 

We follow United States Generally Accepted Accounting Principles, or GAAP. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to our financial statements.

 

Cash and Cash Equivalents

 

We maintain 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 $250,000 per commercial bank. For purposes of the statement of cash flows we consider 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

 

We grant credit to its customers located within the United States of America; and do not require collateral. Our ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by us.

Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts.  Although we expect to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2011, we had a reserve for potentially un-collectable accounts of $15,000.  Five (5) customers accounted for approximately 58% of accounts receivable at December 31, 2011 and no one customer accounted for more than 13% of the accounts receivable balance. Our trade accounts primarily represent unsecured receivables.  Historically, our 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 raw materials, as well as changing customer demand.  We make 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 30, 2011, we had a reserve for potentially obsolete inventory of $160,000. 

 

Property and Equipment



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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.  We follow 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)

 

Long –Lived Assets

 

Our 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 our 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. We have 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

 

We have 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, 2011, we had outstanding common shares of 197,659,056 used in the calculation of basic earnings per share.  Basic Weighted average common shares and equivalents at December 31, 2011 and 2010 were 190,315,404 and 184,638,320, respectively.  As of December 31, 2011, we had outstanding warrants to purchase 10,682,955 additional common shares and options to purchase 1,103,861 additional common shares. Fully diluted weighted average common shares and equivalents for the years ended 2011 and 2010 were 202,069,928 and 203,639,511, respectively.

 

Research and Development

 

We have curtailed all research and development and focusing our business on its core business of electronics contract manufacturing. 

 

Research and Development Costs incurred in association with the alternative fuels technology development (which include salaries and equipment) were expensed as incurred. We expensed $0.00 in Research and Development Costs during the years ended December 31, 2011 and 2010. 

 

Segment Information     

 



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Except as identified above in the research and development section, we operate our primary business of electronics contract manufacturing.

 

Share Based Compensation  

 

For a discussion on share based compensation and recently issued accounting pronouncements relating to share based compensation, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our accompanying un-audited financial statements. 

 

Income Taxes

 

For a discussion income taxes and recently issued accounting pronouncements relating to share based compensation, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our accompanying unaudited financial statements. 

 


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

for the years ended December 31,

 

 

 

 

2011

2010

 

 

 

Sales

100%

100%

Cost Of Goods Sold

69%

72%

Gross Profit

31%

28%

 

 

 

General And Administrative

24%

25%

Share Based Compensation

1%

1%

Net Profit / (Loss) From Operations

5%

2%

 

 

 

Other Income / (Expenses)

0%

7%

Interest Expense

-3%

-1%

Net Profit / (Loss) Before Income Taxes

2%

9%

Income Tax Expense

0%

0%

Net Profit / (Loss)

2%

9%

 

Net Sales 

 

For the year ended December 31, 2011, our revenue was $4,549,798 compared to $2,799,935 for the same period in 2010.  Our revenue increased by $1,749,863 for the year ended December 31, 2011, compared to the same period in 2010. The increased in revenue was due to increased orders within existing accounts and we added 10 new customers in 2011.

Major Customers

 

Our top 5 customers accounted for approximately 58% of our net sales for the year ended December 31, 2011, compared to 73%, for the same period in 2010. We believe that our ability to grow our core business depends on increasing sales to



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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 or 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, 2011, our gross profits increased to 31% from 28% for the same period in 2010. 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 and potential scrap. 



Selling, General and Administrative (SG&A) Expenses 

 

For the year ended December31, 2011, our SG&A expense was 24% compared to 25% for the same period in 2010.  This decrease is primarily due to the increase in revenue.  We have also made adjustments to decrease SG&A expense.

 

Net Income/(Loss) from operations

 

For the year ended December 31, 2011, our net income from operations was 5% compared to net income from operations of 2% for the same period in 2010. This was primarily due to an increase in revenue as well as the decrease in expenses.

 

For the year ended December 31, 2011 interest expense was $136,897 compared to $15,341 for the same period in 2010, this was due to implementation of our asset based line of credit with Farwest Capital referenced in Note 8.

 

Liquidity and Capital Resources

 

PROBE MANUFACTURING, INC.

Condensed Statements of Cash Flows

for the years ended December 31,

 

 

 

 

2011

2010

Net Cash provided / (Used) In Operating Activities

   $                 (378,117)

 $                  70,396

Cash Flows Used In Investing Activities

                   (25,310)

                   (51,556)

Cash Flows Provided / (used)  By Financing Activities

                   421,776

                   (18,840)

Net (Decrease) Increase in Cash and Cash Equivalents

 $                    18,349

 $                           -  

 

 

 

Capital Requirements for long-term Obligations

 

On February 18, 2011 we entered into an Accounts Receivable Purchasing Agreement (the “ARPA”) with DSCH Capital Partners, LLC d/b/a Far West Capital (“FWC”), an unaffiliated third party.  Pursuant to the ARPA, FWC may purchase, in its sole discretion, eligible accounts receivable of our company on a revolving basis up to a maximum of $750,000.  Under the terms of the ARPA, FWC may purchase eligible receivables from us with full recourse for the face amount of such eligible receivables less a discount of 1.0%.  In addition, we are required to pay FWC a monthly cost of funds fee equal to the net funds employed by FWC at a rate equal to the Wall Street Journal Prime Lending Rate plus 4.75%, with a floor of 7.00%.  FWC will retain 20% of the purchase price of the receivables as a reserve amount.

 

The ARPA also provides that FWC has the right to require us to repurchase any purchased accounts receivable: (a) if there is a dispute as to the validity of such receivable by the account debtor, (b) if certain covenants, warranties or representations made by us with respect to such receivables are breached, (c) upon and during the continuance of an event of default under



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Financial Statements


the ARPA or upon the termination of the ARPA, or (d) if such receivable remains unpaid 90 days after the invoice date.  The ARPA has an initial term of one year with automatic renewals for successive one-year periods. Notwithstanding that, FWC may terminate the ARPA at any time upon 90days prior written notice or without notice upon and during the continuance of an event of default.

 

Additionally, provided there does not exist an event of default under the ARPA or the rider thereto (the “Rider”), FWC may make advances to or for the benefit of the company  in an aggregate amount up to and not to exceed  $250,000.00 from time to time during the term of the Rider and upon our request therefore, which advances shall be subject to all of the terms and conditions of the ARPA and shall be revolving consisting of advances against our  eligible inventory as defined in the Rider as follows: (i) the advances against eligible inventory, at FWC’s discretion, will be in amounts up to the sum 50% of all eligible inventory; provided, however, the advances against eligible inventory shall at no time exceed 33% of the net outstanding purchased accounts under the ARPA plus the outstanding amount due, or net funds employed, from advances made on eligible inventory within conditions contained within the Rider. The balance cap percentage shall be 25% after 120 days from date of the Rider.  Eligible inventory will be valued at the lower of cost or market value.

 

There can be no assurances that this financing will be sufficient to sustain profitable growth and attain additional capital to support growth. There can be no assurance that we will be successful in obtaining any such additional financing, or that we will be able 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, we 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 we be unable to continue as a going concern.  

 

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 and Supplemental Data.

 

 

PROBE MANUFACTURING, INC.

10-K

TABLE OF CONTENTS

FINANCIAL STATEMENTS

 

 

Page

Report of independent registered public accounting firm

23

Balance Sheet as of December 31, 2011 and 2010

24

Statement of Operations for the years ended December 31, 2011 and 2010

25

Statement of Stockholders Equity for the years ended December 31, 2011 and 2010

26

Statement of Cash flows for the years ended December 31, 2011 and 2010

28

Footnotes to the Financial Statements

29

 

 


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Financial Statements


 

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


April 2, 2012

Board of Directors

Probe Manufacturing, Inc.

17475 Gillette Avenue

Irvine, CA  92614


We have audited the accompanying consolidated balance sheet of Probe Manufacturing, Inc. (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2011 and 2010. 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 audit.


We conducted our audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and changes in stockholders’ deficit and its cash flows for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.


As discussed in Note 1 of the notes to the accompanying consolidated financial statements, the financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in the footnotes, the Company has current assets of $1,460,906 and current liabilities of $1,260,952.  Sales have increased from $2,799,935 in 2010 to $4,549,798 for the comparable period in 2011.  In addition, the Company has an accumulated deficit of ($238,483) and is dependent on at least maintaining current revenue levels. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/W. T. Uniack & Co. CPA’s P.C.

Woodstock, Georgia


 



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Financial Statements


 

Probe Manufacturing, Inc.

Balance Sheet as of

 

 

 

 

 

 

December 31,

December 31,

 

 

2011

2010

Assets

 

 

Current Assets:

 

 

 

 Cash

 $                  18,349

 $                          -  

 

Accounts receivable – net

                   719,320

                   403,109

 

Inventory

                   693,528

                   447,133

 

Total Current Assets

    1,431,197

       850,242

 

 

 

 

Property And Equipment – Net

       127,092

       113,665

 

 

 

 

 

Notes receivable

                     11,000

                     11,000

 

Other Assets

         29,709

         20,057

Total Assets

 $ 1,598,998

 $    994,964

 

 

 

 

Liabilities And Stockholders' ( Deficit )

 

 

Current Liabilities:

 

 

 

Bank overdraft

 $              -  

 $      47,502

 

Accounts payable - trade

                   495,487

                   383,989

 

Customer Deposits

                     23,139

                     13,737

 

Accrued Expenses

                   188,083

                   282,229

 

Notes Payable - Line of Credit

                   545,579

                             -  

 

Notes Payable - Related Party

 

                     70,000

 

Notes Payable - Current

           8,664

           8,400

 

Total Current Liabilities

    1,260,952

       805,857

Long-Term Debt:

 

 

 

Notes Payable

                 -  

         14,332

 

Less Current portion of Long Term Debt

                 -  

          (8,400)

 

Net Long-Term Debt

                 -  

           5,932

Total Liabilities

    1,260,952

       811,789

 

 

 

 

Stockholders'  ( Deficit )

 

 

 

Shares to be issued

                 -  

         21,250

 

Common stock, $.001 par value; 400,000,000 shares authorized; 197,659,056 and 184,638,320 shares issued and outstanding respectively

       197,659

       184,638

 

Additional paid-in capital

       379,503

       306,709

 

Treasury Stock

             (633)

                 -  

 

Accumulated deficit

      (238,483)

      (329,422)

 

Total Stockholders'  ( Deficit )

       338,046

       183,175

Total Liabilities And Stockholders' Deficit

 $ 1,598,998

 $    994,964

 

 

 

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,

 

 

 

 

2011

2010

 

 

 

Sales

 $        4,549,798

 $        2,799,935

Cost of Goods Sold

           3,146,478

           2,004,278

Gross Profit

           1,403,320

              795,657

 

 

 

General And Administrative

           1,133,836

              701,144

Share Based Expense

                40,764

                26,694

Net Profit / (Loss) From Operations

              228,720

                67,819

 

 

 

Other Income / (Expenses)

                13,755

              190,890

Interest Expense

            (136,897)

              (15,341)

Net Profit / (Loss) Before Income Taxes

              105,578

              243,368

Income Tax Expense

                14,638

                          -

Net Profit / (Loss)

 $             90,940

 $           243,368

 

 

 

Per Share Information:

 

 

Basic weighted average number

 

 

of common shares outstanding

       190,315,404

       184,638,320

 

 

 

Net Profit / (Loss) per common share

 $             0.0005

 $               0.001

 

 

 

Per Share Information:

 

 

Diluted, weighted average number

 

 

of common shares outstanding

       202,069,928

       203,639,511

 

 

 

Diluted, Net Profit / (Loss) per common share

 $         0.0005

 $           0.001

 

 

 

The accompanying footnotes are an integral part of these financial statements



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Probe Manufacturing, Inc.

Consolidated Statement of Stockholders Equity

as of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock        .001 Par

Shares to be Issued

Treasury Stock

 

 

 

Description

 Shares

Amount

 Shares

Amount

Shares

Amount

Additional Paid in Capital

Accumulated Deficit

Stock
holders' Deficit Totals

Balance 12/31/2009

      184,638,320

 $  184,638

                   -  

 $            -  

               -  

 $               -  

 $       301,266

 $  (572,790)

 $         (86,886)

 

 

 

 

 

 

 

 

 

 

Share based Option Amortization

 

 

 

 

 

 

               5,443

 

                 5,443

Stock Issued to be issued

 

                  -  

   4,250,000

       21,250

 

 

                       -   

 

                21,250

Net Profit

 

 

 

 

 

 

 

        243,368

            243,368

Balance 12/31/2010

      184,638,320

 $  184,638

   4,250,000

 $   21,250

               -  

 $               -  

 $      306,709

 $  (329,422)

 $          183,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 (4,250,000)

     (21,250)

 

 

 

 

              (21,250)

Shares issued for 2010 services

          4,250,000

          4,250

 

 

 

 

              17,000

 

                21,250

Shares issued for services

          4,770,736

           4,771

 

                -  

 

           -  

             29,393

 

                34,164

Shares issued for Web Development

          4,000,000

          4,000

 

 

 

 

               19,801

 

                23,801

Warrants issued for financing fee

 

 

 

 

 

 

               6,600

 

                 6,600

Treasury Stock - Repurchase

 

 

 

 

    115,000

             (633)

 

 

                   (633)

Net Profit

 

 

 

 

 

 

 

          90,940

               90,940

Balance 12/30/2011

      197,659,056

 $  197,659

                   -  

                -  

    115,000

 $         (633)

 $      379,503

 $  (238,483)

 $        338,046

 

 

The accompanying footnotes are an integral part of these financial statements

 



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Probe Manufacturing, Inc.

Statements of Cash Flows

for the years ended December 31,

 

 

 

 

 

 

 

 

2011

2010

Cash Flows from Operating Activities:

 

 

 

Net Income / ( Loss )

 $                  90,940

 $                243,368

 

Adjustments to reconcile net loss to net cash

 

 

 

 

used in operating activities:

 

 

 

 

Depreciation and amortization

                     35,683

                     40,975

 

 

Share based expense

                     40,764

                     26,694

 

 

Gain on debt Settlement

 

                 (190,960)

 

 

Loss on sale of subsidiary

 

 

 

 

Net profit of subsidiary

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

(Increase) decrease in accounts receivable

                 (316,211)

                 (288,728)

 

 

(Increase) decrease in inventory

                 (246,395)

                   (44,266)

 

 

(Increase) decrease in other assets

                     (9,652)

                       2,570

 

 

(Decrease) increase in accounts payable

                   111,498

                   196,041

 

 

(Decrease) increase in customer deposits

                       9,402

                   (11,697)

 

 

Other (Decrease) increase in accrued expenses

                   (94,146)

                     96,399

Net Cash provided / (Used) In Operating Activities

                 (378,117)

                     70,396

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

Purchase of Property and equipment

                   (25,310)

                   (51,556)

Cash Flows Used In Investing Activities

                   (25,310)

                   (51,556)

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

Bank Overdraft / (Repayment)

                   (47,502)

                   (13,172)

 

Proceeds / (Payments) on Line of Credit

                   545,579

                            -  

 

Repurchase Treasury Stock

                        (633)

                            -  

 

Payments on capital lease settlement obligations

                            -  

                   (70,000)

 

Proceeds / (Payments) on notes payable

                   (75,668)

                     64,332

Cash Flows Provided / (used)  By Financing Activities

                   421,776

                   (18,840)

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

                     18,349

                            -  

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

                            -  

                            -  

 

 

 

 

 

Cash and Cash Equivalents at End of Period

 $                  18,349

 $                         -  

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

Interest Paid

 $                127,415

 $                  12,841

 

Shares issued for web development

 $                  23,801

 

 

 

The accompanying footnotes are an integral part of these financial statements



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Financial Statements


 

Probe Manufacturing, Inc.

 

Notes to Financial Statements

For The Years Ended December 31, 2011 And 2010

 

Notes 1- GENERAL

The Company

 

Probe Manufacturing, Inc. was founded in 1993. Probe is a high quality global electronics manufacturing service (EMS) company. We provide a full range of engineering, manufacturing and integrated supply chain services to original equipment manufacturers (OEM) companies, who design and market electronic products.. Currently, our revenue is generated from sales of our services primarily to customers in the medical device, aerospace, alternative fuel, industrial and instrumentation products manufacturers. Probe's EMS offerings include new product introduction, collaborative design, materials management, product manufacturing, product testing and 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 determining future trends and estimates of activity can be very difficult.

 

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

$90,940, total stockholder’s equity of $338,046 and a working capital surplus of $170,245; however, we still had an accumulated deficit of $(238,483) as of December 31, 2011 and used $378,117 in net cash from operations for the year ended December 31, 2011. 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 generate positive cash flow from operations.

Plan of Operations

 

Management is taking the following steps to sustain profitability and growth: (i) to build and pursue global opportunities leveraging core competencies; (ii) organic growth, new sales and expansion of services along the supply chain line; (iii) manufacturing rights and equity through our manufacturing foundry platform; (iv) expansion of capabilities and competencies through mergers and acquisitions providing scale, cost synergies and revenue opportunities.

 

Our future success is likely dependent on its ability to sustain profitable growth and attain additional capital to support our future success is likely dependent on our ability to attain growth capital in order to sustain growth and profitability.  There can be no assurance that we will be successful in obtaining any such financing, or that it will be able 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, we 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 we be unable to continue as a going concern. 

 

There can be no assurances that this financing will be sufficient to sustain profitable growth and attain additional capital to support growth. There can be no assurance that we will be successful in obtaining any such additional financing, or that we will be able 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, we 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 we be unable to continue as a going concern.  

 



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Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

The accompanying financial statements of the Company have been prepared in accordance with the instructions to Form 10-K for the fiscal year ending December 31, 2011.

 

We follow the Generally Accepted Accounting Principles of the United States, or GAAP. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to our audited financial statements. 

 

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.

 

Cash and Cash Equivalents

 

We maintain 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 $250,000 per commercial bank. For purposes of the statement of cash flows we consider all cash and highly liquid investments with initial maturities of one year or less to be cash equivalents.

 

Accounts Receivable

 

We grant credit to its customers located within the United States of America; and do not require collateral. Our ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by us.

 Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts.  Although we expect to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2011, we had a reserve for potentially un-collectable accounts of $15,000.  Five (5) customers accounted for approximately 58% of accounts receivable at December 31, 2011 and no one customer accounted for more than 13% of the accounts receivable balance. Our trade accounts primarily represent unsecured receivables.  Historically, our 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 raw materials, as well as changing customer demand. We make 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 30, 2011, we had a reserve for potentially obsolete inventory of $160,000. 

 

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.  We follow 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:



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Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

 

                Furniture and fixtures                                                         3 to 7 years

                Equipment                                                                            7 to 10 years

                Leasehold improvements                                                  2 years (life of the lease)

 

Long –Lived Assets

 

Our 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 our 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. We have not experienced a material amount of rejected or damaged product.

 

The Company provides services for its customers that range from contract design to original product design to repair services. The Company recognizes service revenue when the services have been performed, and the related costs are expensed as incurred.

 

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

 

We have 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, 2011, we had outstanding common shares of 197,659,056 used in the calculation of basic earnings per share.  Basic Weighted average common shares and equivalents at December 31, 2011 and 2010 were 190,315,404 and 184,638,320 respectively.  As of December 31, 2011, we had outstanding warrants to purchase 10,682,955 additional common shares and options to purchase 1,103,861 additional common shares. Fully diluted weighted average common shares and equivalents for the years ended 2011 and 2010 were 202,069,928 and 203,639,511 respectively.

 

Research and Development

 

Research and Development Costs incurred in association with the alternative fuels technology development (which include salaries and equipment) were expensed as incurred.  We expensed $0 in R&D during the years ended December 31, 2011 and 2010. 

 

 



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Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

Segment Disclosure     

 

FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with contract electronics manufacturing. As such, our operations have been aggregated into one reportable segment for all periods presented.

 

Share Based Compensation  

 

The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) (now contained in FASB Codification Topic 718, Compensation-Stock Compensation), 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 warrants. 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 awards. 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 years ended December 31, 2011 and 2010 we had $40,764 and 26,694, respectively, in share based expense, due to the issuance of our options and warrants.  As of December 31, 2011 we had $0 in non-vested expense to be recognized. 

 

Income Taxes

 

The Company accounts for income taxes under SFAS No. 109 (now contained in FASB Codification Topic 740-10-25, Accounting for Uncertainty in Income Taxes), 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. As of December 31, 2011, we had a net operating loss carry forward of $(238,482) and a deferred tax asset of $81,084 using the statutory rate of 34%. The deferred tax asset may be recognized in future periods, not to exceed 20 years.  However, due to the uncertainty of future events we have booked valuation allowance of $81,084.

 



Table of Contents                 

Financial Statements


Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

 

December 31, 2011

Deferred Tax Asset

 $                            81,084

Valuation Allowance

                             (81,084)

Deferred Tax Asset (Net)

 $                                   -  

 

 

NOTE 3 – INVENTORY

 

Inventories by major classification were comprised of the following at:

 

 

December 31, 2011

December 31, 2010

Raw Material

                   $    601,214

$       513,345

Work in Process

                       249,872

101,092

Finished Goods

                           2,441

2,697

Total

                       853,528

617,134

Less Reserve for excess or obsolete inventory

                     (160,000)

                     (170,000)

Total Inventory

                 $      693,528

 $       447,134

 

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment were comprised of the following at:

 

 

December 30, 2011

December 31, 2010

Furniture and fixtures

 $                     33,558

 $                     33,558

Equipment

                   1,937,815

                   1,888,740

Leasehold improvements

                        36,686

                        36,686

Total

                   2,008,059

                   1,958,984

Accumulated Depreciation

                 (1,880,967)

                 (1,845,319)

Net Fixed Assets

 $                   127,092

 $                   113,665

 

 

NOTE 5 – ACCRUED EXPENSES

 

 

December 31, 2011

December 30, 2010

 

 

 

Accrued Wages

 $                        89,704

  $                      195,936 

 Accrued Interest

                             3,552

                              2,400 

 Accrued Professional Fees

                                   -  

                              4,350 

Accrued Other

                             3,345

                              7,960 

State Income Tax Payable

                           14,638

                                   -  

Accrued Rent

                           52,190

                            59,190 

 Accrued Vacation

                           24,653

                            12,393 

 Total Accrued Expenses

 $                      188,082

 $                      282,229 

 



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Financial Statements


Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

NOTE 7 - CAPITAL LEASE SETTLEMENT OBLIGATIONS 

 

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group.  In September 2004, we had outstanding balances of $457,604 and $556,293 on the

 

two leases and were unable to make the monthly lease payments. As a result, we entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500, which was amended on June 1, 2007.

 

 On April 9, 2010 we entered into an agreement with CIT to settle the balance in full for $70,000, as a result we realized a gain of $190,960.  As of December 31, 2011 the balance due to CIT was $0.

 

NOTE 8 – NOTES PAYABLE

 

Related Party – Notes payable                      

 

Note Payable - On June 23, 2011 we entered short term $70,000 demand note to B&S Development Group, LLC.  The term of this note is four month due on October 23, 2010 with an interest rate of %15 percent per annum.  This note required the payment of a 12% due diligent fee to be amortized over the life of the note. Total payments for interest and due diligent fees are $3,000 per month.  Bijan Israel is one of our largest shareholders; beneficially owning 69,959,347 shares of common stock. On February 17, 2010 the balance of this note was paid in full.  As of December 31, 2011 the outstanding balance was zero.

 

Notes payable

 

Note Payable. This is a term note payable, unsecured, dated November 03, 2009 payable to Linwood Goddard at a 12.00% interest rate, with a 36 month amortization and monthly payments of $334.14.  As of December 31, 2011 the balance was $4,332. 

 

Note Payable. This is a term note payable, unsecured, dated December 24, 2009 payable to Linwood Goddard at a 12.00% interest rate, with a 36 month amortization and monthly payments of $334.14.  As of December 31, 2011 the balance was $4,332. 

 

NOTE 9 – COMMITMENTS AND CONTIGENCIES

 

Operating Rental Leases

 

On October 14, 2009 we entered into a 5 year lease with Bernard family trust, with a commencement date of December 31, 2009. The facility is approximately 19,701 square feet and located at 17475 Gillette, Irvine CA, 92614.


On March 28, 2011 we signed an amendment to our facility lease with an increase of 1,600 square feet. The increase in the lease commences on April 1, 2011 and continues through year five.  The amended lease has the following payments:

 

 

Original Lease

Amended lease

Year

Monthly Rent

Monthly Rent

1

7,880

7,880

2

9,850

10,650

3

10,835

11,715

4

11,820

12,780

5

12,805

13,845

 



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Financial Statements


 

Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

NOTE 10 – CAPITAL STOCK TRANSACTIONS

 

On April 21, 2005, our Board of Directors and shareholders approved the following capital stock transactions:

 

We 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, our 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. 

 

Stock Repurchase Program

On November 1, 2011, the Company adopted a plan to repurchase up to 5,000,000 shares of its issued and outstanding common stock in accordance with the guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

The plan allows the Company to purchase its issued and outstanding common shares in the open market or in negotiated transactions, from time to time, depending on market conditions and other factors as well as being subject to relevant rules under Untied States securities regulations. The plan does not obligate the Company to make any purchases, at any specific time or in any particular situation. The plan may be suspended or discontinued at any time at the sole discretion of the Company. Share repurchases will be funded with the Company's available cash, after determining the working capital requirements of the Company. Accordingly, there is no guarantee as to the exact number of shares that will be repurchased under the plan.

The company's Board of Directors authorized the repurchase plan because it believes recent market conditions may have caused the Company's common stock to be undervalued. The timing and number of any shares repurchased will depend on the terms and conditions of the plan and no assurance can be given that any specific amount of common stock will be repurchased.

As of December 31, 2011, we had repurchased 115,000 shares of our common stock.

Common Stock Transactions

 

For the years ended December 31, 2011 and 2010, we issued the following securities without registration under the Securities Act of 1933, as amended. These securities were issued on the reliance of an exemption provided by Section 4(2) of the Securities Act.

 

On June 29, 2011, we issued 1,000,000 shares to our Chief Financial Officer for service and employment with the company during the year ended December 31, 2010.  These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.

 

On June 29, 2011, we issued 1,000,000 shares to our Vice-President of Quality Control for service and employment with the company during the year ended December 31, 2010. These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.



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Financial Statements


Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

 

On June 29, 2011, we issued 1,250,000 shares for business consulting services performed on behalf of the company during the year ended December 31, 2010.  These shares were accrued for during 2010 and were accounted for in our financial statements but the stock certificate was not physically issued until the date stated herein.


On June 29, 2011, we issued 500,000 shares for to a board of directors’ advisor for advisory services performed on behalf of the company during the year ended December 31, 2011. 

 

On June 29, 2011, we issued 500,000 shares to our independent director for his board service during the year ended December 31, 2011.

 

On September 1, 2011, we issued 1,000,000 shares as an initial tranche for website design consulting services performed during the first three quarters of 2011. In addition, on October 2, 2011, we issued another 1,000,000 said services to be performed for the remainder of 2011.

 

On October 4, 2011 we issued 500,000 shares for business consulting services performed on behalf of the company during the first three quarters of 2011.

 

On December 1, 2011, we issued 2,000,000 shares for website optimization consulting services.

 

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, 2011 and 2010 there were 197,659,056 and 184,638,320 shares of common stock issued and outstanding, respectively.  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.

 

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 common stock shares 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 25, 2006 the Articles of Incorporation were amended authorizing 15,000 shares Series C Convertible Preferred Stock.

 

As of August 20, 2006 all preferred stock has been converted into Common stock and there are no outstanding preferred shares as of December 31, 2011.

 

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.



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Financial Statements


Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

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 1,192,875 Series A Warrants issued and outstanding.  Each warrant gives the holder the right to purchase 5 shares of common stock (5,964,375 total shares) at $0.33 per share.  The Series A Warrants expired on November 15, 2011.

 

Series B - Common Stock Warrants

We currently have 1,192,875 Series B Warrants issued and outstanding.  Each warrant gives the holder the right to purchase 5 shares of common stock (5,964,375 total shares) at $0.50 per share.  The Series B Warrants will expire on May 15, 2012.

 

Series C – Common Stock Warrants

We currently have 600,000 Series C Warrants issued and outstanding.  Each warrant gives the holder the right to purchase 1 shares of common stock (600,000 total shares) at $0.267 per share.  The Series C Warrants expired on November 5, 2010.

 

Series D – Common Stock warrants

 

We currently have 1,718,580 Series D Warrants issued and outstanding.  Each warrant gives the holder the right to purchase 1 share of common stock (1,718,580 total shares) at $0.133 per share. The Series D Warrants expire on November 5, 2012.

 

For the year ended December 31, 2008 and 2009, we recognized share based compensation expense of $14,403 and $8,232, respectively from the issuance of options and Warrants.

 

Series E – Common Stock warrants

 

On April 8, 2011, we issued 3,000,000 series E Warrants. Each warrant gives the holder the right to purchase 1 share of common stock (3,000,000 total shares) at $0.05 per share. The Series E Warrants expire on April 8, 2016, as a result we recognized $6,600 in share based expense.

 



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Financial Statements


Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

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, 2008

   14,247,330

                0.38

 

  14,247,330

          0.38

 

Granted

                -  

                   -  

 

               -  

             -  

 

Exercised

                -  

                   -  

 

               -  

 

Outstanding December 31, 2009

   14,247,330

                0.38

 

  14,247,330

          0.38

 

Granted

                -  

                   -  

 

               -  

             -  

 

Expired C - Warrants

       600,000

                0.27

 

       600,000

          0.27

 

Exercised

                -  

                   -  

 

               -  

 

Outstanding December 31, 2010

   13,647,330

                0.38

 

  13,647,330

          0.38

 

Granted

     3,000,000

                0.05

 

    3,000,000

          0.05

 

Expired

     5,964,375

                0.33

 

    5,964,375

          0.33

 

Exercised

                -  

                   -  

 

               -  

 

Outstanding December 31, 2011

   10,682,955

                0.31

 

  10,682,955

          0.31

 

 

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 in years

 

 Warrants - Common Share Equivalents

Weighted Average Exercise price

$0.33

 

$0.33

 Expired

 

               -  

$0.33

$0.50

     5,964,375

$0.50

                 0.46

 

    5,964,375

$0.50

$0.13

 

$0.13

 Expired

 

 

$0.13

$0.13

     1,718,580

$0.13

                 0.85

 

    1,718,580

$0.13

$0.05

     3,000,000

$0.05

                 4.27

 

    3,000,000

$0.05

Total

   10,682,955

$0.31

 

 

  10,682,955

$0.31

 



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Financial Statements


Probe Manufacturing, Inc.

 

Notes to Financial Statements   – (Continued)

 

Stock Options

 

On February 8, 2007 pursuant to our 2006 Qualified Incentive Option Plan which was adopted by our Board of Directors granted Company employees an incentive stock option to purchase up to 652,766 shares of our common stock.  These options were granted at $.173 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. During the fiscal year 2009 we had a reduction in the outstanding stock options of 403,779 as a result of employee termination and forfeiture of the options. As of December 31, 2011, there were 203,861 outstanding options under this plan.

 

On February 8, 2008, we granted stock options to its key employees, to purchase up to 750,000 shares of our common stock, which was approved by our Board of Directors. These options were granted at $.173 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As a result, we recognized share-based compensation expense in the amount of $5,313 for the year ended December 31, 2007, $2,657 for the year ended December 31, 2008; $2,656 for the year ended December 31, 2009; $2,656 for the year ended December 31, 2010 and $0 for the year ended December 31, 2011. As of December 31, 2011 the balance of the outstanding options under this plan is 600,000.

 

On February 28, 2008 our granted stock options to a key employee, to purchase up to 300,000 shares of our common stock, which was approved by our Board of Directors. These options were granted at $.033 cents, the fair market value of the Company at the time of the grant.  These options expire on February 8, 2017. As a result, we recognized share-based compensation expense in the amount of $5,574 for year ended December 31, 2008; $5,576 for the year ended December 31, 2009; $2,786 for the year ended December 31, 2010; and $0 for the year ended December 31, 2011.

 

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

Note Payable - On June 23, 2010 we entered short term $70,000 demand note to B&S Development Group, LLC. The term of this note is four month due on October 23, 2010 with an interest rate of 15.00% per annum. This note required the payment of a 12% due diligent fee to be amortized over the life of the note. Total payments for interest and due diligent fees are $3,000 per month. Bijan Israel the managing member of B&S Development Group, LLC and is also a managing member of KB Development Group, LLC. KB Development Group is the largest shareholder of the company at 69,959,347 shares. As of December 31, 2010 the outstanding balance was $70,000. On February 17, 2010 the balance of this note was paid in full.


Kambiz Mahdi, our Chief Executive Officer, owns Billet Electronics, which is an independent distributor of electronic components. From time to time we purchase parts from Billet Electronics. In addition, from time to time we provide assembly and value added services to Billet Electronics.  In addition Billet was a supplier of parts and had dealings with current and former customers of our company. Our board of directors has approved such transactions of our chief executive officer.

 

 On June 26, 2011 we issued 1,000,000 shares of common stock to John Bennett, our Chief Financial Officer, as additional compensation for 2010, these shares were previously accrued and to be issued.


On June 26, 2011 we issued 500,000 shares of common stock to Shervin Talich for Board of Director fees for April 2011 through March 2012.



NOTE 12 – SUBSEQUENT EVENTS – (Un-audited)

 

None.



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 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9a.  Controls and Procedures.

 

(a)                 Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act, of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rules 13a-15(b) of the Exchange Act, an evaluation as of December 31, 2011 was conducted under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2011. 

 

(b)                 Report of Management on Internal Control over Financial Reporting

 

We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management including our of our chief executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO

 

Based on our evaluation under the Internal Control-Integrated Framework, our chief executive officer and chief financial officer concluded that our internal control over financial reporting was effective as of December 31, 2011.

 

(c)                 Changes in Internal Control over Financial Reporting

 

There have been no other changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K for the year ended 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9b.  Other Information.

 

None.

 

PART III

 

 

Item 10.     Directors, Executive Officers and Corporate Governance

Director Qualifications

We believe that our Board of Directors should encompass a diverse range of talent, skill and expertise sufficient to provide sound and prudent guidance with respect to our operations and interests. Each director also is expected to: exhibit high standards of integrity, commitment and independence of thought and judgment; use his or her skills and experiences to provide independent oversight to our business; participate in a constructive and collegial manner; be willing to devote sufficient time to carrying out their duties and responsibilities effectively; devote the time and effort necessary to learn our business; and represent the long-term interests of our Shareholders. Furthermore, we believe our Board of Directors should



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be comprised of persons with skills in areas such as: finance, electronic manufacturing, leadership of business organizations and legal matters.

In addition to the targeted skill areas as noted above, we endeavor to select members of our Board of Directors which have a strong record of achievement in key knowledge areas that are critical for directors to add value to our Board of Directors, including:

·       Strategy knowledge of our business model, the formulation of corporate strategies, knowledge of key competitors and markets;

 

·       Relationships understanding how to interact with investors, accountants, attorneys, management companies, and markets in which we operate; and

 

·       Functional understanding of finance matters, financial statements and auditing procedures, technical expertise, legal issues and marketing.

 

Our Directors

 

Kambiz Mahdi, age 46, Kambiz Mahdi is co-founder, and served as President and Chief Executive Officer of Probe Manufacturing from 1996 until December of 2005 and again from July 2009 until present. Prior to Probe Manufacturing, Mr. Mahdi was Technical Sales Manager at Future Electronics for six years. While at Future Electronics, Mr. Mahdi developed superior technical management leadership and skills servicing some of the top 1000 fortune technology customers and their applications. Mr. Mahdi also started Billet Electronics a global supply chain provider of products, services and solutions in the technology sector in 2007. He has established the company as a leading independent distributor of electronic components and provider of value-added services to its market. Mr. Mahdi has a BS degree in Electrical Engineering from California State University of Northridge.  Mr. Mahdi has not served on any other boards of public companies in the past five years.

 

Our Board of Directors selected Mr. Mahdi to serve as a director because he is our Chief Executive Officer and has served in various executive roles with our company for 14 years, with a focus on electrical manufacturing, sales and operations. Mr. Mahdi has profound insight into the development, marketing, finance, and operations aspects of our company. He has expansive knowledge of the electronic manufacturing industry and relationships with chief executives and other senior management at companies in the same or complimentary industries. Our Board of Directors believes that Mr. Mahdi brings a unique and valuable perspective to our Board of Directors.

 

John Bennett, age 51, John Bennett has been with Probe Manufacturing since February 2005, as the Chief Financial Officer. He has been in the Electronic manufacturing Industry for 22 years. He has held positions as the Controller, Vice President of Finance and Chief Financial Officer, with experience in Contract Manufacturing of Printed Circuit Board Assembly, Cable and Harness Assembly, Box Builds and Battery & Charger assembly. He holds a Bachelor of Science in Accounting from Mesa University and a Master of Science in Finance from the University of Colorado. Mr. Bennett has not served on any other boards of public companies in the past five years.

 

Our Board of Directors selected Mr. Bennett  to serve as a director because he is our Chief Financial Officer and has been with our company for more than six years, where his primary focus has been on the financial systems and operations and SEC reporting of the company. He has significant knowledge of, and relationships within, the electronic manufacturing industry, due in part to the 22 years he has spent working in the industry. Our Board of Directors believes that his executive experience in the electronic manufacturing coupled with his deep knowledge of our company’s strategies and operations will bring strong financial and operational expertise to our Board of Directors.

 

Shervin Talieh, age 44, Shervin Talieh has over 17 years of hands-on experience building and growing organizations that provide solutions to clients in various sectors. This experience has been developed across many functions, including corporate strategy, business development, marketing, branding, alliances, and operations; in small and large firms, through startups, turnarounds, and stable environments alike. Mr. Talieh started his career by successfully building, growing and selling his consulting startup, Index Data. Most recently, Mr. Talieh is the founder and CEO of Drumbi, an Internet technology startup focused on data and voice synchronization. At Drumbi, he guides the company's strategy, fund-raising, and operations. Prior to Drumbi, Mr. Talieh served at Vice President, Business Development for Goldeneye Solutions, a SaaS



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technology company. This was preceded by his tenure at Accenture, where he was a Partner in the Los Angeles Office, and a member of the executive team responsible for over 700 professionals in the region. Mr. Talieh has not served on any other boards of public companies in the past five years.

 

Our Board of Directors selected Mr. Talieh to serve as a director due to his strong relationships and understanding of the operations of technology companies. Mr. Talieh’s vast experience in business operations enhances his ability to contribute insight on achieving business success in a diverse range of economic conditions and competitive environments. Our Board of Directors believes that this experience will bring valuable knowledge and insight to our company.

 

Corporate Governance

 

Director Attendance at Meetings of the Board of Directors

 

Our Board of Directors held 3 meetings during the fiscal year ended December 31, 2011. Each of our incumbent directors attended at least 75.0% of the aggregate total number of meetings of our Board of Directors held during the period for which he served as a director.

 

Director Attendance at Annual Meetings of the Shareholders

 

Although we have no policy with regard to attendance by the members of our Board of Directors at our annual meetings, we invite and encourage the members of our Board of Directors to attend our annual meetings to foster communication between Shareholders and our Board of Directors.

 

Stockholder Communication with the Board of Directors

 

Any stockholder who desires to contact members of our Board of Directors, or a specified committee of our Board of Directors, may do so by writing to: Probe Manufacturing, Inc., Board of Directors, 17475 Gillette Ave., Irvine, California 92614, Attention: Secretary. Communications received will be distributed by our Secretary to such member or members of our Board of Directors as deemed appropriate by our Secretary, depending on the facts and circumstances outlined in the communication received.

 

Director Independence

 

We have a three-member Board of Directors. Due to the size of our company and the difficulty in finding directors that are competent or have experience in our industry, only one of our directors can be deemed an “independent director.”

 

While our stock is not listed on the New York Stock Exchange, our independent director would qualify as independent under the rules of the New York Stock Exchange.

 

Board Leadership Structure; Independent Lead Director

 

Kambiz Mahdi serves as both our Chairman of the Board of Directors and Chief Executive Officer. Our Board of Directors has determined that the most effective leadership structure for our company at the present time is for our Chief Executive Officer to also serve as our Chairman of the Board of Directors. Our Board believes that because our Chief Executive Officer is ultimately responsible for our day-to-day operations and for executing our business strategy, and because our performance is an integral part of the deliberations of our Board of Directors, our Chief Executive Officer is the director best qualified to act as Chairman of the Board of Directors. Our Board of Directors retains the authority to modify this structure to best address our unique circumstances, and so advance the best interests of all shareholders, as and when appropriate. In addition, although we do not have a lead independent director, our Board of Directors believes that the current structure is appropriate, due to the current size of our operations.

 

Our Board of Directors also believes, for the reasons set forth below, that its existing corporate governance practices achieve independent oversight and management accountability, which is the goal that many companies seek to achieve by separating the roles of Chairman of the Board of Directors and Chief Executive Officer. Our governance practices provide for strong independent leadership, independent discussion among directors and for independent evaluation of, and communication with, members of senior management. These governance practices are reflected in our Code of Business Conduct and Ethics, or our Code of Ethics.

 



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Committees of our Board of Directors

 

We have no standing committees of our Board of Directors at the current time, which is again due to the size of our operations. From time to time, our Board of Directors may establish committees it deems appropriate to address specific areas in more depth than may be possible at a full Board of Directors meeting. As our company grows, we plan to establish an audit committee, compensation committee and nominating and corporate governance committee.  The functions that these committees will perform are currently being performed by our three-member Board.

 

Director Nomination Procedures and Diversity

 

As outlined above, in selecting a qualified nominee, our Board of Directors considers such factors as it deems appropriate, which may include: the current composition of our Board of Directors; the range of talents of a nominee that would best complement those already represented on our Board of Directors; the extent to which a nominee would diversify our Board of Directors; a nominee’s standards of integrity, commitment and independence of thought and judgment; a nominee’s ability to represent the long-term interests of our shareholders as a whole; a nominee’s relevant expertise and experience upon which to be able to offer advice and guidance to management; a nominee who is accomplished in his or her respective field, with superior credentials and recognition; and the need for specialized expertise. While we do not have a formal diversity policy, we believe that the backgrounds and qualifications of our directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow our Board of Directors to fulfill its responsibilities. Applying these criteria, our Board of Directors considers candidates for membership on our Board of Directors suggested by its members, as well as by our Shareholders. Members of our Board of Directors annually review our Board of Directors’ composition by evaluating whether our Board of Directors has the right mix of skills, experience and backgrounds. Our Board of Directors may also consider an assessment of its diversity, in its broadest sense, reflecting, but not limited to, age, geography, gender and ethnicity.

 

Our Board of Directors identifies nominees by first evaluating the current members of our Board of Directors willing to continue in service. Current members of our Board of Directors with skills and experience relevant to our business and who are willing to continue in service are considered for re-nomination. If any member of our Board of Directors does not wish to continue in service or if our Board of Directors decides not to nominate a member for re-election, our Board of Directors will review the desired skills and experience of a new nominee in light of the criteria set forth above.

 

Our Board of Directors also considers nominees for our Board of Directors recommended by Shareholders. Notice of proposed stockholder nominations for our Board of Directors must be delivered in accordance with the requirements set forth in our bylaws and SEC Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Nominations must include the full name of the proposed nominee, a brief description of the proposed nominee’s business experience for at least the previous five years and a representation that the nominating stockholder is a beneficial or record owner of our common stock. Any such submission must be accompanied by the written consent of the proposed nominee to be named as a nominee and to serve as a director if elected. Nominations should be delivered to: Probe Manufacturing, Inc., Board of Directors, 17475 Gillette Ave., Irvine, California 92614, Attention: Chief Executive Officer.

 

Our Board of Directors will recommend the slate of directors to be nominated for election at the annual meeting of shareholders. We have not and do not currently employ or pay a fee to any third party to identify or evaluate, or assist in identifying or evaluating, potential director nominees.

 

Board of Directors Role in Risk Oversight

 

Our Board of Directors oversees our shareholders’ interest in the long-term success of our business strategy and our overall financial strength.

 

Our Board of Directors is actively involved in overseeing risks associated with our business strategies and decisions. It does so, in part, through its approval of all acquisitions and business-related investments and all assumptions of debt, as well as its oversight of our executive officers pursuant to annual reviews. Our Board of Directors is also responsible for overseeing risks related to corporate governance and the selection of nominees to our Board of Directors.

 

In addition, the Board reviews the potential risks related to our financial reporting. The Board meets with our Chief Financial Officer and with representatives of our independent registered public accounting firm on a quarterly basis to discuss and



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assess the risks related to our internal controls. Additionally, material violations of our Code of Ethics and related corporate policies are reported to our Board of Directors.

 

Code of Business Conduct and Ethics

 

We have adopted our Code of Ethics, which contains general guidelines for conducting our business and is designed to help our directors, employees and independent consultants resolve ethical issues in an increasingly complex business environment. Our Code of Ethics applies to our Principal Executive Officer, Principal Financial Officer, and persons performing similar functions and all members of our Board of Directors. Our Code of Ethics covers topics including, but not limited to, conflicts of interest, confidentiality of information, and compliance with laws and regulations. Shareholders may request a copy of our Code of Ethics, which will be provided without charge, by writing to: Probe Manufacturing, Inc., 17475 Gillette Ave., Irvine, California 92614; Attention: Chief Executive Officer. Our Code of Ethics is also available on our website, www.probeglobal.com. If, in the future, we amend, modify or waive a provision in our Code of Ethics, we may, rather than filing a Current Report on Form 8-K, satisfy the disclosure requirement by posting such information on our website, as necessary.

 

Compensation of Independent Directors

The key objective of our non-employee directors' compensation program is to attract and retain highly qualified directors with the necessary skills, experience and character to oversee our management. We currently use equity-based compensation to compensate our non-employee directors due to our restricted cash flow position; however, we may in the future provide cash compensation to our non-employee directors. The use of equity-based compensation is designed to recognize the time commitment, expertise and potential liability relating to active Board service, while aligning the interests of our Board of Directors with the long-term interests of our shareholders. In accordance with the policy of our Board of Directors, we do not pay management directors for Board service in addition to their regular employee compensation. For a discussion of the compensation paid to our only management directors, Mr. Mahdi and Mr. Bennett, for services provided as our CEO and CFO, respectively, see the sections of this proxy statement entitled "Compensation Discussion and Analysis" and "Executive Compensation."

In addition to the compensation provided to our non-employee director, which is detailed below, each non-employee director is reimbursed for any reasonable out-of-pocket expenses incurred in connection with attending in-person meetings of the Board of Directors and Board committees, as well for any fees incurred in attending continuing education courses for directors.

Fiscal Years 2010 and 2011 Annual Cash Compensation

We currently do not provide cash compensation to our non-employee directors and as such did not provide any cash compensation during the years ended December 31, 2010 and 2011.

Fiscal Years 2010 and 2011 Equity Compensation

Yearly Restricted Share Awards

Under the terms of the discretionary restricted share unit grant provisions of our 2006 Incentive Stock Plan and our 2011 Omnibus Incentive Plan, which we refer to as the 2006 Plan and 2011 Plan, respectively, each non-employee director is eligible to receive grants of restricted common stock share awards at the discretion of our Board of Directors. These yearly restricted share unit awards vest in full on the grant date. During fiscal year 2010, our one non-employee director received a restricted common stock share award 500,000 shares of common stock under this program.

Discretionary Grants

Under the terms of the discretionary option grant provisions of the 2006 Plan and the 2011 Plan, non-employee directors are eligible to receive stock options or other stock awards granted at the discretion of the Board of Directors. No director received stock options or other stock awards pursuant to the discretionary grant program during fiscal year 2011 or 2010.

Director Summary Compensation in Fiscal Years 2010 and 2011

The following table sets forth the fiscal years 2010 and 2011compensation for our non-employee directors.

Name

Fees Earned or Paid in Cash ($) (1)

Stock Awards ($) (2)

Total ($)

Shervin Talieh

 $                  -  

 $            1,800

 $              1,800

 



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(1)        This column represents the amount of cash compensation earned in fiscal years 2010 and 2011 for Board and committee service.

(2)        This column represents the grant date fair value of restricted share awards granted in fiscal years 2010 and 2011 in accordance with FASB ASC Topic 718. The grant date fair value of restricted share unit awards is the closing price of our common stock shares on the date of grant.

Change of Control and Termination Provisions

We currently do not having any stock options issued and outstanding to our non-employee directors. In the event of a dissolution or liquidation of the company or if we are acquired by merger or asset sale or in the event of other change of control events, no acceleration of the termination of any of the restrictions applicable to Restricted Shares, Restricted Stock Unit Awards, Options or Stock Appreciation Rights as defined in the 2011 Plan shall occur in the event of a change in control, unless otherwise provided by our Board of Directors or committee thereof, in such grant.

EXECUTIVE OFFICERS

        The names, ages and positions of our executive officers as of December 31, 2011 are as follows:

Name

Age

Position

Kambiz Mahdi

46

Chief Executive Officer and Chairman

John Bennett

51

Chief Financial Officer and Member of Board of Directors

The biographies of Mr. Mahdi and John Bennett can be found on page 4 in this proxy statement under the heading entitled “Information about Director Nominees.”

Compensation Discussion and Analysis

Compensation Philosophy and Objectives

We believe that the quality, skills and dedication of our executive officers are critical factors affecting the company's performance and shareholder value. Accordingly, the key objective of our compensation programs is to attract, retain and motivate superior executive talent while maintaining an appropriate cost structure. In addition, our compensation programs are designed to link a substantial component of our executives' compensation to the achievement of performance goals that directly correlate to the enhancement of shareholder value. Finally, our compensation programs are designed to have the right balance of short and long-term compensation elements to ensure an appropriate focus on operational objectives and the creation of long-term value.

To accomplish these objectives, the Board of Directors has structured our compensation programs to include the following key features and compensation elements:

·         base salaries, which generally are set below the median of our peer group companies and take into consideration the Companys cash flow and revenues;

 

·         equity-based compensation, which aligns our executives' interests with those of our shareholders and promotes executive retention; and

 

·         in most cases, both our performance-based and service-based restricted share units will provide for vesting over four years, thereby promoting the enhancement of long-term shareholder value and executive retention.

 

The Board also generally seeks to compensate its executives through determinable base cash salaries that are sensitive to the company’s cash resources but that also provide for motivational incentive and maintain continuity of management.  In addition, executives are given equity awards to reward performance based on the company’s growth and economic achievements. The Board does not maintain fixed policies for allocating among current and long-term compensation or among cash and non-cash compensation. Instead, the Board maintains flexibility and adjusts different elements of compensation based upon its evaluation of the key compensation goals set forth above.

 

The Board seeks to maintain a balance among fixed and variable compensation, cash and equity, and annual and longer-term incentive compensation to mitigate the risk arising from any element of compensation. While compensation levels may differ among NEOs based on competitive factors, and the performance, job criticality, experience and skill set of each specific NEO, there are no material differences in the compensation philosophies, objectives or policies for our NEOs. We do not maintain a policy regarding internal pay equity.

Compensation Committee



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We currently do not have a standing compensation committee of our Board of Directors at the current time, which is again due to the size of our operations. As our company grows, we plan to establish a compensation committee to address this specific area.  The functions of a compensation committee are currently being performed by our three-member Board.

 

Independent Consultants and Advisors

 

The Board has the authority to retain and terminate any independent, third-party compensation consultants and to obtain advice and assistance from internal and external legal, accounting and other advisors. During our 2011 fiscal year, the Board engaged the EMCI/Hanover Group (“EMCI”), an independent third-party, as its independent adviser for certain executive compensation matters. EMCI was retained by the Board to provide an independent review of the company's executive compensation programs, including an analysis of both the competitive market and the design of the programs. More specifically, EMCI furnished the Board with letter reporting on the fairness of the employment contracts entered into with our chief executive officer and chief financial, which he reported as both fair and necessary to provide for continuity of management, motivational incentive and economic reward, given the progress of the company for the last two fiscal years. The company paid EMCI $1,000.00 for its consulting services related to the above mentioned advisory services.

Role of Executive Officers in Compensation Decisions

Since our Board is composed of our chief executive officer and our chief financial officer, our executives are directly involved in all facets of our compensation structure and in the implementation of the long-term executive agreements entered into with our chief executive officer and our chief financial officer.  However, in determining the fairness, which took into account the company’s revenue growth and the benefit to our shareholders in providing continuity of management at this critical stage in the company’s growth makes, the considerations and recommendations of the third independent Board member and the EMCI were heavily weighted. 

Fiscal Year 2010 and 2011 Executive Compensation

Summary of Fiscal Year 2010 and 2011 Compensation Decisions

The company achieved significant growth in revenue, as well as in adjusted and GAAP operating income, net income and earnings per share. We realized strong revenue growth across all of our market segments, maintaining a diversified and balanced business portfolio. As a result of the company's excellent performance in fiscal year 2010, we decided in 2011 to enter into long-term employment agreement with our CEO and CFO to ensure continuity of management. The agreements are discussed in this proxy statement under the heading entitled “Executive Employment Agreements.

Elements of Compensation

We may allocate compensation among the following components for our named executive officers:

·         base salary;

·         annual incentive bonus awards;

·         performance-based and service-based stock incentive awards;

·         performance based deferred compensation; and

·         other benefits.

As discussed above, a key element of our compensation philosophy is that a significant portion of executive compensation is comprised of long-term elements that encourage our executives to stay with the company, which we believe provides for a stable working environment that ultimately benefits our shareholders

Other Benefits

Executive officers are eligible to participate in all of the company's employee benefit plans, such as medical, dental, vision, group life, disability, and accidental death and dismemberment insurance, in each case on the same basis as other employees, subject to applicable law.

Termination and Change of Control Arrangements

Our CEO and CFO are entitled to certain termination and change of control benefits under their employment agreements. These benefits are described and quantified under the section entitled "Executive Compensation—Potential Payments Upon Termination or Change of Control."

Compensation Risk Assessment

With the assistance of EMCI, the Board reviewed our compensation policies and practices and determined that our compensation programs do not encourage excessive or inappropriate risk-taking. While, a majority of the Board is comprised of our executive officers, the Board believes that the design and mix of our compensation programs appropriately encourage our executive and senior officers to focus on the creation of long-term shareholder value. In its review, the Board noted the following features:



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·         base salaries, which generally are set below the median of our peer group companies and take into consideration the Companys cash flow and revenues;

 

·         equity-based compensation, which aligns our executives' interests with those of our shareholders and promotes executive retention; and

 

·         in most cases, both our performance-based and service-based restricted share units will provide for vesting over four years, thereby promoting the enhancement of long-term shareholder value and executive retention.

 

 

 

 

Item 11.  

Executive Compensation.

 

 

The following table sets forth the fiscal year 2009, 2010 and 2011 compensation for:

·         Kambiz Mahdi, our Chief Executive Officer; and

·         John Bennett, our Chief Financial Officer; and

 

The executive officers included in the Summary Compensation Table are referred to in this proxy statement as our named executive officers. A detailed description of the plans and programs under which our named executive officers received the following compensation can be found in the section entitled "Compensation Discussion and Analysis.”

Summary Compensation Table

 

Name and Principal Position

Year

Salary
($)(3)

Bonus
($)(4)

Stock
Awards
($)(5)

Option
Awards
($)(6)

Non-Equity
Incentive Plan Compensation
($)

Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)

All Other Compensation ($)

Total
($)

Kambiz Mahdi (1)

2009

$          -

   $ -

$        -

$        -

   $           -

   $                        -

   $           -

$          -

Chief Executive Officer

2010

$ 45,000

   $ -

$        -

$        -

   $           -

   $                        -

   $           -

$ 45,000

 

2011

$114,222            -

   $ -

$        -

$        -

   $           -

   $                        -

   $           -

$114,222-

 

 

 

 

 

 

 

 

 

 

John Bennett (2)

2009

$ 112,000

   $ -

$        -

$        -

   $           -

   $                        -

   $           -

$ 112,000

Chief Financial Officer

2010

$112,000

   $ -

$ 5,000

$        -

   $           -

   $                        -

   $           -

$ 117,000

 

2011

$ 112,000

   $ -

$        -

$        -

   $           -

   $                        -

   $           -

  $ 112,000

 

1)       Information for fiscal year 2008 is not included for Mr. Mahdi, who was appointed as the chief executive officer during fiscal year. In 2009 Mr. Mahdi did not take or accrue any salary. In 2010, Mr. Mahdi accrued $45,000 in salary and as of December 31, 2011 the outstanding balance owed is $21,500.

 

2)       For the years 2009, 2010 and 2011, Mr. Bennett took a voluntary pay cut of 20% from $140,000 to $112,000.

 

3)       For 2012, Mr. Mahdi’s salary will be $150,000, pursuant to his employment agreement.  Mr. Bennett’s salary for 2012 will be at $140,000 and will receive 1,000,000 shares of common stock per quarter, pursuant to his employment agreement.

 

4)       There were no bonuses paid or accrued for any executives for fiscal years 2009, 2010 and 2011.

 

5)       Mr. Bennett was granted 1,000,000 shares of restricted common stock valued at .005 ($5,000) as additional compensation. These shares were issued in 2011. Stock awards consist of service-based and performance-based restricted share unit awards. The



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amounts in this column do not reflect compensation actually received by the named executive officers nor do they reflect the actual value that will be recognized by the named executive officers. Instead, the amounts reflect the grant date fair value for grants made by us in fiscal years 2010, calculated in accordance with FASB ASC Topic 718. There were no stock awards granted to the named executive officers in fiscal year 2009. For additional information regarding the assumptions made in calculating the amounts reflected in this column, see the section entitled "Stock-Based Compensation" under Note 2 to our audited consolidated financial statements provided herein.

 

6)       Mr. Bennett was issued an option to purchase 300,000 shares of our common stock on February 8, 2007 at $0.173 under our 2006 Plan and an option to purchase 300,000 shares of our common stock on February 28, 2008.  Both option grants expire on February 08, 2017.  As of December 31, 2010, Mr. Bennett has not exercised his option grants.

 

 

Outstanding Equity Awards at 2010 Fiscal Year-End

        The following table presents information about outstanding options and stock awards held by our named executive officers as of December 31, 2011.

 

Option Awards

 

Stock Awards

 

 

 

 

 

 

 

 

Equity

Equity

 

 

 

 

 

 

 

 

Incentive

Incentive

 

 

 

 

 

 

 

 

Plan Awards:

Plan Awards:

 

 

 

 

 

 

Number

Market

Number of

Market or

 

Number of

Number of

 

 

 

of Shares

Value of

Unearned

Payout Value

 

Securities

Securities

 

 

 

or Units

Shares or

Shares, Units

of Unearned

 

Underlying

Underlying

 

 

 

of Stock

Units of

or Other

Shares, Units

 

Unexercised

Unexercised

Option

 

 

That

Stock That

Rights That

or Other

 

Options

Options

Exercise

Option

 

Have Not

Have Not

Have Not

Rights That

 

Exercisable

Unexercised

Price

Expiration

 

Vested

Vested

Vested

Have Not

Name

(#) (1)

(#)

($)

Date

 

(#)

($)

(#)

Vested ($)

Kambiz Mahdi

 

John Bennett

            300,000

0.173

February 8, 2017

 

 

            300,000

0.033

February 8, 2017

 

_______________

 

(1) Mr. Bennett was issued an option to purchase 300,000 shares of our common stock on February 8, 2007 at $0.173 under our 2006 Plan and an option to purchase 300,000 shares of our common stock on February 28, 2008.  Both option grants expire on February 08, 2017.  As of December 31, 2010, Mr. Bennett has not exercised his option grants.

 

The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) (now contained in FASB Codification Topic 718, Compensation-Stock Compensation), 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 warrants. 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



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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 awards. 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 years ended December 31, 2010, 2009 and 2008 we had $5,000, $0 and $13,000, respectively, in share based expense to executives.  For the year ended December 31, 2011, we had $0 in non-vested expense to be recognized.  

 

Executive Employment Agreements

 

On September 1, 2011, the Board approved long-term executive employment agreements with our Chief Executive Officer, Kambiz Mahdi and Chief Financial Officer John Bennett, for a period of five years from execution, unless terminated earlier pursuant to the terms of their respective agreements. 

 

Mr. Mahdi will receive an annual compensation of $150,000 per year, subject to annual increases based on the greater of the consumer price index or 5.0% to take into account annual cost of living increases and also subject to such increases as may from time to time be determined by the Board of the Directors of the Company. In addition, Mr. Mahdi will receive a severance benefit consisting of a single lump sum cash payment equal the salary that Mr. Mahdi would have been entitled to receive through the remainder or the Employment Period or two (2) years, whichever is greater.

 

Mr. Bennett will receive an annual compensation of $140,000 per year, subject to annual increases based on the greater of the consumer price index or 5.0% to take into account annual cost of living increases and also subject to such increases as may from time to time be determined by the Board of the Directors of the Company. Additionally, Mr. Bennett will receive $40,000, payable in 8,000,000 shares of the company’s common stock at $.005 per share, as a retention bonus. The shares will be issued at the rate of 1,000,000 shares per quarter, on the 15th day of each quarter, commencing on September 15, 2011 and continuing for the following seven quarters. Mr. Bennett will also receive a severance benefit consisting of a single lump sum cash payment equal the salary that Mr. Bennett would have been entitled to receive through the remainder or the Employment Period or two (2) years, whichever is greater.

Potential Payments upon Termination or Change of Control

Severance Benefits

Mr. Mahdia will receive a severance benefit consisting of a single lump sum cash payment equal the salary that Mr. Mahdi would have been entitled to receive through the remainder or the Employment Period or two (2) years, whichever is greater.

Mr. Bennett will receive a severance benefit consisting of a single lump sum cash payment equal the salary that Mr. Bennett would have been entitled to receive through the remainder or the Employment Period or two (2) years, whichever is greater.

 

 

 

Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

 

The following table shows, as of March 30, 2012, the number of shares of our common stock beneficially owned by (1) any person who is known by us to be the beneficial owner of more than 5.0% of the outstanding shares of our common stock; (2) our directors; (3) our named executive officers; and (4) all of our directors and executive officers as a group. The percentage of common stock beneficially owned is based on 197,659,056 shares of our common stock outstanding as of March 30, 2012. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes securities over which a person has voting or investment power and securities that a person has the right to acquire within 60 days.

 



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Name of Beneficial Owners (1)

Number of Shares of Common Stock Beneficially Owned

Percentage

 

 

 

Kambiz Mahdi(2)

69,959,347

35%

John Bennett(3)

2,620,924

1.30%

Shervin Talieh

500,000

*

Bijan Israel(4)

69,959,347

35%

All directors and officers as a group (3 persons)

73,080,271

71.30%

 

 

*

Represents less than 1.0% of our outstanding common stock.

 

 

(1)

The address of each beneficial owner listed is c/o Probe Manufacturing, Inc., 17475 Gillette Ave., Irvine, California 92614.

 

 

(2)

The shares of common stock are held directly by the Kambiz and Bahareh Living Trust and indirectly by Kambiz Mahdi and Bahareh Mahdi as Trustees.

 

 

(3)

On March 18, 2011, Mr. Bennett purchased 1,020,924 shares of Probe Manufacturing, Inc. (the "Company") from Barrett Evans, the former CEO and chairman of the Company in a private transaction for $5,000, or $0.0048 per share. In addition, on June 26, 2011, Mr. Bennett was granted 1,000,000 shares of the Company's common stock as additional compensation for his employment with the Company for the year ended December 31, 2010. In addition Mr. Bennett was issued an option to purchase 300,000 shares of our common stock on February 8, 2007 at $0.173 under our 2006 Plan and an option to purchase 300,000 shares of our common stock on February 28, 2008.  Both option grants expire on February 08, 2017.  As of December 31, 2011, Mr. Bennett has not exercised his option grants.  Pursuant to Mr. Bennett's employment contract with the Company, he will be granted 8,000,000 shares of the Company's common stock over the next eight quarters.

 

 

(4)

The shares of common stock are held directly by the Bijan and Sima Israel Family Trust and indirectly by Bijan Israel and Sima Israel, Trustees.

 

 

 

None of the above shares have been pledged as security.

 

 

 

 

Item 13.  

Certain Relationships and Related Transactions, and Director Independence.

 

 

Director Independence

 

We have a three-member Board of Directors. Due to the size of our company and the difficulty in finding directors that are competent or have experience in our industry, only one of our directors can be deemed an “independent director.”

 

While our stock is not listed on the New York Stock Exchange, our independent director would qualify as independent under the rules of the New York Stock Exchange.

 

Review of Related Person Transactions

 

Our Code of Business Conduct and Ethics provides guidance for addressing actual or potential conflicts of interests, including those that may arise from transactions and relationships between us and our executive officers or directors, such as:

·         Business transaction between the company and any executive are prohibited, unless otherwise approved by the Board; 

·         Activities that may interfere with an executives performance in carrying out company responsibilities; 

·         Activities that call for the use of the companys influence, resources or facilities; and  

·         Activities that may discredit the name or reputation of the company.          

We have various procedures in place to identify potential related person transactions, and the Board of Directors and a separate compliance committee work together in reviewing and considering whether any identified transactions or



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relationships are covered by the Code of Business Conduct and Ethics. A copy of the company's Code of Business Conduct and Ethics on the Corporate Governance is on our website at www.probeglobal.com.

Transactions with Related Persons

For the years ended December 31, 2010 and 2011, the company had the transactions which involved related persons:

·         On June 23, 2010 we entered short term $70,000 demand note to B&S Development Group, LLC.  The term of this note is four month due on October 23, 2010 with an interest rate of %15 percent per annum.  This note required the payment of a 12% due diligent fee to be amortized over the life of the note. Total payments for interest and due diligent fees are $3,000 per month.  Bijan Israel, B&S Development Group, LLC’s managing partner, is one of our largest shareholders; beneficially owning of the company at 69,959,347 shares. On February 17, 2010 the balance of this note was paid in full.  As of December 31, 2011 the outstanding balance was zero.

·         Our chief executive officer was a supplier of parts and had dealings with current and former customers of our company; however, our board of directors has approved such transactions of our chief executive officer.

Item 14.    Principal Accounting Fees and Services.

W.T. Uniack & Co, CPA’s, P.C. has served as our independent registered public accounting firm since November 10, 2008 and audited our financial statements for the period for the year ended December 31, 2010 and December 31, 2011.

 

The following table lists the fees for services billed by our independent registered public accounting firm in 2010 and 2011:

 

Services:

2011

2010

Audit Fees (1)

 $          24,000

 $          24,000

Audit Related Fees (2)

                     -  

                     -  

Tax Fees (3)

                  985

                  985

Total

 $          24,985

 $          24,985

 

 

 

 

(1)

Audit fees billed in 2010 and 2011 consisted of fees related to the audit of our annual financial statements, reviews of our quarterly financial statements, and statutory and regulatory audits, consents and other services related to filings with the SEC.

 

(2)

Audit-related fees related to financial accounting and reporting consultations, assurance and related services.

 

(3)

Tax services consist of tax compliance and tax planning and advice.

 

The Board of Directors pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent registered public accounting firm, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(b) of the Exchange Act and the rules and regulations of the SEC. All services rendered by W.T. Uniack & Co, CPA’s, P.C. for the year ended December 31, 2010 and 2011 were pre-approved in accordance with the policies and procedures described above.

 

Auditor Independence

 

The Board of Directors has considered whether the provision of the above noted services is compatible with maintaining our independent registered public accounting firm’s independence and has concluded that the provision of such services has not adversely affected the independent registered public accounting firm’s independence.

 

The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with respect to our 2011 annual meeting of stockholders.

 

Board of Directors Audit Report to Shareholders

 

Since we do not have a standing Audit Committee our full Board of Directors oversees our financial reporting process. Our management has the primary responsibility for our financial statements as well as our financial reporting process, principles and internal controls. The independent registered public accounting firm is responsible for performing an audit of our financial statements and expressing an opinion as to the conformity of such financial statements with accounting principles generally accepted in the United States of America.

 

In this context, the Board of Directors has reviewed and discussed our audited financial statements as of December 31, 2010 and December 31, 2011 with management and the independent registered public accounting firm. The Board of Directors has



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discussed with the independent registered public accounting firm the matters required to be discussed by the Statement on Auditing Standards No. 61, Professional Standards, as amended. In addition, the Board of Directors has received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as currently in effect, and it has discussed their independence with us.

 

Item 15.  Exhibits, Financial Statement Schedules.

 

(a)(1) Financial Statements:

 

The consolidated financial statements and the related notes are included in Item 8 herein.

 

 

(a)(2) Financial Statement Schedule:

 

 

All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

 

 

(a)(3) Exhibits:

 

 

The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this annual report.

 

 

(b) Exhibits:

 

 

See Item 15(a)(3) above.

 

 

(c) Financial Statement Schedule:

 

 

All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.

 

 

\

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 Irvine, State of California on the 5th day of April, 2011.

 

 PROBE MANUFACTURING, INC.

 ______________________________

 REGISTRANT

 

 

/s/ Kambiz Mahdi                                                                                                               

___________________                                                                                                    

By: Kambiz Mahdi

Chief Executive Officer

 

Date: April 6, 2012

 

/s/ John Bennett                                                                                                                  

___________________                                                                                                    

By: John Bennett

Chief Financial Officer



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Date: April 6, 2012

 

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                                        

 

/s/ Kambiz Mahdi                              Chief Executive Officer and Director             

_______________________          (principal executive officer)

By: Kambiz Mahdi

 

Date: April 6, 2012

 

/s/ John Bennett                                   Chief Financial Officer and Director              

_______________________          (principal financial officer)

By: John Bennett

 

Date: April 6, 2012

 

/s/ Shervin Talieh                                 Director                                                                 

_______________________

By: Shervin Talieh

 

Date: April 6, 2012



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EXHIBIT INDEX

 

 

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.

 

 

The following exhibits are included, or incorporated by reference; in this Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (and are numbered in accordance with Item 601 of Regulation S-K).

 

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).

 

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

 

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 the Chief Executive Officer 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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32.1** Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to  Section  906  of  the  Sarbanes-Oxley  Act  of  2002.

 

101.INS**       XBRL Instance Document

 

101.SCH**      XBRL Taxonomy Extension Schema Document

 

101.CAL**      XBRL Taxonomy Extension Calculation Linkbase Document

 

101.LAB**      XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE**      XBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEF**      XBRL Taxonomy Extension Definition Linkbase Document

_________________

 

* Filed herewith

** Furnished herewith