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 June 30, 2013

 

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.)

 

351 Camer Dr.

Bensalem, PA 22109

(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 [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.   NA

 

Number of shares outstanding of the registrant’s common stock, as of July 31: 4,262,849

 

 

  

TABLE OF CONTENTS

 

 

				Page
PART I FINANCIAL INFORMATION
Item  1.	Financial Statements – (Unaudited)
	Condensed Consolidated Balance Sheets			3
	Condensed Consolidated Statements of Operations			4
	Condensed Consolidated Statements of Cash Flows			5
	Notes to Condensed Consolidated Financial Statements			6
Item  2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item  3.	Quantitative and Qualitative Disclosures about Market Risk			13
Item 4	Controls and Procedures			14
PART II OTHER INFORMATION
Item 1.	Legal Proceedings			15
Item  6.	Exhibits			15
Signatures				15

 

 

 

 

Item 1. Financial Statements -   PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
			June 30,				December 31,
			2013				2012
CURRENT ASSETS
Cash and cash equivalents		$	268,894			$	460,522
Accounts receivable			3,109,935				2,914,859
Inventory, net			12,169,707				12,910,757
Restricted cash - escrow			500,085				500,085
Prepaid expenses			322,656				361,814
Prepaid income taxes and income taxes receivable			123,151				113,197
			16,494,428				17,261,234
PROPERTY AND EQUIPMENT - Net			51,767				49,343
OTHER ASSETS
Deposits			—				24,700
Intangible assets, net			278,266				294,633
Deferred taxes			546,758				606,200
Other assets			135,896				147,377
			960,920				1,072,910
TOTAL ASSETS		$	17,507,115			$	18,383,487
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	3,276,361			$	3,586,179
Accrued restructuring expenses			33,129				229,441
Escrow payable			500,085				500,085
Shareholder loan			535,000				—
Current portion of long term debt			1,250,400				729,400
Line of credit			6,191,744				7,102,787
			11,786,719				12,147,892
LONG -TERM LIABILITIES
Term Loan			1,145,433				1,770,600
TOTAL LIABILITIES			12,932,152				13,918,492
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock A $.001 par value; 1,400,000 shares authorized
at June 30, 2013 and December 31, 2012; 1,336,703  shares			1,337				1,337
issued and outstanding, respectively.  Liquidation preference of $0.735 per share (total of $982,477)
Preferred Stock C $.001 par value; 4,825,000 shares authorized
at June 30, 2013 and December 31, 2012; 4,608,675 shares			4,608				4,608
issued and outstanding, respectively.  Liquidation preference of $0.735 per share (total of $3,387,376)
Common stock, $.001 par value; 100,000,000 shares authorized
at June 30, 2013 and December 31, 2012;			4,263				4,009
4,262,849 and 4,009,349 shares issued and outstanding, respectively
Additional paid-in capital			11,485,586				11,450,862
Accumulated deficit			(6,920,831	)			(6,995,821	)
TOTAL STOCKHOLDERS' EQUITY			4,574,963				4,464,995
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	17,507,115			$	18,383,487
The accompanying notes are an integral part of these condensed consolidated financial statements.

  

  

 

PRECISION AEROSPECE COMPONENTS, INC. AND

SUBSIDIARIES CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS (UNAUDITED)

 

 

  

		FOR THE SIX MONTHS ENDED JUNE 30,								FOR THE THREE MONTHS ENDED JUNE 30,
		2013				2012				2013				2012
NET REVENUE		$	14,305,260			$	6,329,706			$	7,100,501			$	4,223,685
COST OF GOODS SOLD			10,611,534				4,528,213				5,263,665				3,020,137
GROSS PROFIT			3,693,726				1,801,493				1,836,836				1,203,548
OPERATING EXPENSES
General and administrative expenses			2,978,268				1,382,335				1,480,224				830,777
Professional and consulting fees			162,696				386,716				88,992				301,218
Depreciation and amortization			62,778				13,505				39,330				7,920
Total Operating Expenses			3,203,742				1,782,556				1,608,546				1,139,915
INCOME  BEFORE OTHER INCOME (EXPENSE)			489,984				18,937				228,290				63,633
OTHER INCOME (EXPENSE)
Interest and financing expenses			(360,694	)			(48,948	)			(187,473	)			(33,075	)
Gain on bargain purchase of assets			—				982,315				—				982,315
			(360,694	)			933,367				(187,473	)			949,240
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES			129,290				952,304				40,817				1,012,873
Provision (benefit) for income taxes			54,300				(69,158	)			17,200				(26,444	)
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES		$	74,990			$	1,021,462			$	23,617			$	1,039,317
NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHARES
Basic		$	0.02			$	0.27			$	0.01			$	0.28
Diluted		$	0.01			$	0.27			$	0.00			$	0.28
Weighted average shares outstanding - basic			4,044,595				3,818,953				4,079,453				3,753,725
Weighted average shares outstanding - diluted			13,283,712				3,818,953				13,318,571				3,753,725

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

  

 

  

 

PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(UNAUDITED)

 

		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	74,990			$	1,021,462
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization			43,966				17,639
Stock issued for compensation and services			34,978				9,978
Amortization of deferred financing costs			30,292
Deferred income taxes			54,300
Bargain purchase gain			—				(982,315	)
Inventory write-down			300,000				93,784
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable			(195,022	)			(118,541	)
(Increase) Decrease in inventory			446,771				(448,517	)
Decrease in prepaid expenses			39,101				(16,044	)
(Increase) Decrease in prepaid income taxes and income taxes receivable			(6,261	)			(43,097	)
Decrease (Increase) in other assets			4,341				(30,908	)
(Decrease) in accounts payable and accrued expenses			(310,272	)			(83,566	)
(Decrease) Increase in accrued restructuring expenses			(196,312	)			—
Net cash (used in)/provided by operating activities			320,872				(580,125	)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in restricted cash			—				(500,000	)
Increase in escrow payable			—				500,000
Acquisition of business			—				(7,174,529	)
Purchase of property and equipment			(30,021	)			(2,654	)
Net cash (used in) investing activities			(30,021	)			(7,177,183	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments) proceeds from line of credit - Newstar			(913,312	)			6,573,914
(Payments for) proceeds from term loan - Newstar			(104,167	)			2,500,000
Net proceeds from stockholder loan			535,000
Proceeds from issuance of stock			—				250,000
Net payments of line of credit - IDB			—				(1,574,619	)
Net cash provided by/(used in) financing activities			(482,479	)			7,749,295
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		$	(191,628	)		$	(8,013	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		$	460,522			$	269,956
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	268,894			$	261,943
Cash paid during the period for:
Interest paid		$	344,639			$	—
Income taxes paid		$	—			$	—
The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 

 

  

  

PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

 

 

1. SUMMARY OF BUSINESS

 

Precision Aerospace Components, Inc. and Subsidiaries (the “Company”) distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product. The Company’s products 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 operations are carried out through its wholly-owned distribution subsidiaries Aero-Missile Components, Inc. (“Aero-Missile”) and Freundlich Supply Company, Inc. (“Freundlich”), both of whom have Stocking Distributor relationships with a number of United States fastener manufacturers and who sell high technology, specially engineered fasteners - nuts and bolts - predominantly to all levels of the aviation industries (original equipment manufacturers, maintenance and repair organizations, and other distributors as well as to the United States Department of Defense (“Department of Defense”). Creative Assembly Systems, Inc. (“Creative Assembly”) is a value added distributor of proprietary and specialty fasteners, primarily serving the heavy truck, automotive, appliance, and material handling industries and Tiger-Tight Corp. (“Tiger-Tight”) the exclusive North American master distributor of the Tiger-Tight locking washer. Tiger-Tight washers are used in demanding vibration applications and the Company believes they have significant advantages in comparison to competitive products. Tiger-Tight products are now available and under evaluation by several major US corporations, is being used aboard the SpaceX Dragon – the first civilian space craft to dock and return from the International Space Station.

 

The Company’s products are manufactured, by others, to exacting specifications and are made from materials that provide the strength and reliability required for their aerospace and industrial applications.

 

On May 25, 2012, the Company acquired the assets of Fastener Distribution and Marketing Company, Inc., which included Aero-Missile and Creative Assembly. The Company paid for the acquisition with a new credit facility consisting of a $2.5 million term loan and a $10 million revolving loan with Newstar Business Credit, LLC. The operating results of the Aero-Missile and Creative Assembly businesses are included in the financial results from the date of acquisition.

 

2. Summary of Significant Accounting Policies

 

Interim Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in the Company’s opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the three months and six months ended June 30, 2013 are not necessarily indicative of the results that the Company will have for any subsequent period.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K.

 

 

3. LONG-TERM DEBT AND LINE OF CREDIT

 

Long-term debt

 

On May 25, 2012, the Company entered into a three year $2.5 million term loan (the “Term Loan”), with payments of interest only during the first year. The principal amount of the Term Loan will be due and payable in 24 monthly installments of approximately $104,200, beginning on June 1, 2013. The Term Loan bears interest, at the Company’s election, at a rate tied to one of the following rates, in each case plus a specified margin: (i) the prime lending rate, but not less than 3.25%, plus a margin of 5.60% to 6.10% or (ii) adjusted one-month LIBOR, but not less than 1.5%, plus a margin of 7.10% to 7.60%. The interest margin for each such type of borrowing varies depending on the Company’s Fixed Charge Coverage Ratio.

 

As of June 30, 2013, $2,396,000 was outstanding at an interest rate of 9.10%.

 

Revolving funding facility

 

The Company has a revolving funding facility pursuant to which it can draw up to $10,000,000 against eligible assets. The facility allows for draws of up to eighty-five (85) percent of eligible accounts receivable or to eighty-five (85) percent of eligible inventory up to a maximum inventory advance amount of six million five hundred thousand dollars ($6,500,000); however the outstanding amount against eligible inventory is further limited to, an amount equal to 2.015 times the amount which can be drawn against the eligible accounts receivable. Eligible accounts receivable are, generally, those domestic accounts not outstanding for more than ninety (90) days or, for government accounts one hundred twenty (120) days and eligible inventory is inventory as determined by the bank, presently the net orderly liquidation value as determined by the bank. The loan balance is secured by a first lien position on all of the Company’s assets. The loan balance bears interest, at the Company’s election, at a rate tied to one of the following rates, in each case plus a specified margin: (i) the prime lending rate, but not less than 3.25%, plus a margin of 1.50% to 2.00%, or (ii) adjusted one-month LIBOR but not less than 1.5%, plus a margin of 3.00% to 3.50%. The interest margin for each such type of borrowing varies depending on the Company’s Fixed Charge Coverage Ratio. The facility is due May 25, 2015.

 

During March 2013, the lender and the Company amended the debt agreements in order to change certain of the covenant ratios for 2013 and subsequent. In addition, the lender waived their covenants for December 2012 and January 2013. The waiver was required mainly as a result of the Company’s decision to write down its inventory in December 2012 which adversely impacted certain of the covenant ratios.

 

As of June 30, 2013, approximately $6.2 million was outstanding at an interest rate of 5.00%.

 

 

 

 

4. COMMITMENTS AND CONTINGENCIES

 

The Company has operating leases for office and warehouse space with original terms ranging from three to five years. The Company currently has three locations with leases which are month to month and three locations with existing long term leases. The three leases have monthly payments of approximately $2,000, $2,100 and $2,100 and expire in November 2013, December 2015 and February 2016, respectively. Substantially all leases contain renewal provisions at the Company’s option. The Company is responsible for real estate taxes, utilities, and repairs under the terms of certain of the operating leases.

 

Future minimum lease payments under these leases are as follows (approximately):

  

	2013			$	66,500
	2014				52,700
	2015				54,600
	2016				4,400
	Total			$	178,200

  

The Company is subject to the possibility of claims and lawsuits arising in the normal course of business. An employee who was terminated for cause has filed a whistleblower claim which we believe has no merit. In the opinion of management, the Company liability, if any, under existing claims, asserted or unasserted, would not have a material adverse effect on the Company’s consolidated financial position or results of operations.

  

During 2010, the Company entered into an employment agreement with its President and Chief Executive Officer. In the event of the termination of the agreement under certain circumstances the Company could be liable for up to twelve months’ salary (approximately $220,000 at June 30, 2013).

 

5. SHAREHOLDER LOAN

 

During April 2013, our primary shareholder and CEO entered into a short term agreement to make a loan to the Company. The outstanding balance for the loan is approximately $0.535 million with a maturity date of October 14, 2013. The loan has a stated interest rate of 10%. These funds were used in order to satisfy certain vendor obligations. The loans are to be collateralized by certain inventory purchases to be held by the shareholder. The inventory will be available to be sold by the Company in the normal course of business. The specific inventory is segregated within the Company’s warehouse locations but must be maintained by the Company to meet its specific quality control procedures. All amounts borrowed by the Company are considered loans for accounting purposes and are repayable on demand from available operating funds. These loans are approved by the Company’s primary lender, Newstar.

 

 

 

 

 

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 the Company’s 10-K report for the year ended 2012 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 three and six months ended June 30, 2013 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.

 

Plan of Operation and Discussion of Operations

 

The Company distributes high-quality, predominantly domestically-manufactured, technically complex, nut and bolt products and a proprietary locking washer product 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 operations are carried out through its wholly-owned distribution subsidiaries Aero-Missile Components, Inc. (“Aero-Missile”) and Freundlich Supply Company, Inc. (“Freundlich”), both of whom have Stocking Distributor relationships with a number of United States fastener manufacturers and who sell high technology, specially engineered fasteners - nuts and bolts - predominantly to all levels of the aviation industries (original equipment manufacturers, maintenance and repair organizations, and other distributors as well as to the United States Department of Defense (“Department of Defense”). Creative Assembly Systems, Inc. (“Creative Assembly”) is a value added distributor of proprietary and specialty fasteners for production, primarily serving the heavy truck, automotive, appliance, and material handling industries and Tiger-Tight Corp. (“Tiger-Tight”) the exclusive North American master distributor of the Tiger-Tight locking washer. Tiger-Tight washers are used in demanding vibration applications and the Company believes they have significant advantages in comparison to competitive products. Tiger-Tight products are now available and under evaluation by several major US corporations; they are being used aboard the SpaceX Dragon – the first civilian space craft to dock and return from the International Space Station.

 

The Company’s products are manufactured, by others, to exacting specifications and are made from materials that provide the strength and reliability required for their aerospace and industrial applications.

 

On May 25, 2012, the Company acquired the assets of Fastener Distribution and Marketing Company, Inc., which included Aero-Missile and Creative Assembly (collectively the “FDMC Acquisition”) with a fair value of $8.8 million (pre-tax) for approximately $7.1 million. The Company paid for the acquisition and repaid the existing outstanding credit facility of approximately $1.575 million with a new credit facility consisting of a $2.5 million term loan and a $10 million revolving loan with Newstar Business Credit, LLC (the “NewStar Loans”). The operating results of the FDMC Acquisition businesses are included in the financial results from the date of acquisition. The FDMC Acquisition Businesses are significantly increasing the Company’s revenue with related impacts on the cost of revenue and other items in the Company’s results of operations, compared to prior periods. The integration of the FDMC Acquisition businesses and the servicing of the acquisition debt will be important drivers of the Company’s financial results in future reporting periods.

 

The acquisition provides the Company numerous benefits, including expanded breadth of product offerings and markets served, coast to coast physical presence, substantially increased depth of management and sales capability and marks a significant event in the Company’s development.

 

The Company is a niche player in the North American fastener industry. The fastener distribution industry is highly fragmented with no single company holding a dominant position. The Company competes with numerous distributors who serve as authorized stocking distributors for the fastener manufacturers in the Company’s supplier base.

 

The Company’s Tiger-Tight product is a unique lock washer product that is seeking to gain market acceptance. It has extraordinary holding properties, is reusable and does not destroy the material which it is holding in place. In the coming year, the Company anticipates widespread distribution of Tiger-Tight lock washers under an exclusive distribution agreement providing the Company master distribution rights of the product in North America.  The washers, which the Company believes are superior to any competitive product, are now readily available and manufactured in the USA. While the Company carries a full line of washers, special orders can be accommodated.

 

The Company’s subsidiary,Aero Missile, has been named the Master Distributor by SPS Technologies in Jenkintown, Pennsylvania for its FLEXLOC® Locknut product line toward the end of last year; the Company’s initial sales of this mature product high market acceptance were slowed due to certain pricing changes which took place as the company started its distribution. The Company is now achieving growing revenues from sales of the FLEXLOC® line which it anticipates will continue as the year progresses.

 

  

The FLEXLOC® Locknut is a premium locknut line with Military, Aerospace and Industrial applications. FLEXLOC® locknuts have been designed into challenging joint applications by engineers for over 50 years. The FLEXLOC® line enjoys an unequalled history of success in applications where resistance to severe vibration is required. As a Master Distributor, Aero-Missile Components will service a network of SPS Authorized FLEXLOC® Distributors. The FLEXLOC® Locknut product line is manufactured by SPS Technologies domestically in the United States. FLEXLOC® is a registered trademark of SPS Technologies, a PCC Company.

 

During the first quarter, the Company opened a warehouse facility in Denton Texas to serve one of its customers. This facility allows the customer to anticipate just in time delivery from the now closely located facility, rather than to be concerned about shipping delays, and will result in additional sales of additional products to the customer, the initial impact during the first quarter and a portion of this quarter was to reduce the Company’s sales to the customer as the customer absorbed its safety stock of materials in its inventory. The Company has seen sales return to anticipated levels in the last part of the second quarter.

 

The Company has also experienced delay in shipment of orders to the Navy Department as a result of its consolidation, and anticipates restoration of these shipments when the facilities are inspected. The inspection is anticipated to occur in the third quarter.

 

During the third quarter 2013 the Company anticipates starting shipment of a unique sealing product that it has developed in conjunction with one of the major manufacturers and its customer to fulfill specific customer needs. The product should fulfill similar needs with other customers. The product addresses current product offering technical shortfalls by increasing resistance to torque out and providing an optional self-sealing feature.

 

The Company is a one-stop source for standard, self-locking, semi-special and special nuts, bolts and washers manufactured to several military, aerospace and industrial specifications. The Company maintains an inventory of approximately 44,000 SKUs comprised of approximately 65 million parts of premium quality, brand name fastener products.

 

The Company, during the first quarter of 2013, completed the last phase of its relocation and consolidation of the activities of its headquarters operations, as well as the operations of its Freundlich Supply Company Inc. and Tiger-Tight Inc. subsidiaries from Staten Island New York to Bensalem, Pennsylvania, at the present location of its Aero-Missile Components Inc. subsidiary. This relocation allows the Company to better serve its customers through the co-location of its broadened inventory and is enabling the Company to realize additional efficiencies from its recent acquisition. As a result of this relocation, the Company is achieving significant and continuing savings from the elimination of the facilities costs associated with its Staten Island location. Additionally, the lower overall tax environment outside of New York City and State is beneficial to the Company.

 

The Company sells its products pursuant to written purchase orders from its customers. All products are shipped from the Company’s warehouses via common carrier.

 

With the acquisition, the Company’s percentage of sales to the Department of Defense, one of two customers who accounted for more than 10 percent of the Company’s sales as a percentage of its total sales, was reduced. Sales to two customers totaled greater than 10% during 2013. The United States Department of Defense (“DOD”) represented approximately 20% and 18% of the Company’s total sales for the three and six months ended June 30, 2013. PACCAR Inc represented approximately 12% and 11% of the Company’s total sales for the three and six months ended June 30, 2013. No other customer accounted for greater than 10% of the Company’s total sales and the Company has no substantial concentrations of credit risk in its trade receivables.

 

The Company’s sales and gross profit this quarter were above the comparable period last year. This is largely a result of the acquisition which occurred on May 25, 2012, and is reflected in the results of operations from that date. The Company believes that its sales will be increasing in the upcoming months, as new business opportunities mature. While the Company anticipates the economy will show increased growth in the last part of 2013, the defense related segments are anticipated to not show improvement and may exhibit further weakness as adjustment is made to the effects of reduced defense related funding.

 

 

 Results from Operations for the six and three months ending June 30, 2013

 

The Company’s revenues increased approximately 126% and 68% or $8.0 and $2.9 million for the six and three months to $14.3 and 7.1 million from $6.3 and $4.2 million in the comparable period last year. This is largely a result of the acquisition. The Company believes that its sales will be increasing in the upcoming months, but not until the middle part of the third quarter of 2013, based on discussions which it has had with customers.

 

Government purchasing has declined during this quarter as the Defense Department has dealt with uncertainties regarding its funding and the Company had raised some of its offering prices to accommodate transient higher goods costs necessitated by required purchases of smaller lots. Longer term, although a reduced Government purchasing schedule will impact sales to manufacturers, the pace of operations of the military and prescribed maintenance schedules are the driving forces behind the consumption of the parts supplied by the Company to the Government and reallocation of inventory investment will generally maintain present government sales levels. Repair and maintenance to equipment no longer immediately required for combat requirements will take an extended time. Additionally possible restrictions of new purchases will mitigate toward additional repair and refurbishment of existing equipment.

 

The Company’s gross profit increased approximately 105% and 53% or $1.9 and $0.6 million for the six and three months to $3.7 and $1.8 million from $1.8 and $1.2 million in the comparable period last year. This is largely a result of the acquisition. The Company believes based on discussions it has had with customers related to sales that its gross profit will improve as 2013 progresses.

 

The Company’s total operating expenses increased 80% and 41% or $1.4 and $0.5 million for the six and three months to $3.2 and $1.6 million from $1.8 and $1.1 million in the comparable period last year. This is largely a result of the acquisition and costs associated with the acquisition.

 

The Company’s accounts receivable have increased by approximately $0.1 million to $3.1 million at June 30, 2013 from $3.0 million at December 31, 2012; this difference is due to mainly to sales and normal deviations in customer payments. The Company’s inventory has reduced approximately $0.7 million from June 30, 2013 to December 31, 2012; The Company’s inventory does not have any life limitations and is all available for sale.

 

 

 

 

In conjunction with its acquisition, the Company refinanced its operations. The refinancing included entering into a new $2.5 million term loan, due in May 2015. The Company previously had no long term debt. The term loan, which has interest paid currently, also started being amortized monthly in June 2013. Each of the 24 monthly payments is $104,200. Additionally, the Company entered into a new line of credit and has drawn approximately $0.45 million from December 31, 2012 to March 31, 2013 to substantially provide financing for additional inventory acquisition and reduction in accounts payables. Accounts payable decreased by approximately $0.3 million to $3.3 million from $3.6 million at December 31, 2012.

 

During April 2013, our primary shareholder and CEO entered into a short term agreement to make a loan to the Company. The outstanding balance for the loan is approximately $0.535 million with a maturity date of October 14, 2013. The loan has a stated interest rate of 10%. These funds were used in order to satisfy certain vendor obligations. The loans are to be collateralized by certain inventory purchases to be held by the shareholder. The inventory will be available to be sold by the Company in the normal course of business. The specific inventory is segregated within the Company’s warehouse locations but must be maintained by the Company to meet its specific quality control procedures. All amounts borrowed by the Company are considered loans for accounting purposes and are repayable on demand from available operating funds. These loans are approved by the Company’s primary lender, Newstar.

 The Company is presently attempting to refinance its debt.

 

Liquidity

 

The Company anticipates additional capital expenditures of approximately $0.25 million on plant and equipment as it brings all of its facilities on to the same enterprise software system.

 

The Company believes that it can meet its financial obligations at its presently contemplated operating levels, even as its growth is constrained by its present financing. However, if the anticipated sales levels are not attained, the Company’s availability to access its line of credit would be adversely affected. The Company believes that its present funding is insufficient to enable the Company to accomplish some of its desired sales growth plans. The Company is presently seeking to expand its capital availability which will enable the Company to fully take advantage of sales opportunities presented to it which require the Company to make additional investments in inventory.

 

The Company believes it can expand its business with its present staff numbers.

 

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. CONTROLS AND PROCEDURES

 

(A) 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 as of June 30, 2013 on or about July 18, 2013.  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.

 

(B) Internal Controls Over Financial Reporting

 

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 January 30, 2013, 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 year end 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.

 

 

 

 

PART II

OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

 

An employee who was terminated for cause has filed a whistleblower claim which we believe has no merit. 

 

ITEM 6. EXHIBITS

 

The following exhibits are included herein:

Exhibit No.			Exhibit
10.1		Fourth Amendment to the Loan and Security Agreement, dated as of May 25, 2012, among Precision Aerospace Components, Inc., Freundlich Supply Company, Inc. (“Freundlich”), Tiger-Tight Corp., Aero-Missile Components, Inc., and Creative Assembly Systems, Inc., the lenders from time to time party to the Agreement, and Newstar Business Credit, LLC, as administrative agent.
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: August 14, 2013		PRECISION AEROSPACE COMPONENTS, INC.
			/s/ Andrew S. Prince
			Andrew S. Prince
			President and Chief Executive Officer

 

 

 

 

 

EXHIBIT INDEX

Exhibit Number			Description
10.1		Fourth Amendment to the Loan and Security Agreement, dated as of May 25, 2012, among Precision Aerospace Components, Inc., Freundlich Supply Company, Inc. (“Freundlich”), Tiger-Tight Corp., Aero-Missile Components, Inc., and Creative Assembly Systems, Inc., the lenders from time to time party to the Agreement, and Newstar Business Credit, LLC, as administrative agent.
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