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, 2011
[ ] 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
-------
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)
(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: 236,270,834 common shares as of
May 13, 2011
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEET
AVSTAR AVIATION GROUP, INC.
Period End: March 31, 2011
March 31, December 31,
2011 2010
ASSETS
Current assets
Cash 25,214 5,648
Accounts receivable 161,075 146,826
Prepaid expenses 11,757 11,007
Inventory 55,937 4,858
-----------------------
Total Current Assets 253,983 168,339
Property and equipment: 46,840 5,280
Proven oil and gas properties (successful
efforts method), net of accumulated
depletion of $144,723 4,540
Unproven oil and gas properties (successful
efforts method)
------------------------
Total Fixed Assets 46,840 9,820
Investment in subsidiary 810,938 781,840
-------------------------
Total assets 1,111,761 959,999
=========================
AVSTAR AVIATION GROUP, INC.
BALANCE SHEET
Period End: March 31, 2011
March 31, December 31,
2011 2010
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable 140,689 83,189
Credit card payable 0 0
Other current liabilities 304,166 383,574
Accrued interest payable to related parties 99,197 99,197
Notes payable to related parties 571,900 477,336
Notes payable 3,713 -
Stock payable -
-------------------------
Total current liabilities 1,119,665 1,043,296
Long term debt to related parties 1,050,577 1,057,477
Asset retirement obligations 0 0
-------------------------
Total liabilities 2,170,242 2,100,773
Stockholders' deficit:
Preferred stock: $.001 par value;
1,000,000 shares authorized,
none issued and outstanding
Common stock: $.001 par value;
500,000,000 shares authorized;
236,270,834 shares issued and
outstanding 208,271 176,900
Additional paid-in capital 21,471,591 21,441,852
Accumulated deficit (22,738,343) (22,759,526)
-----------------------------
Total stockholders' deficit (1,058,481) (1,140,774)
-----------------------------
Total liabilities and stockholders' deficit 1,111,761 959,999
=============================
AVSTAR AVIATION GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Three Months Ended
March 31 March 31
2011 2010
Oil and gas revenue $1,293 $1,090
Income from subsidiary operations 584,442 100,428
----------------------------------
Total revenue 585,735 101,518
Costs and expenses:
Cost of goods sold by subsidiary 417,220 60,619
Lease operating expenses
Production taxes
Dry hole costs -
Depreciation and depletion 260 3,540
Selling, general and administrative,
including stock based compensation 135,962 638,800
---------------------------
Total costs and expenses 553,442 702,959
---------------------------
Income (Loss) from operations 32,293 (42,513)
Other (expenses):
Interest expense 11,110
----------------------------
Net income (loss) $ 21,183 $ (601,441)
============================
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, 2011 and 2010
(Unaudited)
Three Months Ended Three Months Ended
March 31 March 31
2011 2010
Cash flows from operating activities:
Net income (loss) $ 21,183 $(601,441)
Adjustments to reconcile net loss to
net cash used in operating activities (17,624)
Accounts receivable (12,899) 120,646
Accounts payable 75,805
Payable to shareholder 4,739
-----------------------------------
Net cash used in operating activities 71,204 (480,795)
Cash flows from investing activities:
Capital and exploratory expenditures 260 3,540
Investment in subsidiary (58,063)
Furniture and equipment (36,935)
------------------------------------
Net cash used in investing activities (94,738) 3,540
Cash flows from financing activities:
Repayment of debt (6,900)
Paid in capital 31,371
Common stock 18,629
-----------------------------------
Net cash used in financing activities 43,100
-----------------------------------
Net increase (decrease) in cash and
cash equivalents 19,566 (475,524)
Cash and cash equivalents at beginning
of period 5,648 3,731
------------------------------------
Cash and cash equivalents at end of
period $ 25,214 $ 2,000
====================================
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, 2011
Preferred Additional Total
Stock Common Stock Paid-In Accumulated Stockholders'
Shares Shares Amount Capital Deficit Deficit
Balances as of
December 31,
2010 178,899,542 176,900 21,441,852 (22,759,526)(1,140,774)
Debt reduction 31,371,292 31,371 18,629 50,000
Imputed interest 11,110 11,110
Net income 21,183 21,183
--------------------------------------------------------------
Balance at March
31, 2011 208,270,834 208,271 21,471,591 (22,738,343) (1,058,481)
==================================================================
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, 2010, 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.
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 operation 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.
CONCENTRATION OF CREDIT RISK
----------------------------
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, 2010 and 2009, 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
three months ended March 31, 2011 and 2010, the Company reported net income
of $21,183 and net loss of $601,441 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 2011 the Company issued an aggregate of 16,029,412 shares of
its common stock in three issues to Asher Enterprises for the partial conversion
of a convertible promissory note.
During February 2011 the Company issued 6,111,111 shares of its common
stock to Asher Eneterprises for a partial conversion of a convertible promissory
note.
During March 2100 the Company issued 9,230,769 shares of its common stock
to Asher Enterprises for a partial conversion of a convertible promissory note.
During May 2011 the Company issued 8,000,000 shares of its common stock to
a person holding a convertible promissory note in exchange for a reduction of
$40,000 of the indebtedness represented by this note.
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.
The MRO Subsidiary has the following features and provides the following
services:
* 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 Air Carrier 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 "Air Carrier
Subsidiary"), a company related to MAMCO. We acquired the Air Carrier 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 Air Carrier Subsidiary,
was elected to our Board of Directors and as our Chief Executive Officer and
President.
In connection with the acquisition of the Air Carrier Subsidiary and in
order to effectuate a verbal agreement and understanding that they had made some
time ago, we and the prior stockholders of the Air Carrier 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 Air Carrier
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.
The Air Carrier Subsidiary operates 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 Air Carrier Subsidiary also flies to other
destinations in the Bahamas on a chartered basis. Currently, only three of the
Air Carrier 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 $350,000 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. 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 economy 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 additional aircraft will allow the West Palm Beach
market to be opened and new destination in the Bahamas started.
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. Several companies have been
identified as acquisition targets as capital is available to us.
In February 2011, the Air Carrier Subsidiary relocated both its passenger
and freight operations to a newly constructed facility at the Sheltair North
complex at the Ft. Lauderdale-Hollywood International Airport. With this move
the passenger and freight facilities are separated, giving the passengers more
of an "airline terminal" atmosphere, while maintaining the perks of free parking
and easy luggage handling, without the "big terminal" inconveniences. The
customer acceptance has been overwhelmingly good and our ground support
operations are operating much more efficiently.
By moving to this new facility we also lowered our fuel costs by
approximately 15%. This price reduction (along with a fuel surcharge instituted
in February) has mitigated the fuel price increases of the market considerably.
With fuel being our largest single cost by far, the relocation has contributed
greatly to our operations being profitable for the first quarter.
While refurbishment of the aircraft has not progressed as quickly as
scheduled, we were able to return one aircraft to service in late March.
Revenues received from the addition of this aircraft will be recognized
beginning in the second quarter. We expect to return another aircraft to service
in June. Efforts are continuing, to secure financing that will allow us to
accelerate the return to service of additional aircraft.
During the first quarter the Air Carrier Subsidiary's personnel have been
preparing our application to the Department of Transportation to upgrade our
authorities to "Commuter" status. This new authority will allow us to increase
our frequency to each destination and advertise our schedule in the traditional
airline venues. We expect this authority to become effective in the fourth
quarter of this year allowing us to take full advantage of the 2011-2012 winter
season. Additionally, the Air Carrier Subsidiary's personnel have been designing
and implementing a new scheduling and reservation software. The scheduling
module became operational in March of 2011, the reservation module will be
installed in late May and the freight module will be installed in early June.
The full implementation of these modules will give better internal controls over
yield management and freight management and will allow booking of reservations
over the internet. The final module will be to fully integrate the operational
systems into the accounting system required for the DOT commuter requirements.
With the increased fuel costs of late 2010 and early 2011, the general
aviation segment continues to suffer. We are continuing to search for
opportunities to acquire aviation maintenance and service organizations. At this
time we feel that more favorable opportunities will be available during the fall
and early winter of 2011. We are currently negotiating sources of capital to be
in a position to pursue these opportunities as they are identified.
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, 2011, we
reported a net income of $ 21,183 compared to a loss of $ 601,441 reported for
the three months ended March 31, 2010.
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
Financial results for the quarter ended March 31, 2011 are not directly
comparable to financial results for the quarter ended March 31, 2010. During
August 2010, we completed the acquisition of Twin Air Calypso Limited, Inc.
("TAC Limited"). TAC Limited operates air carrier amd air charter services.
This acquisition appreciably affected the financial results for the quarter
ended March 31, 2011compared to the financial results for the quarter ended
March 31, 2010.
QUARTER ENDED MARCH 31, 2011 COMPARED TO THE QUARTER ENDED MARCH 31, 2010
-------------------------------------------------------------------------
REVENUES. Revenues for the first quarter 2011 were $585,735 (consisting of
$584,442 in revenues from aviation operations and $1,293 in revenues from oil
and gas operations) compared to revenues of $101,518 for the first quarter 2010
(consisting of $100,428 in revenues from aviation operations and $1,090 in
revenues from oil and gas operations). The increase in aviation operations in
the first quarter of 2011 from the first quarter of 2010 resulted from the
acquisition of Twin Air Calypso Limited and additional business for Twin Air
Calypso Services.
EXPENSES. Costs and expenses for the first quarter 2011 were $ 553,442
compared to costs and expenses of $702,959 for the first quarter 2010.
This decrease in costs and expenses reflects the following:
* $417,220 in costs of goods sold in the first quarter 2011
compared to $60,619 in costs of goods sold in the first
quarter 2010 as the volume of services provided increased.
* $135,962 in selling, general and administrative expenses including
stock based compensation in the first quarter 2011 compared to
$638,800 in these expenses in the first quarter 2010; of the
$638,800, $450,000 relates to the issuance of 15.0 million shares of
our common stock to our former President and Chief Executive Officer
in connection with the re-negotiation of this officer's verbal
employment agreement.
NET INCOME. As a result of aviation related revenues, the net income of
$21,183 for the first quarter 2011 represents a swing of $622,624 from the net
loss of $601,441 for the first quarter 2010.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2011, we had a working capital deficiency of approximately
$865,682. 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 $350,000 to complete the
scheduled maintenance and refurbishing of our remaining eight aircraft.
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.
Our independent certified public accountant has added an emphasis paragraph
to its report on our consolidated financial statements for the year ended
December 31, 2010 regarding our ability to continue as a going concern. Key to
this determination is our historical losses of $1,016,664 in 2010 and $988,990
in 2009. Management plans to try to fund our company partially through the
raising of capital through the sale of our equity instruments or issuance of
debt, although there can be no assurance of success in this regard. Moreover,
management plans on additional revenues from operations from our business as a
source to finance our company, although there can be no assurance of that these
revenues will materialize at the expected rates. There can be no assurance that
we will be successful in achieving these objectives, becoming profitable or
continuing our business without either a temporary interruption or a permanent
cessation.
Recent Convertible Debt
-----------------------
Asher Notes. Commencing on April 19, 2010, we entered into a series of
transactions in which we issued five convertible promissory Asher Notes (singly
a "Asher Note" and collectively the "Asher Notes") to Asher Enterprises, Inc.
("Asher") in consideration of certain amounts loaned by Asher to us. The
following table gives the designations to which the Asher Notes are referred
hereinafter, the dates of the Asher Notes, the original principal amounts of the
Asher Notes, and the scheduled maturity dates of the Asher Notes:
DESIGNATION ISSUANCE ORIGINAL PRINCIPAL MATURITY
OF NOTE DATE OF NOTE AMOUNT OF NOTE DATE OF NOTE
------- ------------ -------------- ------------
First 4/19/2010 $50,000 1/21/2011
Second 6/1/2010 $25,000 3/31/2011
Third 8/31/2010 $40,000 6/2/2011
Fourth 10/21/2010 $35,000 7/25/2011
Fifth 12/20/2010 $45,000 9/22/2011
-------
TOTAL $195,000
While the terms of the Asher Notes vary somewhat, these terms are generally
the same from note to note. The following is a description of the terms of the
Asher Notes.
Each of the Asher Notes bears regular interest at a rate of 8% per annum,
with a default rate of 22% per annum. The Asher Notes are unsecured, and each
of them is due and payable on or before their respective maturity dates. At
any time prior to the payment in full of the entire balance of an Asher Note,
Asher has the option of converting all or any portion of the unpaid balance of
the Asher Note into shares of our common stock at a conversion price discussed
hereafter. Nevertheless, Asher is not entitled to convert any portion of an
Asher Note to the extent that the shares to be issued in connection therewith
would cause Asher's beneficial ownership of our common stock to exceed 4.99% of
the outstanding shares of our common stock. Each conversion price for the Asher
Notes features a "variable" conversion price, and the First and Second Asher
Notes also feature a "fixed" conversion price of $.002, which will apply if it
is less than the related variable conversion price. The variable conversion
price is a percentage discount from an average of the three lowest closing bid
prices of our common stock for the 10 most recent trading days preceding the
date of exercise. The percentage discounts for the variable conversion prices
provided for in the Asher Notes range from 42% for the First Asher Note, 50% for
the Second, Third and Fourth Asher Notes, and 55% for the Fifth Asher Note.
Because of the operation of the floating conversion price and the limitation on
the ability of Asher to convert as described above, we are unable to determine
at any time that number of shares into which Asher could convert one or more of
the Asher Notes. Nevertheless, based on the "fixed" conversion price of $.002,
Asher could convert the remaining outstanding balance of the Asher Notes
indicated below into at least 50.0 million shares of the Company's common stock
The Asher Notes (and related documentation) contain customary
representations and warranties, customary affirmative and negative covenants,
customary anti-dilution provisions, and customary events of default that entitle
Asher to accelerate the due date of the unpaid principal amount of, and all
accrued and unpaid interest on, the Asher Notes. A default on any of the Asher
Notes could lead to certain penalties, including an obligation to (a) pay all of
the following, plus an additional 50% of (i) default interest, (ii) other
monetary penalties, and (iii) the outstanding balance on the related Asher Note,
and (b) to issue shares of our common stock to satisfy the amount computed in
accordance with (a) immediately preceding.
Commencing October 25, 2010, Asher began converting some of the Asher
Notes. As of the date of the Report, Asher had converted an aggregate principal
amount of the Asher Notes equal to $95,000 into 59,871,292 shares of our common
stock, leaving an aggregate outstanding principal amount of the Asher Notes
equal to $100,000 as of May 6, 2011. The First and Second Asher Notes have been
fully converted, while the Third Asher Note has been partially converted.
Schulle Notes. On July 1, 2010, we issued a convertible promissory note in
the original principal amount of $70,000 (the "First Schulle Note") to Henry L.
Schulle, a consultant to us ("Schulle"), in lieu of cash for consulting services
provided by Schulle to us. On January 31, 2011, we issued a second convertible
promissory note in the original principal amount of $60,000 (the "Second Schulle
Note") to Schulle, in lieu of cash for consulting services provided by Schulle
to us. We believes that the execution and delivery of the First Schulle Note
was probably not material enough to require the filing of this Report, but that
upon the execution and delivery of the Second Schulle Note, the First Schulle
Note and the Second Schulle Note (taken as a whole) were material enough to
require the filing of this Report. While the terms of the two notes vary
somewhat, these terms are generally the same from note to note. The following
is a description of the terms of the two notes.
Each of the Schulle Notes bears regular interest at a rate of 8 and 1/2%
per annum. The Schulle Notes are unsecured, and each of them is due and payable
one year after the date of their respective issuances. At any time prior to the
payment in full of the entire balance of a Schulle Note, Schulle has the option,
upon a 65-days notice, of converting all or any portion of the unpaid balance of
the Schulle Note into shares of our common stock at a conversion price discussed
hereafter. Each conversion price for the Schulle Notes features a "variable"
conversion price and also a "fixed" conversion price of $.04, which will apply
if it is less than the related variable conversion price. The variable
conversion price is the closing trading prices of our common stock for the most
recent trading days preceding the date of exercise; provided, however, that the
variable conversion price has a minimum floor of $.005 per share. In view of
our most recent closing trading prices and the minimum variable conversion
price, Schulle could convert the two Schulle Notes into an aggregate of 26.0
million shares. The Schulle Notes contain customary representations and
warranties, registration rights, customary anti-dilution provisions, and
customary events of default that entitle Schulle to accelerate the due date of
the unpaid principal amount of, and all accrued and unpaid interest on, the
Schulle Notes.
On May 2, 2011, Schulle converted $40,000 of the principal amount of the
First Schulle Notes into 8.0 million shares of our common stock, leaving an
aggregate outstanding principal amount of the Schulle Notes equal to $90,000.
Legacy Debt
-----------
We have outstanding the following notes that became due and payable on
December 1, 2008. These notes have an aggregate principal amount totaling
$624,771plus accrued interest of as of April 13, 2011. 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 current
outstanding balance on this note as of April 13, 2011 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 current
outstanding balance on this note as of April 13, 2011 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 April 13, 2011 was $112,169, plus accrued interest.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
OIL AND GAS ASSETS
Management is currently exploring options for our remaining oil and gas
assets, which may include a sale of it or a spin-off of them to shareholders, so
that management can devote its entire attention to our current aviation
business.
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 five Current Reports on Form 8-K, and during 2011 thus
far they have caused us to file late three Current Reports on Form 8-K. Some of
the late filings resulted from the failure of relevant company personnel to
understand the need for prompt disclosure. We are trying to institute the
following corrective action to ensure that such events are timely reported
publicly:
* The adoption of a disclosure policy requiring our personnel to
communicate to a designated committee for evaluation any
information potentially material and thereby requiring public
disclosure;
* The development of a basic program to educate management as to the
events requiring expedited disclosure;
* To avoid late disclosure of events requiring expedited disclosure,
the adoption of 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), the establishment of timelines within which our
professional personnel will strive to work.
Budget limitations have impaired our ability to institute the corrective
action described above. Because the implementation of such corrective action was
not completed 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.
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
10.01 Form of 8% Convertible Note made payable by us to Asher Enterprises,
Inc.
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)
May 16, 2011