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 September 30, 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
incorporation or organization) Identification No.)
3600 Gessner, Suire 220, Houston, Texs 77063
(Address of principal executive offices)
713-965-7582
(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 [ ] No [X]
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: 151,899,542 common shares as of
November 14, 2010
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2010 2009
ASSETS
Current assets:
Cash $ 10,295 $ 4,565
Accounts receivable 161,406 23,950
Prepaid expenses 32,042 8,301
Parts and inventory 44,262 27,916
------------------------
Total Current Assets 248,005 64,732
Property and equipment:
Oil and gas properties (successful efforts
method net of accumulated depletion of
$143,234 and $138,642) 52,432 56,657
Unproven oil and gas properties (successful
efforts method)
------------------------
Total property and equipment 52,432 56,657
Investment in subsidiary 632,407 60,988
------------------------
Total assets $ 932,844 $ 182,377
========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 174,375 $ 164,403
Other current liabilities 295,321 114,965
Accrued interest payable to related parties 99,197 99,197
Notes payable - other 68,448
Notes payable to related parties 260,982 11,900
-----------------------
Total current liabilities 898,323 390,465
Long-term debt to related parties 585,696 659,771
-----------------------
Total liabilities 1,484,019 1,050,236
Stockholders' deficit:
Preferred stock: $.001 par value; 10,000,000
shares authorized, none issued and outstanding - -
Common stock: $.001 par value; 500,000,000
shares authorized; 146,399,542 and 15,728,490
shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively 440,111 400,599
Additional paid-in capital 20,317,213 19,142,545
Accumulated deficit (21,308,499)(20,411,003)
-----------------------
Total stockholders' deficit (551,175) (867,859)
-----------------------
Total liabilities and stockholders' deficit $ 932,844 182,377
========================
-2-
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
Oil and gas revenue $ - $ - $ 1,231 $ 4,295
Revenue from aviation
operations 516,893 183,718 1,121,756 519,913
---------------------------------------------------
Total revenue 516,893 183,718 1,122,987 524,208
Costs and expenses:
Cost of goods sold 448,692 160,500 873,308 363,304
Lease operating expenses
Production taxes 146
Dry hole costs - - - -
Depreciation, depletion and
amortization 2,226 24,515 8,226 19,534
Impairment
Selling, general and
administrative
expenses 322,632 42,940 1,245,312 252,473
---------------------------------------------------
Total costs and expenses 773,500 232,955 2,126,846 635,457
---------------------------------------------------
Loss from operations (256,657) (49,237) (1,003,859) (111,249)
Other income and (expenses):
Other income - - - -
Interest expense (20,107)
---------------------------------------------------
Net loss $ (256,657) $ (49,237) $ (1,003,859) $ (131,356)
===================================================
Basic and diluted net loss per common
share $ (0.00) $ (0.00) $ (0.00) $ (0.00)
Weighted average common
shares 151,899,542 53,904,995 151,899,542 53,904,995
-3-
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
for the Nine months ended September 30, 2009
(Unaudited)
Commmon Additional Accumu- Stockholders'
Stock Paid-In lated Equity
Shares Amount Capital Deficit (Deficit)
Balance at December
31, 2009 65,728,490 $ 400,599 $ 19,142,545 $ (20,411,003) $ (867,859)
Stock issued:
for compensation 15,000,000 15,000 435,500 435,500
for services 24,721,052 874 189,477 190,351
forbearance 1,600,000 1,600 37,340 37,340
reduction of debt 14,000,000 14,000 21,000 35,000
debt conversion 7,000,000 7,000 203,000 210,000
acquisition 18,350,000 1,039 288,351 289,390
Gain on conversion 106,363 106,363
Net loss - (1,003,859) (1,003,859)
---------------------------------------------------------------
Balance at September
30, 2010 146,399,542 $ 440,111 $ 20,317,213 $ (21,308,499) $(551,175)
================================================================
-4-
AVSTAR AVIATION GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2010 and 2009
(Unaudited)
2010 2009
Cash flows from operating activities:
Net loss $ (1,003,859) $ (131,355)
Adjustments to reconcile net loss to net cash
used in operating activities 231,909 106,892
Net cash used in operating activities (771,950) (24,463)
Cash flows from investing activities (375,946) -
Cash flows from financing activities 1,140,104 25,000
----------------------
Net cash provided by (used in) financing activities 1,140,104 25,000
----------------------
Net increase/(decrease) in cash and cash equivalents (7,792) 537
Cash and cash equivalents at beginning of period 18,087 8,998
-----------------------
Cash and cash equivalents at end of period $ 10,295 $ 9,535
=======================
Supplemental Disclosures
Cash paid for interest $ - $ -
Cash paid for income taxes - -
Non Cash Disclosures
Reclassification of accrued interest into principal
Reclassification of long-term debt
to short-term debt
-5-
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
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.
6
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 that 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.
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, which 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.
7
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
------------------------------------------------
Financial instruments which 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.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
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.
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 nine months ended
September 30, 2010 and 2009, the Company reported net losses of $1,003,859 and
$131,356, 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 the Company issued 600,000 shares of its common stock
to CMS Capital to resolve temporarily certain disagreements that this firm had
with the Company.
During February 2010 the Company issued 521,052 shares of its 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, the Company issued 15.0 million shares of its common
stock to Russell Ivy, then 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.
8
Moreover, the Company issued an aggregate of 21.0 million shares of its
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 June 2010, the Company issued 750,000 shares of its common stock to
Miami Aviation Maintenance Co. in consideration of the assignment of certain of
its assets to a newly-formed, indirect wholly-owned Florida subsidiary of ours.
During June 2010, the Company issued 600,000 shares of its common stock to
CMS Capital to resolve temporarily certain disagreements that this firm had with
the Company.
During July 2010, the Company issued 4.0 million shares of its common stock
to an attorney for the Company to secure accrued fees owed to him.
During July 2010, the Company issued an aggregate of 10.0 million shares of
its common stock to an investors' relations firm for services to be provided,
and 5.0 million shares of our common stock to a person holding interest in a
convertible promissory note in exchange for a reduction of $12,500 of the
indebtedness represented by this note.
During August 2010, the Company issued an aggregate of 17.6 million shares
of its common stock to the shareholders of Twin Air Calypso Limited, Inc. in
connection with the acquisition of that Company.
During August 2010, the Company issued 5.0 million shares of its common
stock to Henry A. Schulle, a vice president and the Company's Secretary, for
unspecified services rendered in connection with the founding of the Company,
the continued operation of the Company, and as an inducement for Mr. Schulle to
enter into an employment agreement.
During October 2010, the Company issued 12.0 million shares of its common
stock to a person holding a convertible note, in exchange for the payment
$12,000 of the indebtedness represented by the note.
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 "MRO Subsidiary") of the Company,
and (b) Miami Aviation Maintenance Co. ("MAMCO") executed a bill of sale whereby
MAMCO assigned to the MRO 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 MRO
Subsidiary, SDA had previously assigned all of its assets to the MRO Subsidiary
in consideration of all of the shares of the common stock of the MRO Subsidiary
to be outstanding for the foreseeable future. The MRO Subsidiary was formed to
provide aviation MRO services, as well as airline support services. The
services are being offered out of North Perry Airport in Pembroke Pines, Broward
County, Florida.
On August 19, 2010, we completed a transaction in which we acquired all of
the outstanding stock in Twin Air Calypso Limited, Inc. (the "Charter Air
Subsidiary"), a company related to MAMCO. We acquired the Charter Air Subsidiary
in exchange for 18.0 million shares of our common stock and some cash payments
in the approximate aggregate amount of $275,000 to be paid in a small number of
future installments over the fairly near future. Because of amounts previously
paid, we were not required to pay any cash down payment at closing. The Charter
Air Subsidiary operates a charter air service from South Florida to the Bahamas
with eight aircraft. In connection with the completion of this transaction,
Clayton I. Gamber, a stockholder in and the chief executive officer of the
Charter Air Subsidiary, was elected to our Board of Directors and as our Chief
Executive Officer and President.
9
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. Due to acquisitions, we are now in two aviation sectors,
the maintenance, repair and overhaul ("MRO") of aircraft providing products and
services for the general aviation sector, and the charter air service business.
Currently, we are striving to stabilize our two existing businesses in view
of the difficult economy over the past few years. Once these are stabilized,
our business plan will be 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. A combination of the economic trends, valuation levels, and
technological innovations has impacted this sector, making our prospects of
growing a portfolio of FBO businesses compelling. These facilities will be
supported by our existing MRO business. We believe that after September 11,
2001, both private air transportation and the number of aircraft owned by both
individuals and business dramatically increased, although such increase has been
tempered in recent years due to the recent unfavorable economy. 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 "MRO Subsidiary") of ours, and
(b) Miami Aviation Maintenance Co. ("MAMCO") executed a bill of sale
whereby MAMCO assigned to the MRO 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 MRO Subsidiary, SDA had previously assigned all of its assets to the
MRO Subsidiary in consideration of all of the shares of the common stock of the
MRO Subsidiary to be outstanding for the foreseeable future. The MRO
Subsidiary was formed to provide aviation MRO services, as well as airline
support services. The services are being offered out of North Perry
Airport in Pembroke Pines, 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.
10
The MRO Subsidiary has the following features and provides the following
services:
* FAA Cetified PArt 145 Repair Station in cluding avionics
* Major & Minor Airframe Repairs on all aircraft 12,500 pounds and less
* Annual Inspections
* Computerized Aircraft Weight and Balance
* Engine Maintenance, Repair & Overhaul including custom installations
and refurbishment.
* Aircraft Modifications and STC kit installations
* Routine Maintenance/Insurance and Accident Repairs
* Composite Airframe Repairs
* Pre-purchase Inspections/Log Book Analysis
* Oxygen Service/Nitrogen Service
* Service Parts
* Janitrol/Southwind Heater Service/AD compliance inspections
* Dye/Fluorescent Penetrant Inspection Service
* Aircraft Exterior & Interior Detailing Services
* ACES Dynamic propeller balancing service
* Avionics installations and repairs
* Minor paint repairs and detailing
* Instrument Panel upgrades and Component installs
* Engine Scanners and Monitor installation
* EGT/CHT calibration
The MRO Subsidiary recently commenced a focused, direct marketing program
of its services and is starting to see an increased interest from potential
customers. Moreover, the MRO Subsidiary currently has the only avionics shop at
North Perry Field, providing services for the electronic systems on aircraft
that provide communications, navigation and guidance, display systems, flight
management systems, sensors and indicators, weather radars, electrical systems,
and various onboard computers. Finally, the MRO Subsidiary recently completed
the lease of a fuel truck, pursuant to which it will offer to sell fuel to third
parties. This truck will also provide fuel to the Charter Air Subsidiary
(discussed immediately below) at discounted rates, enabling this other
subsidiary to realize fuel cost savings. All training regarding the operation
of the fuel truck has been completed, and commencement of sales by this truck is
contingent solely upon the completion of the fire inspector's inspection, which
is expected by the end of November 2010, but we have no assurance in this
regard.
On August 19, 2010, we completed a transaction in which we acquired all of
the outstanding stock in Twin Air Calypso Limited, Inc. (the "Charter Air
Subsidiary"), a company related to MAMCO. We acquired the Charter Air Subsidiary
in exchange for 18.0 million shares of our common stock and some cash payments
in the approximate aggregate amount of $275,000 to be paid in a small number of
future installments over the fairly near future. Because of amounts previously
paid, we were not required to pay any cash down payment at closing. In
connection with the completion of this transaction, Clayton I. Gamber, a
stockholder in and the chief executive officer of the Charter Air Subsidiary,
was elected to our Board of Directors and as our Chief Executive Officer and
President.
In connection with the acquisition of the Charter Air Subsidiary and in
order to effectuate a verbal agreement and understanding that they had made some
time ago, we and the stockholders of the Charter Air Subsidiary entered into
certain option agreements (the "Option Agreements"). The Option Agreements
permit us to repurchase a portion of the 18.0 million shares of common stock
issued in connection with the acquisition for an aggregate purchase price of
$1.75 million. The number of shares depends on the per-share "Market Value" of
our common stock, which is basically the 20-day trading average prior to the
time of exercise. The portion of such 18.0 million shares that may be
repurchased generally equals the quotient obtained by dividing $1.25 million by
the Market Value; provided, however, that the stockholders of the Charter Air
Subsidiary may retain a maximum of 7.353 million shares and a minimum of 625,000
shares. Moreover, the Option Agreements require us to repurchase the portion of
shares determined in accordance with the preceding whenever we complete a
private placement of our securities for an aggregate purchase price of at least
$3.0 million.
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The Charter Air Subsidiary operates a charter air service from South
Florida to the Bahamas with eight leased aircraft. It has regular flights of
both passengers and cargo to two destinations on the island of Abaco and three
destinations on the island of Eleuthera. The Charter Air Subsidiary also flies
to other destinations in the Bahamas on a chartered basis. Currently, only three
of the Charter Air Subsidiary's leased aircraft are flying, as five of these
aircraft are currently down for routine maintenance and refurbishing. However,
we will need to raise about $500,000 to complete this maintenance and
refurbishing. Our goal is to raise this amount, and complete the maintenance and
refurbishing, so that all eight planes will be phased into operation by the the
end of the first quarter of 2011. Although we are now seeking to raise this
amount, we have no assurance that we will be able to do so. We are striving to
get all eight aircraft operational in order to fill the voids in the market
caused by the challenging ecomony in the market. This challenging market has
caused some of our competitors to suspend or cease flying, creating a void in
certain routes that we believe we can fill in a manner positive to our financial
performance. The additonal aircraft will allow the West Palm Beach market to be
opened and new destination in the Bahamas started.
Since August 19 of this year a review of existing acquisition plans has
been completed, a new "affiliate" program has been developed, and strategies for
obtaining airframe and avionic dealerships have been implemented. Several
companies have been identified as acquisition targets for the first quarter of
2011. The "affiliate" program will expand AvStar's capabilities while decreasing
operating costs for the Charter Air Subsidiary. In December of 2010 the Charter
Air Subsidiary will be moving to a new facility on the Ft Lauderdale-Hollywood
International Airport that will lower rental and fuel costs while providing a
more efficient operation and better amenities for the passengers.
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 maintenance, repair and overhaul
operations ("MROs"), and charter operations.
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 nine months ended September 30,
2010, we reported a loss of $1,003,859 compared to a loss of $131,356 reported
for the nine months ended September 30, 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.
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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 SEPTEMBER 30, 2010 COMPARED
TO THE QUARTER ENDED SEPTEMBER 30, 2009
REVENUES. Revenues for the third quarter 2010 were $516,893 (consisting of
$516,893 in revenues from aviation operations and $-0- in revenues from oil and
gas operations) compared with revenue of $183,718 for the third quarter 2009
(all from aviation operations from SDA). The increase in revenues in the third
quarter of 2010 resulted from the acquisition of Twin Air Calypso Limited and
additional business for Twin Air Calypso Services. The decrease in oil and
gas revenues in the third quarter of 2010 from the third quarter of 2009
resulted from a decrease in production.
EXPENSES. Costs and expenses for the third quarter 2010 were $773,550
compared with costs and expenses of $232,955 for the third quarter 2009. This
increase in costs and expenses reflects the following:
* $448,692 in costs of goods sold in the third quarter 2010 from
aviation operations compared with $160,500 in costs of goods sold
in the third quarter 2009 as the volume of services provided
decreased
* $2,226 in depreciation, depletion and amortization in the third
quarter 2010 compared with $24,515 in depreciation, depletion and
amortization in the third quarter 2009.
* $322,632 in selling, general and administrative expenses including
stock based compensation in the third quarter 2010 compared to
$42,940 in these expenses in the third quarter 2009; of the
$206,611 in selling, general and administrative expenses including
stock based compensation in the third quarter 2010, $5,000 related to
the issuance of five milion shares of our common stock to Henry A.
Schulle.
NET LOSS. As a result of the large increase in selling, general and
administrative expenses, the net loss of $256,657 for the third quarter 2010
represents an increase of $207,420 from the net loss of $49,237 for the third
quarter 2009.
NINE MONTHS ENDED SEPTEMBER 30, 2010
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2009
REVENUES. Revenues for the first nine months 2010 were $1,122,987,
consisting of $1,121,756 in revenues from aviation operations and $1,231 in oil
and gas revenues. These revenues represent a an increase from revenues for the
first nine months 2009 of $524,208, consisting of $519,913 in revenues from
aviation operations and $4,295 in oil and gas revenues. The increase in
revenues in the third quarter of 2010 resulted from the acquisition of Twin Air
Calypso Limited and additional business from Twin Air Calypso Services. The
decrease in oil and gas revenues in the first nine months of 2010 from the first
nine months of 2009 resulted from a decrease in production.
EXPENSES. Costs and expenses increased to $2,126,846 in the first nine
months 2010 from $635,457 in the first nine months 2009. This increase in costs
and expenses reflects the following:
* $873,308 in costs of goods sold in the first nine months 2010
from aviation operations compared with $363,304 in costs of goods
sold in the first nine months 2009 from aviation operations as
the volume of services provided decreased.
* $8,226 in depreciation, depletion and amortization in the first
nine months 2010 compared with $ 19,534 in depreciation, depletion
and amortization in the first nine months 2009.
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* $708,161 in selling, general and administrative expenses including
stock based compensation in the first nine months 2010 compared with
$198,738 in these expenses in the first nine months 2009; of the
$708,161 in selling, general and administrative expenses including
stock based compensation in the third quarter 2010, $5,000 relates
to the issuance of five million shares of our common stock to Henry
A. Schulle.
NET LOSS. As a result of the considerable decrease in revenues and the
considerable increase in expenses, the net loss of $1,003,859 for the first nine
months 2010 represents an increase of $872,503 from the net loss of $131,356 for
first nine months 2009.
LIQUIDITY AND CAPITAL RESOURCES
Currently, we have limited financial ability to pursue our new business
plan. In addition to stabilizing our two existing businesses, our immediate
financial goal is to raise approximately $500,000 to complete the scheduled
maintenance and refurbishing of five of our eight aircraft, and get these planes
flying again. Although we are now seeking to raise this amount, we have no
assurance that we will be able to do so. We believe that, once these aircraft
are flying again, our goal of stabilizing our existing business can be
accomplished, and we can start considering the resumption of our original
business plan of acquiring other businesses. Once the stabilization is
accomplished (if at all), we begin 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
$693,085 and aggregate accrued interest of $65,977.56 as of September 30, 2010.
We are currently exploring ways to satisfy these amounts.
(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 September 30, 2010 was $103,683, plus accrued
interest.
(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 September 30, 2010 was $461,015, 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 September 30, 2010 was $128,387, plus accrued interest.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
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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.
Management identified significant deficiencies with respect to the timely public
reporting of events requiring such reporting. During 2010, these deficiencies
caused us to file late four Current Reports on Form 8-K. In 2009, we were also
late on a number of filings. Some of the late filings resulted from the failure
of relevant company personnel to understand the need for prompt disclosure. As
of the end of the period of this report, we began instituting the following
corrective action to ensure that such events are timely reported publicly:
* We are adopting a disclosure policy requiring our personnel to
communicate to a designated committee for evaluation any
information potentially material and thereby requiring public
disclosure;
* We are developing a basic program to educate management as to the
events requiring expedited disclosure;
* To avoid late disclosure of events requiring expedited disclosure,
we are adopting certain procedures, such as required
consultation with securities counsel before issuing any equity
shares, entering into any agreement that may be material, taking any
action at a Board of Directors meeting or the like; and
* To avoid late filings of documents having regular due dates
(such as Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q), we are establishing timelines within which our
professional personnel will strive to work.
Because the implementation of the preceding corrective action began as of the
end of the period of this report, the significant deficiencies that we
identified still existed as of the end of the period of this report.
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.
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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/ Clayton I. Gamber
Clayton I. Gamber,
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)
November 22, 2010
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