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PMFI > SEC Filings for PMFI > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for PROBE MANUFACTURING INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PROBE MANUFACTURING INC


1-Apr-2013

Annual Report


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 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 (OEM) from our 23000 sq-ft facility in Irvine, California and Trident Manufacturing's 16000 sq-ft facility in Salt Lake City, Utah, which we subsequently acquired in the first quarter of 2013. Our revenue is generated from sales of our services primarily to customers in the medical device, aerospace/military, telecommunication, alternative fuel, industrial and instrumentation product manufacturers. We provide our domestic customers with low cost, flexible and scalable manufacturing services. We utilize innovative manufacturing solutions, automated management systems and global sourcing strategies to provide 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 printed circuit board 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 (PCB), and box build assemblies. Some examples of our customer's finished goods products includes Ultrasound Therapeutic medical devices, electronic control units that help vehicles run on natural gas or hydrogen, electronic control units for precision laser welding 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.

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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) innovative manufacturing solutions and now multiple domestic facilities; and (v) global sourcing solutions and domestic customer centric program management team, PMI is well positioned to take advantage of the projected increase in outsourced onshore manufacturing.

On March 20, 2013, we completed the acquisition of Trident Manufacturing, Inc., a full-service electronics manufacturing service company based in Salt Lake City, Utah. This acquisition and future acquisitions like this will provide us with an expanded presence in lower cost regions of the US; strengthen our supply chain performance while increasing service levels and profitability; provides additional manufacturing capacity and value-added cable and harness offerings through Trident's facility and ultimately enhance our capacity to deliver seamless end-to-end solutions for diversified markets from manufacturing to distribution. (See Note 12, Subsequent Events, included in the notes to our financial statements herein).

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 total stockholder's equity of $284,973 and a working capital surplus of $131,010 and a net profit from operations of $71,510; however, we still had net loss of $(116,373) for the year ended December 31, 2012 and an accumulated deficit of $(354,856) as of December 31, 2012 and used $314,334 in net cash from operations for the year ended December 31, 2012. 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.

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.

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Plan of Operation

Management is taking the following steps to sustain profitability and growth:
(i) organic growth, new sales and expansion of services along the supply chain line; (ii) Utilization of our manufacturing foundry platform to support innovators by making investment in their technologies in return for manufacturing rights and equity; and (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.

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.

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Summary of Results

For the year ended December 31, 2012, we had a net loss of $(116,373) compared to a net profit of $90.940 for the same period in 2011. The decreased net profit in 2012 was mainly due to the increase in interest expense of $50,986, an increase in our allowance for doubtful accounts of $44,000 and our increase in inventory reserve of $30,000. In addition we saw a decrease in orders and revenue in the third and fourth quarter and an increase in administrative expenses due to the investment in additional certifications and personnel and purchases of additional manufacturing equipment.

For the year ended December 31, 2012, our revenue was $4,961,612 compared to $4,549,798 for the same period in 2011, due to the increase in revenue in the first and second quarter of 2012 from existing customer accounts.

For the year ended December 31, 2012, our cost of goods sold was 72% compared to 69% for the same period in 2011, mainly due to the increase in direct labor as a percent of sales.

For the twelve months ended December 31, 2012, our gross margin was 28% compared to 31% for the same period in 2011.

For the twelve months ended December 31, 2012, our SG&A cost was 26% compared to 25% for the same period in 2011.

For the year ended December 31, 2012, we had a net profit from operations of $71,510, net loss of $(116,373) and a working capital surplus of $131,010. Our total stockholder's equity decreased by $53,073, resulting in shareholder surplus of $284,973 as of December 31, 2012. The net loss of $(116,373) was mainly due to the increase in interest expense of $50,986, an increase in our allowance for doubtful accounts of $44,000 and our increase in inventory reserve of $30,000.

As of December 31, 2012, we had a working capital surplus of $131,010, compared to working capital surplus of $170,245 as of December 31, 2011, a decrease of $39,235. This was mainly due to the increase in our allowance for doubtful accounts of $44,000 and our increase in inventory reserve of $30,000.

Key performance indicators for the year ended December 31, 2012 and 2011:

Key performance indicators:

                            2012 2011
Inventory Turnover          5.41 5.51
Days Sales in Backlog        67  184
Days Sales Outstanding       68   45
Days Payables Outstanding    46   51

Inventory turnover are calculated as the ratio of cost of material compared to the average inventory for that period. For the year ended December 31, 2012, our inventory turnover was 5.41 compared to 5.51 for the same period in 2011.

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, 2012, Days Sales in Backlog was 67 days compared to 184 days for the same period in 2011.

Our backlog as of December 31, 2012 was $913,427 compared to $2,293,596 as of December 31, 2011.

Days sales outstanding is calculated as the ratio of average accounts receivable during that period compared to average daily sales for the same period, this has deteriorated as a result of our customers stretching out payments and adverse economic conditions in general. For the year ended December 31, 2012, days receivables outstanding was 68 days compared to 45 days for the same period in 2011.

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, 2012, day's payable outstanding was 46 compared to 51 for the same period in 2011.

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Financial Statements

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, 2012.

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 GAAP 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, 2012, we had a reserve for potentially un-collectable accounts of $66,000. Five
(5) customers accounted for approximately 75% of accounts receivable at December 31, 2012 and one customer accounted for 32% and no other 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 31, 2012, we had a reserve for potentially obsolete inventory of $190,000.

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:

        Furniture and fixtures                             3 to 7 years

        Equipment                                       7 to 10 years

        Leasehold improvements                          2 years (life of the
lease)

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Long -Lived Assets

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, 2012, we had outstanding common shares of 20,331,906 used in the calculation of basic earnings per share. Basic Weighted average common shares and equivalents at December 31, 2012 and 2011 were 19,848,119 and 19,031,540, respectively. As of December 31, 2012, we had outstanding warrants to purchase 300,000 additional common shares and options to purchase 107,789 additional common shares. Fully diluted weighted average common shares and equivalents for the years ended 2012 and 2011 were 20,335,887 and 20,206,993, respectively; however, the fully diluted shares were withheld from the calculation in 2012, as they were anti-dilutive due to the net loss.

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, 2012 and 2011.

Segment Information

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 audited financial statements.

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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 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,

                                        2012 2011

Sales                                   100% 100%
Cost of Goods Sold                       72%  69%
Gross Profit                             28%  31%

General And Administrative               26%  25%
Share Based Compensation                  0%   1%
Net Profit / (Loss) From Operations       1%   5%
                                          0%   0%
Other Income / (Expenses)                 0%   0%
Interest Expense                         -4%  -3%
Net Profit / (Loss) Before Income Taxes  -2%   2%
Income Tax Expense                        0%   0%
Net Profit / (Loss)                      -2%   2%

Net Sales

For the year ended December 31, 2012, our revenue was $4,961,612 compared to $4,549,798 for the same period in 2011. Our revenue increased by $411,814 for the year ended December 31, 2012, compared to the same period in 2011. The increased in revenue was due to increased orders within existing accounts.

Major Customers

Our top 5 customers accounted for approximately 69% of our net sales for the year ended December 31, 2012, compared to 58%, for the same period in 2011. We believe that our ability to grow our core business depends on increasing sales to existing customers, and on successfully attracting new customers. Customer contracts can be canceled and volume levels can be changed or delayed based on our customer's performance and the end users' markets they serve 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.

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Gross Profit

For the year ended December 31, 2012, our gross profits decreased to 28% from 31% for the same period in 2011. 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 of materials.

Selling, General and Administrative (SG&A) Expenses

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