September 11, 2007
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attn: Linda Cvrkel, Branch Chief
RE: Global Aircraft Solutions, Inc.
Form 10-K for the year ended December 21, 2006
Filed April 23, 2007
Form 10-Q for the quarter ended March 31, 23007
Filed May 23, 2007
File No. 000-28575
Dear Ms. Cvrkel:
On behalf of Global Aircraft Solutions, Inc. (the "Company"), we are submitting
this letter. This letter provides a full and complete response to the Staff's
letter, dated July 12, 2007 (the "Comment Letter"), to Ms. Patricia Graham,
Chief Accounting Officer of the Company, regarding the Annual Report on Form
10-K, filed April 23, 2007 and Quarter Report on Form 10-Q filed May 23, 2007,
File No. 000-28575.
As indicated in the responses, we agree to incorporate the comments applicable
to the Company in future filings with the Commission, and believe that revisions
are not needed to the current filing.
The responses set forth below are numbered in accordance with the numbered
comments from the Comment Letter. Although this letter does not contain the text
of each of the Staff's comments itemized by number, with corresponding response
immediately following, we have enclosed a copy of the Comment Letter for the
Staff's convenience.
Form 10-K for the year ended December 31, 2006
Item 6. Selected Financial Data
1) We do not believe that the information currently omitted in Item 6 represents
a material misrepresentation. However, in response to the staff's comment, we
will cross-reference in future filings to a discussion of factors that
materially affect the comparability of the information provided in the Selected
Financial Data section.
The following qualifying statements reflect our response to your comments:
Figures for year 2002 reflect activity dating from the Company's reverse merger
with HAT in May of 2002 through December 31, 2002; Figures for the year 2004 and
after reflect inclusion of our World Jet Acquisition, which was effective
January 1, 2004; 2005 and 2006 net income and earnings per share figures reflect
the Company's share of Jetglobal activity, an unconsolidating affiliate as of
August, 2005. (For further details on these items see Part I, Item I of this
document.)
Assets increased substantially from 2003 to 2004 primarily due to the
acquisition of World Jet. During the period 2004 to 2005 the purchase of
inventory from Jetran by World Jet increased inventory $2,900,000. Additionally,
the investment into Jetglobal resulted in $6,333,690 in equity assets for the
same period.
Management's Discussion & Analysis - Results of Operations - 2005-2006
2) The Company included EBITDA in its MD&A discussion, as it represents one of
the measurements that management uses to measure and evaluate its operations. In
view of the Staff's comment, the Company plans to eliminate the discussion of
the non-GAAP measure "EBITDA" in future quarterly and annual filings.
Management acknowledges and is sensitive to the requirements of Regulation G,
and will provide the required disclosures where non-GAAP measurements are
included in future 8-K filings.
3) In response to the Staff's comment, the Company will expand its MD&A in
future filings to disclose the reasons for changes in consolidated and segment
revenues.
4) In response to the Staff's comment, the Company will expand its MD&A in
future filings to discuss and analyze net sales and cost of sales separately for
each segment.
5) In response to the Staff's comment, the Company will expand its MD&A in
future filings to discuss and analyze net sales and cost of sales separately for
each segment.
Liquidity and Capital Resources, page 27
6) The Company took a serious look at the amounts receivable from Avolar and BCI
at December 31, 2006. The following discussion describes our analysis
considerations supporting our assessment that the receivables were recoverable
at December 31, 2006:
AVOLAR:
We have had and continue to have a strong relationship with Avolar. The pricing
offered them by the Company is significantly below market. Avolar understands
that until such time as they make their account current they cannot take
advantage of this pricing. Because this pricing advantage adds up to thousands
of dollars on an annual basis, Avolar has a significant incentive to pay their
outstanding balance to the Company. At the time the Company issued the financial
statements they were receiving payments as scheduled from Avolar. Avolar has
made weekly payments since January of 2007 and their balance has been reduced by
over $1.16 million.
BCI, DUE FROM INVESTEE PARTNER:
Prior to our filing of our annual report, the Company had reached tentative
agreement with BCI to transfer title to several aircraft in satisfaction of
balances due from investee partner and also eliminating the Company's membership
interest in Jetglobal. The actual results to date of this transaction are
detailed below:
Management transferred its ownership interest in Jetglobal, LLC to the
other partner, BCI Aircraft Leasing, in consideration for aircraft
inventory and a trailing interest in certain claims of Jetglobal
against third parties. The parties executed a final agreement and
settlement on April 20, 2007, was revised on June 29, 2007. The terms
of the final agreement with BCI did not result in any impairment to the
Company. The final agreement calls for a transfer of 6 aircraft with a
total value of $8,650,000 and a trailing interest of 18% in the Delta
Airlines bankruptcy claim estimated to be valued at $2,118,461. (There
is also an 18% trailing interest in a lawsuit against AFG for which no
value can be estimated at this time.) At June 30, 2007, 5 aircraft,
valued at $7,150,000, had been received. The transfer of our interest
to BCI is conditioned upon receipt of the final aircraft on or before
September 20, 2007. If this aircraft is not transferred, we maintain
our interest in Jetglobal. Due from investee partner at June 30, 2007
is $3,618,461. The gain on this transaction, recorded during the second
quarter of 2007 is $27,210.
BCI:
BCI had two aircraft in work at our HAT facility at the filing date of our
annual report.
Those aircraft are still being worked. The Company has made it clear that we
will not be releasing those aircraft to BCI until all monies due are paid to the
Company. The market value of the aircraft exceeds the amounts due to the
Company.
7) In response to the Staff's comment, the Company will expand its liquidity
discussions in future filings to include all periods covered by the Company's
financial statements.
8) In response to the Staff's comment, the Company will expand its liquidity
discussions in future filings to address any liquidity requirements to fund
future capital expenditures. The Company's current plans do not include any
significant capital expenditures for 2007.
Item 9A. Controls and Procedures, page 31
9) The Company's management and internal auditors determined that the disclosure
controls were not effective at the end of the period due to the ineffective
accounting at the Company's joint venture partner, Jetglobal. However, in
response to those control weaknesses, the Company recreated the general ledger
of Jetglobal and obtained documentation from the joint venture partner to
substantiate the account balances and the revenue and expense. Management relied
on the audited financial statements of Jetglobal to reflect the amounts
presented in our financial statements. Management elected to withdraw from the
partnership with Jetglobal and subsequent to year-end arrived at terms for a
separation agreement with Global's partner BCI. The phrase "management has
informed the Audit Committee that it is in the process of changing procedures to
correct this weakness" did not correctly identify management's position.
Management's plan to correct the weakness was not to change Jetglobal procedures
but to eliminate the need for reliance in them by reaching an agreement with BCI
that would eliminate Global membership in the partnership. This matter became
moot in the second quarter of 2007, as the Company divested its interest in
Jetglobal.
Audited Financial Statements
Consolidated Balance Sheets
10) The nature and amounts due to the Company are summarized below:
2006 2005
Four aircraft, guaranteed sale $1,957,692 $1,957,692
Consulting services for partnership to be paid by BCI to Global directly per agreement 1,300,000 --
Maintenance work -- 241,592
Aircraft 328 to BCI under partnership agreement 688,722 688,722
------------ -----------
Total $3,946,414 $2,888,006
============ ===========
A majority of the 2005 receivable balance related to the sale of the Company's
interest in four aircraft within Jetglobal to BCI. Because the cash flowed
through the joint venture, the Company originally classified the amount due from
that sale as due from Jetglobal. However, that receivable was legally due from
BCI. The amount due from BCI for the sale of the interest in the aircraft was
collected in January 2006.
In response to the Staff's query, the Company's "equity in net asset of and
advances to affiliates" at December 31, 2005 was calculated as follows:
Initial investment in Jetglobal $1,125,000
Payment of 25% share of purchase of
aircraft 3,846,154
Aircraft 328 and 382 to joint venture
partners, by agreement (1,377,444)
Expenses paid on behalf of Jetglobal 251,440
Share of 2005 net income (157,874)
------------
Balance at December 31, 2005 $3,687,276
============
11) In response to the Staff's comment, the Company will present service and
product revenues and related cost of sales separately on the face of the
financial statements.
Consolidated Statements of Cash Flows
12) In response to the Staff's query, the nature and amounts of share-based
payments along with a reconciliation to the amounts disclosed in Note 9 are
detailed in the table below:
- ------------------------------------ ------------ ---------------- -- ---------------------------------------
Shares Price of shares Amount expensed
granted (measurement
date)
- ------------------------------------ ------------ ---------------- -- ---------------------------------------
2004 2005 2006
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
Third parties, for services:
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
1,200,000 $0.18 $ 40,785 $ 69,912 $ 61,233
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
400,000 0.23 29,288 46,020 16,692
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
55,000 0.32 17,600
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
70,000 0.70 70,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
100,000 1.53 153,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
Employees, employment agreements:
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
1,000,000 0.32 320,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
Employees, option exercise price
under price at date of grant
(Options for 900,000 shares at
$0.17, price at date of grant $0.23) Options 0.23 54,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
180,000 0.30 12,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
330,000 0.60 114,162 46,378
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
30,000 0.97 10,781
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
30,000 1.23 790
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
15,000 1.30 19,500
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
60,000 1.20 33,334
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
375,000 0.95 71,751
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
Directors, under agreements:
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
200,000 0.80 3,000 77,000 80,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
(Options for 30,000 shares $1.03
(measurement date) A$1.09 Black
Scholes) Options 32,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
20,000 1.35 27,000
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
10,000 1.39 13,900
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
TOTALS $ 476,673 $ 326,594 $ 617,459
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
Tax effects - stock compensation 148,079
- ------------------------------------ ------------ ---------------- -- --- -------- --- --------- --- --------
Notes to the Financial Statements
Note 3. Summary of significant Accounting Policies
- - Inventory
13) Our consolidated inventory is made up of rotable parts, consumables, (items
used up in the repair of aircraft such as tape, etc.), expendables (rivets,
hardware etc. used in the repair of aircraft that stay as part of the aircraft)
Inventory items previously classified as non-current consisted of items that
were held for over one year. As long as aircraft fleets exist that are made up
of a particular model of aircraft the rotable parts that comprise that aircraft
are considered by the Company to be current inventory. It has been and remains
our policy to expense any items that we determine to be obsolete, damaged or
unlikely to sell. In the past, the company has not had an allowance for slow
moving and obsolete inventory nor does it have one now. In light of the Staff's
comment, the Company will eliminate the phrase "net of allowance for slow moving
and obsolete inventory" on the balance sheet caption for inventory until such
time as market conditions are indicative that such an allowance would present
the correct value of the inventory presented on our balance sheet.
- - Revenue and Cost Recognition
14) Revenue from part sales is recognized when parts are shipped. Pursuant to
purchase orders, all parts are forwarded FOB shipping so that title passes at
time of shipping and the Company has no further contractual or legal obligation
to customer upon shipping. Revenues from time and material contracts and all
other ancillary services are recognized as the services are performed. Revenue
from aircraft sales is recognized when the customer accepts delivery of the
aircraft and/or when title is transferred.
- - Earnings Per Share
15) In response to the Staff's comment, the Company will disclose in future
filings the number of common stock equivalents that could potentially dilute
future EPS but were excluded from the calculation due to anti-dilution.
Note 4. Segment Information
16) In response to the Staff's comment, the Company will provide a
reconciliation of total assets and capital expenditures to the consolidated
total assets and capital expenditures reflected in our financial statements in
future filings.
Note 5. Equity in Net Assets and Advances to Affiliates
Note 11. Related Party Transactions
17) In response to the Staff's comment, the Company will expand its disclosure
in future filings to clarify the nature of the $1,957,692 consideration received
in the transaction.
- -As currently disclosed in Note 5, when the Company entered into the Jetglobal
joint venture agreement, BCI represented that it had already secured a sale of
four aircraft. As one of the conditions of the Company's investment in
Jetglobal, BCI guaranteed that this sale would be completed. Shortly after the
Company invested in Jetglobal, Jetglobal acquired 26 aircraft. However, the
customer for four of those aircraft rescinded its purchase order. The Company's
management demanded that BCI abide by its representations and guarantee so BCI
agreed to purchase the Company's interest in those four aircraft in a manner
that would result in the same cash flow to the Company had they been sold to
that third party. The gain on this transaction was calculated based on the price
paid by BCI less the pro-rata original cost of the aircraft to the Company. That
is, the Company's interest in the inventory was 25% of Jetglobal's acquisition
cost and the transaction was structured such that 25% of the sales price
originally quoted to the third party would be allocated to the Company. BCI paid
the Company in cash.
Note 6. Inventory
18) The difference between the December 31, 2005 inventory amounts detailed in
Note 6 and the face of the balance sheet is the amount of inventory that was
shown on the face of the balance sheet as inventory, non-current in 2005. (See
question 13) A revised table is as follows:
2006 2005
Maintenance Hardware $1,030,465 $1,372,640
Parts for Resale 6,554,455 6,944,795
Aircraft & Engines 267,771 450,000
---------- ----------
$7,852,691 $8,767,435
========== ==========
19) In response to the Staff's comment, the Company will disclose in future
filings the amount of rental expense for each period for which an income
statement is presented.
Note 9. Shareholders' Equity
20) For each transaction which the Company issued shares of it's common stock,
the Company valued these shares at "fair value." The Company determined and
measured fair value at the trading price of the stock on the date of the
transaction.
In response to the Staff's comment, the Company will disclose in future filings
the transaction amounts ascribed to the issued shares, and how those amounts
were calculated or determined.
21) In response to the Staff's comment, the Company has reviewed its issued
warrants, which include a cashless exercise option, in accordance with the
definitions and guidelines contained in SFAS No. 150, SFAS No. 133 and EITF
00-19. The Company performed the following analysis to assess the potential
classification of the warrants issued as liabilities or derivatives.
SFAS No. 150
- ------------
Review of warrants under SFAS 150 criteria:
1. The Company (issuer) does not have an unconditional obligation to
redeem the instruments by transferring assets at a specified or
determinable date, or upon an event certain to occur. The warrant
holder's decision to exercise the cashless option feature is strictly
based on his or her own volition and judgment.
2. The Company does not have an unconditional obligation to repurchase
its equity shares nor is it required to settle such obligation by
transferring assets when the holder exercises its stock purchase
warrants. Exercising of the warrants, which includes a cashless option
feature, is strictly based on the holder's decision and is not tied to
any provision stipulating a future mandated repurchase.
3. The Company does not have an unconditional obligation to issue a
variable number of common stock shares based on settlement of a
liability. There is no fixed monetary amount tied to the warrants nor
are there settlement variations indexed to any external metrics. The
warrant holder is granted an option to purchase (solely based on their
own judgment) a fixed number of common stock shares at a fixed per
share price. Under the terms of the cashless option feature, a formula
based on Fair Market Value of the Company's Common stock is employed
in the computation:
X = Y (A-B) / A
Where X = the number of shares of Common stock to be issued to the
holder
Y = the number of shares of Common stock purchasable under the
Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised (at
the date of such calculation)
A = the Fair Market Value of one share of the Company's Common
stock (at the date of such calculation)
B = Purchase Price (as adjusted to the date of such
transaction)
Based on the above discussion, we believe that no liabilities exist relative to
issued and exercised warrants under the guidelines contained in SFAS 150.
SFAS No. 133
- ------------
Review of warrants under SFAS 133 criteria:
Under Paragraph 11 (a) of SFAS 133 "... the reporting entity shall not consider
the following contracts to be derivative instruments for purposes of the
Statement: (a.) Contracts issued or held by that reporting entity that are both
(1) indexed to its own stock and (2) classified in stockholders' equity in its
statement of financial position.
Warrants issued by the Company have an established Common stock purchase price
and, if the cashless option feature is elected by the holder, a formula tied to
current fair market value of Company stock is applied as discussed above.
Transactions are reported and included in the Company's statement of financial
position.
EITF 00-19
- ----------
Review of warrants under EITF 00-19 criteria:
All warrants issued by the Company have an explicit limit on the number of
shares to be delivered, a fixed redemption price per share and are finalized
only via physical settlement (i.e., receipt of cash) or, if elected by the
holder, a cashless exercise option (as described above). There are no net-share
or net-cash settlement options. Therefore, by definition in Paragraph 7, these
contracts are classified as equity instruments.
Additionally, the Company has reserved, and shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common stock for
the purpose of enabling the Company to issue the shares of Common stock
underlying the Warrants.
Conclusion:
We believe all of the above criteria and analysis supports the Company's
accounting and disclosure of warrant activities.
The warrants were issued at a stated exercise price. The warrants have economic
characteristics and risks clearly and closely related to the common stock to
which they were related. Most of those warrants were issued in connection with a
private placement and had no future registration right requirement. Other
warrants were granted as stock-based compensation.
22) The following table shows the activity of the outstanding warrants during
the years ended December 31, 2006 and 2005:
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Warrant holder Exercise Shares Exercise Exercised Shares Expiration
Price underlying, date issued
beginning of
year 2005
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Barron Partners $0.68 7,200,000 08/03/05 7,200,000 7,200,000 ------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 7,200,000 05/30/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
J G Capital $0.34 720,000 08/26/05* 501,000 399,000 05/30/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
05/08/06* 219,000 219,000 ------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$0.68 540,000 08/08/06 240,000 125,124 05/30/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 540,000 05/30/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Alpha Capital $1.00 625,000 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 625,000 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Greenwich Growth $1.00 96,154 03/30/06 96,154 96,154 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 96,154 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Grushki & Mittman, $0.52 31,731 9/14/05* 31,731 22,812
PC
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.00 15,865 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 15,865 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Heza Holding $0.52 31,731 12/27/05* 31,731 21,017
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.00 15,865 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 15,865 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
J G Capital $0.52 95,192 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.00 47,597 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 47,597 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Stonestreet $1.00 192,308 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 192,308 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
Whalehaven $1.00 144,231 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
$1.36 144,231 09/02/09
-------------------- ------------ ------------------ ------------ ---------- ------------ ----------
*Denotes cashless exercise
In response to the Staff's comment, the Company will include a table in future
filings showing the activity of the outstanding warrants during each period for
which a balance sheet is presented.
Stock-Based Compensation Disclosures
23) In response to the Staff's comment, the Company will expand disclosure in
future filings to include a description of the method and related assumptions
used to estimate the fair value of awards under share-based payment
arrangements, in addition to total compensation cost and related tax benefits
for share-based payment arrangements.
Note 19. Selected Quarterly Financial Data
24) In response to the Staff's comment, the Company will include in future
filings, details of unusual or infrequent items that are reflected in the
selected quarterly financial data.
Form 10-Q for the quarter ended march 31, 2007
Consolidated Statements of Operations
25) In response the Staff's comment, the Company has reclassified its discount
amounts to appropriately reflect them as reductions to revenue. The Company has
made this correction, which is reflected in the filing of its report on Form
10-Q for the second quarter 2007. The Company has reclassified the first quarter
amount to reflect the proper year-to-date amounts for revenue.
Item 4. Controls and Procedures
26) In response to the Staff's comment, the Company will reflect the appropriate
wording in future filings to specifically conclude whether its disclosure
controls and procedures are effective or ineffective as of the evaluation date.
On behalf of the Company, we hope the Staff finds this letter responsive to its
comments on the Company's Annual and Quarterly Reports. Please advise as to
whether or not you are requiring us to file a 10-K/A in connection with your
comments and our responses thereto or if our responses are sufficient as long as
we update all future filings as indicated above.
Should members of the Staff have any questions or comments regarding these
materials please feel free to call me at 520-294-3481.
Sincerely,
/s/ Patricia Graham
- ----------------------------------
Patricia Graham
Chief Accounting Officer