UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 0-30503
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AVSTAR AVIATION GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Colorado 76-0635938
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
3600 Gessner, Suite 220, Houston, Texas 77063
(Address of principal executive offices)
(281) 710-7103
(Registrant's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the Registrant is a large accelerated filer, 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 [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [} No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 103,049,542 common shares as of
May 16, 2010
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEET
AVSTAR AVIATION GROUP, INC.
Period End: March 31, 2010
March 31, December 31,
2010 2009
ASSETS
Current assets
Cash 2,000 2,471
Accounts receivable 22,987 50,533
Prepaid expenses 8,301 10,139
Inventory 44,262 44,262
-----------------------
Total Current Assets 77,550 107,405
Property and equipment: 19,537 25,263
Proven oil and gas properties (successful
efforts method), net of accumulated
depletion of $144,723 33,581 27,989
Unproven oil and gas properties (successful
efforts method) 152,000
------------------------
Total Fixed Assets 53,118 205,252
Investment in subsidiary 60,988 10,000
-------------------------
Total assets 191,656 322,657
=========================
AVSTAR AVIATION GROUP, INC.
BALANCE SHEET
Period End: March 31, 2010
March 31, December 31,
2010 2009
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable 95,190 58,843
Credit card payable 0 18,374
Other current liabilities 146,974 65,944
Accrued interest payable to related parties 99,197 99,197
Notes payable to related parties 161,721 24,753
Notes payable -
Stock payable -
-------------------------
Total current liabilities 503,082 267,111
Long term debt to related parties 624,771 659,771
Asset retirement obligations 0 8,193
-------------------------
Total liabilities 1,127,853 935,075
Stockholders' deficit:
Preferred stock: $.001 par value;
1,000,000 shares authorized,
none issued and outstanding 10,000
Common stock: $.001 par value;
500,000,000 shares authorized;
96,049,542 shares issued and
outstanding 430,920 390,499
Additional paid-in capital 19,622,748 18,521,904
Accumulated deficit (20,989,865) (19,534,821)
-----------------------------
Total stockholders' deficit (936,197) (612,418)
-----------------------------
Total liabilities and stockholders' deficit 191,656 322,657
=============================
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Three Months Ended
March 31 March 31
2010 2009
Oil and gas revenue $1,090 $2,672
Income from subsidiary operations 100,428 172,722
----------------------------------
Total revenue 101,518 175,394
Costs and expenses:
Cost of goods sold by subsidiary 60,619 107,797
Lease operating expenses 787
Production taxes 146
Dry hole costs - 100
Depreciation and depletion 3,540 745
Selling, general and administrative,
including stock based compensation 638,800 108,432
---------------------------
Total costs and expenses 702,959 217,907
---------------------------
Loss from operations (601,441) (42,513)
Other (expenses):
Interest expense (20,107)
----------------------------
Net loss $(601,441) $ (62,620)
============================
Basic and diluted net loss per common share $(0.00) $(0.00)
AVSTAR AVIATION GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2010 and 2009
(Unaudited)
Three Months Ended Three Months Ended
March 31 March 31
2010 2009
Cash flows from operating activities:
Net loss $(601,441) $(62,620)
Adjustments to reconcile net loss to net cash
used in operating activities 120,646 57,185
-----------------------------------
Net cash used in operating activities (480,795) (5,425)
Cash flows from investing activities:
Capital and exploratory expenditures 3,540 -
Cash flows from financing activities:
Repayment of debt - -
-----------------------------------
Net cash used in financing activities - -
-----------------------------------
Net decrease in cash and cash equivalents (475,524) (4,690)
Cash and cash equivalents at beginning
of period 3,731 8,998
------------------------------------
Cash and cash equivalents at end of
period $2,000 $4,308
====================================
Supplemental Disclosures:
Cash paid for interest $- $-
Cash paid for income taxes - -
Noncash investing and financing
activities:
Oil and gas property acquired
with common stock issuance $32,000
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Three Months ended March 31, 2010
Preferred Additional Total
Stock Common Stock Paid-In Accumulated Stockholders'
Shares Shares Amount Capital Deficit Deficit
Balances as of
December 31,
2009 65,726,490 400,599 19,142,545 (20,388,424) (845,280)
Stock issued
for compensation 15,000,000 15,000 435,000 450,000
for services 721,052 721 15,863 16,584
for forbearance 600,000 600 8,340 8,940
Debt reduction 14,000,000 14,000 21,000 35,000
Net loss (601,441) (601,441)
--------------------------------------------------------------
Balance at March
31, 2010 96,049,542 430,920 19,622,748 (20,989,865) (936,197)
==================================================================
AVSTAR AVIATION GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
AvStar Aviation Group, Inc. (the "Company"), a Colorado corporation formerly
known as "Pangea Petroleum Corp.," have been prepared in accordance with
accounting principles generally accepted in the United States of America and the
rules of the Securities and Exchange Commission (the "SEC") and should be read
in conjunction with the audited financial statements and notes thereto contained
in the Company 's latest Annual Report on Form 10-K filed with the SEC. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
Notes to the consolidated financial statements that would substantially
duplicate the disclosure contained in the audited financial statements for the
most recent fiscal year, December 31, 2009, as reported in the Company 's latest
Annual Report on Form 10-K, have been omitted.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND CRITICAL ACCOUNTING POLICIES
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Derivative Values and Hedging. This guidance resolves issues
addressed in Statement 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets". This
Statement permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006. Its
adoption did not have a material impact on the Company's financial condition or
results of operations.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Fair Value Measurements and Disclosures which establishes a formal
framework for measuring fair value under GAAP. It defines and docifies the many
definitions of fair value included among various other authoritative literature,
clarifies and, in some instances, expands on the guidance for implementing fair
value measurements, and increases the level of disclosure required for fair
value measurements. Although SFAS 157 applies to and amends the provisions of
existing FASB and AICPA pronouncements, it does not, of itself, require any new
fair value measurements, nor does it establish valuation standards. SFAS 157
applies to all other accounting pronouncements requiring or permitting fair
value measurements, except for SFAS No. 123 (F), share-based payment and related
pronouncements, the practicability exceptions to fair value determinations
allowed by various other authoritative pronouncements, and AICPA Statements of
Position 97-2 and 98-9 that deal with software revenue recognition. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Management does not believe the adoption of SFAS 157 will have a material
impact on the Company's financial condition or results of operations.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Financial Instruments which is an elective, irrevocable election to
measure eligible financial instruments and certain other assets and liabilities
at fair value on an instrument-by-instrument basis. The election may only be
applied at specified election dates and to instruments in their entirety rather
than to portions of instruments. Upon initial election, the entity reports the
difference between the instruments' carrying value and their fair value as a
cumulative-effect adjustment to the opening balance of retained earnings. At
each subsequent reporting date, an entity reports in earnings, unrealized gains
and losses on items for which the fair value option has been elected. SFAS 159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and is applied on a prospective basis. Early adoption of SFAS
159 is permitted provided the entity also elects to adopt the provisions of SFAS
157 as of the early adoption date selected for SFAS 159. The Company has elected
not to adopt the provisions of SFAS 159 at this time.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Income Taxes which clarifies the accounting for uncertainty in
income taxes recognized in financial statements in accordance with FASB 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The provisions of
FIN 48 are effective for fiscal years beginning after December 15, 2006, with
the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The adoptions of this pronouncement did
not have a material effect on the financial position or results of operations of
the Company.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Business Combinations to increase the relevance, representational
faithfulness, and comparability of the information a reporting entity provides
in its financial reports about a business combination and its effects. SFAS 141R
replaces SFAS 141, " Business Combinations " but, retains the fundamental
requirements of SFAS 141 that the acquisition method of accounting be used and
an acquirer be identified for all business combinations. SFAS 141R expands the
definition of a business and of a business combination and establishes how the
acquirer is to: (1) recognize and measure in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquired company; (2) recognize and measure the goodwill
acquired in the business combination or a gain from a bargain purchase; and (3)
determine what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is applicable to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, and is to be applied
prospectively. Early adoption is prohibited. SFAS 141R will impact the Company
only if it elects to enter into a business combination subsequent to December
31, 2008.
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Non-Controlling Interests to improve the relevance, comparability,
and transparency of the financial information a reporting entity provides in its
consolidated financial statements. SFAS 160 amends ARB 51 to establish
accounting and reporting standards for noncontrolling interests in subsidiaries
and to make certain consolidation procedures consistent with the requirements of
SFAS 141R. It defines a noncontrolling interest in a subsidiary as an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 changes the way the consolidated
income statement is presented by requiring consolidated net income to include
amounts attributable to the parent and the noncontrolling interest. SFAS 160
establishes a single method of accounting for changes in a parent's ownership
interest in a subsidiary which does not result in deconsolidation. SFAS 160 also
requires expanded disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. SFAS 160 shall be applied
prospectively, with the exception of the presentation and disclosure
requirements which shall be applied retrospectively for all periods presented.
The Company does not believe that the adoption of SFAS 160 would have a material
effect on its consolidated financial position, results of operations or cash
flows.
The Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company's results of
operations, financial position or cash flow.
ACCOUNTING ESTIMATES
--------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the country-region place United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. These estimates mainly involve the useful lives of property and
equipment, the impairment of unproved oil and gas properties, the valuation of
deferred tax assets and the realizability of accounts receivable.
CASH AND CASH EQUIVALENTS
-------------------------
For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when purchased to
be cash equivalents.
STOCK BASED COMPENSATION
------------------------
Effective January 1, 2009, AvStar Aviation adopted the authoritative
guidance for Stock Compensation that established financial accounting and
reporting standards for stock based employee compensation plans. It defines a
fair value based method of accounting for an employee stock option or similar
equity instrument. In January 2006, the Company implemented SFAS No. 123R, and
accordingly, the Company accounts for compensation cost for stock option plans
in accordance with SFAS No. 123R.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
------------------------------------------------
Financial instruments that subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company has
concentrated its credit risk for cash by maintaining deposits in a financial
institution, which may at times exceed the amounts covered by insurance provided
by the United States Federal Deposit Insurance Corporation ("FDIC") The Company
has not experienced any losses on deposits. During the years ended December 31,
2009 and 2008, 100% of the Company's revenues were received from five customers.
INCOME TAXES
------------
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation
allowance, if necessary, is provided against deferred tax assets, based upon
management's assessment as to their realization.
BASIC AND DILUTED NET LOSS PER SHARE
------------------------------------
Basic loss per share is computed using the weighted average number of
shares of common stock outstanding during each period. Diluted loss per share
includes the dilutive effects of common stock equivalents on an "as if
converted" basis. For the years ended December 31, 2009 and 2008, potential
dilutive securities had an anti-dilutive effect and were not included in the
calculation of diluted net loss per common share.
3. GOING CONCERN CONSIDERATIONS
Since its inception, the Company has suffered recurring losses from
operations and has been dependent on existing stockholders and new investors to
provide cash resources to sustain its operations. During the three months ended
March 31, 2010 and 2009, the Company reported net losses of $601,441 and
$62,620, respectively. These conditions raise substantial doubt about our
ability to continue as a going concern.
The Company has developed a multi-step plan and has taken actions to
improve its financial position and deal with its liquidity problems. The final
steps of the plan are still being developed, but may include additional private
placements of our common stock, and efforts to raise additional debt financing
or equity investments. There can be no assurance that any of the plans developed
by the Company will produce cash flows sufficient to ensure its long-term
viability as a going concern.
Our long-term viability as a going concern is dependent on certain key
factors, as follows:
* our ability to obtain adequate sources of outside financing to
support near term operations and to allow the Company to continue
forward with current strategic plans.
* our ability to ultimately achieve adequate profitability and cash
flows to sustain continuing operations.
4. STOCKHOLDERS' EQUITY
During January 2010 we issued 600,000 shares of our common stock to CMS
Capital to resolve temporarily certain disagreements that this firm had with the
Company.
During February 2010 we issued 521,052 shares of our common stock to two
Trusts for the benefit of Henry L. Schulle in lieu of cash compensation for past
services provided by him and another 200,000 shares as reimbursement for certain
expenses that he advanced on our behalf.
On March 19, 2010, we issued 15.0 million shares of our common stock to
Russell Ivy, our president and Chief Executive Officer, in connection with the
re-negotiation of this officer's verbal employment agreement (including a salary
reduction) and the memorialization of this agreement in writing. These shares
were issued as an inducement to Mr. Ivy to enter into the written employment
agreement.
Moreover, we issued an aggregate of 21.0 million shares of our common stock
to three persons holding interests in a convertible promissory note in exchange
for an aggregate of $52,500 of the indebtedness represented by this note. Of
these shares, 14.0 million were issued near the end of March 2010, and 7.0
million were issued about the third week of April 2010.
During April 2010, we agreed to issue 750,000 shares of our common stock
to Miami Aviation Maintenance Co. in consideration of the assignment of
certain of our assets to a newly-formed, indirect wholly-owned Florida
subsidiary of ours.
5. RECENT EVENTS
On March 31, 2010, the Hangar Sublease dated May 1, 2007 between San Diego
Airmotive ("SDA") and French Valley Aviation, Inc. ("French Valley") terminated.
The original term of this Hangar Sublease had already expired, and the parties
had continued the sublease on a month-to-month basis. French Valley decided
that it did not want to continue this arrangement beyond March 31, 2010, and
accordingly this arrangement terminated on such date. We decided not to seek
alternative space to continue SDA's services at French Valley Airport in
Southern California, but intend to continue such services in Florida, per the
proposed transaction described immediately below. We intend to maintain in
force and effect SDA's licenses and permits so that we can return to provide
services in California in the future, if we elect to do so.
On April 8, 2010, (a) Twin Air Calypso Services, Inc., a newly-formed,
indirect wholly-owned Florida subsidiary (the "Operating Subsidiary") of the
Company, and (b) Miami Aviation Maintenance Co. ("MAMCO") executed a bill of
sale whereby MAMCO assigned to the Operating Subsidiary certain of its assets
used to provide aviation MRO services. These assets were assigned in
consideration of 750,000 shares of our common stock. In connection with the
organization of the Operating Subsidiary, SDA had previously assigned all of its
assets to the Operating Subsidiary in consideration of all of the shares of the
common stock of the Operating Subsidiary to be outstanding for the foreseeable
future. The Operating Subsidiary was formed to provide aviation MRO services,
as well as airline support services. The services will be offered out of North
Perry Field in Pembroke Pines, Florida in Broward County, Florida.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements are subject to known and
unknown risks, uncertainties and assumptions about us that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "continue," or the negative of such terms or other similar
expressions. Factors that might cause or contribute to such a discrepancy
include, but are not limited to, those described in our other Securities and
Exchange Commission filings. The following discussion should be read in
conjunction with our Financial Statements and related Notes thereto included
elsewhere in this report.
GENERAL
Until February 2009, we had historically been an independent energy company
focused on exploration and development of oil and natural gas reserves, whose
core business was directed to the development of oil and gas prospects in proven
onshore production areas. In February 2009, we adopted a significant change in
our corporate direction. At that time, we decided to focus our efforts on
acquiring aviation related businesses and developing these businesses to their
commercial potential.
Our business plan is to acquire, consolidate and grow businesses in the
general aviation industry. We have adjusted our future goals and will place our
primary focus on the acquisition of a portfolio of fixed base operations (FBOs)
at airports that support light jet traffic along with turbine powered and piston
engine aircraft. We believe that the time is here to invest in this sector. It
is both a combination of the economic trends, consumer confidence and valuation
levels as well as new technological innovations that have just started to impact
this sector that makes our prospects of growing a portfolio of FBO businesses
compelling. These facilities will be supported by our maintenance, repair and
overhaul ("MRO") of aircraft providing products and services for the general
aviation sector. We believe that since September 11, 2001, both private air
transportation and the number of aircraft owned by both individuals and business
have dramatically increased. Each of these sectors, in addition to routine
maintenance, has mandated a number of inspections by the FAA that are commonly
included in traditional MRO services.
In February 2009, we acquired San Diego Airmotive ("SDA"), which had been
operating (through its predecessor entity) as an MRO since 1987. SDA
historically provided MRO services for single and multi-engine aircraft.
On March 31, 2010, the Hangar Sublease dated May 1, 2007 between SDA and
French Valley Aviation, Inc. ("French Valley") terminated. The original term of
this Hangar Sublease had already expired, and the parties had continued the
sublease on a month-to-month basis. French Valley decided that it did not want
to continue this arrangement beyond March 31, 2010, and accordingly this
arrangement terminated on such date. We decided not to seek alternative space to
continue SDA's services at French Valley Airport in Southern California, but we
are continuing such services in Florida, per the transaction described
immediately below. We intend to maintain in force and effect SDA's licenses and
permits so that we can return to provide services in California in the future,
if we elect to do so.
On April 8, 2010, (a) Twin Air Calypso Services, Inc., a newly-formed,
indirect wholly-owned Florida subsidiary (the "Operating Subsidiary") of ours,
and (b) Miami Aviation Maintenance Co. ("MAMCO") executed a bill of sale whereby
MAMCO assigned to the Operating Subsidiary certain of its assets used to provide
aviation MRO services. These assets were assigned in consideration of 750,000
shares of our common stock. In connection with the organization of the Operating
Subsidiary, SDA had previously assigned all of its assets to the Operating
Subsidiary in consideration of all of the shares of the common stock of the
Operating Subsidiary to be outstanding for the foreseeable future. The Operating
Subsidiary was formed to provide aviation MRO services, as well as airline
support services. The services are being offered out of North Perry Field in
Hollywood, Florida in Broward County, Florida. The impetus for the transaction
was the recent termination of SDA's Hangar Sublease at French Valley Airport in
Southern California and the perception that the continuation in Florida of the
business historically conducted by SDA was advisable in view of the perceived
greater strength of the local Florida economy relative to the local California
market in which SDA has historically provided services.
As capital is available to us, we intend to grow our business through the
expansion of our existing MRO business as well as by acquisitions of fixed base
operations ("FBOs"), expansion of our existing MRO, charter operations and other
operational aircraft related businesses.
Since our inception, we have recurring losses from operations and have
depended on existing stockholders and new investors to provide the cash
resources to sustain its operations. During the three months ended March 31,
2010, we reported a loss of $601,441 compared to a loss of $62,620 reported for
the three months ended March 31, 2009.
Our long-term viability as a going concern depends on certain key factors,
as follows:
* Our ability to continue to obtain sources of outside financing to
allow us to continue our business operations.
* Our ability to increase profitability and sustain a cash flow
level that will ensure support for continuing operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of the financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate estimates. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. These estimates and assumptions provide a basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions, and these differences may
be material.Critical accounting policies that affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements are discussed in the footnotes to the financial statements comprising
a part of this report.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2010 COMPARED TO THE QUARTER ENDED MARCH 31, 2009
-------------------------------------------------------------------------
REVENUES. Revenues for the first quarter 2010 were $101,518 (consisting
of $100,428 in revenues from aviation operations and $1,090 in revenues from oil
and gas operations) compared to revenue of $175,394 for the first quarter 2009
(consisting of $172,722 in revenues from aviation operations and $2,672 in
revenues from oil and gas operations). The decrease in aviation operations from
the first quarter of 2009 to the first quarter of 2010 resulted from a decrease
in the volume in services provided, as the local economy in California in which
these operations are provided seemed to deteriorate further. The decrease in
oil and gas revenues from the first quarter of 2009 to the first quarter of 2010
resulted from a decrease in production.
EXPENSES. Costs and expenses for the first quarter 2010 were $702,959
compared to costs and expenses of $217,907 for the first quarter 2009.
This increase in costs and expenses reflects the following:
* $60,619 in costs of goods sold in the first quarter 2010 from
SDA's operation compared to $107,797 in costs of goods sold in the
first quarter 2009 as the volume of services provided decreased
* $638,800 in selling, general and administrative expenses including
stock based compensation in the first quarter 2010 compared to
$108,432 in these expenses in the first quarter 2009; of the
$638,800 in selling, general and administrative expenses including
stock based compensation in the first quarter 2010, $450,000
relates to the issuance of 15.0 million shares of our common
stock to our president and Chief Executive Officer in
connection with the re-negotiation of this officer's verbal
employment agreement.
The increase in costs and expenses was partially offset as interest expense
declined in the first quarter 2010 to $-0- compared to $20,107 in the first
quarter 2009.
NET LOSS. As a result of the considerable decrease in revenues and the
large increase in stock based compensation-, the net loss of $601,441 for the
first quarter 2010 represents an increase of $574,070 from the net loss of
$62,620 for the first quarter 2009.
LIQUIDITY AND CAPITAL RESOURCES
Currently, we have limited financial ability to pursue our new business
plan. We are currently trying to determine the scope of the business activities
that we will pursue in the foreseeable future. The amount of capital that we
will need depends on the scope of the business activities that we ultimately
decide to pursue. This scope is uncertain at this time. However, we know that we
must obtain additional financing to pursue our business plan at any level that
we are likely to pursue. We are currently searching for sources of financing,
but we currently do not have any binding commitments for, or readily available
sources of, financing. We cannot assure anyone that financing will be available
to us when needed or, if available, that such financing can be obtained on
commercially reasonably terms. If we do not obtain financing we will be
constrained to contract the scope of our business plan. Under certain
circumstances, we may be constrained to attempt to sell some of our assets.
However, we cannot assure anyone that we will be able to find interested buyers
or that the funds received from any such sale would be adequate to fund our
activities. Under certain circumstances, we could be forced to cease our
operations and liquidate our remaining assets, if any.
We have outstanding the following notes that became due and payable at
December 1, 2008. These notes have an aggregate principal amount totaling
$624,771 and aggregate accrued interest of $99,197 as of March 31, 2010. We are
currently exploring ways to satisfy these amounts. The outstanding principal
amount was reduced by $17,500 in April 2010 when a portion of one of the notes
was converted into our common stock.
(a) Note payable to Mary Pollock Merritt, daughter of our former chief
executive officer. This note bears interest at rates of 12% per year
and became due on December 31, 2008. This note is not collateralized.
The outstanding balance on this note as of March 31, 2010 was $111,691,
plus accrued interest. The outstanding principal amount of this note
was reduced by $17,500 in April 2010 when a portion of it was
converted into our common stock.
(b) Note payable to Charles Pollock, our former chief executive officer and
a significant stockholder of ours. This note bears interest of 12% per
year and became due on December 31, 2008. This note is not
collateralized. The outstanding balance on this note as of March 31,
2010 was $400,911, plus accrued interest.
(c) Note payable to Mark Weller, our former president and a significant
stockholder of ours. This note bears interest of 12% per year and became
due on December 31, 2008. This note is not collateralized. The
outstanding balance on this note as of March 31, 2010 was
$112,169, plus accrued interest.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
ITEM 4T. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period of this report, our principal executive and
principal financial officer carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures. This
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer. We have concluded, based on that evaluation, that, as of such date, the
disclosure controls and procedures were not effective to ensure that information
required to be disclosed in reports filed or submitted under the Securities
Exchange Act of 1934 (the "Exchange Act") is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. Although
the evaluation did not detect any material weaknesses in our system of internal
accounting controls over financial reporting, management identified significant
deficiencies with respect to the timely public reporting of events requiring
such reporting. We are instituting corrective action to ensure that such events
are timely reported publicly. Notwithstanding management's assessment that our
internal control over financial reporting was ineffective as of the end of the
period of this report, and the significant deficiencies described above, we
believe that the consolidated financial statements included in this report
correctly present our financial condition, results of operations and cash flows
for the periods covered thereby in all material respects.
LIMITATIONS ON EFFECTIVENESS OF CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within our company have been detected. These inherent
limitations include, but are not limited to, the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act, during the period of this report that have materially affected, or
are reasonably likely to materially affect our internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS.
(a) The following exhibits are filed with this Quarterly Report or are
incorporated herein by reference:
Exhibit
Number Description
31.01 Certification pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934.
31.02 Certification pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934.
32.01 Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification Pursuant to 18 U.S.C. Section 1350, as pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AVSTAR AVIATION GROUP, INC.
(Registrant)
By: /s/Russell Ivy
--------------
Russell Ivy,
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert Wilson
-----------------
Robert Wilson,
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
May 19, 2010