ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed consolidated financial statements.
Management's discussion and analysis of financial condition and results of operations, as well as other portions of this document, include certain forward-looking statements about the Company’s business and products, revenues, expenditures and operating and capital requirements. From time to time, information provided by the Company or statements made by its directors, officers or employees may contain “forward-looking” information subject to numerous risks and uncertainties. Any statements made herein that are not statements of historical fact are forward-looking statements including, but not limited to, statements concerning the characteristics and growth of the Company’s markets and customers, the Company’s objectives and plans for its future operations and products and the Company’s expected liquidity and capital resources. Such forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties, and, accordingly, actual results could differ materially for those discussed. Among the factors that could cause actual results to differ materially from those projected in any forward-looking statement are as follows: the effect of business and economic conditions; conditions in the industries in which the Company operates, particularly the airline industry; the Company’s ability to win government contracts; the impact of competitive products and continued pressure on prices realized by the Company for its products; constraints on supplies of raw material used in manufacturing certain of the Company’s products or services provided; capacity constraints limiting the production of certain products; changes in anticipated operating results, credit availability, equity market conditions or the Company’s debt levels may further enhance or inhibit the Company’s ability to maintain or raise appropriate levels of cash; requirements for unseen maintenance, repairs or capital asset acquisitions; difficulties or delays in the development, production, testing and marketing of products; market acceptance issues, including the failure of products to generate anticipated sales levels; difficulties in manufacturing process and in realizing related cost savings and other benefits; the effects of changes in trade, monetary and fiscal policies, and laws and regulations; foreign exchange rates and fluctuations in those rates; the cost and effects of legal and administrative proceedings, including environmental proceedings; and the risk factors reported from time to time in the Company’s SEC reports. The Company undertakes no obligation to update any forward-looking statement as a result of future events or developments.
FINANCIAL CONDITION AND LIQUIDITY
The Company’s liquidity needs arise from its debt service, working capital and capital expenditures. The Company has historically funded its liquidity needs with proceeds from equity contributions, bank borrowing, short term notes from officers, cash flows from operations and the offering of its subordinated debentures.
During the nine month period ended March 31, 2016, the Company recorded a net loss of $66,376 compared to a net loss of $292 during the nine month period ended March 31, 2015.
For the first nine months of fiscal year 2016, the Company had an increase in cash and cash equivalents of $9,914, compared to a decrease in cash and cash equivalents of $225,658 for the same period in fiscal year 2015. As of March 31, 2016, the Company held cash and cash equivalents of $64,956, compared to $98,633 for cash and cash equivalents as of March 31, 2015. The Company’s net cash provided by operating activities for the nine month period ended March 31, 2016 was primarily due to the reduction of inventory of $706,423. The Company used this net cash for the nine month period ended March 31, 2016 to reduce accounts payable and due to financing company by $187,456 and deferred revenue by $183,943.
Cash flow used in investing activities was $14,190 during the first nine months of fiscal year 2016 and was primarily used for the payment of buying new equipment, compared to a negative cash flow of $7,222 used in the first nine months of fiscal year 2015. Net cash used for financing activities was $248,832 during the first nine months of fiscal year 2016, and was used to pay down the notes payable, compared to a $699,649 used for financing activity in the first nine months of fiscal year 2015. The remaining increases and decreases in the components of the Company’s financial position reflect normal operating activity.
The Company had positive working capital of $513,684 at March 31, 2016, a decrease of $220,958 since June 30, 2015 due primarily to reductions in inventory. At March 31, 2016, current assets amounted to $2,568,258 and current liabilities were $2,054,574, resulting in current ratio of 1.25 to 1.0, compared to 1.32 to 1.0 at June 30, 2015. Long-term debt was $1,744,003 at March 31, 2016 compared to $1,955,328 at June 30, 2015. Stockholders’ equity was a positive $6,860 at March 31, 2016 compared to a positive balance of $73,236 at June 30, 2015. The Company’s present working capital must continue to improve in order for it to meet current operating needs.
Capital expenditures for continuing operation for the first nine months of fiscal year 2016 were $14,190, compared with capital expenditures of $14,812 during the same period in fiscal year 2015. The Company anticipates that it will spend approximately $10,000 on capital expenditures during the final three months of fiscal year 2016 for equipment and building improvements for aviation ground support operations. The Company plans to finance these capital expenditures primarily through operating cash flows as net income continues to improve in the aviation segment.
The Company has no lines of credit facilities as of March 31, 2016. The company needs to have a line of credit.
As indicated above, the Company believes that its financial position and debt capacity should enable it to meet its current and future cash requirements despite the need for improved working capital to meet current operating needs.
INFLATION
Because of the relatively low levels of inflation experienced this past fiscal year, and as of March 31, 2016, inflation did not have a significant effect on the Company’s results in the first nine months of fiscal year 2016.
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL YEAR 2016 COMPARED
WITH THIRD QUARTER OF FISCAL YEAR 2015
Revenue decreased $517,115 to $993,677 or 34.2%, in the third quarter of fiscal year 2016 in comparison to the prior year’s comparable period. The decrease was primarily due to lack of government sales.
Gross profit margin decreased 94% in the third quarter of fiscal year 2016, compared to the corresponding period in fiscal year 2015. This decrease was primarily due to lower sales.
Selling expenses as a percentage of sales decreased 0.35% of net revenues for the comparable period. The decrease of $16,968 in the third quarter of fiscal year 2016, compared to the corresponding period in fiscal year 2015, was primarily due to lower travel expense.
General and administrative expenses in the third quarter of fiscal year 2016 decreased $61,702, or 34%, in comparison to the third quarter of fiscal year 2015. The decrease was primarily to fewer working hours for office workers.
Interest expense in the third quarter of fiscal year 2016 was $33,811, a decrease of $5,121, or 13.2%, in comparison to the third quarter of fiscal year 2015. The decrease was due to lower debt balances and purchase of fewer chassis.
Interest income in the third quarter of fiscal year 2016 is immaterial.
FIRST NINE MONTHS OF FISCAL YEAR 2016 COMPARED
WITH FIRST NINE MONTHS OF FISCAL YEAR 2015
Revenue decreased $726,767 to $3,589,875 or 16.8%, in the first nine months of fiscal year 2016 in comparison to the prior year’s comparable period. The decrease was primarily due to lack of government sales.
Gross profit margin decreased 60% in the first nine months of fiscal year 2016, compared to the corresponding period in fiscal year 2015. This decrease was primarily due to less sales.
Selling expenses as a percentage of sales decreased 0.29% of net revenues for the comparable period. The decrease of $28,070 in the first nine months of fiscal year 2016, compared to the corresponding period in fiscal year 2015, was primarily due to lower travel expense.
General and administrative expenses in the first nine months of fiscal year 2016 decreased $3,685, or 0.9%, in comparison to the first nine months of fiscal year 2015. The decrease was primarily to fewer working hours of office workers.
Interest expense in the first nine months of fiscal year 2016 was $104,920, a decrease of $24,879, or 19.2%, in comparison to the first nine months of fiscal year 2015. The decrease was due to lower debt balances and purchase of fewer chassis.
Interest income in the first nine months of fiscal year 2016 is immaterial.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
(a) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the nine months ended March 31, 2016, we continued to implement our remediation efforts related to the following material weaknesses reported in the Form 10-K for the year ended June 30, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Due to the limited number of Company personnel, a lack of segregation of duties exists. An essential part of internal control is for certain procedures to be properly segregated and the results of their performance to be adequately reviewed.
Due to weaknesses in the Company’s financial reporting controls specifically relating to inventory, management believes there is more than a remote likelihood that a material misstatement of annual or interim financial statements would not be prevented or detected, as happened with our 2009 — 2012 annual financial statements.
Due to the lack of expertise and personnel for financial reporting, the Company was not able to file required financial reports on time.
The Company did not have effective controls to provide reasonable assurance as to timely account reconciliations. Management believes that there is a more than remote likelihood that a material misstatement of annual or interim financial statements would not be prevented or detected in a timely manner. Management plans to update management plans in an effort to reduce the risk and material misstatement of the financial statements.
As a result of the remediation efforts noted below, there were improvements in internal control over financial reporting during the nine months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were no other changes in internal control over financial reporting (as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(b) REMEDIATION ACTIONS
In response to these material weaknesses, we developed remediation plans to address the control deficiencies identified in fiscal year 2015. We continued to implement the following remediation actions during the nine months ended March 31, 2016:
Segregation of duties
• Engaged a third party specialist for advice and consultation
• Provided training and education to different accounting functions
• Established review controls
Financial reporting control
• Provided training for calculating the cost of raw material, work in progress, and finished goods.
• Completed review of the Company's critical accounting and internal control policies with third party advisors that are knowledgeable regarding GAAP and internal controls
• Provided training and education relating to accounting for modifications and extinguishments
• Hired third party advisors to assist in preparing consolidated financial statements
In addition to the above steps, management intends to continue its remediation efforts by:
• Provide ongoing training and education relating to GAAP around complex and non-routine transactions specifically identified through regular review of emerging issues and Company business activities
• Completing our review with the assistance of a third party advisor of the Company’s financial reporting controls and implementing recommended control procedures to strengthen the Company’s control procedures in areas which involve significant judgements and estimates, which involve application of complex accounting methods under GAAP, or which could have a material impact on the accuracy of our financial statements.
We are committed to a strong internal control environment, and believe that, when fully implemented, the remediation actions described above will represent significant improvements in the Company’s accounting and financial reporting functions. The Company anticipates that it will complete its testing of the additional internal control processes designed to remediate these material weaknesses during the balance of 2016. We will continue to assess the effectiveness of our remediation efforts in connection with management’s future evaluations of internal control over financial reporting.