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BASTA HOLDINGS, CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) DESCRIPTION OF BUSINESS We provide aviation services to third parties. These services include the provision of aviation support services to Aircraft Charter Solutions, Inc. ("ACS"), a company that provides aviation support services to AECOM Technology Corporation, a subcontractor for Dyncorp International Inc., which is a contractor for the U.S. government under the U.S. Army's Logistics Civil Augmentation Program ("LOGCAP") in Afghanistan. The Company shall be a subcontractor for ACS, providing ACMI (aircraft, crew, maintenance, insurance) as well as war risk insurance, operational management and dispatch coordination for flights, U.S. government regulation and compliance with government mandated MOD 11 level medical examinations, visas and communication support, and other management and logistic support. The Company's flight operations will include services such as the delivery of food, water, fuel, spare parts, personnel and other items to locations throughout Afghanistan. Additionally, the Company provides similar services to IAL International Aviation Logistics Limited ("IAL") for services rendered in Libya. The Company also provides management services to WAB International, Inc. ("WAB"), and promotion and marketing of services to Monarch Air Group, LLC ("Monarch"), which are affiliated with the Company through common management. On January 31, 2014, and effective January 31, 2014, we entered into an Exclusive Agreement for Management related to two of WAB's Aviation Services Contracts. In consideration with this agreement, we originally agreed to amend its articles of incorporation to authorize the issuance of Series A Preferred Shares and each such share was to entitle the holder to a certain number of votes. On March 12, 2014, we amended that agreement while maintaining the same effective date. The amended agreement calls for us to provide management services which includes vendor and financial management under two of WAB's contracts. The amendment provides that we will be paid ten percent (10%) of the gross revenues from the two contracts and eliminated our obligation to issue to any Series A Preferred Shares to WAB. WAB provides airlift support, dedicated helicopters and rotary and fixed wing aircraft to international clientele. WAB services include cargo and passenger transportation, logging, mining support, offshore drilling support, relief efforts, firefighting and search-and-rescue. As of April 30, 2014, the Company had not commenced any activities pursuant to Exclusive Agreement for Management. Management is in the process of developing plans and anticipates launching said services before the end of the quarter ending July 31, 2014. During the quarter covered by this Report, Management reviewed the Company's contract with WAB International, Inc. to determine its overall viability. Due to the reductions of US DOD's operations in Afghanistan and Iraq, which have been implemented by the US Government ahead of previously anticipated schedules, Management concluded that focusing our efforts on the remainder of the respective WAB contracts was not in the best interest of the Company. Instead, with approval from WAB, we approached several customers, including, but not limited to, former customers of WAB, and offered our ACMI, maintenance, repair and overhaul and other services directly to such customers on a month to month basis. The result was that the Company was awarded direct orders from these customers and proceeded to deliver services to them on a case by case basis throughout the quarter. We anticipate that such direct engagements will continue. In addition, the Company will make efforts to expand its outreach to new customers with direct offers of ACMI, MRO and other fixed and rotary wing specialty aviation services. Effective January 31, 2014, we entered into an Exclusive Agreement for the Promotion and Marketing of Services of Monarch Air Group, LLC. ("Monarch"). Monarch is a Florida limited liability company which is in the business of providing aircraft, crew maintenance and insurance leases for rotary and fixed wing aircraft as well as chartering on-demand private, corporate and luxury flights. Upon execution of this agreement, the Company received a one-time fee of $5,000 which has been reflected in revenues for the nine months ended July 31, 2104, and Monarch agreed to pay us 10% of gross sales generated from our services As of July 31, 2014, the Company had not commenced any activities pursuant to the Exclusive Agreement for the Promotion and Marketing of Services. Management is in the process of developing plans and anticipates launching said services before the end of the quarter ending October 31, 2014. On April 20, 2014 and beginning on May 5, 2014, the Company entered into a two year Aircraft Dry Operating Lease Agreement (the Aircraft Dry Lease") with an individual in connection with the lease of an aircraft. The Aircraft Dry Lease expires on May 6, 2016, can be renewed by agreement in writing by all parties, and can be cancelled at any time with at least 60 day notice to the other without cause. Payments due pursuant to Aircraft Dry Lease are $10,000 per month plus $700 per flight hours flown in the previous month. Upon receipt of the aircraft, it was determined that it had maintenance issues that would keep it from safely flying for a significant period, and so the lease was adjusted to start once the aircraft is deemed safe for flight. The $10,000 payment for the first month has been re-classified as a Prepaid Expense on the consolidated Balance Sheet. The Company paid a security deposit of $50,000 for the operating lease On May 30, 2014, we entered into an Aircraft Management Agreement with Monarch. Pursuant to that Agreement, Monarch agreed to use, maintain and operate a Beechcraft 400 that the Company leases. Monarch agreed to maintain the aircraft and manage it at the Company's expense and cost and the Company agreed to pay Monarch 10% of all funds received for Charters in any given month. Additionally, pilot salaries and benefits and other expenses, as defined, will be paid by the Company. Basta received no payments from Monarch from this agreement. On May 20, 2014 we entered into an agreement with Chemoil Corporation DBA Chemoil Aviation to purchase and sell Chemoil's jet fuel. We will act as a representative of Chemoil by introducing Chemoil to prospective customers and jet fuel suppliers. We will earn a commission on all revenues generated by corresponding agreements that we broker between our customers and Chemoil. The commission rate is to be determined. In addition, we will purchase aviation fuel from Chemoil for resale to customers at fixed based operator sites and maintenance repair overhaul facilities. As of July 31, 2014, we had not generated any purchases or sales under this agreement. 14 -------------------------------------------------------------------------------- Current Operating Environment and Outlook After a decade of unprecedented defense spending to support operations in Afghanistan and throughout the Middle East, our industry is adjusting to a period of reduced funding and budget uncertainty brought about by the convergence of a variety of policy, political and fiscal realities. These factors include the ongoing draw-down of U.S. troops in Afghanistan, and governmental spending cuts. While there exists potential challenges that could adversely impact our business on a short term basis, we believe the longer term industry trends are positive and will result in continued demand in our target markets for the types of services we provide. Such trends include the realignment of the military force structure, leading to increased outsourcing of non-combat functions, including life-cycle asset management functions ranging from organizational to depot-level maintenance; While determining the size and scope of the U.S. and international presence in Afghanistan is dependent on concluding a Bilateral Security Agreement ("BSA"), we still anticipate remaining issues will be resolved and that there will be opportunities to support the enduring U.S. and NATO presence. Support opportunities include the U.S. Department of State ("DoS"), which is expected to expand and include the U.S. embassy in Kabul and four consulates around the country. Additionally, we anticipate that there will be a continued need to advise, assist and help professionalize Afghan National Security Forces for many years, as specified in the U.S. Afghanistan Strategic Partnership Agreement. In the Middle East, we expect instability and challenges to our customer's regional relationships will persist. However, we believe U.S. defense ties and presence throughout the region will continue to be of vital strategic interest to the U.S. and its allies. We believe that our aviation services and support will be key enablers in this environment and we are especially well positioned to provide these services to both U.S. forces and Allied nations. Finally, the re-balance to Asia reflects the increased importance of the Asia-Pacific regions, in both security and economic terms for the U.S. As the U.S. revitalizes and reinforces its presence in this vital region, we expect to see increased demand for our services to our existing and future customer base. A convergence of market factors have led us to recognize a significant opportunity to establish a super-competitive Independent Aviation Maintenance, Repair and Overhaul (MRO) service strategically located in the U.S. to satisfy soaring demands of the world's commercial jet transport fleet. We are pursuing a strategy that not only recognizes the enormous opportunity that these factors are creating, but also introduces a market-changing business model to rapidly gain customers and control market share for sustainable long-term growth. Once established and operated domestically, we plan on replicating our MRO business model in the rapidly expanding aviation markets of China and the former Soviet Union. We cannot be certain that the economic environment or other factors will not adversely impact our business, financial condition or results of operations in the future. We believe that our primary sources of liquidity of strong customer collections will enable us to continue to perform under our existing relationships and support further growth of our business. However, adverse conditions, such as a long term credit crisis or sequestration, could adversely affect our ability to obtain additional liquidity at acceptable terms or at all. Critical Accounting Policies and Estimates While our significant accounting policies are more fully described in Note 2 to our financial statements for the three and nine months ended July 31, 2014, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to the accounting for and recovery of long-lived assets, income taxes, and the valuation of equity transactions. We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Impairment of long-lived assets In accordance with ASC Topic 360, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value. 15 -------------------------------------------------------------------------------- Revenue Recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, products are fully delivered or services have been provided, the purchase price is fixed or determinable and collection is reasonably assured. Revenue from helicopter services on an "ad hoc" basis, which usually entails a short contract notice period and duration, is recognized as the related services are performed and is based on a monthly fixed fee plus additional fees for each hour flown. The Company works as an agent between its customers and the service providers under these "ad hoc" service arrangements. Therefore, the Company recognizes revenue under these arrangements on the net amount retained, which is the amount billed to the customer less the amount paid to the service providers. Recent accounting pronouncements Accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption. Comparison of Operating Results for the Three Months Ended July 31, 2014 to the Three Months Ended July 31, 2013 Revenues For the three months ended July 31, 2014, we had reportable revenues of $406,018 as compared to no revenues for the three months ended July 31, 2013. During the quarter, we received a total of approximately $3.6 million in flight arranged revenue of which we paid approximately $3.2 million to WAB for costs related to flight services provided to our customers during the quarter ended July 31, 2014. These costs are reported as part of commission revenue, net, on the accompanying condensed statements of operations. We expect our revenues to increase in future quarters as we begin providing rotary and fixed wing aircraft services to our potential customers. The increased income from the same quarter last year is attributable to the Company's contracts revenues whereby it became a fully operating company and is no longer in the development stage. Operating Expenses For the three months ended July 31, 2014, we incurred operating expenses of $219,479 as compared to $18,726 for the three months ended July 31, 2013. Operating expenses comprised general and administrative expenses of salaries and related benefits and professional fees such as legal and accounting, Edgar filing fees, consulting fees, investor relations fees, and transfer agent fees. The increase in general and administrative expenses in the three months ended July 31, 2014 as compared to the three months ended July 31, 2013 is mainly attributable due to the Company's becoming operational in the third quarter as opposed to the Company's status as a development stage company for the three months ended July 31, 2013. Net Income For the three months ended July 31, 2014, we had net income of $132,385 as compared to a net loss for the three months ended July 31, 2014 of $18,726. For the three months ended July 31, 2014 we had net income per common share of $0.04 and $0.03 (basic and diluted), as compared to a net loss per common share of $0.01 and $0.01 (basic and diluted) for the three months ended July 31, 2013. The turnaround in the quarter ended July 31, 2014 from the quarter ended July 31, 2013 is again attributable to the Company becoming a fully operating company with revenues as opposed to being a development stage company. Comparison of Operating Results for the Nine Months Ended July 31, 2014 to Nine Months Ended July 31, 2013 Revenues For the nine months ended July 31, 2014, we had reportable revenues of $411,018 as compared to no revenues for the nine months ended July 31, 2013. During the nine months, we received a total of approximately $3.6 million in flight arranged revenue of which we paid approximately $3.2 million to WAB for costs related to flight services provided to our customers during the nine months July 31, 2014. These costs are reported as part of commission revenue, net, on the accompanying condensed statements of operations. We expect our revenues to increase in future quarters as we begin providing rotary and fixed wing aircraft services to our potential customers. The increased income from the same quarter last year is attributable to the Company's contracts revenues whereby it became a fully operating company and is no longer in the development stage. 16 -------------------------------------------------------------------------------- Operating Expenses For the nine months ended July 31, 2014, we incurred operating expenses of $382,636 as compared to $27,451 for the nine months ended July 31, 2013. Operating expenses comprised general and administrative expenses of salaries and related benefits and professional fees such as legal and accounting, Edgar filing fees, consulting fees, investor relations fees, and transfer agent fees. The increase in general and administrative expenses in the nine months ended July 31, 2014 as compared to the nine months ended July 31, 2013 is mainly attributable due to the Company's becoming operational in the third quarter as opposed to being a development stage company in the nine months ended July 31, 2013. Net Loss For the nine months ended July 31, 2014, we had a net loss of $25,772 as compared to a net loss for the nine months ended July 31, 2013 of $27,451. For the nine months ended July 31, 2014 we had net loss per common share of $0.01 and $0.01 (basic and diluted), as compared to a net loss per common share of $0.01 and $0.01 (basic and diluted) for the nine months ended July 31, 2013. Liquidity and Capital Resources Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. To date, we have funded our operations through the sale of our common stock, from loans from our former controlling shareholder, and others and from working capital advances. All funds received have been expended in the furtherance of growing the business. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term: ? An substantial increase in working capital requirements to finance our business plan, ? Addition of administrative and professional personnel as the business grows, and ? The cost of being a public company. At July 31, 2014 we had current assets of $23,202 and total assets of $76,772 as compared to current and total assets of $7,429 at October 31, 2013. At July 31, 2014, we had current and total liabilities of $58,254 as compared to current and total liabilities of $14,383 at October 31, 2013. We currently have no material commitments for capital expenditures, however, in order to expand operations, we must raise funds through equity or debt financing. We will need to raise additional funds, particularly if we are unable to generate positive cash flow as a result of our operations. We estimate that based on current plans and assumptions, that our available cash will not be sufficient to satisfy our cash requirements under our present operating expectations, without further financing, for up to 12 months. Other than working capital and funds received from operations and from the sales of our equity instruments, we presently have no other alternative source of working capital. We began to generate cash flows from operations and expect to generate funds for management and marketing services rendered in connection with the agreements we entered into with WAB, Monarch and Chemoil. We may not have sufficient working capital to fund the expansion of our operations and to provide working capital necessary for our ongoing operations and obligations and we will need to raise significant additional capital. We do not anticipate we will be profitable in the remainder of fiscal 2014. Therefore our future operations may be dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will be required to further curtail our marketing and development plans and possibly cease our operations. Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. Operating activities For the nine months ended July 31, 2014, net cash flows used in operating activities amounted to $(53,283) as compared to net cash flows used in operating activities of $(32,791) for the nine months ended July 31, 2013. The increase in cash used during the nine months ended July 31, 2014 as compared to the nine months ended July 31, 2013 is again attributable to the Company becoming a fully operating company with the normal expenses associated with that and the fact that it is no longer considered a development stage company. 17 -------------------------------------------------------------------------------- Investing Activities For the nine months ended July 31, 2014, net cash flows used in investing activities was $(3,794) related to the purchase of property and equipment. Financing activities For the nine months ended July 31, 2014 and 2013, net cash flows provided by financing activities was $66,390 and $30,100 respectively. During the nine months ended July 31, 2014, we received net proceeds from the sale of preferred stock in the amount of $51,244. Contractual Obligations We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. Off-Balance Sheet Arrangements As of the date of this report, we did not have any off-balance sheet arrangements that have, or is reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. |