UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


(Mark one)


FORM 10-K





[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2010


or





[  ] 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
000-30185




Precision Aerospace Components, Inc.


(Exact name of registrant as specified in its charter)


Delaware

20-4763096(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification No.)





2200 Arthur Kill Road, Staten Island, New York
10309-1202(Address of principal executive offices)
(Zip Code)




Registrant’s telephone number, including area code
(718)-356-1500





Securities registered pursuant to Section 12(b) of the Act:




Title of each class



Name of each exchange on which registeredNoneSecurities registered pursuant to section 12(g) of the Act:Common Stock



OTC:BB




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes [  ] No [XX]





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes [  ] No [XX]


Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.





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.[X]





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.  (Check one)




Large accelerated filer [  ]
Accelerated filer [  ]Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [XX]




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 registrants most recently completed second quarter, $2,725,257





Note.—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.





APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:





Indicate by check mark whether the registrant has filed all documents and reports required to be filed by 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.  NA   [  ] Yes     [  ] No





(APPLICABLE ONLY TO CORPORATE REGISTRANTS)





Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as the latest practicable date: as of March 1, 2011 2,865,079.




DOCUMENTS INCORPORATED BY REFERENCE




DOCUMENTS INCORPORATED BY REFERENCE





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).  None










TABLE OF CONTENTS


PagePART IINTRODUCTORY NOTE
3ITEM 1. BUSINESS
3ITEM 1A RISK FACTORS
6ITEM 2. PROPERTIES
10ITEM 3. LEGAL PROCEEDINGS
10PART IIITEM 5. MARKET FOR PRECISION AEROSPACE COMPONENTS, INC.’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
11ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF PLAN OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
12ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
15ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH THE ACCOUTANTANTS ON (SIC) ACCOUNTING AND FINANCIAL DISCLOSURE
16ITEM 9A. CONTROLS AND PROCEDURES
16ITEM 9B. OTHER INFORMATION
16PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERANCE
17ITEM 11. EXECUTIVE COMPENSATION
20ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
21ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
21ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
22PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
23SIGNATURES
23EXHIBITS
24









2





PART I





INTRODUCTORY NOTE





FORWARD-LOOKING STATEMENTS





This Form 10-K contains "forward-looking statements" relating to Precision Aerospace Components, Inc. (the "Company") which represent the Company's current expectations or beliefs including, but not limited to, statements concerning the Company's operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-K that are not statements of historical fact are forward-looking statements.  Without limiting the generality of the foregoing, words such as "may", "anticipate", "intend", "could", "estimate", or "continue" or the negative or other comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, and the ability of the Company to continue its growth strategy and the Company’s competition, certain of which are beyond the Company's control.  Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, or any of the other risks herein occur, actual outcomes and results could differ materially from those indicated in the forward-looking statements.





Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.  New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.





ITEM 1. 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"), a 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”).








3




The Company’s operating subsidiary and source of revenues in 2010 was Freundlich.





In the coming year the Company anticipates widespread distribution of Tiger-tight lock washers under a distribution agreement providing the company master distribution rights in North America of the product.  The washers, which the company believes are superior to any competitive product, are now readily available and manufactured in the USA; while the company carries a full line, special orders can be accommodated.  The product is presently under evaluation by several major organizations.





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 6,300 SKUs comprised of more than 21million 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 6,300 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 increased demand exceeded the manufacturing capacity of qualified manufacturers.  Through the middle of 2008, manufacturing lead times continued to increase, as did prices. At the end of 2008 and through 2009, with the slowdown of the economy, lead times decreased.  By the end of the year the times had come down by approximately 50% from their highs in 2008.  In 2010 lead times have generally stabilized at expected levels which reflect true fabrication requirements.




4




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 6,300 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 2009, Freundlich Supply sold approximately 51% 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 2008, sales to the United States Department of Defense represented approximately 48% 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 2009 or 2008.





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 6,300 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 9001:2008 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.








5




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.





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 directors are involved in other businesses which may cause them to devote less time to our business.





Our 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.








6




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.  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 or 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.






7




We may be required to pay liquidated damages if certain committees of our board do not consist of a majority, or solely, of independent directors.





Our Securities Purchase Agreement with Barron Partners LP and Richard Henri Kreger requires us to have (i) an audit committee that is composed solely of independent directors and (ii) 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 convertible preferred stock that may be available for future sale and the sale of these shares may depress the market price of our 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 shares of the Company’s convertible preferred stock.  As of December 31, 2010 they held: 6,462,378 shares of the Company’s series A convertible preferred stock (the “series A preferred stock”) which, are convertible into 10,042,538 shares of the Company’s common stock.





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, 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 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.






8




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” is shares of stock:





o
With a price of less than $5.00 per share;


o
That are not traded on a "recognized" national exchange;


o
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


o
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.








9




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 ussince 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.








ITEM 2.  PROPERTIES





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 $13,498per 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.








ITEM 3.  LEGAL PROCEEDINGS





None




10




PART II





ITEM 5. MARKET FOR PRECISION AEROSPACE COMPONENTS, INC.'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





The Company's common stock currently trades on the OTC:BB under the trading symbol "PAOS".





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, 2009as reported on the web site Nasdaq.com.  It represents inter-dealer quotations, without retail markup, markdown or commission and may not be reflective of actual transactions.  (In December 2009, the Company carried out a 500:1 reverse stock split and the stock prices per share shown on that site and as reflected below have been retroactively restated to reflect that reverse stock split.)






PRICESHIGH


LOW2009First Quarter

$
10.00


$
2.50Second Quarter

$
13.50


$
1.50Third Quarter

$
14.00


$
13.50Fourth Quarter

$
7.50


$
1.502010First Quarter

$
3.00


$
3.00
(1)Second Quarter

$
3.00


$
3.00
(1)Third Quarter

$
3.00


$
3.00
(1)Fourth Quarter

$
0.10


$
0.10
(2)




(1)
There were no stock trades during the first second or third quarters of 2010 and no reports on the Nasdaq site.  The price shown is carried forward from the last reported price in 2009.


(2)
There was one trade in the fourth quarter 2010, it was at $0.10.





The Company presently is authorized to issue 100,000,000 shares of common stock with a $0.001 par value.  As of March 1, 2011, there were 231 holders of record of the Company's common stock and 2,865,079shares issued and outstanding.





During 2010, the Board approved the issuance of 1,024,871 shares of the Company’s Common Stock to Management and Directors which were fully vested.  The Company recognized a compensation charge of $89,164.  The shares were not required to be registered pursuant to    No underwriter was employed in connection with the offer and sale.  Registrant claimed the exemption from registration in connection with such private placement offering provided under Section 4(2) of the Securities Act of 1933 and Rule 505 or Regulation D thereunder.





The Company is authorized to issue 10,000,000 shares of preferred stock with a $0.001 par value. As of March 1, 2011, there were 2 holders of record and 6,462,378 shares of series A convertible preferred stock outstanding, each of which is convertible into 1.554 shares of the Company’s common stock.  If fully converted, the preferred stock would convert into a total of 10,042,538 shares of 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.






11




ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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 2010, the Company entered into a renewal of its line of credit.  The bank renewed on terms slightly more advantageous to the Company.  The renewal terms provided the company a $2.8 million line (same as previous) at prime plus 1% (previously prime plus 1 1/2%).  At year end the rate was 4.25%.Since both the outstanding principal amount and interest rate has been reduced, the interest expense year over year on the line has been reduced.  There was an overall interest savings of nearly $25,000 for the year ending 2010 compared to 2009.  As an annual line of credit, the line is due within a year (July 31,2011) and is a current liability.  The Company expects that it will be able to renew its present line.The amount available for the Company to draw under its credit line stood at $371,891 at the end of the year, compared with the amount available at the end of 2009 of $118,000.





The Company has paid down an additional $465,000 previously outstanding on the line. Although, primarily due to the timing of deliveries at the end of the year, accounts payable year over year increased by approximately $220,000.  Total corporate liabilities decreased by over $260,000





Additionally the Company increased its inventory by approximately $60,000 ($5,147,785 vs. $5,087,712).  This increase reflects both some new items as well as reducing occurrences where the company runs out of stock pending deliveries.  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 below the replacement cost were it to be reordered today.  Freundlich may have the strategic benefit over a potential new entrant of having a lower cost of goods versus the seller of newly purchased items.  Even with the current relative stabilization of prices, the replacement cost of Freundlich’s inventory is difficult to ascertain exactly, since even if the cost of each particular item is stable or increasing, the unit cost usually decreases as the quantity purchased increases.





At the end of the period the Company’s overall cash position had increased by approximately $130,000 ($328,717 vs. 198,971), as previously noted, this comparatively high cash position will be utilized to pay down the higher than normal accounts payable in the near term.





The Company’s total liabilities were reduced by approximately $250,000 ($2,644,122 vs. $2,892,542) while total assets grew by nearly $90,000 ($8,594,670 vs. $8,507,350) and our current assets grew nearly $125,000 ($6,267,282 vs. $6,140,448), so our Net Worth (total assets minus total liabilities) increased by over $335,000 to $5,950,548 (from $5,614,808).





When looking at the Company’s accumulated deficit of $5,249,890, 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 in 2008 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, which would otherwise be positive during the Company’s four and a half years of operations as presently constituted.








12




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 $371,891.  In the present market environment, other sources of financing for continuing operations may be difficult to obtain.  The Company is hopeful 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 its capital needs 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 or other government imposed expenditures and the Company is quite concerned by the various tax increase and other imposed expenditure 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.  Perhaps the only good news about the very high (over 40%) marginal taxes paid by the company is that the government will pay 40% of the increased interest cost through its failure to be able to tax the decrease in our earnings.





The Company has no off balance sheet financing arrangements.





Results of Operations





The Company has not seen any recovery during 2010 from the economic malaise that has gripped the country.  Company bookings, which appeared to stabilize in mid-year, declined again in the fourth quarter.  It is unclear how the economy will fare during the coming year and what the Company’s market will show as the year unfolds.  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.





The Company recognizes that weak economic times have resulted in reduced utilization of private aircraft.  The use of the parts the Company supplies is related to aircraft operating hours.  The decrease in aircraft flying hours has decreased demand for the products sold by the Company.  As the economy recovers, aircraft flying hours should increase.  Additionally, there should be some multiplier effect as the Company’s customers replenish their inventories.  One glimmer of good news is that as our customers order reduced quantities of individual products, the price per piece increases, so the percentage margin increases.





The weak market for their products has led our suppliers to improve their delivery times to what should be “normal” lead times for their products.  However, there is still substantial variations around the promise dates for products and actual delivery times.  It is surprising to the Company that the substantial corporations that produce a substantial amount of our products profess to have such poor internal  tracking systems that they cannot properly provide us accurate delivery information.  We have been repeatedly told that these systems are in the process of implementation.





During the past year the Company’s sales decreased nearly 4% in comparison to 2009 ($9,730,069 vs. $10,114,990).  This was reflective of the overall decline in business activity.  The Company was able to maintain its overall sales margins at approximately 31%.  As a result of market forces and the return to larger customer orders, which are sold at lower margins, this margin may decline, but if so, the absolute Gross Profit would be expected to increase since the decline would be as a result of higher sales volume.






13




The results of the Company’s operations in 2010 show income before provision for income taxes of $414,977; while this isless than the $603,723 in 2009, approximately $90,000 of the difference is due to the direct and indirect expenses (such as the need to engage a valuation consultant to value the shares) associated with the Company’s non-cash stock compensation expense.  The Company had no similar expense in 2009.  The Company does not anticipate substantial changes in its operating expenses for its present level of operations in the coming year.





By reducing the principal outstanding on its line of credit as well as reducing the rate of interest payable on the principal, the Company reduced its year over year interest expense by approximately $25,000.  This coming year, unless there is a substantial and unanticipated increase in the prime rate, the Company anticipates that its interest expense will remain similar to last year, reduced slightly by the reduction anticipated in the outstanding principal and the slightly reduced full year interest rate.





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 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 Freundlich 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 or appropriate candidates who could enhance the business become available.  Presently many Company level activities are either outsourced or handled at the Freundlich level.





Off-Balance Sheet Arrangements





None.







14




ITEM 8.  FINANCIAL STATEMENTSAND 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 substantially stabilized, as have the lead times for delivery.  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 either the 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 a 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.




Accounts Receivable - 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.






15







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 3, 2011 for the period ended December 31, 2010.  The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's internal control over financial reporting is effective at this reasonable level of assurance as of the time of theevaluation.The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended the ("Exchange Act").  This term refers to the controls and procedures of a company that are designed to ensure that the information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods.  The Company's disclosure controls and procedures are designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives.  The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's disclosure controls and procedures are effective at this reasonable assurance level as of the period covered by this 10-K as of their evaluation.  Due to the size of the Company and as a result of the implementation of the Company’s integrated financial reporting system, items of note are appropriately brought to the attention of the Company’s CEO for appropriate disclosure.





(B) Internal Controls Over Financial Reporting





The Company 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 internal control over financial reporting on or about February 3, 2010 for the period ended December 31, 2010.  The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's internal controls over financial reporting were effective at the reasonable level of assurance described below as of the period covered by this Form 10-K when 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 a material effect on the Company’s financial statements.  The Company's internal control over financial reporting is designed to provide a reasonable level of assurance of achieving the Company's disclosure control objectives.  The Company assessed its internal control system as of December 31, 2010 in relation to criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on its assessment, the Company believes that, as of December 31, 2010, its system of internal control over financial reporting was effective when evaluated.  The Company's Principal Executive Officer/Principal Financial Officer has concluded that the Company's internal control over financial reporting is effective at this reasonable level of assurance as of the time of the 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.






16




PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Set forth below is certain information concerning each of the directors and executive officers of the Company as of March 14, 2011:





Name

Age

Position

With Company SinceAlexander Kreger

67

Director and Chairman of the Board

2006Andrew S. Prince

67

President and CEO, Principal Financial Officer and Director

2006, Officer since 2007Robert Adler

76

Director

2006Donald Barger

68

Secretary and Director

2008David Walters

48

Director

2006





The Company's directors are elected at the annual meeting of stockholders and hold office until their successors are elected.  The Company's officers are appointed by the Board of Directors and serve at the pleasure of the Board and are subject to employment agreements, if any, approved and ratified by the Board.





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.  Previously Mr. Prince was, 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.  Mr. Prince is former Deputy Assistant Secretary of the Navy (1981-1986); Mr. Prince is a director of Gibbs and Cox, a naval architectural engineering firm.  From June 1, 2004-June 1, 2006, Mr. Prince was a director of CDKnet.com.  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 2002 to 2003, Mr. Adler served as an investment advisor for UBS Financial Services.  In 2002, Mr. Adler served as managing director for ING Furman Selz Asset Management (“ING”).  From 1991 to 2000, Mr. Adler served as the vice president and senior investment officer of BHF Securities Corp.  Since October, 2010, Mr. Adler has served as a Director and Chairman of the Audit Committee of Dongsheng Pharmaceutical International Co., a distributor of pharmaceutical products based in Beijing, China. From April 2006 to September 2010, Mr. Adler served as a director and chairman of the audit committee of Sinoenergy Corporation, a developer and operator of retail compressed natural gas (CNG) stations as well as a manufacturer of CNG transport vehicles, natural gas conversion kits for automobiles, and gas station equipment in China. From April 2006 until May 2010, Mr. Adler served as a director and chairman of the audit committee of China Medicine Corp., a comprehensive enterprise engaging in the production and distribution of prescription and over the counter drugs, traditional Chinese medicine products, herbs and dietary-supplements, medical devices, and medical formulations in China. Mr. Adler obtained a B.A. degree from Swarthmore College and is a member of the Institute of Chartered Financial Analysts and the New York Society of Security Analysts.






17




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.





Mr. Barger is the Company’s non-executive secretary and a member of the Company’s Compensation Committee




David Walters




Mr. Walters co-founded Monarch Bay Associates, LLC, a FINRA registered 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 managed the Capital Markets group and led over 100 financings (public and private), 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.  He managed the public offerings for Cruttenden Roth, which was the most prolific public underwriter in the U.S. for deals whose post-offering market cap was less than $100 million.  Mr. Walters sat on Roth's Board of Directors from 1994 through 2000. Previously, he was a 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 also serves as Chairman of the Board of Directors and Chief Executive of., Monarch Staffing, Inc. Mr. Walters earned a Bachelor of Science 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.






18




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 there from, 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 all filing requirements applicable to its executive officers, directors and greater than ten percent (10%) beneficial owners were met for events in 2010.










19




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, 2010, for services in all capacities to the Company:




SUMMARY COMPENSATION TABLE
 
 
 Name & Principal Position
Year

Salary

($)


Bonus

($)


Stock

Awards

($)


Option

Awards

($)


Non-Equity

IncentivePlan

Compensation

($)


Nonqualified Deferred

Compensation Earnings

($)


All Other Compensation

($)Andrew Prince

President, CEO and

Director(1)
2010

$
222,069


$
-


$
84,353


$
-


$
-


$
-


$
-
 
 (1)
Mr. Prince serves as a director of the Company, but without compensation for his director services.
 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 (#)


Compensation of Directors





The following table sets forth information with respect to director’s compensation for the fiscal year ended December 31, 2010:




Name

Fees Earned

or Paid in

Cash


Stock

Awards


Options

Awards


Non-Equity

Incentive Plan

Compensation


Nonqualified

Deferred

Compensaton

Earnings


All Other

Compensation


TotalRobert Adler

$
10,000


$
1,157



-


$
-


$
-


$
-


$
11,157Alex Kreger

$
10,000


$
1,157



-


$
-


$
-


$
-


$
11,157Chris Phillips

$
1,500


$
287



-


$
-


$
-


$
-


$
1,787Donald Barger

$
10,000


$
1,053



-


$
-


$
-


$
-


$
11,053David Walters

$
9,000


$
1,157



-


$
-


$
-


$
-


$
10,157


Non-employee Directors of the Company were 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.






20




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 14, 2011, 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 14, 2011, the Company had 2,865,079 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

PositionRichard Kreger

134 Lords Highway

Weston, CT 06883


166,128



5.8
%


5.8
%Alex Kreger


947,089



33.1
%


33.1
%
Executive Chairman & DirectorBGRS 2005 LLCPO 2127Jenkintown, PA 19046


241,290



8.4
%


8.4
%Robert Adler


13,300



0.5
%


0.5
%
DirectorAndrew Prince


969,571



33.8
%


33.8
%
Director, President and CEODavid Walters


13,300



0.5
%


0.5
%
DirectorDonald Barger


12,100



0.4
%


0.4
%
Director, SecretaryDirectors and Executive Officers as a Group

(5 persons)


1,955,360



68.2
%


68.2
%




(1)
Except where otherwise indicated, the address of the beneficial owner is deemed to be the same address as the Company.










Securities Authorized for Issuance Under Equity Compensation Plans





The Company has no presently active plan.








ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





All of the Company’s directors, other than Mr. Prince, the Company’s President and Chief Executive Officer, are independent directors.








21







ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit Fees





The aggregate fees billed or to be billed for professional services rendered by our independent registered public accounting firms for the audit of our annual financial statements, review of financial statements included in our quarterly reports and other fees that are normally provided by the accounting firms in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2010 and 2009 were: $99,100 for 2010 and $91,694 for 2009.





Audit Related Fees





The aggregate fees billed or to be billed for audit related services by the Company’s independent registered public accounting firms that are reasonably related to the performance of the audit or review of our financial statements, other than those previously reported in this Item 14, for the fiscal years ended December 31, 2010 and 2009 were $-0- in 2010 and $-0- in 2009.





Tax Fees





The aggregate fees billed for professional services rendered by the Company’s independent registered public accounting firms for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2010 and 2009 were $3,200 in 2010 and $15,000 in 2009.





All Other Fees





The aggregate fees billed for products and services provided the Company’s independent registered public accounting firms for the fiscal years ended December 31, 2010 and 2009 were $-0- in 2010 and $-0- in 2009.





Audit Committee





Our Audit Committee implemented pre-approval policies and procedures for our engagement of the independent auditors for both audit and permissible non-audit services.  Under these policies and procedures, all services provided by the independent auditors must be approved by the Audit Committee  or Board of Directors prior to the commencement of the services, subject to certain de-minimus non-audit service (as described in Rule 2-01(c)(7)(C) of Regulation S-X) that do not have to be pre-approved as long as management promptly notifies the Audit Committee of such service and the Audit Committee or Board of Directors approves it prior to the service being completed.  All of the services provided by our independent auditors have been approved in accordance with our pre-approval policies and procedures.








22




PART IV





ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES





Listed in the Exhibit Index on page 25 hereof.








SIGNATURES





In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







PRECISION AEROSPACE COMPONENTS, INC.Date: March 14, 2011
By
/s/ Andrew S. PrinceAndrew S. Prince

President and Chief Executive Officer





In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title

Date/s/ Andrew S. Prince

President, Chief Executive Officer and Director

March 14, 2011Andrew S. Prince

(Principal Executive Officer and Principal Financial Officer)/s/ Alexander Kreger

Chairman of the Board of Directors

March 14, 2011Alexander Kreger/s/ Robert Adler

Director

March 14, 2011Robert Adler/s/ Donald Barger, Jr.

Director

March 14, 2011Donald Barger, Jr./s/ David Walters

Director

March 14, 2011David Walters





23






EXHIBIT NO.3.1

Certificate of Incorporation

Incorporated by reference to Exhibit 3.1 to the Company’s Report on Form 8-K as filed with the United states Securities and Exchange Commission on July 27, 20063.2

By-laws

Incorporated by reference to Exhibit 3.2 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 20063.3

Series A Preferred Stock Certificate of Designation

Incorporated by reference to Exhibit 3.3 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 20063.4

Series B Preferred Stock Certificate of Designation

Incorporated by reference to Exhibit 3.4 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 20063.5

Restated Certificate of Incorporation

Incorporated by rreference to Exhibit 3.5 to the Company's Report on Form 10-K as filed with the United States Securities and Exchange Commission on March 31, 201010.1

Asset Purchase Agreement by and among Delaware Fastener Acquisition Corporation, Michael Freundlich and Freundlich Supply Company, Inc.

Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 200610.2

Securities Purchase Agreement by and among Jordan 1 Holdings Company, Barron Partners LP and Certain Equity Investors

Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 200610.3

Registration Rights Agreement

Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 200610.4

Convertible Note

Incorporated by reference to Exhibit 10.4 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 200610.5

Form of Series A Warrant

Incorporated by reference to Exhibit 10.5 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 200610.6

Form of Series B Warrant

Incorporated by reference to Exhibit 10.6 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on July 27, 200610.7

Contract of Sale and Security Agreement between Freundlich Supply Company, Inc. and Greater Bay Business Funding

Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on March 19, 200710.8

Amendment to Contract of Sale and Security Agreement between Freundlich Supply Company, Inc. and Greater Bay Business Funding.

Incorporated by reference to Exhibit 10.2 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on March 19, 200710.9

Guaranty between Greater Bay Business Funding and Freundlich Supply Company, Inc. and Precision Aerospace Components, Inc.

Incorporated by reference to Exhibit 10.3 to the Company’s Report on Form 8-K as filed with the United States Securities and Exchange Commission on March 19, 200710.10

Loan and Security Agreement as of March 6, 2008, by and among Freundlich Supply Company, Inc. (borrower) Precision Aerospace Components, Inc. (guarantor) and Israel Discount Bank of New York (lender)

Incorporated by reference to Exhibit 10.10 to the Company's Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on March 31,2008
  24
 
 10.11

Demand Grid Promissory Note/Prime Rate between Freundlich Supply Company, Inc. and Israel Discount Bank of New York.

Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 8-K as filed with the United States Securities and Exchange Commission on September 30, 2010.10.12

Line Letter for $2,800,000 Line of Credit issued by Israel Discount Bank of New York in favor of Freundlich Supply Company, Inc.

Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 8-K as filed with the United States Securities and Exchange Commission on September 30, 2010.31.1

Certification By Chief Executive Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Provided herewith31.2

Certification By Principal Financial Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Provided herewith32.1

Certification by Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Provided herewith
















25


















PRECISION AEROSPACE COMPONENTS, INC.AND SUBSIDIARIES
 CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2010 AND 2009




























1
  PRECISION AEROSPACE COMPONENTS, INC.AND SUBSIDIARIES
 CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2010 AND 2009
 
 
 
 
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
PageReport of Independent Registered Public Accounting Firm
3Consolidated Balance Sheets as of December 31, 2010 and 2009
4Consolidated Statements of Operations for the Years EndedDecember 31, 2010 and 2009
5Consolidated Statement of Stockholders’ Equity for the YearsEnded December 31, 2010 and 2009
6Consolidated Statement of Cash Flows for the YearsEnded December 31, 2010 and 2009
7Notes to Consolidated Financial Statements
8








2




Report of Independent Registered Public Accounting Firm
 
  The Board of Directors and Stockholders
 Precision Aerospace Components, Inc.
   We have audited the accompanying consolidated balance sheet of Precision Aerospace Components, Inc. and subsidiaries (the “Company”), as of December 31, 2010 and 2009 and the related consolidated statement of operations, changes in stockholders’ equity and cash flows for each of the two years ended December 31, 2010 and 2009. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
  We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2010 and 2009 and the consolidated results of its operations and cash flows for each of the two years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States.
  
  /s/ Friedman LLP
 New York, New York
  March 14, 2011
 
       3
   PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
   ASSETSDecember 31,

December 31,2010


2009CURRENT ASSETSCash and cash equivalents

$
328,717


$
198,971Accounts receivable


720,803



778,450Inventory, net


5,147,785



5,087,712Prepaid expenses


6,110



5,941Prepaid income taxes


63,867



69,3746,267,282



6,140,448PROPERTY AND EQUIPMENT - Net


80,944



120,458OTHER ASSETSDeposits


24,700



24,700Goodwill


2,221,744



2,221,7442,246,444



2,246,444TOTAL ASSETS

$
8,594,670


$
8,507,350LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses

$
412,885


$
210,542Line of credit


2,217,000



2,682,0002,629,885



2,892,542LONG -TERM LIABILITIESDeferred tax liability


14,237



-TOTAL LIABILITIES


2,644,122



2,892,542COMMITMENTS AND CONTINGENCIES-



-STOCKHOLDERS' EQUITYPreferred Stock A $.001 par value; 7,100,000 shares authorizedat December 31, 2010 and December 31, 2009; 6,462,378 and 6,123,301 shares issued and outstanding


6,462



6,123Preferred Stock B $.001 par value; 2,900,000 shares authorized0 shares issued and outstanding


-



-Common stock, $.001 par value; 100,000,000 shares authorizedat December 31, 2010 and December 31, 2009; 2,865,079 and 1,753,279 shares issued and outstanding


2,865



1,753Additional paid-in capital


11,191,111



11,103,398Accumulated deficit


(5,249,890
)


(5,496,466
)TOTAL STOCKHOLDERS' EQUITY


5,950,548



5,614,808TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
8,594,670


$
8,507,350
    
 4




PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009






2010


2009TOTAL NET REVENUE

$
9,730,069


$
10,114,990TOTAL COST OF GOODS SOLD


6,662,495



7,016,346GROSS PROFIT


3,067,574



3,098,644OPERATING EXPENSESGeneral and administrative expenses ($89,164 noncash compensation for year

ended December 31, 2010 and -0- for December 31, 2009)


2,170,040



1,978,994Professional and consulting fees


303,761



296,311Depreciation


65,389



81,467Total Operating Expenses


2,539,190



2,356,772INCOME  BEFORE OTHER INCOME (EXPENSE)


528,384



741,872OTHER INCOME (EXPENSE)Interest expense


(113,407
)


(138,149
)(113,407
)


(138,149
)INCOME  BEFORE PROVISION FOR INCOME TAXES


414,977



603,723Provision for income taxes


168,401



151,120NET INCOME APPLICABLE TO COMMON SHARES

$
246,576


$
452,603NET INCOME PER BASIC SHARES

$
0.10


$
4.37NET INCOME PER DILUTED SHARES

$
0.02


$
0.03WEIGHTED AVERAGE NUMBER OF BASIC COMMONSHARES OUTSTANDING


2,561,000



103,617WEIGHTED AVERAGE NUMBER OF FULLY DILUTEDCOMMON SHARES OUTSTANDING


12,963,734



15,478,043

























5






PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009






AdditionalPreferred Stock-Series A



Preferred Stock-Series B



Common Stock



Paid-in



AccumulatedShares



Amount



Shares



Amount



Shares



Amount



Capital



(Deficit)



TotalBalance, January 1, 2009


-


$
-



-


$
-



66,649


$
67


$
2,925,760


$
(5,949,069
)

$
(3,023,242
)Reclassification to permanent equity


5,274,152



5,274



2,811,000



2,811



-



-



8,177,362







8,185,447Conversion of Preferred B stock







(2,811,000
)


(2811
)


1,686,630



1,686



1,125







-Conversion of A and B warrants


849,149



849



















(849
)






-Net Income


-



-



-



-



-



-



-



452,603



452,603Balance, December 31, 2009


6,123,301


$
6,123



-


$
-



1,753,279


$
1,753


$
11,103,398


$
(5,496,466
)

$
5,614,808Stock issued for fractional shares














204Exercise of Common Stock A warrants














86,725



87



(87
)






-Stock issued for compensation















1,024,871



1,025



88,139







89,164Exchange of A and B warrants


339,077



339



















(339
)






-Net Income


-



-



-



-



-



-



-



246,576



246,576Balance, December 31, 2010


6,462,378


$
6,462



-


$
-



2,865,079


$
2,865


$
11,191,111


$
(5,249,890
)

$
5,950,548



























6






PRECISION AEROSPACE COMPONENTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009






2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
246,576


$
452,603Adjustments to reconcile net income to net cashprovided by (used in) operating activities:Depreciation and amortization


65,389



81,467Inventory writedown


141,850



209,692Stock Based Compensation


89,164



-Bad debt expense


34,486



-Changes in assets and liabilities:Decrease (increase) in assetsDecrease (increase) in accounts receivable


23,161



95,674Decrease (increase) in inventory


(201,923
)


(705,157
)Decrease (increase) in prepaid expenses


(169
)


33,752Decrease (increase) in prepaid income taxes


5,507



29,242Increase (decrease) in liabilitiesIncrease (decrease)  in accounts payable and accrued expenses


202,344



(41,989
)Increase (decrease) in deferred tax liability


14,237



-Net cash provided by (used in) operating activities


620,622



155,284CASH FLOWS FROM INVESTING ACTIVITIES(Purchases) of property and equipment


(25,876
)


(17,290
)Net cash provided by (used in) investing activities


25,876



(17,290
)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from (payment on) line of credit


(465,000
)


(40,506
)Proceeds from (payment on) subordinated note


-



(75,000
)Net cash provided by (used in) financing activities


(465,000
)


(115,506
)INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


129,746



22,488CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR


198,971



176,483CASH AND CASH EQUIVALENTS - END OF YEAR

$
328,717


$
198,971SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for:Interest paid

$
105,220


$
138,149Income taxes paid

$
143,315


$
175,843

















7





1. HISTORY AND NATURE OF BUSINESS
 
 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 of 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.
 
 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”).
 
 Freundlich is a stocking distributor of aerospace quality, internally-threaded fasteners.  The organization from which the operating assets were acquired 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 purchases products which are manufactured by others to exacting specifications and are made from raw materials that provide the strength and reliability required for aerospace applications.
 
 
 
 8
 
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles of Consolidation and Basis of Presentation
 
 The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.  All inter-company accounts have been eliminated.
 
 Use of 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.
 
 Cash and Cash Equivalents
 
 Cash balances in banks are insured by the Federal Deposit Insurance Corporation subject to certain limitations.  For purposes of the statement of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
 
 Accounts Receivable and Allowance for Doubtful Accounts
 
 Accounts receivable are recorded net of reserves for sales returns and allowances and net of provisions for doubtful accounts.  The Company records an allowance for doubtful accounts to allow for any amounts that may not be recoverable.  The amount of the allowance is based on an analysis of the Company’s prior collection experience, customer credit worthiness, and current economic trends.  Based on management’s review of accounts receivable, no allowance for doubtful accounts is considered necessary.  The Company determines receivables to be past due based on the payment terms of original invoices.  Interest is not typically charged on past due receivables.
 
 Inventory
 
 Inventory is stated at the lower of cost or market, utilizing the specific lot identification method (except as noted subsequently).  The Company is a distributor of goods that retain their value and may be purchased by its customers for an extended period of time.  The Company has adopted the convention that any inventory item for which the Company has not had any transactions within the past five years shall be reduced to a zero value.  Inventory consists of finished goods for resale at December 31, 2010. The Company has not established a valuation allowance for inventory. For the year ended December 31, 2010, the Company had $126,092 inventory which became over five years without sale during the period and has been reduced to zero value. For the year ended December 31, 2009, the Company had $190,853 inventory which became over five years without sale during the period and has been reduced to zero value.
 
 
 
 
 
 9
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Property and Equipment
 
 Property and equipment are stated at cost less accumulated depreciation and amortization.  The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:
 
 
 
 Leasehold improvements

5 years **Furniture and fixtures

7 yearsEquipment and other

3-5 years
 ** Shorter of life or lease term.
 
 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
 
 Goodwill represents the excess of the purchase price over the fair value of tangible and intangible assets acquired in an acquisition.  The Company performs an impairment review of goodwill on an annual basis in the fourth quarter or more frequently if circumstances change.
 
 The impairment review involves a two-step process as follows:
 
 ·
Step 1- The Company compares the fair value of its reporting units to the carrying value, including goodwill, of each of these units.  For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, the Company moves on to Step 2.  If the unit’s fair value exceeds the carrying value, including goodwill, no further work is performed and no impairment expense is necessary.
 
 ·
Step 2- If the Company determines in Step 1 that the carrying value of a reporting unit exceeds the fair value, the Company performs an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit.  This results in an implied fair value for the reporting unit’s goodwill.   The Company then compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill.  If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of the goodwill, an impairment loss is recognized for the excess. The Company has determined that no impairment is needed at December 31, 2010.
 
 Income Taxes
 
 The Company accounts for income taxes using the asset and liability method.  Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective.  Tax benefits are recognized when it is probable that the deduction will be sustained.  A valuation allowance is established when it is more likely that not that all or a portion of a deferred tax asset will not be realized.
 
   10
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Earnings per Common Share
 
 Basic earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of outstanding common shares during the year.  Except where the result would be antidilutive to income, diluted earnings per share has been computed using the treasury stock method for the preferred stock, warrants and options, as well as their related income tax effects.
 
 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.
 
 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 56 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.
 
 Shipping and Handling Costs
 
 Shipping and handling costs relating to sales were approximately $97,000 and $80,000 for the years ended December 31, 2010 and 2009, respectively, and are included in general and administrative expenses in the accompanying Consolidated Statements of Operations.
 
 
 Fair Value of Financial Assets and Liabilities
  In accordance with the authoritative guidance for fair value measurements and the fair value election for financial assets and financial liabilities, a fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy was established that draws a distinction between market participant assumptions based on the following:
   i)
observable inputs such as quoted prices in active markets (Level 1)
 ii)
inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2)
 iii)
unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3).
   11
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Fair Value of Financial Assets and Liabilities (Continued)
  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measure. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.
  Recent Accounting Pronouncements
 
 In May of 2009, the Financial Accounting Standards Board (FASB) issued FASB ASC 855-10, “Subsequent Events”. This Statement is intended to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued.  This Statement is effective for interim and annual periods ending after June 15, 2009.  FASB ASC 855-10 is only disclosure-related, and it does not have an impact on the Company’s financial position and results of operations
 
 In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140” (SFAS 166). SFAS No. 166 has not yet been superseded by FASB Accounting Standards Codification Topic 105. SFAS 166 amends SFAS No. 140 to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions of this Statement shall be applied to transfers that occur on or after the effective date. The adoption SFAS No. 166 will not presently have a material impact on the Company’s financial position or results of operations.
  In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167). SFAS No. 167 has not yet been superseded by FASB Accounting Standards Codification Topic 105. SFAS 167 amends certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption SFAS No. 167 will not presently have a material impact on the Company’s financial position or results of operations.
  In June 2009, the FASB issued ASC 105-10, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 162”). Under ASC 105-10, the FASB Accounting Standards Codification will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. On the effective date of this statement, the Codification will supersede all existing non-SEC accounting and reporting standards. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of ASC 105-10 will not presently have a material impact on the Company’s financial position or results of operations.
    12
  3. PROPERTY AND EQUIPMENT
 
 2010


2009Furniture and fixtures

$
2,392


$
2,392Equipment and other


401,466



375,591Leasehold improvements


6,487



6,487410,345



384,470Less accumulated depreciation and amortization


(329,401
)


(264,012
)Property and equipment, net

$
80,944


$
120,458
 
 
 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 Accounts payable and accrued expenses as of December 31, 2010 and 2009 consist of the following:
 
 2010


2009Accounts payable

$
404,698



184,270Accrued expenses


8,187



26,272Total

$
412,885



210,542
 
  5. LONG-TERM DEBT AND LINE OF CREDIT
 
 Long-term debt
 
 The Company had no long term debt as of December 31, 2010 and 2009.
 
  Revolving funding facility
  The Company has a revolving funding facility pursuant to which it can draw up to $2,800,000 against eligible assets.  The facility allows for draws against up to eighty (80) per-cent of eligible accounts receivable and forty (40) per-cent of eligible inventory, up to a maximum inventory advance amount of two million five hundred thousand dollars ($2,500,000).  Eligible accounts 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 (1.0) per cent.  The balance is secured by a first lien position on all of the Company’s assets.  The facility is due July 31, 2011.  The Company expects that the facility will be renewed.  As of December 31, 2010, $2,217,000 was outstanding, the interest rate was 4.25%, and $371,891 was available to draw.  As of December 31, 2009, $2,682,000 was outstanding, the interest rate was 4.75%, and $118,000 was available to draw.
  
 13
 
 6. COMMITMENTS AND CONTINGENCIES
 
 The Company leases office space for its operations under a triple net lease which expires July 20, 2013.  The lease has an option for renewal for five years at the company's option.  The rental rate is $13,498 per month. The lease has a yearly 4% escalation clause.  The Company can terminate the lease upon six months notice.
 
 The Company has guaranteed the Freundlich revolving funding facility as more completely described in Note 5.
 
 During 2010, the Company entered into an employment agreement with its President and Chief Executive Officer.  In the event of the termination of the agreement under certain circumstances the Company could be liable for up to twelve months salary.
 
 
 7. 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, 2010 and 2009 are as follows:
 
 2010


2009Current income taxFederal

$
89,555


$
76,913State


32,612



34,937City


31,997



39,270Total Current income tax


154,164



151,120Non current income taxFederal


9,023



-State


2,404



-City


2,810



-Total non current income tax


14,237



-Total  income tax

$
168,401


$
151,120
 
 
 Although the Company has an accumulated deficit of $5,249,890 there are no net operating losses available to be used against taxable income.
   14
 
 7. INCOME TAXES (CONTINUED)
  The components of the income taxes consists of the following:
   For the years endedDecember 31,2010


2009Expected federal statutory rate

$
141,092


$
205,266Increase (decrease) in taxes resulting from:State and local income taxes, net of federal benefit


44,977



65,433Permanent Difference - Amortization


(60,022
)


(73,256
)IRS Refund


-



(58,806
)Deferred Taxes


14,237



-Other


28,117



12,483Total Income tax expense (benefit)

$
168,401


$
151,120
    For the years endedDecember 31,2010


2009Expected federal statutory rate


34.00
%


34.00
%Increase (decrease) in taxes resulting from:State and local income taxes, net of federal benefit


10.84
%


10.84
%Permanent Difference - Amortization


-14.46
%


-12.13
%IRS Refund


-



-9.74
%Deferred Taxes


3.43
%


-Other


6.78
%


2.07
%Total Income tax expense (benefit)


40.58
%

$
25.03
%
 There were no significant uncertain tax positions taken, or expected to be taken, in a tax return that would be determined to be an unrecognized tax benefit taken or expected to be taken in a tax return that should have been recorded on the Company’s consolidated financial statements for the year ended December 31, 2010.  Additionally, there were no interest or penalties outstanding as of or for each of the fiscal years ended December 31, 2010 and 2009.
 
 The federal and state tax returns for the years ending December 31, 2007, 2008 and 2009 have been filed and are currently open and the tax returns for the year ended December 31, 2010 will be filed by September 15, 2011.
 
 The Company’s deferred tax liability relates to a temporary timing difference in long-term assets.
   15
  8. EARNINGS PER SHARE
  The following table 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.
 
  December 31,2010


2009Net income (loss) available tocommon stockholders usedin basic EPS and diluted EPS

$
246,576


$
452,603Weighted average number ofcommon shares used in basic EPS


2,561,000



103,617Effect of dilutive securities:Weighted average number ofStock options and warrants,conversion of preferred shares and note


10,402,734



15,374,426Weighted average number of commonshares and dilutive potential commonstock used in diluted EPS


12,963,734



15,478,043EPSBasic


0.10



4.37Diluted


0.02



0.03
 
 
 9. 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 200 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.
 
 The following table summarizes information about stock options outstanding and exercisable at December 31, 2010.
 
 WeightedRange of

exercise prices


Number outstanding at

12/31/10


Average remaining

contractual life


Weighted

average exercise price


Number exercisable at

12/31/10$
175



200



1.58


$
175



200
   
 16
 
 10.  WARRANTS
  2010


2009Shares


Weighted Average Price


Shares


Weighted Average PriceOutstanding at Beginning of year


1,925,276


$
0.915



6,325,000


$
0.915Granted


-







-Exercised


(1,924,876
)






(4,399,724
)Expired


(400
)Outstanding at end of year


-







1,925,276Warrants exercisable at year end


-







1,925,276
 
 
 11.  STOCKHOLDERS EQUITY
 
 Preferred Stock
 
 In addition to its Common Stock, the Company has one series of preferred stock, its Series A Convertible Preferred Stock (the “Preferred Stock”).  All of the rights of the Preferred Stock are set forth in the “Statement of Designations of the Series A Convertible Preferred Stock” which are a part of the Company’s Restated Certificate of Incorporation.  Among those rights: Each Share of the Series A Convertible Preferred Stock is convertible into 1.554 shares of the Company’s common stock; no dividends are payable with regard to the Preferred Stock, the Preferred Stock has no voting rights and no board representation.  In the normal course, a holder or the Preferred Stock along with its affiliates cannot convert its shares if, immediately after such conversion it would beneficially own in excess of 4.9% of the number of shares of the Common Stock outstanding immediately after giving effect to such conversion.  In the aggregate, the shares of the Company’s Preferred Stock have a liquidation preference of $4,750,000 (allocated pro rata to each share), this may be invoked upon a change of control or similar transaction regarding substantially all of the Company’s assets or shares.  While the Preferred Stock is outstanding, no dividends can be paid on the Common Stock and no Common Stock can be redeemed or purchased by the Company.  The Preferred Stock has protection against changes to the Statement of Designation or the creation of securities with rights greater or equal to the Preferred Stock unless approved by the holders of 75% of the shares of the Preferred Stock.
  Share based payments
 
 During 2010, the Board approved the issuance of approximately 1,025,000 shares of the Company’s Common Stock to Management and Directors which were fully vested.  The Company recognized a compensation charge of approximately $89,000.
  17
 
  
 11.  STOCKHOLDERS EQUITY (CONTINUED)
 
 Exchange of A and B Warrants
 
 On June 30, 2010, the Company agreed to exchange all of the remaining warrants issued in connection with the Company’s July 20, 2006 Securities Purchase Agreement for shares of its convertible preferred stock.  The warrants could have acquired an aggregate 1,812,874 shares of the Company’s common stock at their exercise prices.  The warrants were converted into 339,077 shares of the Company’s Series A Preferred Stock which are convertible into 526,927 shares of the Company’s Common Stock.  The exchange is at the rate of one A Warrant (which could have purchased a share of the Company’s common stock at $0.677 per share) and one B Warrant (which could have purchased a share of the Company’s common stock at $1.157 per share), collectively, or four B warrants, for 0.386 shares of the Company’s Series A Convertible Preferred stock the “Preferred Shares”).  The Company completed the exchange upon the execution of the agreement with the warrant holder.
 
 
 Exercise of Common Stock A Warrants
 
 During 2010, an institutional investor converted 112,000 warrants in a cashless exercise to obtain approximately 87,000 common shares.
















18