SEC Filing Summary: Probe Manufacturing, Inc. (Form 10-KSB)
Business Context and Reporting Period
Company: Probe Manufacturing, Inc. (formerly Probe Manufacturing Industries, Inc.)
Reporting Period: Fiscal year ended December 31, 2006
Business Description: The company provides Electronics Manufacturing Services (EMS) to Original Equipment Manufacturers (OEMs) in the industrial, automotive, semiconductor, medical, and military sectors. Services include product design, supply chain management, assembly, testing, and direct order fulfillment. Operations are primarily focused in Southern California.
Going Concern Status: The independent auditors have issued a "going concern" opinion. While the company reported a net profit for 2006, it maintains a working capital deficit and a stockholders' deficit, raising substantial doubt about its ability to continue operations without additional financing.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 | 2005 |
|---|---|---|
| Revenue (Sales) | $9,310,464 | $6,351,362 |
| Cost of Goods Sold | $7,019,402 | $4,953,672 |
| Gross Profit | $2,291,062 | $1,397,690 |
| Gross Margin | 25% | 22% |
| Operating Income | $415,767 | ($425,934) |
| Net Profit / (Loss) | $150,894 | ($634,105) |
| Net Cash from Operating Activities | $608,028 | ($969,076) |
| Working Capital | ($132,686) | ($501,461) |
| Total Stockholders' Deficit | ($745,462) | ($1,049,649) |
| Total Debt (Current + Long-Term) | $3,031,584 | $3,454,119 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 46% year-over-year, driven by new customers and increased orders from existing clients.
- Profitability Turnaround: The company returned to profitability with a net profit of $150,894, reversing a net loss of $634,105 in 2005.
- Margin Expansion: Gross margin improved to 25% from 22% due to operational efficiencies and higher revenue volume. SG&A expenses decreased as a percentage of sales from 29% to 20%.
- Debt Restructuring: The company refinanced lines of credit, reducing interest rates from 20% to 12% and converting revolving credit into term notes with balloon payments due in 2008.
- Facility Move: The company moved to a more cost-effective sublease facility in Lake Forest, CA, in September 2006.
Guidance, Outlook, Risks, and Contingencies
Outlook: Management anticipates flat sales in the first and second quarters of 2007 due to customer re-order reductions and a major customer moving high-volume business to low-cost regions. Future success depends on obtaining additional capital and maintaining positive cash flow.
Key Risks:
- Liquidity: The company has a working capital deficit and relies on debt/equity financing to continue operations. Failure to secure funding could force curtailment of operations.
- Customer Concentration: The top 5 customers accounted for approximately 86% of net sales in 2006. The company has no long-term contracts; purchase orders can be cancelled or rescheduled at any time.
- Related Party Transactions: Significant debt and lease obligations are held by directors, officers, and their affiliates (e.g., Reza Zarif, Kambiz Mahdi, eFund Capital Partners).
- Legal Proceedings: Outstanding judgments include a $93,121 liability to the IRS and an $8,853 balance due to Cadence (software license judgment).
Investor Verification Checklist
- Capital Adequacy: Verify the company's ability to meet debt service obligations, specifically the balloon payments totaling over $1.1 million due in 2008.
- Customer Retention: Confirm the status of contracts with the top 5 customers, which represent the vast majority of revenue.
- Related Party Debt: Review the terms of debt held by insiders and affiliates to assess potential conflicts of interest and repayment priority.
- Going Concern: Monitor cash flow statements closely to ensure the company can sustain operations without immediate equity dilution or default.
- Legal Liabilities: Confirm that payments to the IRS and Cadence remain current to avoid foreclosure or additional penalties.