UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2009
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File No. 000-30185
PRECISION AEROSPACE COMPONENTS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
| Delaware | 20-4763096 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
2200 Arthur Kill Road
Staten Island, New York 10309-1202
(Address of Principal Executive Offices)
(718)-356-1500
(Issuer’s Telephone Number, including Area Code)
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer [ ] | Accelerated Filer [ ] | ||
| Non-Accelerated Filer [ ] (Do not check if a smaller reporting company) | Smaller Reporting Company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [XX] No [ ]
Number of shares outstanding of the Registrant's common stock as of November 1, 2009: 33,324,691
TABLE OF CONTENTS
| Page | |||
PART I FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | 3 | |
Condensed Consolidated Balance Sheets — (Unaudited) | 4 | ||
Condensed Consolidated Statements of Income (Loss)— (Unaudited) | 5 | ||
Condensed Consolidated Statements of Cash Flows — (Unaudited) | 6 | ||
Notes to Condensed Consolidated Financial Statements | 7 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 16 | |
Item 4 and 4T | Controls and Procedures | 16 | |
PART II OTHER INFORMATION | |||
Item 6. | Exhibits | 17 | |
Signatures | 17 | ||
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
INDEX
| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED): | Pages | |
| Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008 (Audited) | 4 | |
| Condensed Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 2009 and 2008 (Unaudited) | 5 | |
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (Unaudited) | 6 | |
| Notes to Condensed Consolidated Financial Statements | 7-11 | |
3
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| (UNAUDITED) | ||||||||
| ASSETS | ||||||||
| September 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 185,634 | $ | 176,483 | ||||
| Accounts receivable, net | 1,016,223 | 874,124 | ||||||
| Inventory, net | 5,167,594 | 4,592,247 | ||||||
| Prepaid expenses | 14,854 | 39,693 | ||||||
| Prepaid income taxes | - | 98,616 | ||||||
| 6,384,305 | 5,781,163 | |||||||
| PROPERTY AND EQUIPMENT - Net | 140,759 | 184,634 | ||||||
| OTHER ASSETS | ||||||||
| Deposits | 24,700 | 24,700 | ||||||
| Goodwill | 2,221,744 | 2,221,744 | ||||||
| 2,246,444 | 2,246,444 | |||||||
| TOTAL ASSETS | $ | 8,771,508 | $ | 8,212,241 | ||||
| LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 375,452 | $ | 252,530 | ||||
| Subordinated note payable-current portion | - | 75,000 | ||||||
| Loan payable-current portion | 2,797,506 | 2,722,506 | ||||||
| Income taxes payable | 74,664 | - | ||||||
| 3,247,622 | 3,050,036 | |||||||
| TOTAL LIABILITIES | 3,247,622 | 3,050,036 | ||||||
| TEMPORARY EQUITY | ||||||||
| Preferred Stock A $.001 par value; 7,100,000 shares authorized | ||||||||
| 5,274,152 shares issued and outstanding | 5,274 | 5,274 | ||||||
| Preferred Stock B $.001 par value; 2,900,000 shares authorized | ||||||||
| 2,811,000 shares issued and outstanding | 2,811 | 2,811 | ||||||
| Additional paid-in capital - preferred stock | 2,916,173 | 2,916,173 | ||||||
| Additional paid-in capital -options | 4,417,917 | 4,417,917 | ||||||
| Additional paid-in capital -warrants | 843,272 | 843,272 | ||||||
| 8,185,447 | 8,185,447 | |||||||
| STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Preferred Stock A $.001 par value; 7,100,000 shares authorized | - | - | ||||||
| 5,274,152 shares issued and outstanding | ||||||||
| Preferred Stock B $.001 par value; 2,900,000 shares authorized | - | - | ||||||
| 2,811,000 shares issued and outstanding | ||||||||
| Common stock, $.001 par value; 100,000,000 shares authorized | ||||||||
| 33,324,691 shares issued and outstanding | 33,325 | 33,325 | ||||||
| Additional paid-in capital | 2,892,502 | 2,892,502 | ||||||
| Retained earnings (deficit) | (5,587,388 | ) | (5,949,069 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | (2,661,561 | ) | (3,023,242 | ) | ||||
| TOTAL LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 8,771,508 | $ | 8,212,241 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) | ||||||||||||||||
| FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 | ||||||||||||||||
| (UNAUDITED) | ||||||||||||||||
| Nine Months ended September 30, | Three Months ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| REVENUE - SALES | $ | 7,826,999 | $ | 8,601,266 | $ | 2,362,561 | $ | 2,763,986 | ||||||||
| TOTAL REVENUE | 7,826,999 | 8,601,266 | 2,362,561 | 2,763,986 | ||||||||||||
| TOTAL COST OF GOODS SOLD | 5,464,927 | 5,883,410 | 1,586,593 | 1,940,493 | ||||||||||||
| GROSS PROFIT | 2,362,072 | 2,717,856 | 775,968 | 823,493 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
General and administrative expenses ($4,378,930 and $525,468 noncash compensation for the nine and three months ended September 30, 2008) | 1,406,809 | 5,789,633 | 450,601 | 998,484 | ||||||||||||
| Professional Fees | 222,659 | 223,841 | 71,626 | 59,431 | ||||||||||||
| Depreciation | 60,642 | 59,996 | 20,332 | 20,068 | ||||||||||||
| Total Expenses | 1,690,110 | 6,073,470 | 542,559 | 1,077,983 | ||||||||||||
| INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) | 671,962 | (3,355,614 | ) | 233,409 | (254,490 | ) | ||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest expense | (104,832 | ) | (170,480 | ) | (43,012 | ) | (44,836 | ) | ||||||||
| (104,832 | ) | (170,480 | ) | (43,012 | ) | (44,836 | ) | |||||||||
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES | 567,130 | (3,526,094 | ) | 190,397 | (299,326 | ) | ||||||||||
| Provision for income taxes | 205,449 | 358,613 | 91,668 | 85,296 | ||||||||||||
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARES | $ | 361,681 | $ | (3,884,707 | ) | $ | 98,729 | $ | (384,622 | ) | ||||||
| NET INCOME (LOSS) PER BASIC SHARES | $ | 0.01 | $ | (0.12 | ) | $ | 0.00 | $ | (0.01 | ) | ||||||
| NET INCOME (LOSS) PER DILUTED SHARES | $ | - | $ | ** | $ | - | $ | ** | ||||||||
| WEIGHTED AVERAGE NUMBER OF BASIC COMMON | ||||||||||||||||
| SHARES OUTSTANDING | 33,324,691 | 33,324,691 | 33,324,691 | 33,324,691 | ||||||||||||
| WEIGHTED AVERAGE NUMBER OF FULLY DILUTED | ||||||||||||||||
| COMMON SHARES OUTSTANDING | 8,271,774,396 | 8,923,618,083 | 8,139,190,795 | 8,772,556,464 | ||||||||||||
** - Outstanding instruments to purchase stock were not included in the computation of diluted EPS because inclusion would have been antidilutive.
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 | ||||||||
| (UNAUDITED) | ||||||||
| 2009 | 2008 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | 361,681 | $ | (3,884,707 | ) | |||
| Adjustments to reconcile net income (loss) to net cash | ||||||||
| provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 60,642 | 59,996 | ||||||
| Stock Based Compensation | - | 4,378,930 | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in assets | ||||||||
| Decrease (increase) in accounts receivable | (142,099 | ) | (113,066 | ) | ||||
| Decrease (increase) in inventory | (575,347 | ) | (546,138 | ) | ||||
| Decrease (increase) in prepaid expenses | 24,839 | (48,606 | ) | |||||
| Decrease (increase) in prepaid income taxes | 98,616 | - | ||||||
| Decrease (increase) in security deposits | - | (12,000 | ) | |||||
| Increase (decrease) in liabilities | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | 122,921 | (236,306 | ) | |||||
| Increase (decrease) in income taxes payable | 74,664 | (360,280 | ) | |||||
| Total adjustments | (335,764 | ) | 3,122,530 | |||||
| Net cash provided by (used in) operating activities | 25,917 | (762,177 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| (Purchase) of property and equipment | (16,766 | ) | (4,116 | ) | ||||
| Net cash (used in) investing activities | (16,766 | ) | (4,116 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| (Payment) of convertible note payable | - | (1,000,000 | ) | |||||
| (Payment) of S/T loan payable Greater Bay | - | (387,466 | ) | |||||
| Proceeds from issuance of short term loan payable- IDB | 100,000 | 2,722,506 | ||||||
| (Payment) of principle of short term loan payable - IDB | (25,000 | ) | - | |||||
| (Payment) of principle of subordinated note payable | (75,000 | ) | (300,000 | ) | ||||
| Net cash provided by financing activities | - | 1,035,040 | ||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 9,151 | 268,747 | ||||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 176,483 | 154,709 | ||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 185,634 | $ | 423,456 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest paid | $ | 93,195 | $ | 169,299 | ||||
| Income taxes paid | $ | 27,329 | $ | 651,753 | ||||
| SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY: | ||||||||
| Issuance of options for stock based compensation | $ | - | $ | 4,378,930 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
| PRECISION AEROSPACE COMPONENTS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (UNAUDITED) |
1. BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company's annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the December 31, 2008 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these condensed financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year. These results are not necessarily indicative of the results to be expected for the full year.
These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the consolidated financial statements are as follows:
Inventory
Inventory is stated at the lower of cost or market, utilizing the specific lot identification method (except as noted subsequently). The Company is a distributor of goods that retain their value and may be purchased by its customers for an extended period of time. The Company has adopted the convention that any Inventory item for which the Company has not had any transactions within the past five years shall be reduced to a zero value. Inventory consists of finished goods for resale at September 30, 2009. For the nine months ended September 30, 2009, $160,628 was written off. For the similar period in 2008, $121,654 was written off.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:
| Warehouse equipment | 5 years |
| Leasehold improvements | 5 - 39 years ** |
| Computers | 5 years |
| Furniture and fixtures | 7 years |
| Equipment | 5 years |
** Shorter of life or lease term.
7
| PRECISION AEROSPACE COMPONENTS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (UNAUDITED) |
Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142 “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. In conjunction with the purchase of Freundlich assets and acquisition of DFAS in July 2006, goodwill was recognized at $2,221,744. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. The Company tests for impairment on an annual basis or based upon facts that may occur.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Concentration of Credit Risk
Sales to the United States Department of Defense (“DOD”) represented approximately 53.6 percent of the Company’s total sales for the quarter ended September 30, 2009 and 51.0 percent for the year to date. No other customer accounted for greater than 10 percent of the Company’s total sales and the Company has no substantial concentrations of credit risk in its trade receivables.
Shipping and Handling Costs and Fees
The Company records freight cost on merchandise purchased to cost of goods sold and freight and delivery charges on sales to selling, general and administrative expenses.
Income Taxes
The Company accounts for income taxes in accordance with Statements of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes and liabilities are computed annually for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Earnings (Loss) per Common Share
Basic earnings (loss) per share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. Basic earnings (loss) per share excludes any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share.
8
| PRECISION AEROSPACE COMPONENTS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (UNAUDITED) |
3. PROPERTY AND EQUIPMENT-NET
Substantially all of the Company's property and equipment are pledged as collateral for its loans.
| September 30, 2009 | December 31, 2008 | |||||||
| Furniture and fixtures | $ | 2,392 | $ | 2,392 | ||||
| Equipment and other | 375,067 | 358,300 | ||||||
| Leasehold improvements | 6,487 | 6,487 | ||||||
| 383,946 | 367,179 | |||||||
| Less accumated depreciation and amortization | (243,187 | ) | (182,545 | ) | ||||
| Property and equipment, net | $ | 140,759 | $ | 184,634 | ||||
Depreciation expense for the nine months ended September 30, 2009 was $ 60,642.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2009 and December 31, 2008 consist of the following:
| September 30, 2009 | December 31, 2008 | |||||||
| Accounts payable | $ | 349,179 | $ | 237,390 | ||||
| Accrued expenses | 26,273 | 15,140 | ||||||
| Total | $ | 375,452 | $ | 252,530 | ||||
5. COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space for its operations under a lease which expires July 20, 2013. The Company has an option to extend the lease. The present rental rate is $12,400 per month.
On August 31, 2009, the Company guaranteed the performance of Freundlich in connection with the agreement, entered into on the same date, between Freundlich and Israel Discount Bank of New York (the “Agreement”). The Agreement runs through April 30, 2010. The Agreement established a revolving funding facility which allows Freundlich to receive up to two million eight hundred thousand dollars ($2,800,000). The funds will be made available to Freundlich in accordance with an advance formula which allows for the payment of up to eighty (80) per-cent of eligible accounts and fifty (50) per-cent of eligible inventory, up to a maximum inventory advance amount of two million five hundred thousand dollars ($2,500,000). The advance rate against eligible inventory will decrease at the rate of 2.5% per month from 50% to 30%. (Subsequent to the period of this report, the Company and the bank agreed that the inventory decrease rate will be 1% per month to 40%). Eligible accounts are those domestic accounts not outstanding for more than one hundred twenty (120) days and eligible inventory is inventory as determined by the bank, presently that which has had sales within the preceding sixty (60) months. The daily rate on the outstanding balance is, the prime rate plus one and one half (1 1/2) per cent, but not less than four and one quarter (4.25) per cent. The balance is secured by a first lien position on all of Freundlich’s assets. At September 30, 2009, the Company had the availability to borrow an additional $2,494 under this facility.
9
| PRECISION AEROSPACE COMPONENTS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (UNAUDITED) |
6. SHORT-TERM DEBT AND LINE OF CREDIT
| Short-term debt as of September 30, 2009 and December 31, 2008 consists of the following: | ||||||||
| 2009 | 2008 | |||||||
| Revolving funding facility. Due 2009 (See note 5). | $ | 2,797,506 | $ | 2,722,506 | ||||
| $750,000 subordinated term loan due April 30, 2009 secured by all assets equipment at a variable rate of Prime plus 1% (6.25 on March 31, 2008). | - | 75,000 | ||||||
| $ | 2,797,506 | $ | 2,797,506 | |||||
7. OPTIONS AND AGREEMENTS
On February 27, 2008 the Board of Directors of the Company (the “Board”) approved an employment agreement (the “Agreement”) with Andrew S. Prince, the Company’s President and CEO, as well as the options awarded in conjunction with the agreement.
The Company used the Black Scholes Model to value the options. The Company recognized an expense of $4,378,930 noncash compensation for the nine months ended September 30, 2008 and $0 for the nine months ended September 30, 2009.
8. FAIR VALUE MEASUREMENTS
On October 1, 2008, the Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent framework for measuring fair value under Generally Accepted Accounting Principles and expands fair value financial statement disclosure requirements. SFAS 157’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. SFAS 157 classifies these inputs into the following hierarchy:
Level 1 Inputs– Quoted prices for identical instruments in active markets.
Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs– Instruments with primarily unobservable value drivers.
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009.
10
| PRECISION AEROSPACE COMPONENTS, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2009 AND 2008 (UNAUDITED) |
8. FAIR VALUE MEASUREMENTS (CONTINUED)
Fair Value Measurements on a Recurring Basis as of September 30, 2009:
| Assets | Level I | Level II | Level III | Total | ||||||||||||
| Cash equivalents | $ | - | $ | - | $ | - | $ | - | ||||||||
| Total Assets | $ | - | $ | - | $ | - | $ | - | ||||||||
| Liabilities | $ | - | $ | 2,797,506 | $ | - | $ | 2,797,506 | ||||||||
| Total Liabilities | $ | - | $ | 2,797,506 | $ | - | $ | 2,797,506 | ||||||||
9. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its year-end financial statements for the year end 2006 to reflect an effective date of July 20, 2006, for the acquisition of the assets to Freundlich Supply Company. The Company previously reported all financial activity for the period of July 1, 2006 to July 19, 2006 in its originally filed Form 10-KSB for the year ended December 31, 2006. This error caused revenues for 2006 to be overstated by $735,675, cost of sales to be overstated by $514,305 and goodwill to be overstated by $221,370 with a tax liability overstatement of $66,527. Additionally there were reclassifications between liabilities, temporary equity and permanent equity. This restatement affected the Company’s financial statements for the period ended September 30, 2008, however it had no impact on the income statement for the period.
Originally Filed For the period ended September 30, 2008 | Restated For the period ended September 30, 2008 | |||||||
| Assets | $ | 8,526,666 | $ | 8,305,296 | ||||
| Liabilities | $ | 3,312,430 | $ | 3,245,903 | ||||
| Temporary Equity | 5,230,287 | 8,146,460 | ||||||
| Stockholders' Equity | (16,051 | ) | (3,087,067 | ) | ||||
| Total Liabilities and Stockholders' Equity | $ | 8,526,666 | $ | 8,305,296 | ||||
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" relating to Precision Aerospace Components, Inc. (the "Company") which represent the Company's current expectations or beliefs including, but not limited to, statements concerning the Company's operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "anticipate", "intend", "could", "estimate" or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company's control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks set out under the caption “Risk Factors” in our 10-K report for the year ended 2008 occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
General
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, and the notes thereto, included herein. The information contained below includes statements of the Company's or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion of forward-looking statements, see the information set forth in the Introductory Note to this Quarterly Report under the caption "Forward Looking Statements" which information is incorporated herein by reference.
The condensed consolidated interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual consolidated statements and notes. Certain information and footnote disclosers normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosers are adequate to make the information presented not misleading. The results for the nine months ended September 2009 may not be indicative of the results for the entire year.
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management, are necessary for fair presentation of the information contained herein.
To incorporate issues which have come to the Company’s attention, the Company is filing the modified financials from its 10-Q for the third quarter of 2008. The issues do not include any items regarding the day to day operations of the Company for the period subsequent to acquisition of the Freundlich assets, even though they affect the presentation of the operating results. In the comparable period in 2008, the issues related to the accounting presentation of the options issued by the Company, which was a non-cash event and which the Company was required to not show as a separate line item, but rather to include the expense within its general and administrative expenses.
12
Plan of Operation and Discussion of Operations
The Company's operations are presently carried out through its wholly-owned Freundlich Supply Company, Inc. (“Freundlich”) subsidiary.
Freundlich and, through it, the Company is a stocking distributor of aerospace quality, internally-threaded fasteners. Freundlich distributes high-quality, domestically-manufactured nut products that are used primarily for aerospace and military applications and for industrial/commercial applications that require a high level of certified and assured quality. The Company’s products are manufactured, by others, to exacting specifications or are made from raw material that provides strength and reliability required for aerospace applications.
Freundlich is a niche player in the North American aerospace fastener industry. The fastener distribution industry is highly fragmented with no single company holding a dominant position. Freundlich currently focuses exclusively on the distribution of aerospace quality nut products, serving as an authorized stocking distributor for seven of the premier nut manufacturers in the United States. Freundlich competes with numerous distributors who serve as authorized stocking distributors for the fastener manufacturers in its supplier base.
Freundlich is a one-stop source for standard, self-locking, semi-special and special nuts manufactured to several military, aerospace and equivalent specifications. Freundlich maintains an inventory of approximately 6,400 SKUs comprised of more than 22 million parts of premium quality, brand name nut products.
Freundlich sells its products to original equipment manufacturers, repair facilities, and other distributors in the aerospace industry and directly to the United States Department of Defense. Freundlich sells its products pursuant to written purchase orders from its customers. All products are shipped from Freundlich’s warehouse in Staten Island, New York via common carrier. During this quarter, sales to the Department of Defense represented nearly 53.6%, of our total sales, for the year to date sales to the Department of Defense represented approximately 51%, of our total sales. No other customer accounts for more than 10% of our sales.
The Company’s third quarter this year was below that achieved in the same period last year; however our balance sheet position continued to improve. There has been no recovery in the slowdown in fastener industry orders. The only good news from this is that the smaller orders are usually shipped at higher margins. The reduction in orders has allowed the manufacturers to reduce their lead times and to make continued progress reducing their backlog. Apparently, due to the fact that many of the specialized fasteners the Company acquires are produced by duopolies or triopolies, the Company has yet to see reductions in prices which should have resulted from reductions in the cost of raw materials utilized to fabricate the products. Prices have substantially stabilized. The Company has continued to experience an increased flow of goods, both as a result of delayed orders being finally received as well as more recent orders being received earlier than anticipated. This has increased inventory above projected growth for the year to date. Certain lead times are still significantly longer than are required for product fabrication, as these times are reduced increased deliveries are expected. However, there has been a reduction in the total value of shipments which fall in this category. Overall inventory growth for the quarter continued at the pace expected, but starting from the higher level of the prior quarter, so that inventory investment for the year to date is above what had been anticipated. The Company believes that inventory growth will slow going forward, because there has been substantial delivery of backorders as well as because there has been a reduction in recent re-orders to accommodate market conditions. Until the inflation which the Company is anticipating occurs, the inventory investment pressures which have afflicted the Company in the recent past will abate, thereby improving the discretionary cash flow available to the Company.
The Company’s consolidated revenues decreased nearly 15% in the quarter to $2,362,561 from $2,763,986 in the comparable period last year due to a particularly weak July compared to a very strong July and August last year and decreased over 9% for the year to date to $7,826,999 from $8,601,266 in the comparable period last year. This was the result of a combination of both a historically strong first quarter last year combined with a particularly weak January and early February this year and the weak third quarter.
The Company’s gross profit of $775,968 is 6% less than the gross profit of $823,493 for the same 3 month period last year. This gross profit is approximately 33% percent of revenues as opposed to approximately 30% for the same period last year and the gross profit of $2,362,072 is about 13% less than the gross profit of $2,717,856 for the year to date period last year. This gross profit is approximately 30% percent of revenues as opposed to nearly 32% for the same period last year. The reduction in margin was anticipated as the prior higher margins were the result of both reduced margins on older government contracts due to higher costs of goods which are not fully recouped through the price increases allowed in the contracts and the use of older inventory which was obtained at lower prices as well as present market conditions which are resulting in more aggressive pricing. The reduction in gross profits was offset somewhat by smaller order sizes which often result in higher margins. We anticipate that margins will trend slightly lower in coming quarters due more to competitive pressures in a weaker market than to price of goods increases.
13
The Company showed an improvement in both its net income before taxes and interest expense and net income applicable to common shares (“profit”) numbers shown both for the three month period $233,409 and $98,729 versus losses last year of ($254,490) and ($384,622), respectively, for the three month period and $671,962 and $361,681 respectively, for the year to date, versus losses of ($3,355,614) and ($3,844,707), respectively, for the same period last year. This improvement is mainly due to the requirement imposed on the Company in accordance with Generally Accepted Accounting Principles (“GAAP”) that the Company not clearly differentiate between expenses and non cash option expenses. The Company is concerned that this required presentation may be misleading. The non cash option expenses included in the expenses for last year were $525,468 for the three month period and $4,378,930 for the entire year to date period last year. The Company utilized the Black Scholes option pricing model which is commonly and widely used to determine the non-cash option expense amount. The recognition of this expense did not have an impact on cash flows, although it does affect the income statement and balance sheet for financial reporting purposes. The Internal Revenue Service does not allow any portion of this non-cash expense to be utilized as a deduction to income for income tax purposes. This non-cash expense amount does not get reversed or taken into income now that the options have expired unexercised.
Although the Company incurred slightly lower interest expenses of $43,012 for the three months compared to $44,836 for the period last year, for the year to date interest expenses have been reduced by over $65,000; $104,832 this year, compared to $170,480 for the same period last year. The decrease for the period was mainly due to the Company having replaced Freundlich’s previously existing $1,000,000 credit facility on March 6, 2008 with a $3,000,000 credit facility, having a lower variable rate of interest (Prime plus 1% versus Prime plus 4%) and utilizing $1,000,000 of the new facility to pay off the Company’s previously existing convertible debt (without conversion or penalty) on March 31, 2008; the paid off debt had a substantially higher rate of interest (14%); additionally, the prime rate which is the basis of measurement for the Company’s variable rate debt, declined year over year. The Company has also paid off, in February 2009, its subordinated secured loan, which had an interest rate of Prime plus 1% on the outstanding balance. On August 31, 2009 the credit facility was renewed at an interest rate of Prime plus 1 1/2% on the outstanding balance, with a maximum draw of $2,800,000.
These actions will decrease the future interest payments required to be made by the Company. Additionally they have caused the debt liabilities on the Company’s balance sheet to all be short term, since the line of credit needs to be renewed within the year, presently by April 30, 2010.
At the close of the period, the Company had $2,494 available to draw under the credit facility (the maximum draw having been reduced by $200,000). At the close of the same period last year, the Company had $186,223 available to draw under the credit facility.
The Company’s inventory totaled $5,167,594 at the end of the period. Inventory had been $4,592,247 at year end 2008, bringing the total investment in inventory for the period to over $575,000. The increase is largely due to the increased deliveries resulting from an increased pace of deliveries of overdue orders and reduced lead times. The Company anticipates that inventories will stabilize as some of the recent deliveries are shipped, prices of new orders stabilize or are reduced and shorter lead times as well as the potential for reductions in producer prices lead to reductions in the size and timing of replacement orders. There still may be some acceleration in deliveries as lead times continue to decline and older orders finally arrive.
The Company’s accounts payable and accrued expenses totaled $375,452 at the end of the period. This is an increase of nearly $123,000 from the $252,530 at the end of last year. The accounts payable portion, $349,179 increased by over $110,000 from the $237,390 at the end of last year. The, accrued expenses portion, $26,273was increased by over $10,000 from the $15,140 at the end of last year. The increased payables result directly from the increased deliveries of supplies. The increased payables result directly from the increased deliveries. The Company continues to evaluate and apply its resources where it believes it will achieve the best overall benefit.
The Company’s net assets (total assets less total liabilities) at the end of the period, $5,523,886, were over $360,000 greater than the $5,162,205 at the end of last year. This continues the Company’s growth in net assets.
The Company does not presently anticipate any material additional capital expenditures on plant and equipment for existing operations during 2009 and the present cash flow from the activities of Freundlich and its financing facility is sufficient to meet the Company’s cash requirements, assuming it receives inventory in orderly fashion as has been the case; however, additional financing will be necessary to more rapidly increase operations and expand operations.
The Company believes it can expand its business with its present staff until acquisitions warrant additional personnel. Freundlich may make an additional hire to improve business operations. Presently many Company level activities are either outsourced or handled at the Freundlich level.
The Company has reached agreement with its investors in its financing of July 20, 2006, further extending the date by which the Company is required to file a registration statement effecting a 150:1 reverse split through December 15, 2009. The Company, with the investors’ agreement, is in the process of carrying out a 500:1 reverse split.
14
The Company has restated its year-end financial statements for the year end 2006 to reflect an effective date of July 20, 2006, for the acquisition of the assets of Freundlich Supply Company. The Company previously reported all financial activity for the period of July 1, 2006 to July 19, 2006 in its originally filed Form 10-KSB for the year ended December 31, 2006. This error caused revenues for 2006 to be overstated by $735,675, cost of sales to be overstated by $514,305 and goodwill to be overstated by $221,370 with a tax liability overstatement of $66,527. Additionally there were reclassifications between liabilities, temporary equity and permanent equity. This restatement affected the Company’s financial statements for the period ended September 30, 2008, however it had no impact on the income statement for the period.
Originally Filed For the period ended September 30, 2008 | Restated For the period ended September 30, 2008 | |||||||
| Assets | $ | 8,526,666 | $ | 8,305,296 | ||||
| Liabilities | $ | 3,312,430 | $ | 3,245,903 | ||||
| Temporary Equity | 5,230,287 | 8,146,460 | ||||||
| Stockholders' Equity | (16,051 | ) | (3,087,067 | ) | ||||
| Total Liabilities and Stockholders' Equity | $ | 8,526,666 | $ | 8,305,296 | ||||
15
Critical Accounting Policies
The Company considers the accounting policies related to revenue and related cost recognition, the valuation of inventory, the valuation of goodwill, and transactions related to our debt and equity financing activity, to be critical to the understanding of our results of operations. For a more detailed discussion of the Company’s critical accounting policies, please see the Company’s consolidated financial statements and accompanying notes. Critical accounting policies include the areas where the Company has made what it considers to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact the Company’s financial results under different assumptions and conditions. The Company prepares its financial statements in conformity with U.S. generally accepted accounting principles. As such, the Company is required to make certain estimates, judgments, and assumptions that it believes are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not required for smaller reporting companies, and, if it were required, is not applicable to the Company’s present operations.
ITEM 4 & 4T CONTROLS AND PROCEDURES
(A) Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer/Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures on August 26, 2009. The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended the ("Exchange Act"). This term refers to the controls and procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's disclosure controls and procedures are effective at this reasonable assurance level as of the period covered by this Form 10-Q. Due to the size of the Company and as a result of the implementation of the Company’s integrated financial reporting system, items of note are appropriately brought to the attention of the Company’s CEO for appropriate disclosure.
In addition, the Company's Principal Executive Officer/Principal Financial Officer evaluated all changes in the Company’s internal controls over financial reporting that have occurred during the Company’s last fiscal quarter (which is the period covered by this Form 10-Q) and there have been no changes in its internal controls during the Company's last fiscal quarter, or from the date of their last evaluation, August 26,2009, that have materially affected, or are reasonably likely to materially affect, those internal controls over financial reporting. The term "internal control over financial reporting" is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. This term refers to the process designed by management and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles that (1) pertain to maintenance of records; (2) provide reasonable assurance that transactions are recorded as necessary, including that receipts and expenditures of the issuer are being made in accordance with authorizations of management and directors of the issuer; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the Company’s financial statements. The Company assessed its internal control system as of December 31, 2008 in relation to criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's internal control over financial reporting is designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives. The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's internal control over financial reporting is effective at this reasonable level of assurance.
16
PART II
OTHER INFORMATION
ITEM 6. Exhibits.
The following exhibits are included herein:
| Exhibit No. | Exhibit | |
31.1 | Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended | |
31.2 | Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: November 9, 2009 | PRECISION AEROSPACE COMPONENTS, INC. |
/s/ Andrew S. Prince | |
| Andrew S. Prince | |
| President and Chief Executive Officer |
17
EXHIBIT INDEX
| Exhibit Number | Description | |
31.1 | Certification of Chief Executive Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended | |
31.2 | Certification of Chief Financial Officer of the Company required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer of the Company required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended |
18