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, 2010
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 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 Regulations 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).
YES ____ 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 [X] No [ ]
Number of shares outstanding of the registrant’s common stock, as of November 1, 2010: 2,825,079
| TABLE OF CONTENTS |
| Page | |||
PART I FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheets — (Unaudited) | 2 | ||
Condensed Consolidated Statements of Operations — (Unaudited) | 3 | ||
Condensed Consolidated Statements of Cash Flows — (Unaudited) | 4 | ||
Notes to Condensed Consolidated Financial Statements | 5 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 12 | |
Item 4 and 4T | Controls and Procedures | 12 | |
PART II OTHER INFORMATION | |||
Item 6. | Exhibits | 14 | |
Signatures | 14 | ||
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
INDEX
| CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED): | Pages | |
| Condensed Consolidated Balance Sheets as of September 30, 2010(Unaudited) and | ||
| December 31, 2009 | 2 | |
| Condensed Consolidated Statements of Operations for theNine and Three Months | ||
| Ended September 30, 2010 and 2009 (Unaudited) | 3 | |
| Condensed Consolidated Statements of Cash Flows for theNine Months | ||
| Ended September 30, 2010 and 2009(Unaudited) | 4 | |
| Notes to Condensed Consolidated Financial Statements | 5-9 | |
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| ASSETS | ||||||||
| September 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Unaudited) | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 181,952 | $ | 198,971 | ||||
| Accounts receivable, net | 1,004,155 | 778,450 | ||||||
| Inventory, net | 5,100,044 | 5,087,712 | ||||||
| Prepaid expenses | 14,856 | 5,941 | ||||||
| Prepaid income taxes | - | 69,374 | ||||||
| 6,301,007 | 6,140,448 | |||||||
| PROPERTY AND EQUIPMENT - Net | 75,187 | 120,458 | ||||||
| OTHER ASSETS | ||||||||
| Deposits | 24,700 | 24,700 | ||||||
| Goodwill | 2,221,744 | 2,221,744 | ||||||
| 2,246,444 | 2,246,444 | |||||||
| TOTAL ASSETS | $ | 8,622,638 | $ | 8,507,350 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 376,647 | $ | 210,542 | ||||
| Income taxes payable | 28,239 | - | ||||||
| Loan payable-current portion | 2,292,000 | 2,682,000 | ||||||
| 2,696,886 | 2,892,542 | |||||||
| LONG -TERM LIABILITIES | - | - | ||||||
| TOTAL LIABILITIES | 2,696,886 | 2,892,542 | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred Stock A $.001 par value; 7,100,000 shares authorized ; 6,462,378 shares issued | ||||||||
| and outstanding September 30, 2010 and 6,123,301 shares issued and outstanding December 31, 2009 | 6,462 | 6,123 | ||||||
| Common stock, $.001 par value; 100,000,000 shares authorized; 2,825,079 shares issued | ||||||||
| and outstanding September 30, 2010 and 1,753,483 shares issued and outstanding December 31, 2009 | 2,825 | 1,753 | ||||||
| Additional paid-in capital | 11,187,671 | 11,103,398 | ||||||
| Accumulated deficit | (5,271,206 | ) | (5,496,466 | ) | ||||
| TOTAL STOCKHOLDERS' EQUITY | 5,925,752 | 5,614,808 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 8,622,638 | $ | 8,507,350 | ||||
The accompanying notes are an integral part of these condensed consolidted financial statements.
2
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | ||||||||||||||||
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, | FOR THE THREE MONTHS ENDED SEPTEMBER 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| TOTAL REVENUE | $ | 7,217,251 | $ | 7,826,999 | $ | 2,685,591 | $ | 2,362,561 | ||||||||
| TOTAL COST OF GOODS SOLD | 4,927,223 | 5,464,927 | 1,863,003 | 1,586,593 | ||||||||||||
| GROSS PROFIT | 2,290,028 | 2,362,072 | 822,588 | 775,968 | ||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General and administrative expenses | 1,553,203 | 1,406,809 | 514,476 | 450,601 | ||||||||||||
| Professional Fees | 228,542 | 222,659 | 67,360 | 71,626 | ||||||||||||
| Depreciation | 63,561 | 60,642 | 21,638 | 20,332 | ||||||||||||
| Total Operating Expenses | 1,845,306 | 1,690,110 | 603,474 | 542,559 | ||||||||||||
| INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) | 444,722 | 671,962 | 219,114 | 233,409 | ||||||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest expense | (80,080 | ) | (104,832 | ) | (29,005 | ) | (43,012 | ) | ||||||||
| (80,080 | ) | (104,832 | ) | (29,005 | ) | (43,012 | ) | |||||||||
| INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES | 364,642 | 567,130 | 190,109 | 190,397 | ||||||||||||
| Provision (benefit) for income taxes | 139,382 | 205,449 | 108,927 | 91,668 | ||||||||||||
| NET INCOME (LOSS) APPLICABLE TO COMMON SHARES | $ | 225,260 | $ | 361,681 | $ | 81,182 | $ | 98,729 | ||||||||
| NET INCOME (LOSS) PER BASIC SHARES | $ | 0.09 | $ | 5.43 | $ | 0.03 | $ | 1.48 | ||||||||
| NET INCOME (LOSS) PER DILUTED SHARES | $ | 0.02 | $ | 0.02 | $ | 0.01 | $ | 0.01 | ||||||||
| WEIGHTED AVERAGE NUMBER OF BASIC COMMON | ||||||||||||||||
| SHARES OUTSTANDING | 2,467,593 | 66,649 | 2,825,079 | 66,649 | ||||||||||||
| WEIGHTED AVERAGE NUMBER OF FULLY DILUTED | ||||||||||||||||
| COMMON SHARES OUTSTANDING | 13,002,225 | 16,543,549 | 12,867,617 | 17,545,113 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidted financial statements.
3
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
| FOR THE NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
| 2010 | 2009 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | 225,260 | $ | 361,681 | ||||
| Adjustments to reconcile net income (loss) to net cash | ||||||||
| provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 63,561 | 60,642 | ||||||
| Inventory writedown | 97,972 | 160,628 | ||||||
| Stock Based Compensation | 85,684 | - | ||||||
| Bad debt expense | 34,486 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Decrease (increase) in assets | ||||||||
| Decrease (increase) in accounts receivable | (260,191 | ) | (142,099 | ) | ||||
| Decrease (increase) in inventory | (110,304 | ) | (735,975 | ) | ||||
| Decrease (increase) in prepaid expenses | (8,915 | ) | 24,839 | |||||
| Decrease (increase) in prepaid income taxes | 69,374 | 98,616 | ||||||
| Increase (decrease) in liabilities | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | 166,105 | 122,921 | ||||||
| Increase (decrease) in income taxes payable | 28,239 | 74,664 | ||||||
| Total adjustments | 166,011 | (335,764 | ) | |||||
| Net cash provided by (used in) operating activities | 391,271 | 25,917 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| (Purchase) of property and equipment | (18,290 | ) | (16,766 | ) | ||||
| Net cash (used in) investing activities | (18,290 | ) | (16,766 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from loan payable IDB Bank | - | 100,000 | ||||||
| (Payment on) loan payable IDB Bank | (390,000 | ) | (25,000 | ) | ||||
| Proceeds from (payment on) subordinated note | - | (75,000 | ) | |||||
| Net cash provided by (used in) financing activities | (390,000 | ) | - | |||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (17,019 | ) | 9,151 | |||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 198,971 | 176,483 | ||||||
| CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 181,952 | $ | 185,634 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest paid | $ | 80,080 | $ | 93,195 | ||||
| Income taxes paid | $ | 36,427 | $ | 27,329 | ||||
The accompanying notes are an integral part of these condensed consolidted financial statements.
4
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(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 stat ements be read in conjunction with the December 31, 2009 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. The Company is a distributor of goods that retain their value and may be purchased by its customers for an extended period of time. Therefore any inventory item for which the Company has not had any transactions within the past five years is reduced to a zero value. Inventory consists of finished goods for resale at September 30, 2010. For the nine months ended September 30, 2010,$97,972was written off.For the similar period in 2009, $160,628was 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.
5
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
Goodwill and Other Intangible Assets
Financial Accounting Standards Board (“FASB”) Codification Topic 360 (ASC Topic 360) “Accounting for Goodwill and Other Intangible Assets and Accounting for Impairment or Disposal of Long-Lived Assets” 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. 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 58 percent of the Company’s total sales for the quarter ended September 30, 2010 and 55percent for the year to date; for the similar periods in 2009 such sales were 54 percent and 51 percent respectively.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 FASB Codification Topic 740 “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.
6
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
3. PROPERTY AND EQUIPMENT-NET
Substantially all of the Company's property and equipment are pledged as collateral for its loans.
| September 30, 2010 | December 31, 2009 | |||||||
| (Unaudited) | ||||||||
| Furniture and fixtures | $ | 2,392 | $ | 2,392 | ||||
| Equipment and other | 393,880 | 375,590 | ||||||
| Leasehold improvements | 6,487 | 6,487 | ||||||
| 402,759 | 384,469 | |||||||
| Less accumated depreciation and amortization | (327,572 | ) | (264,011 | ) | ||||
| Property and equipment, net | $ | 75,187 | $ | 120,458 | ||||
Depreciation expense for the nine months ended September 30, 2010and 2009 was $63,561and $60,642, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2010 and December 31, 2009 consist of the following:
| September 30, 2010 | December 31, 2009 | |||||||
| (Unaudited) | ||||||||
| Accounts payable | $ | 376,647 | $ | 184,270 | ||||
| Accrued expenses | - | 26,272 | ||||||
| Total | $ | 376,647 | $ | 210,542 | ||||
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space for its operations under a triple net lease which expires July 20, 2013. The lease has an option for renewal for five years at the Company's option. The rental rate is $12,979 per month. The Company can terminate the lease upon six months notice.
The Company has guaranteed the Freundlich revolving funding facility as more completely described in Note 6.
7
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
6. SHORT-TERM DEBT AND LINE OF CREDIT
| Short-term debt as of September 30, 2010 and December 31, 2009 consists of the following: | ||||||||
| September 30, 2010 | December 31, 2009 | |||||||
| (Unaudited) | ||||||||
| Revolving funding facility due July 31, 2011 (see below) | $ | 2,292,000 | $ | 2,682,000 | ||||
| $ | 2,292,000 | $ | 2,682,000 | |||||
Revolving Funding Facility
The Company has a $2,800,000 available to draw revolving funding facility. Availability of payment of up to eighty (80) per-cent of eligible accounts receivable and forty (40) per-cent of eligible inventory, up to a maximum inventory advance amount of two million five hundred thousand dollars ($2,500,000). Eligible accounts receivable are those domestic accounts receivable not outstanding for more than one hundred twenty (120) days and eligible inventory is inventory as determined by the bank, presently that inventory which has had sales within the preceding sixty (60) months. The daily rate on the outstanding balance is the prime rate plus one (1) per cent. The balance is secured by a first lien position on all of the Company’s assets. The facility is due as of July 31, 2011. The Company expects that the facilitywill be renewed. As of September 30, 2010, $2,292,000 was outstanding, the interest rate was 4.25%, and $501,751 was available to draw.As of September 30, 2009, $2,797,506 was outstanding, the interest rate was 4.25%, and $2,494 was available to draw.
7. OPTIONS AND AGREEMENT
On April 7, 2010, 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. In the event of termination the Company could be liable for up to twelve months salary.
8
PRECISION AEROSPACE COMPONENTS, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(UNAUDITED)
8. SECURITIES EVENTS
On April 7, 2010, the Board approved the issuance of 984,871 shares of the Company’s Common Stock to Management and Directors which were fully vested upon issuance. The Company recognized a compensation charge of $ 85,684.
On June 30, 2010, the Company agreed to exchange all of the remaining warrants issued in connection with the Company’s July 20, 2006 Securities Purchase Agreement for shares of its convertible preferred stock. The warrants could have acquired an aggregate 1,812,874 shares of the Company’s common stock at their exercise prices. The warrants have been converted into 339,077 shares of the Company’s Series A Preferred Stock which are convertible into 526,927 shares of the Company’s Common Stock. The exchange is at the rate of one A Warrant (which could have purchased a share of the Company’s common stock at $0.677 per share) and one B Warrant (which could have purchased a share of the Company’s common stock at $1.157 per share), collectively, or four B warrants, for 0.386 shares of the Company’s Series A Convertible Preferred stock the “Preferred Shares”). Each Preferred Share is convertible into 1.554 shares of the Company’s common stock. The Company completed the exchange upon the execution of the agreement with the warrant holder.
9
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, a nd 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 2009 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 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.The results for the nine months ended September 2010 may not be indicative of the resu lts 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.
10
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 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 6,200 SKUs comprised of more than 19 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 approximately 58%, of our total sales, last year for the quarter our sales to the Department of Defense represented approximately 54% percent of our total sales.For the year to date, sales to the Department of Defense represented approximately 55%, of our total sales, last year for the same period our sales to the Department of Defense represented approximately 51% percent of our total sales.No other customer accounts or accounted for more than 10% of our sales.
The Company’s sales and gross profit for this quarter were greater than for the comparable period last year; despite this better quarter, sales and both gross and net profits for the year still trailthe level attained last year. Our gross profit margin was below the similar quarter last year, but is still slightly greater for the year to date. Non-cash expenses in the form of stock based compensationhave reduced operating income for the year to date.With the further reduction in the need for outstanding financing,our balance sheet position has continued to improve.New purchase orders from customers have not exhibited any consistency and were weakening as the quarter progressed, however for the entire quarter the level of bookingssubstantially exceeded the depressed level seen by the Company for the same peri od in 2009 and the total bookings for the year to date have exceeded bookings for the similar period last year. Pricing and product availability have generally stabilized.
The Company’s consolidated revenues increased over13% in the quarter to $2,685,591 from $2,362,561 in the comparable period last year; for the year to the end of the period the revenues decreased by over 7%, to $7,217,251 from $7,826,999. This was the result of both fulfilling prior orders along with fulfilling the larger, but still comparatively weak, new order activity.
The Company’s gross profit of $822,588 is about 6% morethan the gross profit of $775,968 for the same 3 month period last year and about 3% less for the year, to $2,290,028 from $2,362,072.This gross profit as a percentage of sales is approximately 31% percent of revenues for the three month period as opposed to approximately 33% last year and is due to the order mix; for the year to dateit 32% as opposed to 30% for the same period last year.The increase in margin for the entire year was due to the margins on sales of smaller orders being higher than are those on larger orders.
The increase in operating expenses for the year to date,to $1,845,306 from $1,690,110, and $603,474 from $542,559, was substantially due to a one-time $85,684,non-cash, stock compensation expense, which occurred in the 2nd quarter and the non-collectability of a check for approximately $26,000 presented for a COD order. The Company has historically had nearly no uncollectable accounts.
The Company’s accounts receivable have increased by over $225,000 to $1,004,155 from $778,450 at the end of last year because of the stronger recent sales than at the end of last year. The Company’s inventory at the end of the quarter, $5,100,044 is substantially higher than the approximately $4,800,000 expected by the Company due to over $300,000 which was either delivered at the end of the quarter or is awaiting government approval to ship. The Company’s inventory was $4,845,662at the end of the 2ndquarter and$5,087,712 at the end of last year, as deliveries stabilized at levels more consistent with the reduced lead times presently available to the Company.
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The Company has applied its profits from sales and reduction in inventory to pay down its bank loan by $390,000 to $2,292,000 from $2,682,000 at the end of last year.The Company has used available cash above its desired safety level to take advantage of discounts with certain of its suppliers. The Company is usually in a position to take advantage of the discounts offered. The Company continues to evaluate and apply its resources where it believes it will achieve the best overall benefit. Because of the recent shipments and forced delay in deliveries by the government, the Company’s accounts payable at the end of the quarter, $376,647 were over $190,000 more than at the end of last year, when they were $184,270.
The Company’s net assets (total assets less total liabilities) at the end of the period, $5,925,752, were about $310,000 greater than the $5,614,808 at the end of last year.This continues the Company’s growth in net assets which reflect the continued strong operations of the Company, even during a period of difficult market conditions.
As reported on the Company’s 8-K filed on October 1, 2010, On September 29, 2010, the existing guaranty by Precision Aerospace Components, Inc. (the “Company”), of the performance of Freundlich Supply Company, Inc. (“Freundlich”), the Company’s wholly-owned subsidiary, in connection with Freundlich’s agreement, entered into on the same date, between Freundlich and Israel Discount Bank of New York (the “Agreement”) and the Agreement itself were extended through July 31, 2011 on substantially the terms and conditions as in effect under the heretofore existing revolving funding facility entered on August 31, 2009 and amended on November 5, 2009. The only change, other than new maturity date, is the decrease in the annual interest rate by ½% to Prime plus 1%, and the rem oval of a minimum interest rate. Eligible accounts are those domestic accounts not outstanding for more than one hundred twenty (120) days past due; eligible inventory is inventory as determined by the bank, presently that which has had sales within the preceding sixty (60) months. The balance continues to be secured by a first lien position on all of Freundlich’s assets.
The Company does not presently anticipate any material additional capital expenditures on plant and equipment for existing operations during 2010 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 does not presently anticipate making further hires; however, it is possible that it may make an additional hire to improve business operations. Presently many Company level activities are either outsourced or handled at the Freundlich level.
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 w ith 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 proceduresas of September 30, 2010on or about October 13, 2010. 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.
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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 prior evaluation, on or about March 10, 2010,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 p ersonnel, 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 September 30, 2010 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 Treadw ay 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.
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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 8, 2010 | PRECISION AEROSPACE | ||
| COMPONENTS, INC. | |||
/s/ Andrew S. Prince | |||
| Andrew S. Prince | |||
| President and Chief Executive Officer | |||
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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 | ||
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