[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________________________ to________________________________________
Commission File Number________________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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 [ XX ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (229.405 of this chapter)is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. Yes [ ] No [XX]
Indicate by check mark whether the registrants is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [XX ] No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $392,600
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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. [XX] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of March 15, 2009 33,324,691.
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Pat II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
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.
DESCRIPTION OF PRECISION AEROSPACE COMPONENTS’ BUSINESS
Organizational History
Precision Aerospace Components (Precision Aerospace or the “Company”) was previously known as Jordan 1 Holdings Company (“Jordan 1”) and was incorporated in Delaware on December 28, 2005. Jordan 1 is the successor to Gasel Transportation Lines, Inc. ("Gasel"), an Ohio corporation that was organized under the laws of the State of Ohio on January 27, 1988.
Gasel was a trucking company that filed for bankruptcy in the Southern District of Ohio, Eastern Division, in May 2003. On December 12, 2005, a final plan of reorganization was approved by the court and the bankruptcy proceeding was dismissed.
On December 30, 2005, Gasel entered into a private sale of stock under a Stock Purchase Agreement with Venture Fund I, Inc., a Nevada corporation owned and controlled by accredited investor Ruth Shepley (“Shepley”), of Houston, Texas. Under the terms of the Stock Purchase Agreement, Shepley purchased 29,000,000 shares of restricted common stock for a purchase price of $100,000.
Subsequent to December 30, 2005, Jordan 1 did not engage in any business activity until July 20, 2006 when it entered into an exchange agreement (the “Exchange Agreement”) pursuant to which the Company acquired all of the equity of Delaware Fastener Acquisition Corp., a Delaware corporation (“DFAC”), pursuant to an exchange agreement with the stockholders of DFAC. Contemporaneously, DFAC acquired the assets, subject to certain liabilities, of Freundlich Supply Company, Inc. (“Freundlich Supply”) pursuant to an asset purchase agreement (the “Asset Purchase Agreement”) dated May 24, 2006 among DFAC, Freundlich Supply, and Michael Freundlich. The purchase of the assets was financed by the proceeds from the sale by the Company of its securities pursuant to a securities purchase agreement (the “Securities Purchase Agreement”). As a result of the Exchange Agreement, DFAC became a wholly-owned subsidiary of the Company. Upon completion of the foregoing transactions, the Company changed its name to Precision Aerospace Components, Inc. and DFAC changed its name to Freundlich Supply Company, Inc. (“Freundlich”).
The Company’s present sole operating subsidiary and sole source of revenues is Freundlich.
Overview of Business
Freundlich and through it the Company is a stocking distributor of aerospace quality, internally-threaded fasteners. The organization from which the operating assets were acquired, Freundlich Supply, was founded in 1938 and had been operating in its present business line since 1940. The Company 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 and are made from raw materials that provide the strength and reliability required for aerospace applications.
Freundlich is a niche player in the North American aerospace fastener industry. Freundlich currently focuses on aero-space and nuclear quality nut products, serving as an authorized stocking distributor for seven of the premier nut manufacturers in the United States.
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 a large inventory of more than 6,400 SKUs comprised of more than 21 million parts of premium quality, brand name nut products. Management believes that Freundlich’s demonstrated ability to immediately fulfill a high percentage (over 50 percent) of customer orders from stock-on-hand gives Freundlich a distinct competitive advantage in the marketplace. Freundlich sells its products pursuant to written purchase orders it receives from its customers. All products are shipped via common carrier.
Industry Overview
The fastener distribution industry is highly fragmented. No one company holds a dominant position. This is primarily caused by the varied uses of fasteners and the size of the industry. Freundlich competes with the numerous fastener distributors which serve as authorized stocking distributors for the seven nut manufacturers in the Freundlich supplier base. Freundlich believes that the depth of its 6,400 SKU inventory represents a competitive advantage. As a stocking distributor, Freundlich has employed a business model of maintaining levels of inventory on hand or on order with its suppliers that can satisfy its customers’ projected needs. While this business model has allowed Freundlich to mitigate the supply shortage suffered by the industry, the extremely long supply times are creating challenges and creating shortages at Freundlich. Regulatory requirements which require manufacturer certifications create a barrier to new supplier entry into the aerospace fastener manufacturing business beyond the usual investment and patent barriers faced by new entrants to other industries. Certain domestic manufacturing capacity was eliminated during a post-9/11 downturn in the aerospace industry. The industry began a turnaround in 2004, driven by increased levels of defense spending and increased commercial demand caused by new orders received by Boeing Company and others. The continuing increased demand has exceeded the manufacturing capacity of qualified manufacturers. Through the middle of this year, manufacturing lead times have continued to increase, as have prices. As the year was ending, the lead times appear to be stabilizing albeit at long periods, in some cases in excess of a year. After close of the year lead times started to slightly decrease. Prices of finished product are yet to reflect the reported declines in raw material costs.
Inventory
As a stocking distributor, Freundlich attempts to maintain levels of inventory on hand or on order to satisfy its customers’ projected needs. Freundlich has approximately 6,400 different types of nuts in its inventory, comprised of more than 21 million parts of premium quality, brand name nut products. Freundlich’s primary suppliers include the following:
SPS Technologies
Greer Stop Nut
Republic Fastener Mfg. Corp
MacLean-ESNA
Alcoa Fastening Systems
Bristol Industries Inc.
Abbott-Interfast Corporation
Customers
In 2008, Freundlich Supply sold approximately 48% of its products to the United States Department of Defense. All of these products were sold for maintenance, repair and operations functions, were shipped to various government installations across the United States and were sold for many different government programs. For 2007, sales to the United States Department of Defense represented approximately 37% of total sales.
Freundlich’s commercial customers include original equipment manufacturers, repair facilities and other distributors. Other than the sales to the United States Department of Defense, no one customer represented more than 10 percent of total sales in 2008 or 2007.
Competition
The fastener distribution industry is highly fragmented. No one company holds a dominant position. This is primarily caused by the varied uses of fasteners and the size of the industry. The Company competes with the numerous fastener distributors which serve as authorized stocking distributors for the seven nut manufacturers in the Company's supplier base. The Company believes that the depth of its 6,400 SKU inventory represents a competitive advantage.
Few barriers to entry exist for fastener distributors generally. However, the business model employed by Freundlich promotes competitive differences favoring Freundlich and collectively not generally seen in the industry.
Freundlich’s quality system is certified to AS9100:2004 and ISO 9001:2000 quality measures. Since quality is an important measure of aerospace suppliers, Freundlich strives to maintain its quality system to the highest standards in the industry.
As an authorized stocking distributor for the premier domestic manufacturers, Freundlich is able to maintain relationships with customers not generally available to the industry. Most manufacturers are not expanding their network of authorized distributors.
As a certified government supplier, i.e. because it is listed on the “Qualified Supplier/Manufacturer List,” Freundlich does not have to compete with companies not so listed.
Government Regulation
Freundlich is approved as a “qualified supplier” by the United States Department of Defense, and, as such, can provide certain critical parts that other suppliers not so approved cannot supply.
The Fastener Quality Act (“FQA”) and its implementing regulations issued by the United States Department of Commerce require certain distributors of fasteners to, among other things, maintain lot traceability for all of its products sold. This requires that companies like Freundlich keep their books and records such that they can trace the origin of each item sold to the manufacturer from which the item was purchased. The FQA imposes additional requirements on the manufacturers of subject parts and on the users. Because of the demands of the industry, its customers, and its own quality systems, Freundlich maintains strict lot traceability for each item in inventory, and has done so for many years.
Employees
Freundlich has 17 employees, all of whom are full time employees. We believe our employee relations are very good.
ITEM 1A RISK FACTORS
An investment in our securities involves a high degree of risk. We are subject to various risks that may materially harm our business, financial condition and results of operations. An investor should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our securities. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our common stock could decline. You should only purchase our securities if you can afford to suffer the loss of your entire investment.
RISKS RELATED TO OUR BUSINESS
Fluctuations in our operating results and announcements and developments concerning our business affect our stock price.
Our quarterly operating results, the number of stockholders desiring to sell their shares, changes in general economic conditions and the financial markets, the execution of new contracts and the completion of existing agreements and other developments affecting us, could cause the market price of our common stock to fluctuate substantially.
As a result of the acquisition, our expenses have increased significantly.
Following the 2006 acquisition, our ongoing expenses have increased significantly, these include ongoing public company expenses, such as increased legal and accounting, administrative (including directors and insurance) expenses and the requirement that we register the shares of common stock issued underlying the preferred stock and warrants issued to Barron Partners LP, as well as expenses incurred in complying with the internal controls requirements of the Sarbanes-Oxley Act, and obligations incurred in connection with the acquisition. Our failure to generate sufficient revenue and gross profit could result in reduced profits or losses as a result of the additional expenses and our failure to be able to meet our payment obligations could result in default under our obligations.
We may not be able to obtain necessary additional capital which could adversely impact our operations.
Unless the Company can increase its investment in inventory and meet operational expenses with the existing sources of funds we have available, we may need access to additional financing to grow our sales. Such additional financing, whether from external sources or related parties, may not be available if needed or on favorable terms. Our inability to obtain adequate financing will adversely affect the Company’s pace of business operations or could create liquidity and cash flow problems. This could be materially harmful to our business and may result in a lower stock price.
Our officers and directors are involved in other businesses which may cause them to devote less time to our business.
Our officers' and directors' involvement with other businesses may cause them to allocate their time and services between us and other entities. Consequently, they may give priority to other matters over our needs which may materially cause us to lose their services temporarily which could affect our operations and profitability.
We could fail to attract or retain key personnel, which could be detrimental to our operations
Our success largely depends on the efforts and abilities of key executives, employees and consultants. The loss of the services of a key executive, employee or consultant could materially harm our business because of the cost and time necessary to replace and train a replacement. Such a loss would also divert management attention away from operational issues. To the extent that we are smaller than our competitors and have fewer resources, we may not be able to attract the sufficient number and quality of staff.
We may not be able to grow through acquisitions.
In addition to our planned growth through the development of our business, an important part of our growth strategy is to expand our business and to acquire other businesses in related industries. Such acquisitions may be made with cash or our securities or a combination of cash and securities. If our stock price is less than the exercise price of the outstanding warrants, it is not likely that that warrants will be exercised at their present exercise price. To the extent that we require cash, we may have to borrow the funds or sell equity securities. Any issuance of equity as a portion of the purchase price or any sale of equity, to the extent that we are able to sell equity, to raise funds to enable us to pay the purchase price would result in dilution to our stockholders. We have no commitments from any financing source and we may not be able to raise any cash necessary to complete an acquisition. If we fail to make any acquisitions, our future growth may be limited. As of the date of this report, we do not have any agreement as to any acquisition. Further, any acquisition may be subject to government regulations.
If we make any acquisitions, they may disrupt or have a negative impact on our business.
If we make acquisitions, we could have difficulty integrating the acquired companies’ personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the affect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following:
the difficulty of integrating acquired products, services or operations;
the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;
the difficulty of incorporating acquired rights or products into our existing business;
difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities;
difficulties in maintaining uniform standards, controls, procedures and policies;
the potential impairment of relationships with employees and customers as a result of any integration of new management personnel;
the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers;
the effect of any government regulations which relate to the business acquired; and
potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing or sales of acquired products or the defense of any litigation, whether of not successful, resulting from actions of the acquired company prior to our acquisition.
Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified. These risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations.
We may be required to pay liquidated damages if our board does not consist of a majority of independent directors.
Our Securities Purchase Agreement with Barron Partners LP and Richard Henri Kreger requires us to (i) appoint such number of independent directors that would result in a majority of our directors being independent directors, (ii) have an audit committee that is composed solely of independent directors and (iii) have a compensation committee that is composed of a majority of independent directors. Our failure to maintain these requirements would results in our payment of liquidated damages that are payable in cash or by the issuance of additional shares of series A preferred stock at the election of the investors.
We are dependent on a few major industries.
We are dependent on the aerospace and defense industries for a majority of our revenue and, as a result, our business will be negatively impacted by any decline in those industries.
We face risks relating to government contracts.
There are inherent risks in contracting with the U.S. government, including risks that are peculiar to the defense industry, which could have a material adverse effect on our business, prospects, financial condition and operating results, including changes in the department of defense’s procurement policies and requirements.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT
There are a large number of shares underlying our series A and B convertible preferred stock and our warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock. Currently, the Company is not authorized to issue a sufficient number of shares if the preferred shares were converted to common stock or the warrants were exercised for common stock.
The Company entered into a Securities Purchase Agreement with Barron Partners LP and Richard Henri Kreger (the “Investors”) pursuant to which the Investors purchased and as of Dec 31, 2008 held: (a) 5,274,152 shares of the Company’s series A convertible preferred stock (the “series A preferred stock”) which, are convertible into 4,098,016,050 shares of the Company’s common stock; (b) warrants to purchase 1,581,150,000 shares of the Company’s common stock at $0.00135 per share; and (c) 1,581,150,000 shares of the Company’s common stock at $0.00231 per share..
Additionally, all 2,811,000 shares of the Company’s series B convertible preferred stock convert into 843,300,000 common shares, however these shares cannot be converted until the stock Reverse Split described below.
The Securities Purchase Agreement provides that the Company will have filed a restated certificate of incorporation that will (i) change the authorized capital stock to 10,000,000 shares of preferred stock and 90,000,000 shares of common stock and (ii) effect a one-for-150 reverse split of the common stock (the “Reverse Split”). The total number of shares, upon full conversion of all securities which could be converted to common stock of the Company without giving effect to the Reverse Split or presently authorized shares, would be 8,774,196,464 shares. The Company presently has an authorized common stock limit of 100,000,000 shares. As a result, the Investors will not have the ability to convert the series A preferred stock or exercise the warrants in full unless the Reverse Split is effected. The Investors have agreed to extend that the date of the Reverse Split to December 15, 2009. If the Reverse Split is not effective on or prior to December 15, 2009, the Company is required to pay the investors liquidated damages in an amount equal to 5% of the investment made by the investors, which would be $287,500 and if it fails to timely file and maintain effective a registration statement it may be liable for liquidated damages which would be 2,100 shares of Series A stock per day it is in violation, up to a maximum of 750,000 shares.
The sale of these shares may adversely affect the market price of our common stock.
The terms of our Securities Purchase Agreement may restrict our ability to obtain necessary financing and could impede us from using our securities as consideration in contracts related to our operations.
Under the Securities Purchase Agreement, we are restricted, during the three year period commencing on the date of the agreement or such earlier time as the investors have sold certain of their securities, (i) from issuing or selling any of our common stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or content events directly or indirectly related to the business of the Company or the market for the Common stock, or (ii) in a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms which are more favorable to the Investors than the terms initially provided to the investor in its initial securities purchase agreement with the Company. In addition, the Company is restricted from issuing Preferred Stock and Convertible Debt. Further, each investor through the Securities Purchase Agreement has a right of first refusal in subsequent private placements of securities on a pro rata basis to the investor’s holdings in the total post financing total fully diluted shares of the Company. These restrictions could impede us from using our securities as consideration in contracts related to our operations, including, but not limited to, common stock issued to consultants and vendors and obtaining additional financing. This may force us to use our limited cash to pay third parties as opposed to issue our securities and may also lead to certain parties deciding to not enter into contracts with us to provide us with necessary financing. If we have difficulty in entering into contracts related to our operations or obtaining additional financing, we may be forced to curtail our business operations.
RISKS RELATING TO OUR COMMON STOCK
If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholder to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Our common stock may be affected by limited trading volume and the price of our shares may fluctuate significantly, which cumulatively may affect shareholders' ability to sell shares of our common stock
There has been a limited public market for our common stock. A more active trading market for our common stock may not develop. An absence of an active trading market could adversely affect our shareholders' ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These factors may negatively impact shareholders' ability to sell shares of the Company's common stock.
Our common stock may be affected by sales of short sellers, which may affect shareholders' ability to sell shares of our common stock
As stated above, our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations. These fluctuations could cause short sellers to enter the market from time to time in the belief that the Company will have poor results in the future. The market for our stock may not be stable or appreciate over time and the sale of our common stock may negatively impact shareholders' ability to sell shares of the Company's common stock.
Because we may be subject to the “penny stock” rules, our investors may have difficulty in selling their shares of our common stock.
“Penny Stock” are shares of stock:
With a price of less than $5.00 per share;
That are not traded on a "recognized" national exchange;
Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ listed stock must still have a price of not less than $5.00 per share); or
Of issuers with net tangible assets less than $2.0 million (if the issuer has been in continuous operation for at least three years) or $10.0 million (if in continuous operation for less than three years), or with average revenues of less than $6.0 million for the last three years.
Our Common Stock is presently deemed to be Penny Stock.
If our stock price continues to be less than $5.00 per share, our stock may be subject to the SEC’s penny stock rules, (Rule 3a51-1 promulgated under the Securities Exchange Act of 1934) which impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Broker-dealers dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stocks. Moreover, broker-dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor.
According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:
Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
This may make it more difficult for investors to sell their shares due to suitability requirements.
The protection provided by the federal securities laws relating to forward looking statements does not presently apply to us since our shares are Penny Stock shares.
Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, as long as our shares continue to be a Penny Stock, we will not have the benefit of this safe harbor protection in the event of any proceeding based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. Section 404 of the Sarbanes-Oxley Act requires increased control over financial reporting requirements, including documentation and testing of our internal control procedures in order to satisfy its requirements, annual management assessments of the effectiveness of such internal controls and a report by our independent certified public accounting firm addressing these assessments. This section may become fully applicable to us in the future resulting in significantly increased cost due to the additional third party report required. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
The Chairman of our board of directors will own a controlling interest in our voting stock following the completion of a proposed 1-for-150 reverse split.
The chairman of our board of directors, Alexander Kreger, will own approximately 53% of our outstanding common stock immediately following the completion of our proposed 1-for-150 reverse split. As a result, Mr. Kreger will have the ability to control substantially all matters submitted to our stockholders for approval, including:
election of our board of directors;
removal of any of our directors;
amendment of our certificate of incorporation or bylaws; and
adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal executive office and the offices and distribution center of Freundlich is located at 2200 Arthur Kill Road, Staten Island, New York 10309. The space is leased, pursuant to a triple net lease, by the Company through July 2013. The space is leased for approximately $12,400 per month. We have an option to extend our lease for this space and the Company can terminate the lease upon six months notice. The approximately 18,000 square foot building is constructed from brick and cinder block and is maintained in excellent condition. The space is sufficient for our present and anticipated needs.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR PRECISION AEROSPACE COMPONENTS, INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock currently trades on the OTC:BB under the trading symbol "PAOS.OB".
The following table sets forth the highest and lowest bid prices for the common stock for each calendar quarter and subsequent interim period since January 1, 2007 as reported on the web site Big Charts. It represents inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.
| | | PRICES | |
| | | HIGH | | | LOW | |
| 2007 | | | | | | | | |
| First Quarter | | $ | 0.03 | | | $ | 0.007 | |
| Second Quarter | | $ | 0.09 | | | $ | 0.023 | |
| Third Quarter | | $ | 0.05 | | | $ | 0.03 | |
| Fourth Quarter | | $ | 0.035 | | | $ | 0.008 | |
| | | | | | | | | |
| | | | | | | | | |
| 2008 | | | | | | | | |
| First Quarter | | $ | 0.017 | | | $ | 0.01 | |
| Second Quarter | | $ | 0.09 | | | $ | 0.023 | |
| Third Quarter | | $ | 0.05 | | | $ | 0.023 | |
| Fourth Quarter | | $ | 0.035 | | | $ | 0.008 | |
The Company presently is authorized to issue 100,000,000 shares of common stock with a $0.001 par value. As of MarchFebruary 13, 2009, there were 78 holders of record of the Company's common stock and 33,324,691 shares issued and outstanding.
The Company is authorized to issue 10,000,000 shares of preferred stock with a $0.001 par value. As of MarchFebruary 13, 2009, there were 2 holders of record and 5,274,152 shares of series A convertible preferred stock outstanding, each of which is convertible into 777 shares of the Company’s common stock and there were 5 holders of record and 2,811,000 shares of series B convertible preferred stock outstanding each of which would be convertible into 300 shares of the Company’s common stock. (These shares convert automatically upon the reverse split described herein into 2 shares of the Company’s post split common stock.)
Dividends
Precision Aerospace has not declared or paid cash dividends on its common stock since its inception and does not anticipate paying such dividends in the foreseeable future. The payment of dividends may be made at the discretion of the Board and will depend upon, among other factors, the Company's operations, its capital requirements, and its overall financial condition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The following discussion and analysis should be read in conjunction with the 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 on forward-looking statements, see the information set forth in the Introductory Note to this Annual Report under the caption "Forward Looking Statements" which information is incorporated herein by reference.
The Company's operations are presently carried out through its Freundlich subsidiary. A description of Freundlich's operations and marketplace is contained in section 1 of this report.
Liquidity and Capital Resources
During this past year the Company entered into a $3million dollar line of credit (at prime plus 1%), replacing its $1 million dollar line (at prime plus 4%). A portion of the additional availability was utilized to pay off the Company’s 1 million dollar, 14% interest convertible subordinated note, due July 2011 without any prepayment penalty or conversion. Since the interest rate being paid on the new line is the prime rate plus one percent, at year end the rate was 4.25 percent meaning that the Company is presently realizing an interest saving of nearly $100,000. This savings and reduction of potential dilution has been realized by bringing more of its debt (all of its debt) to be due within 12 months. The Company expects that it will be able to renew its present line.
The Company has also paid down an additional $375,000 of the Company’s subordinated note. It also reduced its accounts payable by over $285,000 and reduced accrued expenses by over $65,000. The Company has also paid all of its income taxes fully to date; this included a payment of the 2007 taxes and the estimated 2008 taxes to have been paid through the end of the year. The total of these tax payments was over $460,000.
Additionally the Company increased its inventory by over $700,000 ($4,592,247 vs $3,885,332). It is important to fully recognize the value of the Freundlich inventory. Not only does Freundlich’s inventory enable Freundlich to meet customer demand and obtain orders, but a portion of the inventory is carried on the Company’s balance sheet at a value well below the replacement cost were it to be reordered today. As Freundlich replaces its lower cost inventory with new higher-priced inventory, it will have to make this investment. Freundlich has the strategic benefit over a potential new entrant of having a lower cost of goods versus the seller of newly purchased items. The replacement cost of Freundlich’s inventory is difficult to ascertain exactly, since the cost of each particular item is generally increasing and the unit cost usually decreases as the quantity purchased increases.
As a result of these additional payments and the Company’s operations, the Company’s overall cash position increased by over $20,000.
The Company’s total liabilities increased by under $250,000 ($3,050,036 vs $2,807,449) while total assets grew by over $850,000 ($8,212,241 vs $7,372,619) and our current assets grew over $900,000 ($5,781,163 vs $4,877,593) so our Net Worth increased nearly $600,000, or more than 13%, to $5,162,205 (from$4,565,170).
When looking at the Company’s accumulated deficit of $5,949,069, the reader should be aware that the Company restarted from non-operating status in July 2006 with a balance sheet which consisted of virtually no assets, but an accumulated deficit of $2,997,934 which could not be used to offset future taxes, and this year was required to incur a $4,417,917 non cash option charge, so more than $7,400,000 of non cash reductions have been brought to that deficit,deficit., which would otherwise be positive by about 1,500,000 during the Company’s two and a half years of operations as presently constituted.
The amount available for the Company to draw under its credit line stood at over $178,627 at the end of the year, compared with the amount available under it s prior line at the end of 2007 of $302,694.
The Company is dependent upon its cash flow from operations to maintain appropriate liquidity. It can fall back to its line of credit to meet additional liquidity needs; at the end of the year this unused capacity was $178,627. In the present market environment, other sources of financing for continuing operations will be difficult to obtain. The Company does believe that it will be able to raise additional funding to support properly structured, attractive acquisitions; market conditions will impact this.
The Company does not anticipate the need to make any material capital equipment investments in the coming year. It anticipates that it has and will generate sufficient capital to more than offset the additional investment in inventory it will make during the coming year. Stresses could be created if product deliveries to the Company occur at a rate greater than anticipated or operating results fail to reach expectations. The Company’s available cash gets depleted to the extent it must be utilized to pay taxes and the Company is quite concerned by the various tax increase proposals which abound.
The Company does not anticipate any material changes in its mix or cost of its capital resources until there is an increase in the prime rate. An increase in the prime rate will increase the Company’s cost of borrowing, since its line of credit is priced at one percentage point over the prime rate, as it changes from time to time. While the Company does not expect a near term increase, it anticipates that there could be substantial future increases. The Company believes it will have sufficient cash flow to absorb reasonable additional interest expenses.
The Company has no off balance sheet financing arrangements.
Results of Operations
The economic turmoil that is gripping the world will affect the Company. What is not clear is what the net effect will be. A significant portion of the Company’s sales are to the Defense Department for aviation and nuclear repair requirements. The Company believes that Defense Department requirements for its products should continue unabated-whether or not there are programmatic reviews of Defense Department programs.
Unfortunately for the Company, non commercial aviation has been singled out as an area of excess, at least when it comes to the purchase and use of certain corporate jets. The Company also recognizes that weak economic times may well result in reduced utilization of private aircraft. This reduction in use should be partially offset by the reduction in fuel prices which will reduce operating costs. The use of the parts the Company supplies is related to aircraft operating hours. A decrease in aircraft flying hours will decrease demand for the products sold by the Company.
While the Company has not yet seen a significant decline in business there has been some decline in activity. This is perhaps better shown on a more macro level where most of the Company’s suppliers are reducing their lead times for their product lines. These lead times are still excessively long, in many instances still in excess of a year. However this is an improvement over the approximate 18 month lead times that previously existed. This Company believes that these reductions are only partially attributable to weakness in order books, but are also attributable to increased capacity that has come on line.
The overall reduction in backlog combined with more stability in material costs should result in an overall stabilization, and perhaps reduction, in the cost of goods the Company purchases. These results will take a while to show themselves in 2009, since the still significant lead times from the fabricator, as well as the lead times the fabricators use to acquire their materials, build in a delay in revisions to the prices charged to the Company.
The more immediate impact should be improved certainty of delivery of products. In the recent past, many of the promised delivery dates to the Company have been meaningless. Having delivery dates which are kept should enable the Company to better manage its business as well as allow the Company to better serve its customers. Reflecting the long lead times for the receipt of its products, which continue to persist, the Company has more than the amount of its inventory on backorder to better enable it to meet the needs of its customers
The Company believes with turmoil comes opportunity and will attempt to take advantage of marketplace conditions.
During the past year the Company’s sales increased over 25% in comparison to 2007 ($11,414,687 vs. $8,961,990). This is substantially due to the increased product deliveries received by the Company. A portion of this, perhaps as much as 10%, can be attributed to the price increases in the goods acquired by the Company which resulted in the Company charging higher prices for its sales. A key component in the Company’s selling effort is the immediate or near term availability of the product for shipment. The Company was unable to fully maintain its margins on the higher priced supplies as can be seen by the reduction in our Gross Profit from nearly 37% to nearly 31%. This decrease in margin had been anticipated. With the stabilization in prices expected, the Company expects that margins will be more stabile; however there may be additional reductions in the margins as a result of market forces.
The results of the Company’s operations in 2008, when either taken alone or compared to 2007, were substantially adversely affected by the mandated requirement in GAAP to include the Company’s non-cash option expense. The reported results are a loss in 2008 of $3,451,628 before provision for income taxes. In 2007 the Company reported income before income taxes of $1,226,664. The options expense amount included for 2008 is over $4,400,000. The inclusion of this expense amount, which was calculated in accordance with Generally Accepted Accounting Principles mandates, using the Black-Scholes valuation formula, makes the observation and utilization of the loss before provision for income taxes substantially misleading when compared the $1,226,664 income the Company reported in the prior year when there were no non cash option expenses. Although the options will expire unexercised and were expected to do so, the “loss” will never be reversed. Additionally the Internal Revenue Service does not allow any portion of the non-cash option expense to be utilized as a deduction to income for income tax purposes. The Company is concerned that this increased understanding will not be available to the significant number of persons who only review the “bottom line” reported number in the electronic reporting sites and will have no understanding of what makes up this number. The Company has been surprised that even sophisticated financial experts, including investment bankers and bankers, and other reviewers, did not initially fully grasp the Company’s financial status until walked through it by the Company. When a small company such as this is required to materially distort the perception created in the public by being required to include, without appropriate break out, certain expenses or events, the Company believes it is indeed time that the reporting rules should be questioned. The present rules, which while presumably well intentioned and understandable to a practitioner, with high probability, lead to the substantial result that the non nuanced reader, particularly those who do not review these full discussions, but only review the financials from other than this report, will be inappropriately misled.
The Company’s Operating Expenses, apart from the noncash option expense, increased due substantially to additional compensation expenses, both directly to staff as well as to professional advisors. The Company anticipates that the level of operating expense for its present level of operations should continue at about the same expense level in the coming year.
By replacing its line of credit and retiring its convertible preferred debt, the Company has reduced its interest expense by nearly $40,000, and unless there is a substantial and unanticipated increase in the prime rate this year, the Company anticipates that this debt realignment should result in a further reduction in interest expense.
The Company is anticipating significant increases in the prime rate in the future and believes that it will have the capability of meeting the increased interest payments that will occur.
The Company, in addition to working to expand its operations internally is looking to expand through acquisitions. The Company recognizes that the proper structuring of each acquisition needs to be even more elegantly addressed in the present economic climate. The task and the operational aspects of the transaction may well be made more difficult and the reporting of results more distorted as a result of the new financial accounting pronouncement SFAS 141R which became effective as of 2009. The Company is concerned that this required accounting will further distort the Company’s future financial reports even though the acquisition causing the distortion makes operational and economic sense.
The opportunities presently under consideration by the Company, in addition to the expansion of the Freundlich operations, are the acquisition of horizontal, vertical and complementary operations. While the company is in various discussions and investigations, no specific acquisition opportunities or ventures are nearing conclusion at this time. In connection with pursuit of these opportunities, the Company will also pursue the arrangement of adequate financing to carry out its plans.
In view of the size of the operations of the Company's sole operating subsidiary, and the costs involved in pursuing and consummating an acquisition, the Company will have to be selective and may have to obtain additional anticipatory financing.
Horizontal acquisitions would effectively improve the Company's overall volume which, in turn, would enable the Company to take advantage of economies of scale as they pertain to inventory management and certain administrative practices. Vertical or synergistic acquisitions could enhance the capability of the Company to satisfy potential customer desires to deal with multi-product companies or to deal with companies that have expanded service offerings not presently provided by Freundlich.
Additionally, acquisition of skills and product lines which are complementary to the Freundlich offering could mutually enhance the sales of each.
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 one or two additional staff members may be retained should business activity warrant it. 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 and the affected investors agree that it is in the best interests of the Company that the deferral continues.
Off-Balance Sheet Arrangements
None.
Subsequent Events
The Company entered into an Employment Agreement with its President
The Company, in its 8-K filed on January 28, 2009, reported that it had approved an employment and compensation agreement with Andrew S. Prince, its President and CEO, which will run through September 30, 2009.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Precision Aerospace required by Article 8 of Regulation S-X are attached to this report. Reference is made to Item 13 below for an index to the financial statements.
Of particular importance are the notes to those financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonably based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. To the extent there are material differences between these estimates, judgments and assumptions and actual results, our financial statements will be affected.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed these critical accounting policies and related disclosures. See Notes to Condensed Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP.
The following areas are of particular importance to the Company’s operations and available cash flow:
Inventory - The prices for replacement inventory have and through the major part of the year continued to escalate. Additionally the lead times for delivery remain long, at times exceeding 60 weeks. With few, insignificant, exceptions, none of the Company’s products in inventory have any shelf life limitations and, assuming eventual utilization, their value, from a replacement perspective meet or exceed their initial acquisition cost. Demand for individual products extends for long durations and the Company’s business is characterized by the either immediate availability or near term availability of a product being crucial to its sale. Sales of a particular product may occur at irregular intervals. Consequently the Company continues to invest in a substantial inventory and to recognize a product as being no longer in demand, if a sale does not occur within five year period. Although the product is, at the end of the five year period, reduced to a zero cost basis, it may remain in the Company’s inventory and be available for sale at a later time.
Allowance for doubtful accounts - In determining the adequacy of the allowance for doubtful accounts, the Company considers a number of factors including the aging of the receivable portfolio, customer payment trends, and financial condition of the customer, industry conditions and overall credibility of the customer. Actual amounts could differ significantly from our estimates.
Income Taxes - In the preparation of consolidated financial statements, the Company estimates income taxes based on the existing regulatory structures. Deferred income tax assets and liabilities represent tax benefits or obligations that arise from temporary differences due to differing treatment of certain items for accounting and income tax purposes. The Company evaluates deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character amount and timing to result in their recovery. A valuation allowance is established when management determines that it is more likely than not that a deferred tax asset will not be realized to reduce the assets to their realizable value. Considerable judgments are required in establishing deferred tax valuation allowances and in assessing probable exposures related to tax matters. The Company’s tax returns are subject to audit and local taxing authorities that could challenge the company’s tax positions. The Company believes it records and/or discloses such potential tax liabilities as appropriate and has reasonably estimated its income tax liabilities and recoverable tax assets.
Options - During 2008 the Company issued non-plan options to officers and directors of the Company. The option number of shares were in accordance with compensation arrangements agreed to by the Company and approved by its board of directors. Grantees vested in the options at the date of issuance. The exercise price of each option that has been granted equals 100% of the market price of the Company’s stock on the date of the grant. Options under this plan vest on the grant date and are exercisable for a period not to exceed 1 year from the option grant issuance date. The Company does not believe that the expense required to be recognized in accordance with GAAP, which is a non cash expense, will be other than an accounting entry for the Company because the Company believes the Options will expire unexercised.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUTANTANTS ON (SIC) ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. 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 on or about February 23, 2009.2009, and again on August 26, 2009, for the period ended December 31, 2008. The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's disclosure controls and procedures were ineffective at the reasonable assurance level described below as of the period covered by this 10-K as of their initial evaluation. The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's disclosure controls and procedures are effective at this reasonable level of assurance as of the time of the re-evaluation. 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 effectivesince they had resulted in an incomplete disclosure regarding the Company’s internal controls over financial reporting, were ineffective at this reasonable assurance level as of the period covered by this 10-K.10-K as of their initial evaluation. The Company believes that it has rectified its disclosure controls and procedures as of the time of the re-evaluation so that they are now effective at this reasonable assurance level. 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
In addition,The Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer/Principal Financial Officer, evaluatedof the Company’s internal controls over financial reportingeffectiveness of the design and determined that there have been no changes in its internal controls that have materially adversely affected, or are reasonably likely to adversely materially affect, those internal controls over financial reporting.
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluationoperation of the Company's internal controls conducted atcontrol over financial reporting on or about February 23, 2009, and again on August 26, 2009, for the end of February 2009, theperiod ended December 31, 2008. The Company's Principal Executive Officer/Principal Financial Officer has determinedconcluded that there are no changes to the Company's internal controls over financial reporting were ineffective at the reasonable level of assurance described below as of the period covered by this Form 10-K when initially evaluated. 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 materially adversely affected, or are reasonably likelya material effect on the Company’s financial statements. The Company's internal control over financial reporting is designed to materially adversely affect,provide a reasonable level of assurance of achieving the Company's disclosure control objectives. 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. Based on its assessment, the Company believes that, as of December 31, 2008, its system of internal control over financial reporting was ineffective when initially evaluated. The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's internal controls over financial reporting. The term "disclosure controls and procedures" is definedreporting, because they had resulted in Rules 13a-15(e) and 15d-15(e)an incomplete disclosure, were ineffective at this reasonable level of assurance as 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 ensureperiod covered by this Form 10-K when initially evaluated. The Company's Principal Executive Officer/Principal Financial Officer has concluded that the information required to be disclosed by a company in the reports that it files under the Exchange ActCompany's internal control over financial reporting is recorded, processed, summarized, and reported within the required time periods. The Company concludes that our disclosure controls and procedures are effective at ensuring that required information will be disclosed on a timely basis in our reports filed underthis reasonable level of assurance as of the Exchange Act.time of the re-evaluation.
ITEM 9B. OTHER INFORMATION
There is no information required to have been disclosed in a report on Form 8-K during the fourth quarter of the year covered by this Form 10-K, but not reported.
PART III
Set forth below is certain information concerning each of the directors and executive officers of the Company as of February 20, 2009:
| Name | | Age | | Position | | With Company Since |
| Alexander Kreger | | 65 | | Director and Chairman of the Board | | 2006 |
| Andrew S. Prince | | 65 | | President and CEO, Principal Financial Officer and Director | | 2006, Officer since 2007 |
| Robert Adler | | 74 | | Director | | 2006 |
| Chris Phillips | | 36 | | Secretary and Director | | 2006 |
| David Walters | | 46 | | Director | | 2006 |
| Donald Barger | | 66 | | Director | | 2008 |
Alexander Kreger
Mr. Kreger served as the President of Kreger Truck Renting Company, Inc. from 1999 through 2008. Mr. Kreger has a BS in accounting and finance from the Wharton School, University of Pennsylvania.
Mr. Kreger is a member of the Company’s Audit and Compensation Committees.
Andrew S. Prince
Mr. Prince is presently President and Chief Executive Officer of the Company. Mr. Prince is, and for the last five years has been, a principal of Prince Strategic Group LC, a strategic advisory and merchant-banking group. Prince Strategic Group’s focus is strategic planning, acquisition/disposition advice, financial restructuring and providing crisis and interim CEO, COO management. Mr. Prince assists large and small organizations to develop and implement their business strategies and refine their operations. He has extensive experience in corporate financing, strategic relationship and acquisition transactions, including their financial and strategic analysis, structuring and negotiations, strategic planning and management development activities as well as background in all facets of operations in both small and large organizations. From June 1, 2004-June 1, 2006, Mr. Prince was a director of CDKnet.com (OTCBB: CDKN). Mr. Prince is a graduate of the United States Naval Academy, Harvard Law School and Harvard Business School.
Mr. Prince is a member of the Company’s Compensation Committee.
Robert I. Adler
From 2000 to 2002, Mr. Adler was Managing Director for ING Furman Selz Asset Management. From 1991 to 2000, he was Vice President, Senior Investment Officer for BHF Securities Corp. He is currently a member of the Board of Directors of China Medicine Company, a distributor of pharmaceutical products, including traditional Chinese herbal medicine, and SinoEnergy Holding Co., a manufacturer of stainless steel vessels for liquid and compressed natural gas.
Mr. Adler is Chairman of the Company’s Audit Committee.
Donald G. Barger Jr.
From September 2007 until his retirement in February 2008. Mr. Barger served as advisor to the CEO of YRC Worldwide Inc. (“YRCW”), a publicly held company specializing in the transportation of goods and materials; until September 2007, he was Executive Vice President and Chief Financial Officer of YRCW. He joined YRCW’s predecessor company, Yellow Corporation (“Yellow”), in December 2000 as Senior Vice President and Chief Financial Officer. Prior to joining Yellow, he served as Vice President and Chief Financial Officer of Hillenbrand Industries Inc. (“Hillenbrand”), a publicly held company serving the healthcare and funeral services industries, from March 1998 until December 2000. Mr. Barger was also Vice President, Chief Financial Officer of Worthington Industries, Inc., a publicly held manufacturer of metal and plastic products and processed steel products, from September 1993 until joining Hillenbrand. Mr. Barger is a director of Quanex Building Products Corporation, a publicly held manufacturer of engineered materials and components for the U.S. building products markets; Globe Specialty Metals, Inc., a publicly held producer of silicon metal and silicon-based specialty alloys; and Gardner Denver a designer, manufacturer, and marketer of compressor and vacuum products, and fluid transfer products. Mr. Barger has a B.S. degree from the United States Naval Academy and an M.B.A. from the University of Pennsylvania, Wharton School of Business.
Chris Phillips
Since February 2008, Chris Phillips has been a managing director for Vicis Capital, LLC, a NY based hedge fund. Previously from October 2004 until January 2008, Chris served as the President and CEO of Apogee Financial Investments, Inc., a merchant bank, who owns 100% of Midtown Partners & Co., LLC, a FINRA licensed broker-dealer. Since July 2000 and up until January 2008, he acted as the managing member of TotalCFO, LLC which provides consulting and CFO services to a number of public and private companies and high net worth individuals. From November 2007 through January 2008 Chris served as the CEO and Chief Accounting Officer of OmniReliant Holdings, Inc. (OTCBB: ORHI). Presently, he is also a Board Member of OmniReliant Holdings, Inc. (OTCBB: ORHI), Brookside Technology Holdings, Corp. (OTCBB: BKSD), and MDwerks, Inc. (OTCBB: MDWK). Mr. Phillips holds a Bachelors of Science Degree in Accounting and Finance and a Masters of Accountancy with a concentration in Tax from the University of Florida. Mr. Phillips is a Florida licensed Certified Public Accountant.
David Walters
David Walters co-founded Monarch Bay Associates, LLC, a FINRA member broker dealer, in 2006. Prior to Monarch Bay Associates, Mr. Walters was a principal with Monarch Bay Capital Group, LLC, a firm that provided advisory services and capital for emerging growth companies. From 1992 through 2000 he was Executive Vice President and Managing Director in charge of Capital Markets for Roth Capital (formerly Cruttenden Roth) where he was instrumental in building the company’s revenues from $7 million to $65 million. As an equity partner, he managed the capital markets group and led over 100 public and private financings, raising over $2 billion in growth capital. Additionally, Mr. Walters oversaw a research department that covered over 100 public companies, and was responsible for the syndication, distribution and after-market trading of the public offerings. Prior to Cruttenden Roth, he was Vice President for both Drexel Burnham Lambert and Donaldson Lufkin and Jenrette in Los Angeles, and he ran a private equity investment fund. Mr. Walters is Chairman of the Board of Directors of the publicly traded companies: Remote Dynamics, Inc. (OCTBB: REDI), Monarch Staffing, Inc. (OCTBB: MSTF.OB), and the non-publicly traded companies Bounce Mobile Systems, Inc. and Systems Evolution, Inc., STI Group, Inc. and a director of Lathian Systems, Inc. Mr. Walters earned a B.S. in Bioengineering from the University of California, San Diego.
Mr. Walters is Chairman of the Company’s Compensation Committee .and a member of the Company’s Audit Committee.
Code of Ethics and Committee Charters
Drafts of committee charters for the Audit and Compensation committees have been prepared and are under review by the Board of Directors but have not been formally adopted.
Code of Ethics
The Code of Ethics applies to the Company’s directors, officers and employees. It is available on the Company’s website.
Audit Committee
The Audit Committee makes such examinations as are necessary to monitor the corporate financial reporting and the external audits of the Company, to provide to the Board of Directors (the “Board”) the results of its examinations and recommendations derived therefrom, to outline to the Board improvements made, or to be made, in internal control, to nominate independent auditors and to provide to the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters that require Board attention.
Compensation Committee
The compensation committee is authorized to review and make recommendations to the Board regarding all forms of compensation to be provided to the executive officers and directors of the Company, including stock compensation and bonus compensation to all employees. Officers of the Company serving on the Compensation committee do not participate in discussions regarding their own compensation.
Nominating Committee
The Company does not have a Nominating Committee and the full Board acts in such capacity.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company’s directors and executive officers and persons who beneficially own more than ten percent (10%) of a registered class of its equity securities, file with the SEC reports of ownership and changes in ownership of its common stock and other equity securities. Executive officers, directors, and greater than ten percent (10%) beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports that they file. Based solely upon a review of the copies of such reports furnished to us or written representations that no other reports were required, the Company believes that, for 2008, all filing requirements applicable to its executive officers, directors and greater than ten percent (10%) beneficial owners were met.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the Company’s principal executive officer,and all of the other executive officers with annual compensation exceeding $100,000, who served during the fiscal year ended December 31, 2008, for services in all capacities to the Company:
SUMMARY COMPENSATION TABLE
| Name & Principal Position | Year | | Salary ($) | Bonus ($) | Stock Awards ($) | | Option Awards(2) ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Year | | Salary | | Bonus | | Stock Awards | | Option Awards(2) | | Non-Equity Incentive Plan Compensation | | Nonqualified Deferred Compensation Earnings | | All Other Compensation |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Andrew Prince President, CEO and Director(1) | 2008 | | $ | 200,000 | $ | 36,999 | - | $ | 4,349,968 | - | - | $ | - | | | | | | | | | $ | | | | $ | | $ | | | |
| (1) | Mr. Prince serves as a director of the Company, but without compensation for his director services. | |
| (2) | Mr. Prince is to have a7% ownership interest in the company based on fully diluted shares outstanding as of January 2007. | |
| | | |
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
| Name | Number of Securities underlying unexercised options (#) exercisable | Number of Securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Options exercise ($) | Options expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards. Number of shares or units and other rights that have not vested (#) |
| | | | | | | | | |
| Andrew Prince | 630,805,669 | - | - | 0.01 | Feb 27 2009 | | | |
Compensation of Directors
The following table sets forth information with respect to director’s compensation for the fiscal year ended December 31, 2008:
DIRECTOR COMPENSATION
| Name | | Fees Earned or Paid in Cash | | | Stock Awards | | | Options Awards | | | Non-Equity Incentive Plan Compensation | | | Nonqualified Deferred Compensaton Earnings | | | All Other Compensation | | | Total | | | Fees Earned or Paid in Cash | | Stock Awards | | Options Awards | | Non-Equity Incentive Plan Compensation | | Nonqualified Deferred Compensaton Earnings | | All Other Compensation | | Total | |
| Robert Adler | | $ | 10,000 | | | $ | - | | | | 13,239 | | | $ | - | | | $ | - | | | $ | - | | | $ | 23,239 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Alex Kreger | | $ | 10,000 | | | $ | - | | | | 13,239 | | | $ | - | | | $ | - | | | $ | - | | | $ | 23,239 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Chris Phillips | | $ | 6,000 | | | $ | - | | | | 13,239 | | | $ | - | | | $ | - | | | $ | - | | | $ | 19,239 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Donald Barger | | $ | 5,000 | | | $ | - | | | | 14,995 | | | $ | - | | | $ | - | | | $ | - | | | $ | 19,995 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| David Walters | | $ | 8,000 | | | $ | - | | | | 13,239 | | | $ | - | | | $ | - | | | $ | - | | | $ | 21,239 | | | | | | | | | | | | | | | | | | | | | | |
Non-employee Directors of the Company are paid $2,500 per meeting for board meeting attendance in person and $1,500 per meeting for board meeting attendance by phone and $1,500 per meeting for each committee meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information with respect to the beneficial ownership of the Common Stock of the Company as of March 25, 2009, for: (i) each person who is known by the Company to beneficially own more than 5 percent of the Company’s Common Stock, (ii) each of the Company’s directors, (iii) each of the Company’s Named Executive Officers, and (iv) all directors and executive officers as a group. As of March 25, 2009, the Company had 33,324,691 shares of Common Stock outstanding.
Name and Address of Beneficial Owner (1) | | Shares Beneficially Owned | | | Percentage of Shares Beneficially Owned | | | Percentage of Total Voting Power | | Position | | Shares Beneficially Owned | | | Percentage of Shares Beneficially Owned | | | Percentage of Total Voting Power | | | Position |
Richard Kreger 134 Lords Highway Weston, CT 06883 | | | 69,111,309 (2) | | | | 69.1 | % | | | 69.1 | % | | | | (2) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Alex Kreger | | | 15,042,000 | | | | 15.0 | % | | | 15.0 | % | Executive Chairman & Director | | | | | | | | | | Executive Chairman & Director |
| | | | | | | | | | | | | | | | | | | | | | |
BGRS 12333 Fairy Hill Road Rydal, PA 19046 | | | 3,150,000 | | | | 3.2 | | | | 3.2 | % | | | | | | % | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Aimee Brooks 12 Graham Terrace Montclair, NJ 07042 | | | 1,722,000 | | | | 1.7 | % | | | 1.7 | % | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Robert Adler | | | 1,350,000 | | | | 1.4 | % | | | 1.4 | % | Director | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Chris Phillips | | | 1,350,000 | | | | 1.4 | % | | | 1.4 | % | Director Secretary | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Andrew Prince | | | 66,675,309 | | | | 66.7 | % | | | 66.7 | % | Director President and CEO | | | (3) | | | | | | | | Director President and CEO |
| | | | | | | | | | | | | | | | | | | | | | |
| David Walters | | | 1,350,000 | | | | 1.4 | % | | | 1.4 | % | Director | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Donald Barger | | | 750,000 | | | | 0.8 | % | | | 0.8 | % | Director | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Directors and Executive Officers as a Group (5 persons) | | | 86,517,309 | | | | 86.5 | % | | | 86.5 | % | | |
Directors and Executive Officers as a Group | | | | | | | | | | | |
** Shorter of life or lease term.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (Continued)
The carrying amount of all long-lived assets is evaluated periodically to determine whether adjustment to the useful life or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
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 is 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. The Company has determined that no impairment is needed at December 31, 2008.
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. The only temporary book to tax differences are depreciation and the amortization of financing fees, and the summation of these amounts for 2008 and 2007 were in management's judgment, immaterial to the financial statements on both an annual and cumulative basis, and so deferred tax assets or liabilities were not recorded.
Earnings (Loss) per Common Share
Basic earnings (loss) per share is calculated by dividing net income attributable to common stockholders by the weighted average number of outstanding common shares during the year. Basic earnings (loss) per share exclude any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share.
Revenue Recognition
Revenues are recognized when title, ownership and risk of loss pass to the customer. A sale occurs at the time of shipment from the Company’s warehouse in Staten Island, New York, as the terms of the Company’s sales are FOB shipping point.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for cash, certificates of deposit, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of the financial instruments.
The Company believes that its indebtedness approximates fair value based on current yields for debt instruments with similar terms.
Concentration of Credit Risk
Sales to the United States Department of Defense (“DOD”) represented approximately 48 percent of our total sales. No other customer accounted for greater than 10 percent of our total sales and the Company has no substantial concentrations of credit risk in its trade receivables.
Gross Profit
The Company determines its gross profit by subtracting cost of goods sold from sales. Cost of goods sold includes the cost of the products sold and excludes costs for selling, general and administrative expenses, which are reported separately in the income statement.
Shipping and Handling Costs and Fees
The Company records freight cost on merchandise purchased to cost of goods.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that began after September 15, 2006. The implementation of this pronouncement had no impact on the Company’s financial position or results of operations.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract under a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualified special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale or trading securities in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. Additionally, SFAS No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, permits an entity to choose either the use of an amortization or fair value method for
2. Summary of Significant Accounting Policies (CONTINUED)
Recent Accounting Pronouncements (Continued)
amortization or fair value method for subsequent measurements, permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights and requires separate presentation of servicing assets separate presentation of servicing assets and liabilities subsequently measured at fair value and additional disclosures for all separately recognized servicing assets and liabilities. SFAS No. 156 is effective for transactions entered into after the beginning of the first fiscal year that began after September 15, 2006. The implementation of this pronouncement had no impact on the Company’s financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.
The implementation of this pronouncement had no impact on the Company’s financial position or results of operations and Management believes this will have no material impact on Company’s financial condition and results of operations.
In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, which amends SFAS No. 87 “Employers’ Accounting for Pensions” (SFAS No. 87), SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (SFAS No. 88), SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (SFAS No. 106), and SFAS No. 132R “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)” (SFAS No. 132R). This Statement requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. SFAS No. 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. The standard provides two transition alternatives related to the change in measurement date provisions. The recognition of an asset and liability related to the funded status provision is effective for fiscal year ending after December 15, 2006 and the change in measurement date provisions is effective for fiscal years ending after December 15, 2008. The Company has no defined benefit pension plans at this time and therefore this pronouncement has no effect on the Company.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). The implementation of this pronouncement had no impact on the Company’s financial position or results of operations and Management believes this will have no material impact on Company’s financial condition and results of operations.
2. Summary of Significant Accounting Policies (CONTINUED)
Recent Accounting Pronouncements (Continued)
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements: an amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 replaces the term minority interests with the newly-defined term of non-controlling interests and establishes this line item as an element of stockholders’ equity, separate from the parent’s equity. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. The Company is reviewing the provisions of SFAS No. 160, which is effective for the Company January 1, 2009. The Company does not presently have any “non-controlling interests” and consequently this new accounting standard will not presently have an impact on the Company’s financial statements and is not anticipated to have a future impact.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133" ("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 is effective the first quarter of fiscal 2010. The Company is reviewing the provisions of SFAS No. 161. The Company does not currently have any such instruments or engage in such activities, and consequently does not anticipate that this new accounting standard will have an impact on the Company’s Financial Statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The effective date of SFAS No. 162 has not yet been determined. The implementation of this standard will not have a material impact on the Company’s Financial Statements.
In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets .Assets. FSP FAS 132(R)-1 requires more detailed disclosures about employers’ plan assets in a defined benefit pension or other postretirement plan, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets. FSP FAS 132(R)-1 also requires, for fair value measurements using significant unobservable inputs (Level 3), disclosure of the effect of the measurements on changes in plan assets for the period. The disclosures about plan
2. Summary of Significant Accounting Policies (CONTINUED)
Recent Accounting Pronouncements (Continued)
assets required by FSP FAS 132(R)-1 must be provided for fiscal years ending after December 15, 2009. The Company has no such plans and has no present intention of having such plans. Even if it had such a plan, this pronouncement is only disclosure-related, and it would not have an impact on the financial position and results of operations, but would affect the disclosures within our financial statements.
3. PROPERTY AND EQUIPMENT
| | | | | | | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Furniture and fixtures | | $ | 2,392 | | | $ | 2,392 | |
| Equipment and other | | | 358,300 | | | | 354,184 | |
| Leasehold improvements | | | 6,487 | | | | 6,487 | |
| | | | 367,179 | | | | 363,063 | |
| | | | | | | | | |
| Less accumated depreciation and amortization | | | (182,545 | ) | | | (102,481 | ) |
| | | | | | | | | |
| Property and equipment, net | | $ | 184,634 | | | $ | 260,582 | |
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2008 and 2007 consist of the following:
| | | 2008 | | | 2007 | |
| Accounts payable | | $ | 237,390 | | | $ | 525,407 | |
| Accrued expenses | | | 15,140 | | | | 81,220 | |
| Total | | $ | 252,530 | | | $ | 606,627 | |
| | | 2008 | | | 2007 | |
| Accounts payable | | $ | 237,390 | | | | 525,407 | |
| Accrued expenses | | | 15,140 | | | | 81,220 | |
| Total | | $ | 252,530 | | | | 606,627 | |
| | | | | | | | | |
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. The rental rate is $12,400 per month. The Company can terminate the lease upon six months notice.
On March 6, 2008, 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, which has a maturity date of April 30, 2009, established a revolving funding facility which allows Freundlich to receive up to three (3) million dollars. 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). 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
5. COMMITMENTS AND CONTINGENCIES ( CONTINUED)(CONTINUED)
preceding sixty (60) months. The daily rate on the outstanding balance will be, at the Company’s option, the prime rate plus one (1) per cent with a minimum of four and one quarter (4.25) per-cent or LIBOR plus three and three quarters (3.75) per cent. The balance is secured by a first lien position on all of Freundlich’s assets. The Agreement replaced the Company’s existing facility with Greater Bay Business Funding.
6. INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due.
Significant components of the income tax provision for the years ended December 31, 2008 and 2007 are as follows:
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | �� | | | |
| Federal | | $ | 234,438 | | | $ | 232,163 | |
| State | | | 63,458 | | | | 106,379 | |
| City | | | 71,358 | | | | 117,017 | |
| Total Current income tax | | $ | 369,254 | | | $ | 455,559 | |
| | | | | | | | | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| | | | | | | |
| Federal | | $ | 234,438 | | | $ | 232,163 | |
| State | | | 63,458 | | | | 106,379 | |
| City | | | 71,358 | | | | 117,017 | |
| Total Current income tax | | $ | 369,254 | | | $ | 455,559 | |
The only temporary book to tax differences are depreciation and the amortization of financing fees, and the summation of these amounts for 2008 and 2007 were in management's judgment, immaterial to the financial statements on both an annual and cumulative basis, and so deferred tax assets or liabilities were not recorded.
Although the Company has a stockholders' equity deficit of $5,949,069 there are no net operating losses available to be used against taxable income.
7. EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE
Earnings (loss) per common and common equivalent share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. At December 31, 2008 and 2007, the number of common shares was increased by the number of shares issuable upon the exercise of outstanding stock options and warrants and the conversion of Series A and Series B Preferred Stock and, in 2007, the convertible note which was paid off without conversion in 2008. In July 31, 2007 the conversion ratios of the Series A Preferred stock and the convertible note were adjusted.
The following data shows the amounts used in computing earnings per share (EPS) and the effect on income and the weighted average number of shares of dilutive potential common stock.
The computation of diluted EPS for 2008 is not presented because inclusion of outstanding instruments to purchase stock would be antidilutive. Dilutive securities are presented for information purposes only.
| | | December 31, | |
| | | 2008 | | | 2007 | |
| Net income (loss) available to | | | | | | |
| common stockholders used | | | | | | |
| in basic EPS and diluted EPS | | $ | (3,820,882 | ) | | $ | 771,105 | |
| | | | | | | | | |
| Weighted average number of | | | | | | | | |
| common shares used in basic EPS | | | 33,324,691 | | | | 33,324,691 | |
| | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | |
| Weighted average number of | | | | | | | | |
| Stock options and warrants, | | | | | | | | |
| conversion of preferrred shares and note | | | 8,852,096,865 | | | | 8,965,985,070 | |
| | | | | | | | | |
| Weighted average number of common | | | | | | | | |
| shares and dilutive potential common | | | | | | | | |
| stock used in diluted EPS | | | 8,885,421,556 | | | | 8,999,309,761 | |
7. EARNINGS (LOSS) PER COMMON SHARE AND COMMON EQUIVALENT SHARE (CONTINUED)
| Fully diluted calculation as of December 31: | | 2008 | | | 2007 | |
| | | | | | | |
| Common Stock | | | 33,324,691 | | | | 33,324,691 | �� |
| | | | | | | | | |
| Series A convertible pfd stock (5,274,152 shares outstanding) each converts to 777 shares. | | | 4,098,016,104 | | | | 4,098,016,104 | |
| | | | | | | | | |
| Series B convertible pfd stock (2,811,000 shares outstanding) each converts to 300 shares; | | | 843,300,000 | | | | 843,300,000 | |
| (not convertible until after 150:1 reverse split) | | | | | | | | |
| | | | | | | | | |
| Convertible Note - paid off March 31, 2008 | | | - | | | | 862,068,966 | |
| | | | | | | | | |
| Options issued - August 2, 2002 | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| Options issued - Februrary 28, 2008 | | | 635,005,669 | | | | - | |
| | | | | | | | | |
| Options issued - December 16, 2008 | | | 1,950,000 | | | | - | |
| | | | | | | | | |
| Warrants - Eagle | | | 200,000 | | | | 200,000 | |
| | | | | | | | | |
| Common Stock Purchase Warrant A | | | 1,581,150,000 | | | | 1,581,150,000 | |
| | | | | | | | | |
| Common Stock Purchase Warrant B | | | 1,581,150,000 | | | | 1,581,150,000 | |
| | | | | | | | | |
| Fully Diluted | | | 8,774,196,464 | | | | 8,999,309,761 | |
| | |
| Fully diluted calculation as of December 31: | | 2008 | | | 2007 | |
| | | | | | | | | |
| Common Stock | | | 33,324,691 | | | | 33,324,691 | |
| | | | | | | | | |
| Series A convertible pfd stock (5,274,152 shares outstanding) each converts to 777 shares. | | | 4,098,016,104 | | | | 4,098,016,104 | |
| | | | | | | | | |
Series B convertible pfd stock (2,811,000 shares outstanding) each converts to 300 shares; (not convertible until after 150:1 reverse split) | | | 843,300,000 | | | | 843,300,000 | |
| | | | | | | | | |
| Convertible Note - paid off March 31, 2008 | | | - | | | | 862,068,966 | |
| | | | | | | | | |
| Options issued - August 2, 2002 | | | 100,000 | | | | 100,000 | |
| | | | | | | | | |
| Options issued - Februrary 28, 2008 | | | 635,005,669 | | | | - | |
| | | | | | | | | |
| Options issued - December 16, 2008 | | | 1,950,000 | | | | - | |
| | | | | | | | | |
| Warrants - Eagle | | | 200,000 | | | | 200,000 | |
| | | | | | | | | |
| Common Stock Purchase Warrant A | | | 1,581,150,000 | | | | 1,581,150,000 | |
| | | | | | | | | |
| Common Stock Purchase Warrant B | | | 1,581,150,000 | | | | 1,581,150,000 | |
| | | | | | | | | |
| Fully Diluted | | | 8,774,196,464 | | | | 8,999,309,761 | |
| | | | | | | | | |
8. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt as of December 31, 2008 and 2007 consists of the following:
| | | 2008 | | | 2007 | |
| $1,000,000 five year convertible unsecured term loan at a rate which was 14% on December 31, 2007, paid off in 2008. | | $ | - | | | $ | 1,000,000 | |
| | | | | | | | | |
| $750,000 subordinated term loan due April 30, 2009 secured by all assets equipment at a variable rate of Prime plus 1% (4.25% and 8.25% on December 31, 2008 and 2007). | | | 75,000 | | | | 450,000 | |
| | | | | | | | | |
| Total debt | | | 75,000 | | | | 1,450,000 | |
| | | | | | | | | |
| Less current portion | | | (75,000 | ) | | | (300,000 | ) |
| | | | | | | | | |
| Long-term portion | | $ | - | | | $ | 1,150,000 | |
8. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Convertible Note
On July 20, 2006, the Company received $1,000,000 in return for issuing a $1,000,000 convertible note due July 20, 2011. The note had an interest rate of 3% p.a. through December 2, 2006, and 12% p.a. through January 30, 2007, and thereafter to 14% p.a. through maturity. The note also had a conversion feature. The note had an original conversion price of $0.002 per share, subject to adjustment for failing to meet specific earnings in 2006 and 2007. On July 31, 2007, the Company and the note holder agreed to a onetime adjustment of the conversion price to $0.00116 per share. If the note could have been fully converted, after the adjustment the note could have been converted to 862,068,966 shares.
The note was paid in full without any conversion on March 31, 2008.
$3,000,000 available to draw revolving funding facility. Availability of 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). 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 will be, at the Company’s option, the prime rate plus one (1) per cent, with a minimum of four and one quarter (4.25) percent or LIBOR plus three and three quarters (3.75) per cent. The balance is secured by a first lien position on all of the Company’s assets. The facility is due as of April 30, 2009. The Company expects that the facility will be renewed. As of December 31, 2008, $2,722,506 was outstanding and $178,627 was available to draw. As of December 31, 2007 $387,466 was outstanding, and $302,694 was available to draw under the prior facility.
9. ACQUISITION
On July 20, 2006, the Company acquired all the assets and certain liabilities of Freundlich Supply, a New York corporation which operated as a distributor of fasteners to the aerospace industry. The purchase price totaled $6,066,930, consisting of the original purchase price of $5,000,000 plus $263,943 working capital adjustment and liabilities assumed of $802,987. The asset purchase agreement provided that the purchase price would be adjusted to the extent of the Seller’s net working capital (defined as the excess of accounts receivable, inventory and prepaid expenses over accounts payable and accrued expenses) exceeded, or was less than, $2,280,000 at closing. Net working capital totaled $2,543,943 at closing, and accordingly, the purchase price was increased by $263,943.
The acquisition was recorded by allocating the cost of the assets acquired and liabilities assumed based upon their estimated fair value at the acquisition date. The excess of the cost of the acquisition over the net of the amounts assigned to the fair value of the assets acquired and the liabilities assumed was recorded as goodwill.
9. ACQUISITION (CONTINUED)
The fair value of the assets and liabilities was determined and the purchase price was allocated as follows:
| Accounts receivable | | $ | 1,113,686 | |
| Inventory | | | 2,521,153 | |
| Prepaid expenses | | | 9,946 | |
| Deposits | | | 400 | |
| Furniture and equipment | | | 200,000 | |
| Goodwill | | | 2,221,745 | |
| Allocation of Purchase Price | | | 6,066,930 | |
| | | | | |
| Accounts payable | | | (779,005 | ) |
| Accrued expenses | | | (23,982 | ) |
| Liabilities Assumed | | | (802,987 | ) |
| | | | | |
| Total Purchase Price | | $ | 5,263,943 | |
The Company acquired the Freundlich Assets in a series of transactions which occurred on the same date.
The events were:
| 1. | The Company acquired DFAC in a stock for stock transaction |
The July 20, 2006 asset purchase of the Freundlich assets were the result of the Company entering into an exchange agreement (the “Exchange Agreement”) pursuant to which the Company acquired all of the shares of Delaware Fastener Acquisition Corp., a Delaware corporation (“DFAC”), in return for 21,000,000 shares of the Company’s common stock and 2,611,000 shares of the Company’s Class B convertible preferred stock. The Company’s Class B convertible preferred stock automatically converts into post 150:1 reverse split common stock in an amount equal to 783,300,000 shares of the Company’s presently existing common stock which would no longer be existing since the conversion cannot occur prior to the 150:1 reverse split discussed below; so it really converts intobelow. (At the time of the reverse split and not before, the Company’s Class B convertible preferred stock will convert to 5,222,000 shares of the Company’s post 150:1 reverse split common stock.)
| 2. | The Company received financing |
The Investors in the Security Purchase Agreement provided the Company financing of $5,750,000. In return the Company issued (a) a $1 Million convertible note which has subsequently been repaid without conversion; (b) 5,277,778 shares of series A Preferred stock each originally convertible into 450 shares (3 post 150:1 reverse split shares) of the Company’s common stock and presently convertible into 777 shares (5.18 post 150:1 reverse split shares) of the Company’s common stock; (c) 10,541,000 Series A warrants convertible into 1,581,150,000 shares of the Company’s common stock at an original exercise price of .00233 per share which has
9. ACQUISITION (CONTINUED)
2. | The Company received financing (Continued) |
been adjusted to .00135 per share (10,541,000 post 150:1 reverse split shares at an original exercise price of $0.35 per share which has been adjusted to $.203 per share) and (d) 10,541,000 Series B warrants convertible into 1,581,150,000 shares of the Company’s common stock at an original exercise price of .004 per share which has been adjusted to .00231 per share (10,541,000 post 150:1 reverse split shares of the Company’s common stock at an original exercise price of $0.60 per share which has been adjusted to $0.347 per share). Other than standard adjustment terms there are no other adjustment terms for either the Preferred stock or the warrants. At the date of the financing the Company’s shares, according to MarketWatch.com traded at $0.0001 per share. As a result of the Exchange Agreement, DFAC became a wholly-owned subsidiary of the Company. The Company then caused its subsidiary, DFAC to carry out the asset purchase agreement as described below. Upon completion of the foregoing transactions, the Company changed its name to Precision Aerospace Components, Inc. and DFAC changed its name to Freundlich Supply Co., Inc. (“Freundlich”).
9. ACQUISITION (CONTINUED)
| 2. | The Company received financing (Continued) |
The adjusted conversion terms and prices shown above are a result of the Company, on July 31, 2007, negotiating adjustments to fix the conversion ratio or prices for the securities. While there are no reported prices on Marketwatch.com on the date of the adjustment, the reported price on the prior day was $0.04. The Securities Purchase Agreement required that the ratio or prices be the adjusted by the percentage shortfall of certain pre-tax income milestones to be reached by the Company in years 2006 and 2007. Due to these contingencies (possible reduction of conversion prices), the Company has reclassified its Company’s preferred A stock and warrants aswere, for GAAP accounting, liabilities at the time of issuance. Upon the fixing of the prices, in 2007, these preferred shares and warrants were reclassifiedclassified as temporary equity because the Company is not authorized to issue a sufficient number of shares if the preferred A shares were converted to common stock or the warrants were exercised for common stock.
No benefit on conversion was recognized as the conversion price of the stock was at or greater than market value on the day immediately before the conversion price was fixed and this was the last reported quote, there being no quote on the date of the fixing of the conversion price.
The Securities Purchase Agreement requires the Company to accomplish a 150:1 reverse split of its common stock; originally to have been accomplished by November 2006, this requirement has been extended several times, without additional consideration, and is now to occur by December 15, 2008 (subsequent to the date covered by this report the date has been further extended to December 15, 2009). In the event the Company does not timely accomplish the 150:1 reverse split it may have to pay a penalty of $287,500 and if it fails to timely file and maintain effective a registration statement it may be liable for liquidated damages which would be 2,100 shares of Series A stock per day it is in violation, up to a maximum of 750,000 shares.
| 3. | DFAC acquired the assets of Freundlich |
Contemporaneously, DFAC acquired the assets, subject to certain liabilities, of Freundlich Supply Company, Inc., described above (“Freundlich Supply”), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”) dated May 24, 2006 among DFAC, Freundlich Supply, and Michael Freundlich. The purchase of the assets was financed by the proceeds from the sale by the Company of its securities pursuant to a securities purchase agreement (the “Securities Purchase Agreement”). The Securities Purchase Agreement requires the Company to accomplish a 150:1 reverse split of its common stock; originally to have been accomplished by November 2006, this requirement has been extended several times, without additional consideration, and is now to occur by December 15, 2008 (subsequent to the date of covered by this report the date has been further extended to December 15, 2009). (In the event the Company does not timely accomplish the 150:1 reverse split it may have to pay a penalty of $287,500 and if it fails to timely file and maintain effective a registration statement it may be liable for liquidated damages which would be 2,100 shares of Series A stock per day it is in violation, up to a maximum of 750,000 shares.)
10. STOCK OPTIONS
The Company had adopted a stock option plan, which provided for the granting of options to certain officers, directors and key employees of the Company. Currently, options for 100,000 shares of common stock have been issued under this plan and remain outstanding. The option price, number of shares and grant date were determined at the discretion of the Company's board of directors. Grantees vested in the options at the date of the grant. The exercise price of each option that has been granted under the plan equals 100% of the market price of the Company’s stock on the date of the grant. Options under this plan vest on the grant date and are exercisable for a period not to exceed 10 years from the option grant date. Plan options are non-transferable.
During 2008 the Company issued non-plan options to officers and directors of the Company. The option number of shares were in accordance with compensation arrangements agreed to by the Company and approved by its board of directors. Grantees vested in the options at the date of issuance. The exercise price of each option that has been granted equals 100% of the market price of the Company’s stock on the date of the grant. Options under this plan vest on the grant date and are exercisable for a period not to exceed 1 year from the option grant issuance date.
A summary of the status of the Company’s stock options as of December 31, 2008 and 2007, and changes during the years then ended is presented below:
| | | 2008 | | | 2007 | |
| | | Weighted Average Exercise | | | Weighted Average Exercise | |
| | | Options | | | Price | | | Options | | | Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of year | | | 100,000 | | | $ | 0.35 | | | | 410,000 | | | $ | 0.70 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 636,955,669 | | | | 0.01 | | | | - | | | | �� | |
| | | | | | | | | | | | | | | | | |
| Exercise | | | - | | | | | | | | - | | | | | |
| | | | | | | | | | | | | | | | | |
| Forfeited | | | - | | | | | | | | 310,000 | | | | 0.81 | |
| | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 637,055,669 | | | $ | 0.01 | | | | 100,000 | | | $ | 0.35 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at end of year | | | 637,055,669 | | | | | | | | 100,000 | | | | | |
| | | | | | | | | | | | | | | | | |
| Weighted average fair value of options granted during the period - none granted | | | - | | | $ | - | | | | - | | | $ | - | |
| | | 2008 | | | 2007 | |
| | | Weighted Average Exercise | | | Weighted Average Exercise | |
| | | Options | | | Price | | | Options | | | Price | |
| | | | | | | | | | | | | |
| Outstanding at beginning of year | | | 100,000 | | | $ | 0.35 | | | | 410,000 | | | $ | 0.70 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 636,955,669 | | | | 0.01 | | | | - | | | | | |
| | | | | | | | | | | | | | | | | |
| Exercise | | | - | | | | | | | | - | | | | | |
| | | | | | | | | | | | | | | | | |
| Forfeited | | | - | | | | | | | | 310,000 | | | | 0.81 | |
| | | | | | | | | | | | | | | | | |
| Outstanding at end of year | | | 637,055,669 | | | $ | 0.01 | | | | 100,000 | | | $ | 0.35 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at end of year | | | 637,055,669 | | | | | | | | 100,000 | | | | | |
| | | | | | | | | | | | | | | | | |
Weighted average fair value of options granted during the period - none granted | | | - | | | $ | - | | | | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
10. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at December 31, 2008.
| Range of exercise prices | | | Weighted Number outstanding at 12/31/08 | | | Average remaining contractual life | | | Weighted average exercise price | | | Number exercisable at 12/31/08 | |
| | | | | | | | | | | | | | |
| $ | 0.35 | | | | 100,000 | | | | 3.58 | | | $ | 0.35 | | | | 100,000 | |
| | | | | | | | | | | | | | | | | | | |
| $ | 0.01 | | | | 635,005,669 | | | | 0.16 | | | $ | 0.01 | | | | 635,005,669 | |
| | | | | | | | | | | | | | | | | | | |
| $ | 0.005 | | | | 1,950,000 | | | | 0.96 | | | $ | 0.005 | | | | 1,950,000 | |
Range of exercise prices | | Weighted Number outstanding at 12/31/08 | Average remaining contractual life | Weighted average exercise price | Number exercisable at 12/31/08 |
| | | | | | | | | |
| $ | 0.35 | | 100,000 | 3.58 | | $ | 0.35 | | 100,000 |
| | | | | | | | | | |
| $ | 0.01 | | 635,005,669 | 0.16 | | $ | 0.01 | | 635,005,669 |
| | | | | | | | | | |
| $ | 0.005 | | 1,950,000 | 0.96 | | $ | 0.005 | | 1,950,000 |
The Black Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions may materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. However, for the options granted in 2008, the Company did utilize the model to meet GAAP guidance, even though this does not properly reflect the cost to the Company.guidance.
For the 2008 options:
Disclosures required by SFAS 123, Accounting for Stock Based Compensation, are as follows:
| Date issued | | 2/27/2008 | | | 12/16/2008 | |
| | | | | | | |
| Dividend yield | | | - | | | | - | |
| | | | | | | | | |
| Risk free interest rate | | | 3.75 | % | | | 2.37 | % |
| | | | | | | | | |
| Expected life | | 1 Year | | | 1 Year | |
| | | | | | | | | |
| Expected volatility | | | 200.43 | % | | | 339.00 | % |
11. WARRANTS
As part of the December, 2000 acquisition of the freight transport and freight brokerage business of Eagle Transportation Services, Inc., and Eagle Transport, Inc., the Sellers were granted warrants to purchase 100,000 shares of common stock at $2.50 per share and 75,000 shares of common stock at $3.00 per share, exercisable after one year and expiring in 10 years (2010).
On August 5, 2002, Gasel and S. Gene Thompson executed an Employment Agreement outlining the terms and conditions of Mr. Thompson’s employment as Vice President and Chief Financial Officer. In accordance with the terms of this agreement, Mr. Thompson was given 25,000 shares of common stock, no par value, of the Company; warrants to purchase an additional 25,000 shares of common stock, no par value, of Gasel at an exercise price of $.35 per share; and will receive additional warrants to purchase 50,000 shares of common stock in the future at the market price effective on the grant dates, which were to be given on January 1, 2003 and January 2, 2004. The warrants may be exercised at any time within a 10-year period after the date of issuance. In the event the Company shall terminate Mr. Thompson’s employment prior to the end of the three year term, or should Gasel enter into a merger or other combination with another company, then the grant date of future warrants shall be accelerated to the date of such merger, combination or termination.
In connection with the Securities Purchase Agreement of July 20, 2006, (the “SPA”) the Company issued 5 year warrants to purchase 1,581,150,000 shares of the Company’s common stock at $0.002333 per share; and 1,581,150,000 shares of the Company’s common stock at $0.004 per share.share..At issuance the warrants exercise prices would have been adjusted downward if specified earnings were not achieved. On July 31, 2007 the Company and the investors under the SPA agreed to eliminate the price adjustment feature (the Company having missed the 1st year target and enroute to missing the 2nd year) and modify the exercise price of the warrants to be fixed at $.001353 and $.0023133 respectively. Upon the renegotiation of the exercise price, the variable nature of the excercised price was eliminated. Consequently, the warrants could be treated in the way that the investing public normally views warrants-as a form of equity and not as a liability-since the variables were removed. The Company does not have sufficient authorized shares (only 100,000,000 shares are authorized) to enable full exercise of the warrants.
The Company, in connection with the Securities Purchase Agreement of July 20, 2006, calculated the fair value of the warrants issued using a Black-Scholes valuation model, in which Management considered all the facts and circumstances of this equity instrument and has deemed the use of a Black-Scholes formula to estimate the fair value of the warrants to be appropriate and consistent with the measurement objectives of the accounting standards.
The factors used by the Company in determining fair value were: closing stock price on Yahoo.finance at the date of the issuance ($0.04), the exercise prices ($.00233 and $0.004), the expected life in years (5 years), the historical volatility of 418.05% was determined by observing the stock price on the issue date and the same date of the eleven prior months, and the discount rate utilized was 2.25%. These factors yielded fair values of $421,636 for each of the warrants issued, a sum of $843,272.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 2008 | | | | 2007 | | | | 2008 | | | 2007 | |
| | | | | Weighted Average Exercise Shares | Price | | Weighted Average Exercise Shares | Price | | Weighted Average Exercise Shares | | | Price | | | Weighted Average Exercise Shares | | | Price | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at Beginning of year (A) | Outstanding at Beginning of year (A) | 3,162,500,000 | $ | 0.0018 | | 3,162,600,000 | $ | 0.0018 | | | 3,162,500,000 | | | $ | 0.00183 | | | | 3,162,600,000 | | | $ | 0.00183 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Granted | | | - | | | | | | - | | | | |
| | Granted | | | - | | | | - | | | | | | | | | | | | | | |
| Exercise | | | - | | | | | | - | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Exercised | | - | | | | - | | | |
| | | | | | | | | | | | |
| | Expired | | | - | | | | (100,000) | | | |
| Expired | | | - | | | | | | | (100,000 | ) | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding at end of year | Outstanding at end of year | 3,162,500,000 | | | | 3,162,500,000 | | | | | 3,162,500,000 | | | | | | | | 3,162,500,000 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Warrants exercisable at year end | Warrants exercisable at year end | 3,162,500,000 | | | | 3,162,600,000 | | | | | 3,162,500,000 | | | | | | | | 3,162,600,000 | | | | | |
| | | | | | | | | | | | |
(A) - -Cannot be fully exercised until the Company completes its 150:1 reverse conversion.
12.RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
The Company is restating its financial statements and disclosures to reflect an effective date of July 20, 2006, for the acquisition 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.
Additionally, the Company’s Balance Sheet for 2006 has been revised to reclassify all of the Company’s Series A Preferred Stock and its Warrants issued in connection with the acquisition as Liabilities because they had possible contingent changes to their conversion or exercise prices. These contingencies were removed by the negotiation of agreement to fix the conversion and exercise prices on July 31, 2007. Upon the fixing of the prices, in 2007, these preferred shares and warrants were reclassified as temporary equity because the Company is not authorized to issue a sufficient number of shares if the preferred A shares were converted to common stock or the warrants were exercised for common stock. These changes to the information included in the report have no impact on the Company’s operations or financial status, either at December 31, 2006 or 2007 or subsequently.